Multinational firms and the new trade theory

A model is constructed in which multinational firms may arise endogenously. Multinationals exist equilibrium when transport and tariff costs are high, incomes firm-level scale economies important relative to plant-level economies. Less obvious, multinationals more total economic activity countries similar incomes, factor endowments, technologies. The thus be useful explaining several stylized facts, including (a) the growing importance of direct investment trade among developed over time (b) greater ratio this for 'north-south' or 'south-south' relationships. offers predictions about volume that contrast with those 'new theory', predicting at first rises then falls as converge Welfare also considered, it shown makes smaller (or high cost) country better off, but make larger low worse off.