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Vertical foreign direct investment: Evidence from Japanese and U.S. multinational enterprises
Authors:Kiyoyasu Tanaka
Institution:Inter-disciplinary Studies Center, Institute of Developing Economies, 3-2-2 Wakaba, Mihama-ku, Chiba-shi, Chiba 261-8545, Japan
Abstract:Foreign direct investment (FDI) in developing countries has increased since the 1990s, but there is mixed evidence of vertical FDI associated with factor-seeking motives. This paper estimates the vertical motive of offshore production by multinational enterprises (MNEs) by exploiting past schooling characteristics as instruments for skilled-labor abundance in a host country. Using panel data on Japanese and U.S. MNEs in the 1990s, I find that skilled-labor abundance has a significantly negative impact on sales of manufacturing foreign affiliate only for Japanese MNEs. The results suggest that vertical FDI activity was more prevalent in Japanese MNEs than U.S. MNEs. A plausible explanation is that Japanese MNEs might be more vertically integrated with their offshore production than U.S. MNEs. A difference in foreign outsourcing activities could generate the observed deviation between Japanese and U.S. MNEs.
Keywords:F21  F23
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