chapter  6
24 Pages

Conceptual Foundations from Trade, Multinational Firms, and Foreign Direct Investment Theory

WithWilfred J. Ethier

This chapter attempts to convey something of the flavor of research into the theory of international trade and direct investment. Trade theory used to consist of several microeconomic ideas embodied in a few “standard” models—most notably the Heckscher-Ohlin-Samuelson model. This trade theory development is of fundamental importance for the theory of the multinational firm. The services of the knowledge-based capital resulting from the firm’s research project can be costlessly supplied to foreign producers, so G reflects additional input needed for production of a good that, because of its newness, may require unusual facilities or monitoring independent of the length of the production run. Assume that increasing returns are external to the firm and internal to the national manufacturing industry. The manufacturing industry is modeled as one of monopolistic competition, with each variety produced by a single firm operating under increasing returns to scale.