Over the last two decades, a constant or growing level of direct foreign investment relative to trade has been observed. This fact is at odds with the most simple minded theory of direct investment which is based on the notion that firms invest to avoid trade barriers. Direct investment has been rising faster than trade during an era in which trade barriers have decreased steadily and dramatically. Furthermore, the developed countries are not only the major sources of direct investment, they are also the major recipients. Thus, direct investment is not primarily a transfer of technology and skills from developed to less developed countries. Also, a country's multinationals are often concentrated in a few industries, and those industry specializations are not obviously explained by current conditions. While it is understood why some industries are more multinationalized than others, there is little understanding of how country characteristics determine and are determined by multinational activity. The focus of this research is on explaining the causes behind the rapid growth of multinational activity in an environment where trade has concurrently been liberalized, and the causes for differences among countries in the structure of outgoing investments. This research is important because it will shed light on a number of important trade issues such as when multinationals transfer technology, do they augment or replace learning that would have occurred in the recipient country.
