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Testing the O-ring theory for FDI

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  • Engemann, Martina
  • Lindemann, Henrike

Abstract

Modern production processes often involve several sequential stages which are performed in many different countries. This pattern of vertical specialization does not only affect trade between countries but it is also of importance for foreign direct investment (FDI). In this paper, we therefore adopt the idea of Kremer (1993) and Costinot et al. (2011) of a sequential production process which is subject to mistakes to the theory of FDI. Using firm-level panel data on German outward FDI, we show that the affiliate sector's position in the value chain affects the firm's FDI location choice. Affiliates in sectors that are positioned toward the end of the value chain are more likely to be located in more productive countries.

Suggested Citation

  • Engemann, Martina & Lindemann, Henrike, 2013. "Testing the O-ring theory for FDI," Discussion Papers 24/2013, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:242013
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    References listed on IDEAS

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    1. Karolina Ekholm & Rikard Forslid & James R. Markusen, 2007. "Export-Platform Foreign Direct Investment," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 776-795, June.
    2. Arnaud Costinot & Jonathan Vogel & Su Wang, 2013. "An Elementary Theory of Global Supply Chains," Review of Economic Studies, Oxford University Press, vol. 80(1), pages 109-144.
    3. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
    4. Pol Antras & Davin Chor & Thibault Fally & Russell Hillberry, 2012. "Measuring the Upstreamness of Production and Trade Flows," American Economic Review, American Economic Association, vol. 102(3), pages 412-416, May.
    5. Chang, Pao-Li & Lu, Chia-Hui, 2012. "Risk and the technology content of FDI: A dynamic model," Journal of International Economics, Elsevier, vol. 86(2), pages 306-317.
    6. Mayda, Anna Maria & Rodrik, Dani, 2005. "Why are some people (and countries) more protectionist than others?," European Economic Review, Elsevier, vol. 49(6), pages 1393-1430, August.
    7. Hummels, David & Ishii, Jun & Yi, Kei-Mu, 2001. "The nature and growth of vertical specialization in world trade," Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.
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    More about this item

    Keywords

    Foreign Direct Investment; O-Ring Theory; Upstreamness;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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