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Hunting High and Low for Vertical FDI

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  • Ronald B. Davies

    () (University of Oregon Economics Department)

Abstract

Recently the two dominant models of foreign direct investment (FDI), the horizontal and vertical models, have been synthesized into the knowledge capital (KK) model. Empirical tests, however, have found that the horizontal model cannot be rejected in favor of the KK model. This paper suggests that this is because the empirical specifications used do not allow the vertical aspects of FDI to manifest themselves. By extending the specification, I find evidence of vertical FDI. In particular, when I use the stock of FDI as my measure of FDI activity I can reject the horizontal model in favor of the KK model and identify countries for which FDI is dominated by vertical investment.

Suggested Citation

  • Ronald B. Davies, 2002. "Hunting High and Low for Vertical FDI," University of Oregon Economics Department Working Papers 2002-12, University of Oregon Economics Department, revised 01 Aug 2002.
  • Handle: RePEc:ore:uoecwp:2002-12
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    References listed on IDEAS

    as
    1. Debaere & PEter, 2004. "Reversing the Perspective: Multinational Activity from Middle-Income Countries," Econometric Society 2004 North American Summer Meetings 140, Econometric Society.
    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, January.
    3. Jagdish Bhagwati & Arvind Panagariya & T. N. Srinivasan, 1998. "Lectures on International Trade, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522470, January.
    4. repec:exe:wpaper:00/05 is not listed on IDEAS
    5. Blonigen, Bruce A. & Davies, Ronald B. & Waddell, Glen R. & Naughton, Helen T., 2007. "FDI in space: Spatial autoregressive relationships in foreign direct investment," European Economic Review, Elsevier, vol. 51(5), pages 1303-1325, July.
    6. McCorriston, S., 2000. "Recent Developments on the Links between Foreign Direct Investment and Trade," Discussion Papers 0005, Exeter University, Department of Economics.
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    Cited by:

    1. Harms, Philipp & Schwab, Jakob, 2015. "Like it or not? How the Economic and Institutional Environment Shapes Individual Attitudes towards Multinational Enterprises," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113150, Verein für Socialpolitik / German Economic Association.
    2. Jinjarak, Yothin, 2007. "Foreign direct investment and macroeconomic risk," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 509-519, September.
    3. Ronald B. Davies & Johannes Voget, 2008. "Tax competition in an expanding European Union," Working Papers 200904, School of Economics, University College Dublin.
    4. Shiro Armstrong, 2009. "Japanese FDI in China: determinants and performance," Asia Pacific Economic Papers 378, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    5. Ronald B. Davies & Delia Ionascu & Helga Kristjánsdóttir, 2008. "Estimating the Impact of Time-Invariant Variables on FDI with Fixed Effects," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(3), pages 381-407, October.
    6. repec:krk:eberjl:v:5:y:2017:i:1:p:151-167 is not listed on IDEAS
    7. Davies, Ronald B. & Voy, Annie, 2009. "The effect of FDI on child labor," Journal of Development Economics, Elsevier, vol. 88(1), pages 59-66, January.
    8. Martina Lawless, 2013. "Do Complicated Tax Systems Prevent Foreign Direct Investment?," Economica, London School of Economics and Political Science, vol. 80(317), pages 1-22, January.
    9. 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.
    10. Davies, Ronald B., 2013. "The silver lining of red tape," Journal of Public Economics, Elsevier, vol. 101(C), pages 68-76.
    11. K. M. Wacker, 2016. "(When) Should We Use Foreign Direct Investment Data to Measure the Activities of Multinational Corporations? Theory and Evidence," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 980-999, November.
    12. repec:eee:streco:v:41:y:2017:i:c:p:86-97 is not listed on IDEAS
    13. Wacker, Konstantin M., 2013. "On the measurement of foreign direct investment and its relationship to activities of multinational corporations," Working Paper Series 1614, European Central Bank.
    14. Johannes Becker & Ronald B. Davies, 2014. "A Negotiation-Based Model of Tax-Induced Transfer Pricing," The Institute for International Integration Studies Discussion Paper Series iiisdp451, IIIS.
    15. Lawless, Martina, 2009. "Tax Complexity and Inward Investment," Research Technical Papers 5/RT/09, Central Bank of Ireland.
    16. 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.
    17. 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.
    18. Maureen Lankhuizen, 2014. "The (Im)possibility of Distinguishing Horizontal and Vertical Motivations for FDI," Review of Development Economics, Wiley Blackwell, vol. 18(1), pages 139-151, February.
    19. Ronald B. Davies, 2012. "CCCTB 4 EU? SA vs. FA w/ FTA," Working Papers 201224, School of Economics, University College Dublin.
    20. Jeffrey H. Bergstrand & Peter Egger, 2013. "Shouldn't Physical Capital Also Matter for Multinational Enterprise Activity?," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 945-965, November.
    21. Ronald B. Davies, 2013. "Tariff-induced transfer pricing and the CCCTB," Working Papers 201314, School of Economics, University College Dublin.
    22. Konstantin M. Wacker & Philipp Grosskurth & Tabea Lakemann, 2016. "Foreign Direct Investment, Terms of Trade, and Quality Upgrading: What Is So Special about South Asia?," Asian Development Review, MIT Press, vol. 33(1), pages 28-55, March.
    23. Markus Leibrecht & Christian Bellak, "undated". "Does the impact of employment protection legislation on FDI differ by skill-intensity of sectors? An empirical investigation," Discussion Papers 09/21, University of Nottingham, GEP.

    More about this item

    Keywords

    Foreign Direct Investment; Vertical Investment; Horizontal Investment; Knowledge Capital.;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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