Factor Endowments and Intra-Industry Affiliate Production by Multinational Enterprises

Abstract

The increased importance of foreign direct investment (FDI) and activities by multinational enterprises (MNEs) has created an interest among trade economists to explain the cross-country pattern of foreign activities by MNEs. Recent theories of FDI have provided a basis for empirical studies of this pattern. According to models of so-called horizontal FDI — that is, foreign direct investment in similar activities as the ones that are undertaken at home — FDI arises as a consequence of multiplant economies of scale and trade costs (for example, Horstmann and Markusen, 1992; Brainard, 1993; Markusen and Venables, 1998, 2000). The resulting country pattern of FDI is one where similarities with respect to incomes and relative factor endowments are conducive to FDI. According to models of vertical FDI — that is, investment in activities that are either upstream or downstream in relation to the activities conducted at home — FDI arises as consequence of the firms’ desire to locate different stages of production at the locations with the lowest production costs (for example, Ethier, and Horn, 1990; Helpman, 1984, 1985). The resulting country pattern from these models is one where differences in relative factor endowments promote FDI.