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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: https://hit-u.repo.nii.ac.jp/record/2051436/files/D07-233.pdf
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    Cited by:

    1. Francesca Spinelli & Dorothée Rouzet & Hongyong Zhang, 2020. "Networks of foreign affiliates: Evidence from Japanese micro‐data," The World Economy, Wiley Blackwell, vol. 43(7), pages 1841-1867, July.
    2. Sierk Horn & Tomoki Sekiguchi & Matthias Weiss, 2021. "Thrown off track? Adjustments of Asian business to shock events," Asian Business & Management, Palgrave Macmillan, vol. 20(4), pages 435-455, September.
    3. Cieślik, Andrzej & Ryan, Michael, 2024. "Institutional quality, the level of development and Japanese outward foreign direct investment," Japan and the World Economy, Elsevier, vol. 71(C).
    4. Veronika Hecht, 2015. "Location choice of German multinationals in the Czech Republic. The importance of agglomeration economies," FIW Working Paper series 159, FIW.
    5. Pierre-Louis Vézina, 2014. "Race-to-the-bottom Tariff Cutting," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 444-458, August.
    6. Naoto JINJI & 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).
    7. Thompson, Edmund R. & Dericks, Gerard H. & Fai, Felicia, 2019. "Development and validation of a firm-level vertical and horizontal internationalization metric," International Business Review, Elsevier, vol. 28(3), pages 533-543.
    8. Naoto JINJI & Xingyuan ZHANG & Shoji HARUNA, 2011. "Does the Structure of Multinational Enterprises' Activity Affect Technology Spillovers?," Discussion papers 11027, Research Institute of Economy, Trade and Industry (RIETI).

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