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Testing the O-ring theory for FDI

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  • Engemann, Martina
  • Lindemann, Henrike
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    Abstract

    Modern production processes often involve several sequential stages which are performed in many different countries. This pattern of vertical specialization does not only affect trade between countries but it is also of importance for foreign direct investment (FDI). In this paper, we therefore adopt the idea of Kremer (1993) and Costinot et al. (2011) of a sequential production process which is subject to mistakes to the theory of FDI. Using firm-level panel data on German outward FDI, we show that the affiliate sector's position in the value chain affects the firm's FDI location choice. Affiliates in sectors that are positioned toward the end of the value chain are more likely to be located in more productive countries. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 24/2013.

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    Date of creation: 2013
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    Handle: RePEc:zbw:bubdps:242013

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    Keywords: Foreign Direct Investment; O-Ring Theory; Upstreamness;

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    1. Su Wang & Jonathan Vogel & Arnaud Costinot, 2011. "An Elementary Theory of Global Supply Chains," 2011 Meeting Papers 95, Society for Economic Dynamics.
    2. Chang, Pao-Li & Lu, Chia-Hui, 2012. "Risk and the technology content of FDI: A dynamic model," Journal of International Economics, Elsevier, vol. 86(2), pages 306-317.
    3. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
    4. Anna Maria Mayda (Georgetown University) and Dani Rodrik (Harvard University), 2005. "Why are some people (and countries) more protectionist than others?," Working Papers gueconwpa~05-05-11, Georgetown University, Department of Economics.
    5. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 776-795, 06.
    6. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
    7. Pol Antràs & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," NBER Working Papers 17819, National Bureau of Economic Research, Inc.
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