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Intra-industry foreign direct investment

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  • Alfaro, Laura
  • Charlton, Andrew

Abstract

We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries—close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms’ final good that they appear identical at the two-digit level. We call these proximate subsidiaries ‘intra-industry’ vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Suggested Citation

  • Alfaro, Laura & Charlton, Andrew, 2007. "Intra-industry foreign direct investment," LSE Research Online Documents on Economics 19690, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:19690
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    File URL: http://eprints.lse.ac.uk/19690/
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    More about this item

    Keywords

    Multinational Activity; Foreign Direct Investment; Horizontal FDI; Vertical FDI; Stages of Production;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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