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Production Patterns of Multinational Enterprises: The Knowledge-Capital Model Revisited

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  • Oyamada, Kazuhiko

Abstract

To prepare an answer to the question of how a developing country can attract FDI, this paper explored the factors and policies that may help bring FDI into a developing country by utilizing an extended version of the knowledge-capital model. With a special focus on the effects of FTA/EPA between a market country and a developing country, simulations with the model revealed the following: (1) although FTA/EPA generally tends to increase FDI to a developing country, the possibility to improve welfare through increased demand for skilled and unskilled labor becomes lower as the size of the country grows; (2) a developing country may suffer severe welfare losses through FTA/EPA if the availability of skilled labor is extremely limited; (3) because the additional implementation of cost-saving policies to reduce the firm-type/trade-link specific fixed cost tends to depreciate the price of skilled labor by saving its input, a developing country can enhance welfare gains from FTA, and it is even possible to recover the welfare effects from negative to positive, by making the arrangement to be EPA.

Suggested Citation

  • Oyamada, Kazuhiko, 2016. "Production Patterns of Multinational Enterprises: The Knowledge-Capital Model Revisited," Conference papers 332676, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332676
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    References listed on IDEAS

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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, April.
    2. Grossman, Gene M. & Helpman, Elhanan & Szeidl, Adam, 2006. "Optimal integration strategies for the multinational firm," Journal of International Economics, Elsevier, vol. 70(1), pages 216-238, September.
    3. Yeaple, Stephen Ross, 2003. "The complex integration strategies of multinationals and cross country dependencies in the structure of foreign direct investment," Journal of International Economics, Elsevier, vol. 60(2), pages 293-314, August.
    4. Zhang, Kevin Honglin & Markusen, James R., 1999. "Vertical multinationals and host-country characteristics," Journal of Development Economics, Elsevier, vol. 59(2), pages 233-252, August.
    5. Tadashi Ito, 2013. "Export-Platform Foreign Direct Investment: Theory and Evidence," The World Economy, Wiley Blackwell, vol. 36(5), pages 563-581, May.
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