Intra-Industry Foreign Direct Investment

Laura Alfaro and Andrew Charlton

No 13447, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a new firm level data set that establishes the location, ownership, and activity of 650,000 multinational subsidiaries -- close to a comprehensive picture of global multinational activity. A number of patterns emerge from the data. Most foreign direct investment (FDI) occurs between rich countries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is larger than commonly thought, even within developed countries. More than half of all vertical subsidiaries are only observable at the four-digit level because the inputs they are supplying are so proximate to their parent firms' final good that they appear identical at the two-digit level. We call these proximate subsidiaries 'intra-industry' vertical FDI and find that their location and activity are significantly different to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are not readily explained by the comparative advantage considerations in traditional models, where firms locate their low skill production stages abroad in low skill countries to take advantage of factor cost differences. We find that overwhelmingly, multinationals tend to own the stages of production proximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

JEL-codes: F2 F23 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-dev
Note: ITI
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Citations: View citations in EconPapers (24)

Published as Alfaro, Laura and Andrew Charlton. "Intra-industry Foreign Direct Investment." American Economic Review 99, 5 (2009): 2096-2119.

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Related works:
Journal Article: Intra-industry Foreign Direct Investment (2009)
Working Paper: Intra-Industry Foreign Direct Investment (2007)
Working Paper: Intra-industry foreign direct investment (2007)
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