Intra-industry foreign direct investment
By: Laura Alfaro, Andrew Charlton.
Contributors: Charlton, Andrew 1978-; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13447.; Working paper series (National Bureau of Economic Research) -- working paper no. 13447.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 25
Subjects: Investments, Foreign -- Mathematical models
Description: We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries -- close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms' final good that they appear identical at the two-digit level. We call these proximate subsidiaries 'intra-industry' vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.
Notes: "September 2007"

Includes bibliographical references (p. 23-25).

Also available in PDF from the NBER World Wide Web site (www.nber.org).