The knowledge-capital approach to the multinational enterprise as outlined in this paper is operational and yields clear, testable hypotheses. It is more useful than some other theories of FDI, such as the transactions cost approach to multinational enterprises. Hypotheses are tested regarding the importance of multinational activity between countries as a function of certain characteristics of those countries, particularly size, size differences, relative endowment differences, trade and investment costs, and certain interactions among these variables as predicted by theory. Data fit the model well, lending considerable support to the theory. Outward investment from a source country to affiliates in a host country is increasing the sum of their economic sizes, their similarity in size, the relative skilled-labor abundance of the parent nation, and the interaction between size and relative endowment differences.