Testing the O-ring theory for FDI

Martina Engemann and Henrike Lindemann

No 24/2013, Discussion Papers from Deutsche Bundesbank

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.

Keywords: Foreign Direct Investment; O-Ring Theory; Upstreamness (search for similar items in EconPapers)
JEL-codes: F14 F23 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:242013

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