Intra-industry foreign direct investment

Laura Alfaro and Andrew Charlton

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Multinational Activity; Foreign Direct Investment; Horizontal FDI; Vertical FDI; Stages of Production (search for similar items in EconPapers)
JEL-codes: F10 F23 L22 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2007-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

Downloads: (external link)
http://eprints.lse.ac.uk/19690/ Open access version. (application/pdf)

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)
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: https://EconPapers.repec.org/RePEc:ehl:lserod:19690

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().