Asset specificities, multinational firms and international trade

A commonly used explanation for vertical integration draws upon the possibility of opportunistic behavior when parties involved in a transaction are required to invest in relationship specific assets. This idea is developed here within the context of the Heckscher-Ohlin-Samuelson model where it is first used to analyze the effects of vertical integration. We then go on to study the case of internalization of transactions across international boundaries, within the multinational firm. Various effects of the formation of a multinational are worked out.