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Horizontal versus Vertical Interdependence in Multinational Activity

Author

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  • Harald Badinger
  • Peter Egger

Abstract

Recent research in international economics highlights the role of interdependencies of investment decisions and sales of multinational firms. Previous work focused on and provided evidence for aggregate flows or stocks of foreign direct investment, showing that interdependence declines in geographical distance among host countries. This could be interpreted as implicit evidence for export-platform foreign direct investment—an activity which creates a complementary relationship between (potential) host markets through final goods exports of foreign subsidiaries to third countries. This paper sheds light on interdependencies that are brought about by (horizontal) trade in final goods and (vertical) trade in intermediate goods (within and between host countries). For this, we use a panel data set of U.S. foreign affiliate sales to 16 developed countries in 7 industries over the period 1983-2000. As one of the first studies on that matter, we explicitly distinguish between horizontal and vertical interdependence in MNE activity and allow for both market size (demand) related as well as remainder linkage effects. The latter are captured by a second order spatial regressive error process. Overall, there is evidence for mainly vertical as opposed to horizontal interdependence and, hence, mainly vertical motives of multinational activity.

Suggested Citation

  • Harald Badinger & Peter Egger, 2008. "Horizontal versus Vertical Interdependence in Multinational Activity," CESifo Working Paper Series 2327, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_2327
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2327.pdf
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    References listed on IDEAS

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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, March.
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    5. Liza Jabbour, 2012. "‘Slicing the Value Chain’ Internationally: Empirical Evidence on the Offshoring Strategy by French Firms," The World Economy, Wiley Blackwell, vol. 35(11), pages 1417-1447, November.
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    11. Harald Badinger & Peter Egger, 2008. "GM Estimation of Higher Order Spatial Autoregressive Processes in Panel Data Error Component Models," CESifo Working Paper Series 2301, CESifo Group Munich.
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    Citations

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    Cited by:

    1. Harald Badinger & Peter Egger, 2009. "Estimation of Higher-Order Spatial Autoregressive Panel Data Error Component Models," CESifo Working Paper Series 2556, CESifo Group Munich.
    2. Konstantin M. Wacker & Krishna Chaitanya Vadlamannati, 2011. "Do Multinationals Influence Labor Standards? A Close Look at US Outward FDI," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 98, Courant Research Centre PEG.
    3. Lin, Hui-Lin & Hsiao, Yi-Chi & Lin, Eric S., 2015. "The choice between standard and non-standard FDI production strategies for Taiwanese multinationals," Research Policy, Elsevier, vol. 44(1), pages 283-293.
    4. Jos Jansen & Ad Stokman, 2011. "International Business Cycle Comovement: Trade and Foreign Direct Investment," DNB Working Papers 319, Netherlands Central Bank, Research Department.

    More about this item

    Keywords

    multinational firms; foreign affiliate sales; spatial econometrics; generalized method of moments estimation; panel data analysis;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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