Intra-Industry Foreign Direct Investment

33 Pages Posted: 28 Sep 2007 Last revised: 6 Mar 2010

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Andrew Charlton

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

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Date Written: September 2007

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.

Suggested Citation

Alfaro, Laura and Charlton, Andrew, Intra-Industry Foreign Direct Investment (September 2007). NBER Working Paper No. w13447, Available at SSRN: https://ssrn.com/abstract=1017770

Laura Alfaro (Contact Author)

Harvard University ( email )

Cambridge, MA 02138
United States

Andrew Charlton

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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