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Re-estimating the Knowledge-Capital Model: Evidence from Japanese and US Multinational Enterprises

  • Kiyoyasu Tanaka

This paper re-estimates the knowledge-capital model by James Markusen (2002) to study market access and factor endowment explanations of foreign direct investment (FDI). I add to the literature by combining consistent datasets on Japanese and U.S. multinational enterprises (MNE) in the period 1989-2002. To reduce potential bias, the prior specification of the knowledge-capital model is augmented with a number of additional control variables and estimated with a system GMM estimator. In the pooled sample, I find that both market access and relative skill endowments matter for the pattern of foreign affiliate sales. When separately estimating Japanese and US samples, the evidence shows that Japanese MNEs are encouraged by relative unskilled-labor abundance in a host country, consistent with a vertical motive of FDI. In contrast, U.S. MNEs concentrate on skill abundant countries, which is in favor of horizontal FDI. These findings imply that combining datasets on multinational activities with heterogeneous motives of FDI is critical for finding evidence of the knowledge-capital model.

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File URL: http://gcoe.ier.hit-u.ac.jp/research/discussion/2008/pdf/gd09-087.pdf
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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Global COE Hi-Stat Discussion Paper Series with number gd09-087.

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Date of creation: Sep 2009
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Handle: RePEc:hst:ghsdps:gd09-087
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  1. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  2. Robert E. Lipsey, 2001. "Foreign Direct Investors in Three Financial Crises," NBER Working Papers 8084, National Bureau of Economic Research, Inc.
  3. Andrew K. Rose, 2002. "Do We Really KNow that the WTO Increases Trade?," Working Papers 182002, Hong Kong Institute for Monetary Research.
  4. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," SSE/EFI Working Paper Series in Economics and Finance 172, Stockholm School of Economics.
  5. Robert E. Lipsey, 2001. "Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data," NBER Working Papers 8665, National Bureau of Economic Research, Inc.
  6. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  7. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  8. James R. Markusen, 1997. "Trade versus Investment Liberalization," NBER Working Papers 6231, National Bureau of Economic Research, Inc.
  9. Bruce A. Blonigen & Ronald B. Davies, 2000. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," NBER Working Papers 7929, National Bureau of Economic Research, Inc.
  10. Braconier, Henrik & Norbäck, Pehr-Johan & Urban, Dieter, 2003. "Reconciling the Evidence on the Knowledge Capital Model," Working Paper Series 590, Research Institute of Industrial Economics.
  11. David L. Carr & James R. Markusen & Keith E. Maskus, 1998. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," NBER Working Papers 6773, National Bureau of Economic Research, Inc.
  12. Céline Azemar & Rodolphe Desbordes & Jean-Louis Mucchielli, 2007. "Do tax sparing agreements contribute to the attraction of FDI in developing countries?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00310534, HAL.
  13. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
  14. James R. Markusen & Keith E. Maskus, 1999. "Discriminating Among Alternative Theories of the Multinational Enterprise," NBER Working Papers 7164, National Bureau of Economic Research, Inc.
  15. James R. Markusen & Keith E. Maskus, 1999. "Multinational Firms: Reconciling Theory and Evidence," NBER Working Papers 7163, National Bureau of Economic Research, Inc.
  16. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  17. Egger, Peter & Pfaffermayr, Michael, 2004. "The impact of bilateral investment treaties on foreign direct investment," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 788-804, December.
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