Three essays in international trade and investment

This thesis is made up of three self-contained essays, each dealing with a particular theoretical or empirical issue in international trade and investment.; The first essay studies the location decision of firms and the development of vertical multinational production in the presence of increasing returns, trade costs, and demand and cost linkages. It presents a two-country two-sector monopolistic competition model in which wages and the geographic distribution of production are endogenous. A firm faces conflicting incentives when choosing where to locate its upstream and downstream activities: to produce in only one place and thus to gain from agglomeration, and also to produce near markets to save on transport and labor costs. Under certain conditions, some firms find it optimal to separate upstream and downstream production in different countries, and multinational firms thus emerge. The model is then used to discuss the implications of economic integration and economic growth for multinational production activities.; The second essay is concerned with the impact of exchange rate movements on the profitability of U.S. multinationals. It focuses on two important sources of exchange rate risk to a multinational corporation: foreign sales and foreign production. Based on the capital asset pricing model, an econometric model is constructed to link the stock market return of a multinational to exchange rate news through these two risk sources. The model is estimated for a sample of eighty U.S. multinationals from seven 3-digit SIC manufacturing industries. Empirical results show that the stock market correctly reveals the profitability effect of exchange rate news predicted by theory.; The final essay examines some implications of recent theories of economic geography and trade through a case study of China. The open door policy adopted in China, through its preferential treatment that consistently favors the coastal regions, has resulted in the geographic concentration of foreign trade and investment. This essay provides evidence at the both aggregate and disaggregated levels that the southeast coast of China experienced much higher rates of industrial growth during 1985-1995 than other regions. This suggests a geographic shift of industry towards this region. Statistical analysis based on provincial-level data shows a clear positive link between inward foreign direct investment and industrial growth. Overall the evidence is broadly consistent with the theoretical implications of economic geography and trade.