Production patterns of Multinational Firms: Horizontal and Vertical Multinationals with traded intermediates

One of the key factors behind the growth of global trade in recent decades is an increase in intermediate input as a result of the development of vertical production networks (Feensta, 1998). Manufacturing goods are no longer produced in a single country. Production processes are subdivided into several stages, in which respective countries specialize in producing parts and components. Many countries are involved in vertical production networks of producing just a single final good for consumers. It is widely recognized that the production networks have formed due to the expansion of multinational enterprises’ (MNEs) activities. Multinational enterprises have been differentiated into two types according to their production structure: horizontal FDI and vertical FDI. However, a new type of FDI which diverges from the vertical one has been proposed in the context of the recent expansion of more complex multinational activities; it is called export-platform FDI. Horizontal FDI maintain affiliates in home and host countries with the headquarters located in the home country, while vertical and export-platform FDI install affiliates in host countries with the headquarters located in the home country. The difference between vertical and export-platform FDI is where their products are sold: vertical FDI seek to sell their products in both the home and host country, while export-platform FDI seek to sell in a third market through the affiliates in the host country (Ekholm et al., 2007). Theoretical research on MNEs has been conducted since the early 1960s (Hymer, 1976), but it developed dramatically from the mid 1980s as a result of the “new” trade theory. There are two important theoretical models of MNEs: one was presented by Helpman (1984) and the other by Markusen (1984). Helpman’s model treats vertical MNEs with monopolistic competition and without trade costs. On the other hand, Markusen’s model treats horizontal MNEs with one factor, assuming firm-level scale...