Vertical FDI Revisited

Centro Studi Luca d'Agliano Development Studies Working Paper No. 167

46 Pages Posted: 11 Mar 2003

See all articles by Henrik Braconier

Henrik Braconier

Research Institute of Industrial Economics (IUI); Ministry of Finance

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Dieter M. Urban

Johannes Gutenberg University of Mainz - Institute for International Economic Theory; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 2002

Abstract

This study explores how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we find strong support for vertical FDI, in the sense that more FDI is conducted in countries where unskilled labor is relatively cheap. In addition, we find that relative skill-premia also affect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of changes in the relative wage costs on international production reallocation within MNEs are large. In fact, if not for the 8% rise in the US skilled wage premium relative to the average host country between 1986- 1994, annual US affliate sales abroad in relation to US GDP would have been half a percentage point higher.

Keywords: multinational firms, wage differentials

JEL Classification: F23

Suggested Citation

Braconier, Henrik and Norbäck, Pehr-Johan and Urban, Dieter M., Vertical FDI Revisited (November 2002). Centro Studi Luca d'Agliano Development Studies Working Paper No. 167, Available at SSRN: https://ssrn.com/abstract=347943 or http://dx.doi.org/10.2139/ssrn.347943

Henrik Braconier

Research Institute of Industrial Economics (IUI) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden
+46 8 665 4537 (Phone)
+46 8 665 4599 (Fax)

Ministry of Finance ( email )

Drottinggatan 21
Stockholm 10333
Sweden

Pehr-Johan Norbäck (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Dieter M. Urban

Johannes Gutenberg University of Mainz - Institute for International Economic Theory ( email )

D 55099 Mainz
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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