The Multinational Firm

Direct investment is incorporated into a simple general equilibrium model of international trade. The analysis focuses on an attempt to endogenize the internalization decision. It is argued that a reasonable approach assumes that arm's length contracts must be “simple” so that “complex” arrangements require internalization. The model relates direct investment to the degree of underlying uncertainty and to fundamental trade determinants, such as relative factor endowments. The behavior of the model contrasts sharply with that of the Markusen-Helpman model, which takes internalization for granted.