The activities of multinational enterprises (MNEs) have become an increasingly important feature of the euro area economy, affecting output, trade and financial linkages. MNEs contribute to domestic output by maintaining large production facilities, offering high-paid jobs, bringing in new...

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...