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Vertical FDI Revisited

Author

Listed:
  • Braconier, Henrik

    (National Institute of Economic Research)

  • Norbäck, Pehr-Johan

    (The Research Institute of Industrial Economics)

  • Urban, Dieter

    (London School of Economics and Political Science)

Abstract

This study explores how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we find strong support for vertical FDI, in the sense that more FDI is conducted in countries where unskilled labor is relatively cheap. In addition, we find t hat relative skill-premia also affect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of changes in the relative wage costs on international production reallocation within MNEs are large. In fact, if not for the 8% rise in the US skilled wage premium relative to the average host country between 1986-1994, annual US affiliate sales abroad in relation to US GDP would have been half a percentage point higher.

Suggested Citation

  • Braconier, Henrik & Norbäck, Pehr-Johan & Urban, Dieter, 2002. "Vertical FDI Revisited," Working Paper Series 579, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:0579
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    Cited by:

    1. Isabel Faeth, 2009. "Determinants Of Foreign Direct Investment – A Tale Of Nine Theoretical Models," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 165-196, February.
    2. Jörn Kleinert & Farid Toubal, 2013. "Production versus distribution-oriented FDI," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(3), pages 423-442, September.
    3. Henrik Braconier & Pehr‐Johan Norbäck & Dieter Urban, 2005. "Reconciling the Evidence on the Knowledge‐capital Model," Review of International Economics, Wiley Blackwell, vol. 13(4), pages 770-786, September.
    4. Richard Baldwin & Toshihiro Okubo, 2014. "Networked FDI: Sales and Sourcing Patterns of Japanese Foreign Affiliates," The World Economy, Wiley Blackwell, vol. 37(8), pages 1051-1080, August.
    5. Ronald B. Davies & Carsten Eckel, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 77-102, February.
    6. Jansen, W. Jos & Stokman, Ad C.J., 2004. "Foreign direct investment and international business cycle comovement," Working Paper Series 401, European Central Bank.
    7. Ronald B. Davies & Carsten Eckel, 2007. "Tax Competition for Heterogeneous Firms with Endogenous Entry:The Case of Heterogeneous Fixed Costs," The Institute for International Integration Studies Discussion Paper Series iiisdp213, IIIS.
    8. Kleinert, Jörn & Toubal, Farid, 2005. "A Structural Model of Export versus Affiliates Production," Tübinger Diskussionsbeiträge 288, University of Tübingen, School of Business and Economics.
    9. Katariina Nilsson Hakkala & Pehr-Johan Norbäck & Helena Svaleryd, 2008. "Asymmetric Effects of Corruption on FDI: Evidence from Swedish Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 627-642, November.
    10. Shujie Yao & Pan Wang, 2012. "Has China Displaced the Outward Investments of OECD Countries?," Discussion Papers 12/10, University of Nottingham, GEP.
    11. Jörn Kleinert & Farid Toubal, 2010. "Gravity for FDI," Review of International Economics, Wiley Blackwell, vol. 18(1), pages 1-13, February.
    12. Alfons Palangkaraya & Andreas Waldkirch, 2008. "Relative factor abundance and FDI factor intensity in developed countries," International Economic Journal, Taylor & Francis Journals, vol. 22(4), pages 489-508.
    13. Tanaka, Kiyoyasu, 2011. "Vertical foreign direct investment: Evidence from Japanese and U.S. multinational enterprises," Japan and the World Economy, Elsevier, vol. 23(2), pages 97-111, March.
    14. Davies, Ronald B., 2005. "Fragmentation of headquarter services and FDI," The North American Journal of Economics and Finance, Elsevier, vol. 16(1), pages 61-79, March.
    15. Lahimer, Noomen, 2009. "La contribution des investissements directs étrangers à la réduction de la pauvreté en Afrique subsaharienne," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/1167 edited by Goaied, Mohamed & Bienaymé, Alain.
    16. Andreas Waldkirch, 2004. "Vertical FDI? A Host Country Perspective," International Trade 0403008, University Library of Munich, Germany.
    17. Isabel Faeth, 2005. "Determinants of FDI in Australia : Which Theory Can Explain it Best?," Department of Economics - Working Papers Series 946, The University of Melbourne.
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    19. Dong, Yan & Fan, Cijun, 2017. "The effects of China's aid and trade on its ODI in African countries," Emerging Markets Review, Elsevier, vol. 33(C), pages 1-18.
    20. Yao, Shujie & Wang, Pan, 2014. "Has China displaced the outward investments of OECD countries?," China Economic Review, Elsevier, vol. 28(C), pages 55-71.

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    More about this item

    Keywords

    Multinational Firms; Skilled-Wage Premium; New Trade Theory;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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