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Vertical Foreign Direct Investment: Evidence from Japanese and U.S. Multinational Enterprises

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  • Kiyoyasu Tanaka

Abstract

Foreign direct investment (FDI) has rapidly increased in developing countries since the 1990s, but formal evidence for vertical FDI has been surprisingly mixed. This paper empirically reconsiders the factor-proportions hypothesis by exploring the role of host countryfs relative skill endowments in offshore production of multinational enterprises (MNEs). Using panel data on sales of foreign affiliates by Japanese and U.S. MNEs in the 1990s, I find that relative skill abundance has a large negative impact on Japanese affiliate sales, but little effects on U.S. affiliate sales. Robust to a wide variety of sensitivity checks, the results strongly support vertical FDI in the case of Japanese MNEs, but not U.S. MNEs. Because the dominant view in favor of horizontal FDI against vertical FDI in the previous literature results primarily from U.S. data, I empirically demonstrate that data sources on MNEs could partly explain weak evidence for vertical FDI.

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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd08-046.

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Date of creation: Mar 2009
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Handle: RePEc:hst:ghsdps:gd08-046

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Keywords: Multinational firms; foreign direct investment; skill endowments;

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  1. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 451-71, June.
  2. Van Assche, Ari, 2008. "Modularity and the organization of international production," Japan and the World Economy, Elsevier, vol. 20(3), pages 353-368, August.
  3. Henrik Braconier & Pehr-Johan Norback & Dieter Urban, 2002. "Vertical FDI Reviseted," Development Working Papers 167, Centro Studi Luca d\'Agliano, University of Milano.
  4. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
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  12. Ronald B. Davies, 2008. "Hunting High and Low for Vertical FDI," Review of International Economics, Wiley Blackwell, vol. 16(2), pages 250-267, 05.
  13. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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  15. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
  16. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
  17. James R. Markusen & Keith E. Maskus, 2001. "Multinational Firms: Reconciling Theory and Evidence," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 71-98 National Bureau of Economic Research, Inc.
  18. David L. Carr & James R. Markusen & Keith E. Maskus, 2003. "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Reply," American Economic Review, American Economic Association, vol. 93(3), pages 995-1001, June.
  19. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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  24. Braconier, Henrik & Norback, Pehr-Johan & Urban, Dieter, 2005. "Multinational enterprises and wage costs: vertical FDI revisited," Journal of International Economics, Elsevier, vol. 67(2), pages 446-470, December.
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Cited by:
  1. Greaney, Theresa M. & Li, Yao, 2009. "Assessing foreign direct investment relationships between China, Japan, and the United States," Journal of Asian Economics, Elsevier, vol. 20(6), pages 611-625, November.

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