Introduction

Globalization has many faces. The most characteristic aspect of globalization is that it appears that the world becomes smaller; transport costs are reduced, trade barriers disappear, and information becomes less expensive and becomes itself an internationally traded product. Although spreading of economic activity is certainly possible, the lessons of the geographical economics approach might increase fears of an ever-growing gap between nations, in which, because of decreases in trade costs, center–periphery structures become the rule instead of the exception. One of the major actors in this process of globalization is the multinational firm, or multinational for short. This is probably the most mobile among all firms, with sufficient “international” knowledge to seize a profitable opportunity when it presents itself. Without specific cultural ties to individual nations, it can rapidly move in and out of countries, acting only on economic incentives. Given the recent growth in foreign direct investment (FDI), which at the moment is growing faster than international trade, one might expect multinational firms to be decisive in at least some of the agglomeration and spreading trends going on today. It will turn out that the geographical economics approach is an excellent and promising methodology to look at multinationals. Together with the general equilibrium models developed in the 1980s by Helpman and Krugman (1985), they provide an improvement to the useful taxonomic OLI framework of Dunning (1977, 1981); see section 8.3.

In chapter 6 we explained how the introduction of intermediate goods can change the mechanisms leading to spreading or agglomeration. Firms, rather than labor, were assumed to be mobile. Agglomeration can come about if workers move to other sectors; in other words, workers are immobile between regions or countries, but mobile within those regions and countries.