Logistics Infrastructure and the International Location of Fragmented Production

Casual evidence suggests that multinational companies increasingly look for places with adequate transport and logistics infrastructure to locate affiliates that participate in cross-border production sharing. Yet, there are no systematic empirical analyses examining how logistics infrastructure interacts with the location decisions made by multinationals. Most studies on the determinants of FDI address the issue of transportation-logistics by examining the impact of distance on the relevant outcome, but distance does not capture by itself the quality of the logistics systems in place. An additional challenge is that investments in logistics infrastructure and FDI flows could be potentially endogenous. We overcome these shortcomings in the literature by embedding indicators of infrastructure into an empirical framework that examines whether countries with adequate logistics systems attract more vertical FDI in industries that are more dependent on logistics services. We find that logistics infrastructure positively impacts vertical FDI in addition to the impact typically found on distance. A change from the first quartile to the third quartile of the distribution of logistics infrastructure is associated with an average increase in the number of vertically-integrated subsidiaries equivalent to 15 percent