Multinational Firms, Integration and Economic Growth

The importance and the impacts of horizontal multinational corporations in the context of integration and economic growth processes are examined. A noncooperative game with two firms that choose to have either one or two plants located in two asymmetric countries is used. The firms compete purely through location. Economic integration has an ambiguous impact upon foreign direct investment. On one hand, it decreases trade costs and easies the access to foreign markets through exports. On the other hand, through economic growth, it increases the size of the markets with relation to plant fixed costs and makes multinationals economically feasible. The latter effect, entails a decentralisation of production towards the smaller country.