《Multinational firms technology diffusion and trade》.pdf

EISEYIER Journal of International Economics41 (1996) 1-28 Multinational firms, technology diffusion and trade Wilfred J. Ethier”‘“, James R. Markusenb ‘Department of Economics, University of Pennsylvania, Philadelphia, PA 19104-6297, USA bDepartment of Economics, University of Colorado, Boulder, CO 80309, USA ReceivedAugust 1994,revised version received October 1995 Abstract Attempts to add multinational firms to the ‘new’ trade theoriesgeneratepredictions about direct investment dramatically at odds with the facts. A failure to treat internalization adequately seemsresponsible at least in part. Empirical evidence also indicates a close associationbetweenmultinational firms and knowledge capital; we exploit this to examine the role of internalization and its relation to locational factors.We model a firm which must choose between costly exporting and the possible dissipation of its knowledge capital by producing abroad. The paper examines the choice between exporting, licensing, and acquiring a subsidiary in this environment.We analyze the cost and technology parameters that support alternative modes of serving the foreign market, and we describe the international equilibrium thatjointly determinesthe patternof specialization and the market mode. We find that similarities in relative factor endowments may promote direct investment. Key words: Internalization; Technology transfer; Licenses; Incentive compatible; Multina- tional firm JEL classzjkation: FlO; F12; F23 1. Introduction Core trade theory was once based squarely on comparative advantage and embodied in a few ‘standard’ models - most notably the Heckscher-Ohlin- *Corresponding author: Tel. (215) 898-5105; Fax.