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

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  • Kyoji Fukao
  • Yuhong Wei

Abstract

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.

Suggested Citation

  • Kyoji Fukao & Yuhong Wei, 2008. "How do the Location Determinants of Vertical FDI and Horizontal FDI Differ?," Hi-Stat Discussion Paper Series d07-233, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:hstdps:d07-233
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    File URL: http://hi-stat.ier.hit-u.ac.jp/research/discussion/2007/pdf/D07-233.pdf
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    Cited by:

    1. Hecht, Veronika, 2015. "Location choice of German multinationals in the Czech Republic : the importance of agglomeration economies," IAB Discussion Paper 201519, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    2. JINJI Naoto & Xingyuan ZHANG, 2013. "Innovation in the Host Country and the Structure of Foreign Direct Investment: Evidence from Japanese multinationals," Discussion papers 13060, Research Institute of Economy, Trade and Industry (RIETI).
    3. JINJI Naoto & ZHANG Xingyuan & HARUNA Shoji, 2011. "Does the Structure of Multinational Enterprises' Activity Affect Technology Spillovers?," Discussion papers 11027, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    horizontal FDI; vertical FDI; location decisoin; Japan's FDI;

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