Geography Reference
In-Depth Information
integrated firms known as type-h firms, and vertically-integrated firms
known as type-v firms (Markusen 2002). Type-h firms, which correspond
to those which in Caves' schema are denoted as carrying out HFDI, are
MNEs which have production establishments at similar levels in the pro-
duction chain in more than one country. The KCM model is based on the
assumption that the firm's knowledge assets are basically a public good
within the firm, whose costs of supply to the firm's foreign plants are very
low. Vertically-integrated type-v firms, which in the work of Caves are
those undertaking VFDI, are the multinational firms which have differ-
ent production establishments in different international locations. The
concept of type-v firms arises from the assumption that firms can split dif-
ferent types of activities along the value chain and locate them in various
places on the basis of international differences in factor endowments, and
in particular on the basis of the knowledge and skill intensities of the local
labour force.
Whether the firm decides to supply foreign and overseas markets
directly via exports from the home country or via local supply from
foreign affiliates depends on the balance between local production econo-
mies of scale and international trade or transport costs (e.g., Markusen
2002; Lankhuizen 2009; but see also Caves 1971, 1982a). In general, high
trade and transport costs encourage FDI, specifically HFDI, as firms seek
to gain easier access to a foreign market, while low trade costs encourage
domestic production and exporting. Similarly, high economies of scale
encourage single site production and exporting, whereas low economies
of scale encourage the establishment of different facilities in different
countries.
Regarding the patterns of FDI, the KCM predicts that type-h multi-
national firms will tend to dominate when the markets in both the home
and host countries are large and similar in terms of their local labour skills
endowments, whereas type-v multinational firms will tend to dominate
when the markets in both countries are very different in terms of their size
and local labour skills endowments. It should be noted that most KCM
conclusions are derived from simulations rather than closed form analyti-
cal solutions because of the multiple dimension and inequalities embedded
in these complex analytical formulations (Markusen 2002; Barba et al.
2004; Lankhuizen 2009).
Most recently, however, an apparent conflict between the KCM expla-
nation of MNE activity and the trends observed in current globalization
has been pointed out by trade theorists. As Neary (2009) argues, if trans-
port and trade costs fall, which, as we will see in subsequent chapters has
indeed been the case in recent decades, then according to the KCM one
would expect that horizontal FDI will decrease, as falling transport and
