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How do the Location Determinants of Vertical FDI and Horizontal FDI Differ?

Listed author(s):
  • Kyoji Fukao
  • Yuhong Wei

Distinguishing between vertical and horizontal foreign direct investment (FDI), this paper examines how the location determinants of the two types of FDI differ. Based on a conditional logit model and data on Japanese foreign affiliates, the main findings are that the most important determinant for horizontal FDI is a large market, whereas labor costs play a significant role in the case of vertical FDI. Concerning the effect of tariffs, geographical distance, and labor quality on the location decision, this study obtains results that differ from those of previous studies on the determinants of location choice of Japanese multinationals. First, tariffs and distance have opposite effects on the location decisions in the case of horizontal and vertical FDI. Second, labor quality has a positive effect only on the location decision of horizontal FDI.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d07-233.

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Date of creation: Jan 2008
Handle: RePEc:hst:hstdps:d07-233
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