ABSTRACT
This chapter provides an analogy between the general equilibrium theory of international trade and the partial equilibrium theory of the multi-national firm in order to show how analytical tools familiar from the former can be properly used in understanding the latter. It analyses the situation in which the parent firm by investing in new research and development renders all its operations, foreign and domestic, more profitable than they would otherwise have been. The chapter discusses the firm by investing in new research and development can either make its product more attractive to its buyers in both countries or reduce the cost of producing a given product both at home and abroad. The very size of these firms clearly indicates that the perfectly competitive behaviour assumed in traditional international trade and investment theory is no longer fully appropriate in the analysis of current international economic phenomena.
