Trade, Multinational Sales and FDI in a Three-Factors Model

The overwhelming importance of multinational activities as well as the coexistence of exporters and multinationals within the developed countries demand for theoretical models which provide a convincing explanation of simultaneous two-way trade and horizontal multinational activities. We present a model with three factors of production to disentangle the twofold importance of headquarters for their affiliates into a know-how and a capital serving part (FDI). Multinationals trade-off the incentives for a high proximity to the market and a concentration of production facilities. We simulate the model to derive predictions about the impact of trade costs, plant set-up costs, fixed multinational network costs, relative country size and factor endowments on exports, multinational sales and FDI. We find that the effects are not uniform for multinational sales and FDI. Whereas exports and affiliate sales increase with the similarity in country size, FDI is more likely to increase monotonously with the sending country's size