International Trade and Multinational Investment Theory of the Firm

Peter Ng’ang’a

doi:10.37284/eajbe.5.1.684

Peter Ng’ang’a, PhD Kenyatta University

DOI: https://doi.org/10.37284/eajbe.5.1.684

Keywords: Cournot Oligopoly, Developing Countries, Export Taxes, Foreign Direct Investment, Multinational Corporations, Transport Costs

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Abstract

This study developed the international trade and multinational investment theory of a firm. It examined the effects of export taxes and transport costs in attracting foreign direct investment. The study answered the following question: when is it profitable for a multinational to locate one of its affiliates in a particular host country to trade in that market in lieu of exporting the product to that country after producing it in the home country? In this study, multinationals locate themselves in developing countries to compete in an oligopolistic market and the host countries compete to attract them. The model predicts: (a) a negative effect of transport costs on the number of multinationals entering developing countries, (b) a negative effect of export taxes on the number of multinationals entering developing countries, and (c) a negative effect on the interaction between transport costs and export taxes on the number of multinationals entering developing countries.

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