Essays in Honor of John Dunning
Edited by H. Peter Gray
Chapter 9: The Multiple Dimensions of International Involvement: An Empirical Test
Rajneesh Narula and Katharine Wakelin INTRODUCTION The post-war era has been a period of signiﬁcant growth in both world trade and foreign direct investment (FDI) by multinational enterprises (MNEs). The two are closely interconnected as trade is increasingly internalised by MNEs, with almost one-third of world trade estimated to be conducted on an intra-ﬁrm basis (UNCTAD, 1994). Despite these facts, MNE activity is largely ignored by most international trade theorists. The competitiveness of a country, i.e. its ability to compete on international markets, is determined not just by its trade performance, but also by the activities of foreign-owned aﬃliates, and the investments of its MNEs overseas. However, the literatures on the theory and determinants of trade and FDI have remained largely independent of each other. This chapter seeks to address this shortcoming, by attempting to unite our understanding of trade and FDI and their interrelatedness by evaluating these issues within a common framework. We utilise a neo-Schumpeterian approach that regards technology as playing a central role in competitiveness. This chapter aims to extend the neo-Schumpeterian approach to trade, which stresses the importance of absolute diﬀerences in technology in inﬂuencing export performance, to consider the absolute advantage of a country (and speciﬁcally the ﬁrms within a country) in a broader sense than its trade performance alone. For the purposes of this chapter, absolute advantage is seen to operate in two distinct ways. The ﬁrst, and that emphasised by the neo-Schumpeterian school (see for instance Dosi,...
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