Human Capital, Country Size, and North-South Manufacturing Multinational Enterprises

Abstract

A model of North-South multinational enterprises (MNEs) is constructed in which both horizontal and vertical MNEs anse endogenously. While honizontal MNEs are more active when host countries become more similar in national income and human capital, vertical MNEs are encouraged by cheap unskilled labor and growing national income in host countries. The unified treatment of the two types of MNEs predicts a negative link of MNEs to cross-country differences in factor proportions and a positive link between MNEs and host country’s size. This result is consistent with empirical evidence that activities of MNEs in a developing country are positively related to the country’s level of economic development.