Insights from neoclassical trade theory and new trade theory have improved our understanding of the structure of foreign trade and investment. Recent developments in the world economy have sparked, however, an increased interest in new theoretical approaches designed to better understand the evidence about firms that organize production on a global scale. These developments include the growing role of multinational corporations in the global economy, their engagement in more complex integration strategies, and the growing share of intermediate inputs in trade flows.

Although traditional theories allow for trade in intermediate inputs and for the emergence of international production networks, they cannot explain some newly observed phenomena. First, while the traditional approaches assume that firms are (for the most part) symmetrically structured within industries, the data exhibit substantial within-industry heterogeneity, both in the size distribution of firms and in their participation in foreign trade. Second, in developing global sourcing strategies firms decide on where to locate the production of different parts of their value chains and also on the extent of their control over these activities. Which activities should they locate in the home country and which should they offshore? If they choose to offshore, should they engage in foreign direct investment (FDI) and import intermediate inputs within their boundaries or should they outsource the production of intermediates to independent foreign suppliers? As is well known from the work of Coase (1937), Williamson (1975, 1985), and Grossman and Hart (1986), these questions cannot be answered in a complete-contracting framework of the type used in traditional theories of international trade.