Types of FDI and determinants of affiliate size: the classification makes the difference

This paper focuses on the role of classifying types of foreign direct investment (FDI) for analyzing the determinants of cross-border investment relationships. We base our investigation on a newly established firm-level data set of German multinational firms and their affiliates in the Czech Republic that allows various categorizations into vertical foreign direct investment (VFDI) and horizontal foreign direct investment (HFDI). Apart from data for conventional approaches to classify FDI types, the surveyed information contained herein also includes a detailed selfassessment of the firms with respect to investment motives, and specifications on intra-firm trade and the flow of intermediate inputs. In order to correct for sample selection, we apply a two-step Heckman procedure by comparing multinational firms that have an affiliate in the Czech Republic to companies without investment abroad. The results for the direct measures of FDI types confirm theoretical expectations and previous empirical literature and stand in marked contrast to the outcome for indirect measurement concepts. Our finding leads us to the conclusion that one should be more cautious in interpreting differences between vertical and horizontal FDI when using approximative classification concepts.