The (Im)possibility of Distinguishing Horizontal and Vertical Motivations for FDI

Skill differences between parent and host countries are considered a key variable for distinguishing horizontal and vertical motivations within aggregate foreign direct investment (FDI). This paper tests the robustness of the skill difference term in the knowledge‐capital model for FDI in a sample of Organisation for Economic Co‐operation and Development (OECD) countries. The evidence in this paper indicates that skill differences per se do not properly explain FDI: the skill level of the host country is also important. This paper argues that both horizontal and vertical FDI may increase in the skill level of the host. It follows that the distinction between vertical and horizontal motivations for FDI with respect to skills is less straightforward than generally assumed in the literature.