Intra-Industry Foreign Direct Investment

Laura Alfaro () and Andrew Charlton

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: We use a new firm level data set that establishes the location, ownership, and activity of 650,000multinational subsidiaries—close to a comprehensive picture of global multinational activity. Anumber of patterns emerge from the data. Most foreign direct investment (FDI) occurs between richcountries. The share of vertical FDI (subsidiaries which provide inputs to their parent firms) is largerthan commonly thought, even within developed countries. More than half of all vertical subsidiariesare only observable at the four-digit level because the inputs they are supplying are so proximate totheir parent firms' final good that they appear identical at the two-digit level. We call these proximatesubsidiaries 'intra-industry' vertical FDI and find that their location and activity are significantlydifferent to the inter-industry vertical FDI visible at the two-digit level. These subsidiaries are notreadily explained by the comparative advantage considerations in traditional models, where firmslocate their low skill production stages abroad in low skill countries to take advantage of factor costdifferences. We find that overwhelmingly, multinationals tend to own the stages of productionproximate to their final production giving rise to a class of high-skill intra-industry vertical FDI.

Keywords: Multinational Activity; Foreign Direct Investment; Horizontal FDI; Vertical FDI; Stagesof Production (search for similar items in EconPapers)
JEL-codes: F10 F23 L22 (search for similar items in EconPapers)
Date: 2007-10
View list of references View citations in EconPapers

Downloads: (external link)
http://cep.lse.ac.uk/pubs/download/dp0825.pdf (application/pdf)

Related works:
Working Paper: Intra-Industry Foreign Direct Investment (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0825

Access Statistics for this paper

More papers in CEP Discussion Papers from Centre for Economic Performance, LSE
Series data maintained by ().