The geography of multinational production

The purpose of this thesis is to contribute to the development of a theoretical model which captures the main firm, sector and location characteristics of multinational firm activity. The knowledge capital model (Markusen and Venables, 1995, 1996) is extended by intra and inter-industry supply linkages to allow multinational firms to be attracted to a country to exploit the agglomeration externalities created by pooling of national or other multinational firms. The main finding through computational general equilibrium (CGE) simulations is that firms show a preference to locate their affiliates in countries with strong supply linkages, as long as the competition among sectors for limited endowments do not increase the factor prices to a level that makes the country disadvantageous. Multinational firms (MNFs) particularly in sectors with high total scale economies, low trade costs and high plant versus firm level scale economies prefer to locate in close proximity to industrial clusters. The propositions obtained from CGE simulations are also tested empirically for manufacturing sector affiliates. The empirical findings provides evidence on the importance of supply linkages in a host economy for attracting MNFs in technology-intensive sectors and that the sub-sectors may vary on the importance they set on finding locations with industrial clusters. In addition to these, the determinants of location decisions of MNFs in Europe and the impact of the European integration policies on multinational production are investigated. The empirical analysis for the potential effects of a regional integration policy reveals that central and peripheral countries may benefit from different aspects of an integration process. Moreover, the intra-region and extra-region foreign direct investment may display different motives for choosing a location for their affiliates. The findings provide support on the hypothesis that intra-EU FDI has become more efficiency seeking, hence, leading to a redistribution of multinational activity within the region.