Kiel Working Papers, Kiel Institute for World Economics
No 1104:
Trade and the Internationalization of Production
Jörn Kleinert
Abstract: Whereas many empirical studies show that the
internationalization of production is driven by falling distance costs,
theoretical models of the endogenous emergence of multinational enterprises
predict the opposite. This paper argues that this dichotomy can be resolved
if the production process is modeled more realistically by taking the use
of intermediate goods into account. The argument is based on a two-country
general equilibrium model set up to study companiesÂ’ internationalization
strategies. Companies use specific intermediate goods in their production
and can choose between exports and foreign production. In choosing between
these alternatives, they face a trade-off between higher variable distance
costs when exporting and additional fixed costs when producing abroad. With
falling distance costs, exports increase. Furthermore, the profitability of
foreign production increases relative to the profitability of exports if
the share of intermediate goods used is not too small. With falling
distance costs, it might therefore pay for a company to become a
multinational enterprise.
Keywords: Trade, Multinational Enterprise, General Equilibrium; (follow links to similar papers)
JEL-Codes: F12; F23; L22; (follow links to similar papers)
44 pages, April 2002
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