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Vertical foreign direct investment: Evidence from Japanese and U.S. multinational enterprises

  • Tanaka, Kiyoyasu

Foreign direct investment (FDI) in developing countries has increased since the 1990s, but there is mixed evidence of vertical FDI associated with factor-seeking motives. This paper estimates the vertical motive of offshore production by multinational enterprises (MNEs) by exploiting past schooling characteristics as instruments for skilled-labor abundance in a host country. Using panel data on Japanese and U.S. MNEs in the 1990s, I find that skilled-labor abundance has a significantly negative impact on sales of manufacturing foreign affiliate only for Japanese MNEs. The results suggest that vertical FDI activity was more prevalent in Japanese MNEs than U.S. MNEs. A plausible explanation is that Japanese MNEs might be more vertically integrated with their offshore production than U.S. MNEs. A difference in foreign outsourcing activities could generate the observed deviation between Japanese and U.S. MNEs.

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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 23 (2011)
Issue (Month): 2 (March)
Pages: 97-111

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Handle: RePEc:eee:japwor:v:23:y:2011:i:2:p:97-111
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

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