Geography Reference
In-Depth Information
variability of foreign production displayed by different industries even
from the same country on the basis of different endowments of particular,
and combined, intangible assets, such as research and technology, dif-
ferentiation capacity, managerial and marketing skills, social capital and
entrepreneurship. The emphasis on industrial, structural and institutional
features - which was rather novel for its time - is critical also for its geo-
graphical dimension, though this is still at a macro level. A
propos
of verti-
cal FDI, for example, Caves explains (1971, p. 10): 'The corporation may
integrate backwards to produce raw materials in less-developed countries
where they might otherwise not be forthcoming, due to shortages of local
social overhead capital and entrepreneurship; but this line of argument
fails to explain extensive vertical direct investments in countries like
Canada and Norway which seem well endowed with railroads and local
entrepreneurs.'
2.3.4
The Knowledge-Capital Model
During the 1980s and 1990s, developments in new trade theory (NTT)
lead to the construction of what becomes known as the knowledge-capital
model
(KCM). The knowledge-capital model was first termed as such
by one of the its most prominent authors, James Markusen (1984, 1995,
2002), but such a model can be thought of as a research programme
which includes the work of a variety of leading scholars including, among
others, Ethier (1986), Helpman (1984, 1985), Markusen (1984), Helpman
and Krugman (1985), Horstmann and Markusen (1987a, b), Ethier and
Markusen (1996), Markusen and Venables (1996, 1998, 2000), Venables
(1999a), Carr et al. (2001). The research agenda set out by the knowledge
capital model is to develop the study of the determinants and effects of
multinational activity in line with the analytical approach of mainstream
economics. These models are developed within a formalized general
equilibrium framework, and attempt to integrate MNE activity into the
mathematical modelling of imperfect competition and increasing returns,
while at the same time borrowing some elements from previous traditions
including the work of Vernon, Caves, and also some of the internalization
theories.
The basic KCM approach rests on the main idea that MNEs are inten-
sive in the use of knowledge-based assets, and the approach combines both
horizontal integration associated with the proximity to demand, and verti-
cal integration associated with the search for lower costs, as determinants
of MNE location and investment activities. Drawing extensively upon
Caves' work, although, curiously, seldom acknowledging it, the KCM
splits multinational firms into two types of firms, namely horizontally
