Working Paper: NBER ID: w13447
Authors: Laura Alfaro; Andrew Charlton
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: Foreign Direct Investment; Multinational Corporations; Vertical FDI; Horizontal FDI
JEL Codes: F2; F23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Type of FDI (vertical) (F23) | Characteristics of the input being sourced (Y20) |
| Type of FDI (vertical) (F23) | Characteristics of the production process (L23) |
| Characteristics of the input being sourced (Y20) | Decision to engage in vertical FDI (F23) |
| Characteristics of the production process (L23) | Decision to engage in vertical FDI (F23) |
| Proximity in production chain (L23) | Vertical FDI (F23) |
| Country skill levels (O57) | Type of FDI (vertical) (F23) |
| Industry skill intensity (J24) | Type of FDI (vertical) (F23) |
| Market size (L25) | Decision to engage in vertical FDI (F23) |
| Bilateral distance (C49) | Decision to engage in vertical FDI (F23) |