Publisher's Synopsis
Excerpt from An Empirical Assessment of the Factor Proportions Explanation of Multinational Sales
The imperfect competition models of the early 19808 provided an explanation for trade based on similarities between countries rather than differences. They also provided a more natural framework for treating multinational enterprises. Although these models diminished the importance of factor proportions in explaining trade flows, consistent with empirical evidence, they maintained the primacy of factor proportions in explaining multinational activities. Yet in recent years, this explanation appears increasingly at odds with observed patterns of foreign direct investment (fdi) and multinational activities. A large and growing share of multinational activity involves industrialized nations as both the source and destination markets, rather than owing from North to South. Between 1961 and 1988, over half of all direct investment out ows generated by 6-5 countries was absorbed by other g-s countries; this share had risen to nearly 70 percent by 1988 (julius, This paper provides empirical evidence that challenges the factor proportions explanation of multinational activity. The same tests on intra-industry ratios and total volumes that were used to demonstrate that a substantial part of trade is explained by factor and income similarities rather than differences are applied to affiliate sales with surprisingly similar results. The predictions of the factor proportions hypothesis for multinational sales is further investigated by distinguishing between affiliate production destined for sale in the local market and that destined for export to the parent's market. Together, the evidence suggests that only a small part of multinational activity into and out of the US in the late 19808 can be explained by factor proportions differences.
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