Over the past decade, foreign direct investment among industrialized countries has grown substantially, frequently flowing across borders in both directions within the same industry. In addition, in several industrialized countries, multinational production substantially dominates exports as the vehicle for foreign market penetration. These trends have received little attention from economists, who focus a disproportionate share of attention on trade, and largely ignore intraindustry investment. This research will analyze the relationship between the international location decisions of firms and trade. It will incorporate multinationals into a general equilibrium model of trade with differentiated products. The model will explain intraindustry investment in terms of a tradeoff between concentration and proximity advantages, and contrast this with investment motivated by factor endowment differences. The project will then use a partial equilibrium framework to examine the firm's choice between exporting and overseas production in a setting with dynamic market share dependence. It will also investigate the policy implications. These relationships will be tested empirically. The empirical tests will be based on gravity equations, which are ideally suited to comparing the roles of transport cost and trade barriers in explaining the choice between multinational production and trade.
