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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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    Cited by:

    1. Amador, João & Cabral, Sónia, 2014. "Global value chains: surveying drivers and measures," Working Paper Series 1739, European Central Bank.
    2. Xuanlong Qin & Danish Iqbal Godil & Muhammad Kamran Khan & Salman Sarwat & Sadaf Alam & Laeeq Janjua, 2022. "Investigating the effects of COVID-19 and public health expenditure on global supply chain operations: an empirical study," Operations Management Research, Springer, vol. 15(1), pages 195-207, June.
    3. João Amador & Sónia Cabral, 2014. "Global Value Chains: Surveying Drivers, Measures and Impacts," Working Papers w201403, Banco de Portugal, Economics and Research Department.

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    More about this item

    Keywords

    Foreign Direct Investment; O-Ring Theory; Upstreamness;
    All these keywords.

    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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