The investment decisions of multinational enterprises

This paper reviews the theory and evidence on the location of economic activity by multinational enterprises (including its effect on trade flows) and explores the implications of MNE location for public policy. Transactional and locational approaches to understanding multinational behavior are explained, then these models are combined to consider both the forms in which technology is transferred and the countries in which multinationals locate their subsidiaries. While controlled investments are preferred by MNEs for some types of technology transfer, there is evidence of increasing participation also in joint ventures and other contractual forms.

The paper also considers the extent to which trade and investment are substitutes, an issue of some importance in the context of free trade agreements.