Theory of the Multinational Firm: An Analysis of Effects of Government Policies

Abstract

The recent stride of multinational firms is remarkable, and shares of multinational firms in.various economic activities in the world have been.also rapidly increased. For example, international production, defined as production..subject to foreign control or decision, reached approximately $330 billion in 1971, and this was somewhat larger than total exports of all market economi.es, $310 billion (U. N. [1974, p. 16]). Along with the. growth of multinational firms, they raised. new issues to individual national economies as well as world economy. These include international location of production plants, their impacts on market conditions, and their contributions to government revenues and the balance of payments of both the home and the host countries. Horst [1971], and Adler and Stevens [1974], clarified some. implications of. commercial policies in the partial equilibrium models of multinational firms which produce the final goods in the two countries. In the general equilibrium models, Batra [1976] and [1976], analyzed the effects of profit taxes and a tariff on the economies of the home and the host countries. However, in these studies the present system of taxation of multinational firms (the. tax credit system) is not recognized, or even more so, its implications are not completely investigated. Furthermore, though it is well recognized by economists such as Barnet and Muller [1974], Fatemi, et al. [1975], and Hufbauer and Nunns [1975], that government policies influence multinational firms' contributions to government revenues and the balance of payments, these aspects have not been formally investigated. The purpose of the present paper is to analyze the impacts of several government policies on multinational firms' decisions, and on their contributions to government revenues and the balance of payments. The multinational firm produces and sells final goods in both countries, using the intermediate good produced in the foreign .country. Our results show that because of the presence of multinational firms, government policy instruments have a much wider scope

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