Multinational Enterprises and the Theories of Trade and Location

Abstract

International economics contains a number of important sub-areas which have long been disjoint from one another. One of these is the traditional general-equilibrium theory of international trade, which constituted the core of both graduate and undergraduate trade courses for decades. Quite separately, another area of study was industrial organization aspectsof international trade, practiced by a separate group of economists with little overlap between them and the trade theorists. Each area had its strengths and weaknesses. Trade theory imposed an important general-equilibrium discipline on researchers, but was almost exclusively conducted under the twin assumptions of perfect competition and constant returns to scale. Any analysis of large national or multinational firms was excluded by definition, as was the possibility of gains from trade through the capture of scale economies or pro-competitive effects. The industrial organization approach to trade was often partial-equilibrium in nature and indeed often not even at that level, focussing instead on the international organization of individual firms. Yet that literature was able to examine important empirical phenomenon ignored by the more formal trade theory.