In an international environment where contracts are not always enforceable and product information is imperfect, the importance of networks or relationships between buyers and sellers matters.  In some countries and cultures, it seems to matter more than in others.  Japanese keiretsu groups are often cited as examples of networks that matter for international trade.  This paper examines the impact of business and social networks on international trade and on foreign direct investment (FDI).  I propose that differences in the strength of network effects across countries can produce asymmetric trade and investment flows that may lead to trade friction.  This proposition is examined using a model of multi-product firms that choose to be either national or multinational in production of a differentiated product.  The firm from the country with strong network effects has a cost advantage in selling to buyers from its own country.  This advantage results in lower inward FDI, lower total imports but larger volumes of so-called reverse imports (i.e., imports from overseas affiliates of that countryís own firms) into the country with strong network effects.  The modelís predictions help to explain asymmetric trade and investment flows that often lead to US-Japan trade friction in industries such as autos and auto parts.

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