Integration and Welfare with Horizontal Multinationals

We construct a two-country model with national and multinational (multiplant) firms and we investigate the effect of economic integration on welfare both at the country and at the aggregate level. Results crucially depend on the share of industrial profits owned by a country and on the effective degree of integration itself. On the one hand, if the share of profits owned by a country is too small, then the overall impact of integration on welfare is negative and positive otherwise. On the other hand, it can be shown that the relation between integration and welfare is U-shaped so that, in each country, there is a welfare-minimizing degree of integration. Hence a marginal increase of the latter might be harmful (both at the country and at the aggregate level) when countries are not sufficiently well integrated while a sufficiently strong improvement in economic integration is always good both at the country and at the aggregate level. Finally, it is shown that when the distribution of global profits is uneven, liberalisation policies always increase welfare inequality.