This paper constructs a model to explore the emergence and impact of multinational firms (MNEs) in the context of the new trade theory. The model allows for the coexistence of national firms (NEs) and MNEs, with MNEs arising endogenously when transport and tariff costs are high, incomes are high, and firm-level scale economies are significant. The model predicts that MNEs become more important relative to NEs as countries become more similar in income levels, factor endowments, and technologies, a phenomenon referred to as the "convergence hypothesis." The model also predicts a non-monotonic relationship between the volume of intra-industry trade and the size difference between countries, initially increasing and then decreasing as countries converge. Additionally, the model analyzes the welfare effects of allowing or excluding MNEs, finding that MNEs can increase welfare in both countries if they are initially similar and transport costs are high, but may decrease welfare in the larger, better-endowed country if differences are initially large and transport costs are low. The paper provides analytical and numerical results to support these predictions and discusses the implications for understanding the growing importance of direct investment relative to trade among developed countries.This paper constructs a model to explore the emergence and impact of multinational firms (MNEs) in the context of the new trade theory. The model allows for the coexistence of national firms (NEs) and MNEs, with MNEs arising endogenously when transport and tariff costs are high, incomes are high, and firm-level scale economies are significant. The model predicts that MNEs become more important relative to NEs as countries become more similar in income levels, factor endowments, and technologies, a phenomenon referred to as the "convergence hypothesis." The model also predicts a non-monotonic relationship between the volume of intra-industry trade and the size difference between countries, initially increasing and then decreasing as countries converge. Additionally, the model analyzes the welfare effects of allowing or excluding MNEs, finding that MNEs can increase welfare in both countries if they are initially similar and transport costs are high, but may decrease welfare in the larger, better-endowed country if differences are initially large and transport costs are low. The paper provides analytical and numerical results to support these predictions and discusses the implications for understanding the growing importance of direct investment relative to trade among developed countries.