Abstract
While the literature has explored which factors determine the emergence of different multinational enterprise (MNE) structures (i.e., horizontal or vertical MNEs), little attention has been paid to differences within the same MNE type. This paper proposes an index to distinguish horizontal foreign direct investment (FDI) from vertical FDI and tries to identify different FDI motivations within the same MNE type. The analysis indicates that industry type, FDI destinations, and the interaction of the two play an important role in determining MNE structures. Our analysis uncovers interesting FDI patterns from data and obtains a more nuanced typology of the US multinational affiliate activities.
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Notes
The classic horizontal MNE model by Markusen [1984] is a one-factor (labor) framework, where firm-specific fixed costs and trade costs play important roles. Markusen and Venables [1998; 2000], recognized as the standard horizontal MNE model, employ a general equilibrium approach with two factors (skilled and unskilled labor force). The vertical MNE model originated by Helpman [1984] and Helpman and Krugman [1985] uses a two-factor framework that introduces monopolistic competition but does not include trade costs.
Aizenman and Marion [2004] study how uncertainty affects FDI profitability (either horizontal or vertical) and discuss the impacts on MNE structures. Their model implies that “increased uncertainty should encourage horizontal FDI but discourage vertical FDI.”
The countries include Argentina, Australia, Austria, Canada, Chile, China, Colombia, Costa Rica, Denmark, Ecuador, Egypt, Finland, France, Germany, Greece, Guatemala, Honduras, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Mexico, The Netherlands, New Zealand, Norway, Panama, Peru, Philippines, Portugal, Singapore, South Africa, Spain, Sweden, Taiwan, Thailand, Trinidad and Tobago, Turkey, United Kingdom, and Venezuela. Since data availability varies by country during the sample periods, our data are an unbalanced panel.
The notation i is equivalent to industry in the following analysis. We return to this point later.
We collect US data from the BEA and other country data from the ILO. Technically speaking, skilled labor is the sum of two ILO occupational categories (0/1: professional, technical, and kindred workers and 2: administrative workers) divided by the total number of workers. A large fraction of the ILO data on occupation categories (0 and 1) is “constructed by interpolating between non-missing observations or extrapolating back or forward, so it should be used cautiously if at all (http://fmwww.bc.edu/ec-p/data/nbercd2/en_oecd.html).” The BEA conducted Benchmark surveys in 1989, 1994, and 1999. The analysis utilizes 1989 data for the periods between 1983 and 1991, 1994 data for between 1992 and 1995, and 1999 data for between 1996 and 2000.
The industry classification in our analysis is based on foreign affiliate activities, since the construction of the D/M index is based on affiliates’ activity in host countries.
Sales are larger for the horizontal FDI than for vertical FDI. This might imply that, on average, horizontal FDI is more common among larger companies.
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Acknowledgements
We are grateful to Yongmin Chen, Masayuki Hara, Nazrul Islam, David Leblang, Jim Markusen, Keith Maskus, Molly Sherlock, Nobuo Teramachi, Ruqu Wang, two anonymous referees, and seminar participants at the ICSEAD and the Japan Society of International Economics for their helpful comments and suggestions for the earlier draft. Kazuhiko Yokota would like to thank Jim Markusen and Keith Maskus for their countless hours of help as thesis advisors. Akinori Tomohara appreciates financial support from the Research Foundation of the City University of New York. All remaining errors are ours.
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Yokota, K., Tomohara, A. A Decomposition of Factors Influencing Horizontal and Vertical FDI: A Separate Analysis. Eastern Econ J 35, 462–478 (2009). https://doi.org/10.1057/eej.2008.45
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DOI: https://doi.org/10.1057/eej.2008.45