Horizontal Foreign Direct Investment Research Articles

Beyond natural resources: horizontal and vertical FDI diversification in Sub-Saharan Africa

This article uses firm-level data to analyse the drivers of Foreign Direct Investment (FDI) to the manufacturing and services sectors of 30 Sub-Saharan African countries. It shows that improving the investment climate helps to attract aggregate FDI. By analysing disaggregate FDI data, the article establishes that there is considerable contrast in behaviour between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets). In particular, the latter firms are attracted to areas with higher trade regulations, highlighting their interest in protected markets. Furthermore, horizontal FDI is more affected by financing and human capital constraints and less affected by infrastructure and institutional constraints than vertical FDI is.

Foreign Direct Investments and Domestic Employment of German SMEs: The Moderating Effect of Owner Management

Despite considerable research, the relationship between foreign direct investment (FDI) and domestic employment is still inconclusive. The present paper contributes to extant research by providing differentiated findings on the FDI and domestic employment relationship. We examine how horizontal and vertical FDI impact domestic employment and how the effects are contingent on the ownership structure of the firm. Testing hypotheses on a dataset of 1,079 erman small and medium‐sized enterprises (SMEs) shows that horizontal FDI has a positive influence, whereas vertical FDI has a negative influence on domestic employment. Furthermore, domestic downsizing due to the establishment of foreign production subsidiaries is less severe in owner‐managed SMEs.

Mutual Recognition Agreements and the Proximity-Concentration Trade-off between Foreign Direct Investment and Export

This article analyses the trade-off relationship between exports and horizontal foreign direct investment (FDI) in response to a mutual recognition agreement (MRA) for technical regulations and certification procedures for import goods. As an MRA is concluded to reduce entry costs of exporting, multinationals (MNEs) derive more benefits from economies of scale than from tariff-jumping strategies, implying that they have more incentive to export than to perform horizontal FDI. In order to prove the above argument, the article introduces MRA and FDI into Helpman, Melitz andYeaple (2004)'s framework of international trade, analyses the relationship between exports and horizontal FDI sales in response to MRA and then tests empirically the theoretical results, utilizing data from US multinational affiliate sales and exports. The empirical results show that MRAs have positive effects on the US exports relative to horizontal FDI, bringing the results in line with the theoretical model.

FDI and pollution havens: Evidence from the Norwegian manufacturing sector

This is an empirical study of the firm and country determinants of foreign direct investment (FDI) and how it is affected by the stringency of environmental regulations in host countries. We employ disaggregated data on sales by Norwegian multinationals' affiliates from 1999 to 2005 that allow such affiliates to be categorized as either efficiency-seeking (vertical) or market-seeking (horizontal) FDI. While the environmental stringency of a host country and its enforcement are found to have no effect on the average investment, we find a significant negative effect on multinationals with vertical motives. Compared to those located in lenient countries, the efficiency-seeking affiliates in more environmentally regulated countries receive less investment from their parent companies in terms of (i) equity capital, (ii) capital stock, and (iii) assets. We further find that the total exports from affiliates to parent companies in Norway decrease with the level of enforced environmental stringency in the host countries.

Two-dimensional analysis of the impact of outward FDI on performance at home: Evidence from Japanese manufacturing firms

This paper empirically investigates two dimensions of changes in firm behavior and performance before and after foreign direct investment (FDI). The first dimension is the difference between vertical and horizontal FDI. The second dimension is the effect of outward FDI on firms’ production and non-production activities in the home country. In our careful empirical analysis we use the propensity score matching method to show that the impact of outward FDI differs by dimension, that is, by FDI type and firms’ production and non-production activities. In particular, while horizontal FDI increases demand for non-production workers, vertical FDI increases demand for skilled production workers.

Vertical FDI versus outsourcing: The role of technology transfer costs

The effect of technology transfer cost on the choice between horizontal foreign direct investment (FDI) and licensing is well established. We explore this “make or buy” decision in the offshoring context when offshore input production involves costly technology transfer. The burden of technology transfer cost that falls on the sourcing firm depends not only on the technological complexity of the offshored input but also on the mode of organizing offshoring. Outsourcing entails low technology transmission cost but a higher distortion in input production by the arm's length supplier while vertical FDI involves a higher technology transmission cost but a lower distortion in input production by the affiliated supplier. Contrary to the existing literature, we find that, irrespective of the type of good, outsourcing is the preferred mode at higher ends of technological complexity.

Export or Merge? Proximity vs. Concentration in Product Space

This paper proposes a proximity-concentration tradeoff in product space as a determinant of horizontal foreign direct investment (FDI). Firms that enter a foreign market by exporting are able to capture consumer surplus from introducing a differentiated product with characteristics that the incumbent cannot match. In relatively globalized product space, in contrast, consumers perceive an entrant’s difference to existing products as less pronounced, so a consumer’s virtual distance costs in product space are lower and a merger with an incumbent (horizontal FDI) offers pricing power that allows the entrant to extract consumer rent. Lower physical trade costs of shipping make Bertrand price competition fiercer in differentiated product space and can provide an additional incentive for a merger. A basic product space model with a linear Hotelling setup can therefore explain why FDI has become more frequent in recent periods in the presence of falling trade costs. Cross-border merger and acquisitions data support the model’s prediction that horizontal FDI grows relatively faster than exports in differentiated goods industries, compared to homogeneous-goods industries.

Is foreign direct investment to China crowding out the foreign direct investment to other countries?

We estimate a theory-based modified gravity model to analyze the effects of foreign direct investment (FDI) to China on FDI to other countries over the period 1990–2004. Our results suggest that on average, ceteris paribus, FDI flows to China have been complementary to FDI flows to other countries. However, these complementarities exhibit a decreasing trend over time and vary between and within country groups. Furthermore, our results suggest that while the FDI to China has encouraged both horizontal and vertical FDI to other countries, these FDI complementarities have been strongest in the case of vertical FDI.

Mothers and Daughters: Heterogeneity of German Direct Investments in the Czech Republic

Much has been written on the distinction between vertical and horizontal foreign direct investment. However, most of the empirical literature relies on indirect and aggregated measures only. The aim of this paper is to help fill this gap by examining the differences between German affiliates in the Czech Republic and their mother companies in Germany on the basis of direct evidence on factor requirements. Using a cluster analysis on firm-level data from the unique ReLoc survey, we identify four main groups of firms that partition the sample by broad sectoral lines and by technological, educational and skill intensity of their operations within each of them. More detailed analysis of the clustering reveals that the vertical model dominates in manufacturing, while the horizontal model of investment prevails in the service sector.

Horizontal and vertical FDI: an analysis of technological determinants

The study analyses the role played by technological determinants, using the approach of National System of Innovation (NSI), in enhancing or hampering Foreign Direct Investments (FDI) with different motivations, namely horizontal and vertical FDI. The empirical analysis is carried out using data relative to the final destination of sales of US foreign subsidiaries in 42 host countries grouped according to income criteria. A two step empirical strategy is employed: first, we estimate a benchmark model finding that technological determinants mainly drive HFDI rather than VFDI. Secondly, applying a dynamic panel data approach we take into account that agglomeration economies may play a role as well more than other FDI determinants. Finally, through a sensitivity analysis we account for different ways of measuring HFDI and VFDI finding that measurement issue matters especially to establish which component of NSI results of greater relevance.

Some new evidence on intra-industry trade and complex FDI in ASEAN countries: a spatial panel approach

This paper examines the interaction on intra-industry trade (IIT) and foreign direct investment (FDI) with special attention to the Association of Southeast Asian Nations (ASEAN). We introduce the 2×3×3 knowledge-capital model, recently proposed by Baltagi et al. (2007) and Uttama and Peridy (2009). The theoretical implications are suggested, not only how IIT is determined by country characteristics, such as similarity in market size and factor differentials, but also trade costs as well as regional economic integration. Moreover, it also empirically investigates the determinants of aggregated and disaggregated IIT in five ASEAN countries over the period 1995–2008, concerned with what extent complex FDIs boost IIT. Using spatial panel data model, we find the fact that the empirical results are consistent with the theoretical predictions. Vertical FDI tends to discourage ASEAN’s IIT, whereas complex horizontal FDI in neighbours tends to encourage its IIT in ASEAN.

Do Multinationals Influence Labor Standards? A Close Look at US Outward FDI

This paper investigates the eects of multinational corporations on labor standards. We argue that the previous literature has failed to distinguish the dierent motives that encourage rms to become multinational. Therefore, we build a stylized model of segmented labor markets with equilibrium unemployment where parts of the labor force are willing to accept reductions in their labor standards to attract job-creating horizontal foreign direct investment. By disentangling US FDI data for 34 advanced host countries throughout the period 1997 to 2002 into vertically and horizontally motivated FDI, we show that this disaggregation provides much more signicant results. Concretely, we

Asymmetric effects of trade costs on entry modes: Firm level evidence

Standard foreign direct investment (FDI) theory suggests that falling trade costs should discourage horizontal FDI. Most FDI is horizontal. Yet, the world witnessed an FDI boom in 1990s, a period of striking falls in trade barriers. This paper carries out an empirical analysis with rich, firm-level data on the activities of Swedish multinationals around the globe in manufacturing sectors from 1987 to 1998 to shed light on this apparent conflict. The analysis is based on the predictions of a recent literature with an industrial organization (IO) angle: Trade costs have asymmetric effects on foreign expansion modes. This view posits that falling trade costs encourage entry realized as mergers and acquisitions (M&As), one of the potential explanations for the conflict between received theory and recent trends in FDI. Empirical results confirm the findings of this recent literature and add to it by testing its extensions.

The Trade‐Off between Foreign Direct Investments and Exports: The Role of Multiple Dimensions of Distance

AbstractTo serve foreign markets, firms can either export or set up a local subsidiary through horizontal foreign direct investment (FDI). The conventional proximity–concentration theory suggests that FDI substitutes for trade if distance between countries is large, while exports become more important if scale economies in production are large. This paper investigates empirically the effect of different dimensions of distance on the choice between exports and FDI. We find that different dimensions of distance affect exports and FDI differently. There is clear evidence of a proximity–concentration trade‐off in geographical terms: the share of FDI sales in total foreign sales increases with geographical distance. The positive relation between import tariffs and FDI intensity provides further evidence for a trade‐off resulting from trade costs. On the other hand, the share of FDI decreases with language differences and cultural and institutional barriers. The latter dimensions of distance thus affect FDI more strongly than exports.

The Nested Variable Model of FDI Spillover Effects: Estimation Using Hungarian Panel Data

A new empirical model is presented that considers the productivity spillover effects of foreign direct investment (FDI) by focusing on the multi-layered structure of industrial classifications. In this model, the market presence of horizontal FDI in a host country is expressed using multiple spillover variables with a nested structure corresponding to the aggregated level of industrial classification. Using large-scale firm-level data from Hungary, we estimated the nested variable model and verified horizontal FDI spillover effects that cannot be captured with the conventional model having a single horizontal variable.

Trade, Wages, FDI and Productivity

We extend the Behrens et al. (2009) general equilibrium heterogeneous firms framework by horizontal foreign direct investment. The model features endogenously determined firm entrants, wages, productivity cutoffs, flexible price markups and allows for wage differentials across countries in equilibrium. The framework is especially suitable to analyze the welfare consequences of attracting FDI since it allows to study through which channels FDI might raise welfare - including the not yet explored impact on the wage differential and the price markups. From a policy perspective we compare a strategic and a cooperative FDI policy scenario and find that supranational coordination leads to welfare gains.

Revisiting the Proximity-Concentration Trade-Off: Distance and Horizontal Foreign Direct Investment in OECD Countries

This paper provides new insights in the link between distance and Foreign Direct Investment (FDI) in OECD countries. We find that the impact of distance on flows and stocks of FDI, controlling for exports, is negative and strongly significant, in line with gravity models, whereas in a standard proximity-concentration framework the impact should be positive. We propose a harmonized theoretical framework, allowing for distance increasing fixed costs, to reconcile these conflicting conclusions. This model is tested using alternative measures of distance (geographical/monetary/financial/legal/cultural) on OECD countries (1997-2001) and the impact of cultural distance appears strongly predominant in this setup.

The Internationalization Process of Firms: From Exports to FDI?

We describe a simple model in which domestic firms decide whether to serve a foreign market through exports or horizontal foreign direct investment (FDI). This choice involves a trade-off between the higher variable trade costs associated with exports and the higher fixed set-up costs associated with establishing foreign subsidiaries. Crucially, firms are uncertain about their profitability in foreign markets and can only learn it by operating there. To obtain market-specific knowledge, firms may follow an “internationalization process”, serving the foreign market via exports first and eventually, in some cases, switching to local subsidiary sales. To assess the validity of the predictions of our model, we use firm-level data on export and FDI decisions in individual destination markets for all companies registered in Belgium over the period 1997-2008. We show that firms’ strategies to serve foreign markets depend not only on the variable and fixed costs associated with exports and FDI, but also on the export experience they have acquired in that market.

Exports, Horizontal FDI and Export Hubs

International operating firms often follow complex market supply strategies, ranging from Exports and Foreign Direct Investments (FDI) to regional Export Hubs. Explaining the driving forces behind multinational setups and their influence on the agglomeration-core pattern has become an emerging question pressuring economists to expand existing models. This paper builds on the fundaments of Brainard (1997), who introduces a multi-production strategy into the classic NEG model and suggests that multinational activities either evolve into Exports or horizontal FDI. By integrating Melitz’s (2003) concept of firm heterogeneity, Helpman et. al. (2006) can already explain the co-existence of Exports and horizontal FDI on the country-level. However, every firm follows a exclusive strategy, using only one distinct supply option to serve a foreign market. In this paper I extend the work of Brainard (1997) to a three country world. By taking account for the relative distance between the countries, this model leads to three distinct supply scenarios. It explains the simultaneous existence of Exports and horizontal FDI on the firm-level, and furthermore introduces the supply strategy of an Export Hub.

Horizontal and Vertical FDI: A Comparative Analysis of Technological Determinants

The study analyzes the role played by technological determinants, using the approach of National System of Innovation (NSI), in enhancing or hampering Foreign Direct Investments (FDI) with different motivations, namely horizontal and vertical FDI. The empirical analysis is carried out using data relative to the final destination of sales of US foreign subsidiaries in 42 host countries grouped according to income criteria. A three step empirical strategy is employed: first, we estimate a benchmark model finding that technological determinants exert a greater influence in high income countries especially for vertical FDI. Secondly, applying a dynamic panel data approach we take into account that agglomeration economies may play a role as well as other FDI determinants. Finally, we are able to further disentangle the destination of sales according to whether they are directed towards other foreign affiliates or to unaffiliated persons recognizing that they are affected by different determinants.