A Simple Theory of Multinational Corporations and Trade with a Trade-Off between Proximity and Concentration

48 Pages Posted: 11 Jul 2000 Last revised: 12 Sep 2010

See all articles by S. Lael Brainard

S. Lael Brainard

Deputy National Economic Advisor, The White House; National Bureau of Economic Research (NBER)

Date Written: February 1993

Abstract

This paper develops a two-sector, two-country model, where firms in a differentiated products sector choose between exporting and multinational expansion as alternative modes of foreign market penetration, based on a trade-off between proximity and concentration advantages. The differentiated sector is characterized by multi-stage production, with increasing returns at the corporate level associated with some activity such as R&D, scale economies at the plant level, and a variable transport cost that rises with distance. A pure multinational equilibrium, where two-way horizontal expansion across borders completely supplants two-way trade in differentiated products, is possible even in the absence of factor proportion differences. It is more likely the greater are transport costs relative to fixed plant costs, and the greater are increasing returns at the corporate level relative to the plant level. The model also establishes conditions for a mixed equilibrium, in which national and multinational firms coexist.

Suggested Citation

Brainard, S. Lael, A Simple Theory of Multinational Corporations and Trade with a Trade-Off between Proximity and Concentration (February 1993). NBER Working Paper No. w4269. Available at SSRN: https://ssrn.com/abstract=227072

S. Lael Brainard (Contact Author)

Deputy National Economic Advisor, The White House ( email )

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