Location of Foreign Direct Investment in Vertically Related Markets

We provide an alternative explanation for the commonly observed FDI in developed countries (DCs) considering a vertically related market structure and endogenizing vertical technology transfer (VTT). We show that even though VTT is more costly in a less developed country (LDC), a multinational does not always transfer less technology there than in a DC. Moreover, we show that a multinational sometimes locates its FDI in a DC where, although downstream competition is stronger than in a LDC, it can obtain the input at better terms due to VTT. Independently of whether the host country is more or less developed, FDI is always welfare-enhancing.