Dynamics of Large Multinationals

Abstract

Abstract Multinational enterprises are very large multi-product firms. To capture salient features of the data, we develop a model of large multinational enterprises, each one producing a continuum of products. These outsized firms compete as oligopolists in domestic and foreign markets, facing competitive pressure from monopolistically competitive single-product firms. The multinational enterprises engage in foreign direct investment (FDI) in order to expand the product scope of their foreign affiliates, and they invest in research and development (R&D) in order to invent new products. We study the dynamic evolution of these enterprises and characterize transition dynamics and steady states. We also characterize the evolution of prices, markups, market shares, and exports relative to subsidiary sales. Furthermore, we study comparative dynamics that result from changes in trade costs, R&D costs, FDI costs, and productivity. Finally, we illustrate the use of our model for an analysis of mergers.