International Trade the World Economy Charles van Marrewijk

International Trade & the World Economy; Charles van Marrewijk Introduction Joseph Schumpeter (1883 -

International Trade & the World Economy; Charles van Marrewijk The size and structure of

International Trade & the World Economy; Charles van Marrewijk Foreign direct investment

International Trade & the World Economy; Charles van Marrewijk Explaining multinationals Dunning’s OLI framework:

International Trade & the World Economy; Charles van Marrewijk Multinationals in general equilibrium Markusen-Venables

International Trade & the World Economy; Charles van Marrewijk Multinationals in general equilibrium Headquarters

International Trade & the World Economy; Charles van Marrewijk Characterization of equilibrium

International Trade & the World Economy; Charles van Marrewijk Case study: hard disk drives

International Trade & the World Economy; Charles van Marrewijk Conclusions Multinationals are becoming increasingly

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International Trade & the World Economy; Charles van Marrewijk CHAPTER 15; MULTINATIONALS Introduction The size and structure of multinationals Foreign direct investment Explaining multinationals Multinationals in general equilibrium Characterization of equilibrium Case study: hard disk drives Conclusions

International Trade & the World Economy; Charles van Marrewijk Introduction Joseph Schumpeter (1883 - 1950)

International Trade & the World Economy; Charles van Marrewijk The size and structure of multinationals

International Trade & the World Economy; Charles van Marrewijk Foreign direct investment

International Trade & the World Economy; Charles van Marrewijk Explaining multinationals Dunning’s OLI framework: • Ownership advantages • Location advantages • Internalization advantages Empirical characteristics of multinationals: • high ratios of R&D relative to sales • employ large numbers of scientific, technical, and other 'white collar' workers as a percentage of their work force • high value of 'intangible' assets • associated with new and/or technically complex products • negatively associated with plant-level scale economies • associated with product-differentiation variables (e. g. advertising/sales) • A minimum or 'threshold' level of firm size seems to be important • Multinationals tend to be older, more established firms.

International Trade & the World Economy; Charles van Marrewijk Multinationals in general equilibrium Markusen-Venables model • Perfect competition and CRS for food sector. • Imperfect competition and IRS for manufacturing sector Production of manufactures characterized by • c - the (constant) marginal production costs in terms of labor • t - the amount of labor needed to transport one unit of manufactures from Austria to Bolivia, or vice versa. • F - the firm level fixed costs in terms of labor. • G - the plant level fixed costs in terms of labor.

International Trade & the World Economy; Charles van Marrewijk Multinationals in general equilibrium Headquarters in Austria Headquarter location Firm level fixed costs Fw. A + Plant level fixed costs Gw. A no Multi-plant production? yes Plant level fixed costs Gw. B n. A; national firm, headquarters in Austria MC in A = cw. A MC in B = (c+t)w. B m. A; multinational firm, headquarters in Austria MC in A = cw. A MC in B = cw. B Headquarters in Bolivia Firm level fixed costs Fw. B + Plant level fixed costs Gw. B Multi-plant production? yes Plant level fixed costs Gw. A m. B; multinational firm, headquarters in Bolivia MC in A = cw. A MC in B = cw. B no n. B; national firm, headquarters in Bolivia MC in A = (c+t)w. A MC in B = cw. B

International Trade & the World Economy; Charles van Marrewijk Characterization of equilibrium

International Trade & the World Economy; Charles van Marrewijk Case study: hard disk drives

International Trade & the World Economy; Charles van Marrewijk Conclusions Multinationals are becoming increasingly important (w. r. t. production, investment, and trade) Most multinationals in OECD countries Most FDI horizontal acquisitions between OECD countries Explaining multinationals • Descriptive OLI framework • Modern general equilibrium framework Modern framework determines market structure endogenously; results confirm reasonably well with stylized facts (multinationals dominate if countries are more similar; national firms dominate if countries differ in size or relative endowment)