Adapting the Knowledge‐capital Model of the Multinational Enterprise to Trade and Investment in Business Services

Abstract

At some conceptual level, trade in goods and services are not that much different. However, the speed at which trade and foreign investment in services is growing, along with the fact that the barriers to these activities are quite different from those for trade in goods, prompts us to take a more careful look. The paper begins with a general discussion about the various policies and technological constraints that impact foreign trade and the establishment of foreign commercial presence in intermediate business services. We then discuss which characteristics an accurate modelling approach must capture. Following that, we develop a model that allows for different regimes of trade and/or foreign affiliate production in services using Markusen's knowledge‐capital model. Simulations show that the pattern of service firm headquarters and office locations can differ considerably depending on whether it is trade, investment, or both that are either liberalised or become technologically feasible. Our results find that the welfare and factor‐price consequences are quite similar across the different scenarios.