An important component of Robert Lipsey's work has been his research on multinational
firms, and his careful documentation of their behavior in terms of production and
intra-firm trade. In this paper, authors extend recent theory referred to as the knowledge-capital
model, which simultaneously generates motives for both horizontal and vertical multinational
production. Autors use this model to derive predictions about foreign affiliates'
of production for local markets versus production for exports as functions of country
characteristics such as market sizes, size differences, and relative endowment differences.
These predictions are then taken to data on affiliate production and trade. Results
confirm several hypotheses. The ratio of production for export sales to production
for local sale by affiliates of foreign multinationals depends negatively on market
size, investment and trade costs in the host country, and positively on the relative
skilled-labor abundance of the parent country (skilled-labor scarcity of the host