Multinationals, production externalities, and complementarity between domestic and foreign activities?

This paper applies theories of industrial organisation explaining the motives for vertical and horizontal integration to shed some light on the relationship between home and foreign production of multinational firms (MNEs). It is argued that once the preconditions for the existence of MNEs are taken into account, namely the motives for integration of firm across country borders, both in the vertical integration and the horizontal integration case a complementary relationship is plausible. Especially, for horizontally integrated MNEs with multiplant economies of scale generated by inputs with public good characteristics it is demonstrated that home and foreign production are complements if multiplant economies of scale and/or marginal transportation costs are sufficiently large. The horizontal integration model is also analyzed in an oligopolistic setting and similar results are obtained.