Towards a Unified Theory of International Trade, International Production and Foreign Direct Investment

Abstract

Traditional theories of international trade have been made obsolete by the recent rapid growth of the multinational corporate form of organization and the substantial role of multinational corporations (MNCs) in the global economy. Traditional theories rely on the existence of given resource endowments in different countries and on the international immobility of factors of production. Such assumptions have little relevance in a world in which MNCs exercise control over factors of production and can allocate those factors among nations according to their owners’ (or managers’) perceived advantage. The distribution of these resources outside the home country entails foreign direct investment (FDI). Foreign direct investment responds only in part to the variables countenanced by traditional trade theory: to explain FDI and intra-MNC international trade it is necessary to introduce those factors which enable large firms to derive an advantage from FDI as well as such additional complexities as barriers to international trade explicitly into the body of international trade theory. In fact, it is no longer adquate to conceive of a theory of international trade but reality requires a unified theory which interrelates international trade, international production and FDI.