American Economic Review: Vol. 99 No. 5 (December 2009)


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Intra-industry Foreign Direct Investment

Article Citation

Alfaro, Laura, and Andrew Charlton. 2009. "Intra-industry Foreign Direct Investment." American Economic Review, 99(5): 2096-2119.

DOI: 10.1257/aer.99.5.2096


We use a new firm-level dataset that establishes the location, ownership, and activity of 650,000 multinational subsidiaries. Using a combination of four-digit-level information and input-output tables, we find the share of vertical FDI (subsidiaries that provide inputs to their parent firms) to be larger than commonly thought, even within developed countries. Most subsidiaries are not readily explained by the comparative advantage considerations whereby multinationals locate activities abroad to take advantage of factor cost differences. Instead, multinationals tend to own the stages of production proximate to their final production, giving rise to a class of high-skill, intra-industry vertical FDI. (JEL G11, J32)

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Alfaro, Laura (Harvard U)
Charlton, Andrew (Centre for Economic Performance, London School of Economics)

JEL Classifications

F23: Multinational Firms; International Business
L22: Firm Organization and Market Structure
L23: Organization of Production
R32: Other Production and Pricing Analysis

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