This paper presents a model in which multinational firms (MNEs) can arise endogenously in competition with national firms (NEs). The model shows that MNEs exist in equilibrium when transport and tariff costs are high, incomes are high, and firm-level scale economies are important relative to plant-level scale economies. MNEs are more important in total economic activity when countries are more similar in incomes, relative factor endowments, and technologies. The model explains several stylized facts, including the growing importance of direct investment relative to trade among developed countries and the greater ratio of investment to trade among developed countries compared to "north-south" or "south-south" economic relationships. The model predicts that trade volume first rises and then falls as countries converge in incomes, relative endowments, and technologies. Welfare analysis shows that direct investment makes the smaller (or high cost) country better off, but may make the larger (or low cost) country worse off. The paper also analyzes the volume of trade and welfare in a two-country model with four firm types: NE firms in each country and MNEs headquartered in each country. The results show that multinationals become more important relative to NE firms as countries become more similar in size, endowments, and technologies. The model also shows that the introduction of MNEs can increase welfare for both countries if they are initially relatively similar in size, endowments, and technologies, and if transport costs are relatively high. However, if these differences are initially large and transport costs are relatively low, the introduction of MNEs may slightly reduce the welfare of the larger, well-endowed, and/or more productive country and increase the welfare of the smaller, poorly-endowed, and/or less productive country. The paper concludes that MNEs are a vehicle for transferring economic benefits from the large, richer nations to the poorer nations.This paper presents a model in which multinational firms (MNEs) can arise endogenously in competition with national firms (NEs). The model shows that MNEs exist in equilibrium when transport and tariff costs are high, incomes are high, and firm-level scale economies are important relative to plant-level scale economies. MNEs are more important in total economic activity when countries are more similar in incomes, relative factor endowments, and technologies. The model explains several stylized facts, including the growing importance of direct investment relative to trade among developed countries and the greater ratio of investment to trade among developed countries compared to "north-south" or "south-south" economic relationships. The model predicts that trade volume first rises and then falls as countries converge in incomes, relative endowments, and technologies. Welfare analysis shows that direct investment makes the smaller (or high cost) country better off, but may make the larger (or low cost) country worse off. The paper also analyzes the volume of trade and welfare in a two-country model with four firm types: NE firms in each country and MNEs headquartered in each country. The results show that multinationals become more important relative to NE firms as countries become more similar in size, endowments, and technologies. The model also shows that the introduction of MNEs can increase welfare for both countries if they are initially relatively similar in size, endowments, and technologies, and if transport costs are relatively high. However, if these differences are initially large and transport costs are relatively low, the introduction of MNEs may slightly reduce the welfare of the larger, well-endowed, and/or more productive country and increase the welfare of the smaller, poorly-endowed, and/or less productive country. The paper concludes that MNEs are a vehicle for transferring economic benefits from the large, richer nations to the poorer nations.