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Re-estimating the Knowledge-Capital Model: Evidence from Japanese and US Multinational Enterprises

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  • Kiyoyasu Tanaka

Abstract

This paper re-estimates the knowledge-capital model by James Markusen (2002) to study market access and factor endowment explanations of foreign direct investment (FDI). I add to the literature by combining consistent datasets on Japanese and U.S. multinational enterprises (MNE) in the period 1989-2002. To reduce potential bias, the prior specification of the knowledge-capital model is augmented with a number of additional control variables and estimated with a system GMM estimator. In the pooled sample, I find that both market access and relative skill endowments matter for the pattern of foreign affiliate sales. When separately estimating Japanese and US samples, the evidence shows that Japanese MNEs are encouraged by relative unskilled-labor abundance in a host country, consistent with a vertical motive of FDI. In contrast, U.S. MNEs concentrate on skill abundant countries, which is in favor of horizontal FDI. These findings imply that combining datasets on multinational activities with heterogeneous motives of FDI is critical for finding evidence of the knowledge-capital model.

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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 gd09-087.

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Date of creation: Sep 2009
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Handle: RePEc:hst:ghsdps:gd09-087

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Keywords: Multinational firm; foreign direct investment; market access; factor endowment;

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References

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  1. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2003. "Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment," American Economic Review, American Economic Association, vol. 93(3), pages 980-994, June.
  2. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  3. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
  4. James R. Markusen & Keith E. Maskus, 1999. "Discriminating Among Alternative Theories of the Multinational Enterprise," NBER Working Papers 7164, National Bureau of Economic Research, Inc.
  5. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June.
  6. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  7. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
  8. James R. Markusen & Keith E. Maskus, 1999. "Multinational Firms: Reconciling Theory and Evidence," NBER Working Papers 7163, National Bureau of Economic Research, Inc.
  9. Bruce A. Blonigen & Ronald B. Davies, 2004. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," International Tax and Public Finance, Springer, vol. 11(5), pages 601-622, 09.
  10. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  11. Robert E. Lipsey, 2001. "Foreign Direct Investors in Three Financial Crises," NBER Working Papers 8084, National Bureau of Economic Research, Inc.
  12. Céline Azémar & Rodolphe Desbordes & Jean-Louis Mucchielli, 2007. "Do tax sparing agreements contribute to the attraction of FDI in developing countries?," International Tax and Public Finance, Springer, vol. 14(5), pages 543-562, October.
  13. Braconier, Henrik & Norbäck, Pehr-Johan & Urban, Dieter, 2003. "Reconciling the Evidence on the Knowledge Capital Model," Working Paper Series 590, Research Institute of Industrial Economics.
  14. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  15. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc.
  16. Egger, Peter & Pfaffermayr, Michael, 2004. "The impact of bilateral investment treaties on foreign direct investment," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 788-804, December.
  17. James R. Markusen, 1997. "Trade versus Investment Liberalization," NBER Working Papers 6231, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ivan Deseatnicov & Hiroya Akiba, 2013. "Reconsideration of the Effects of Political Factors on FDI: Evidence from Japanese Outward FDI," Review of Economics & Finance, Better Advances Press, Canada, vol. 3, pages 35-48, February.

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