Vertical FDI? A Host Country Perspective

Recent empirical studies of the determinants of multinational activity across countries have found overwhelming support for a horizontal rather than a vertical model of foreign direct investment (FDI). They all use U.S. or other developed country data. This paper, in contrast, uses a previously unexploited industry-level data set on FDI in a relatively skilled-labor and capital scarce country, Mexico, to shed light on the determinants of FDI between largely dissimilar countries. The results indicate considerably more support for the vertical model. The correlation between skill differences and FDI is positive in all industries, but when differences are large, FDI flows into sectors that are intensive in total labor, regardless of skill level. The concentration of multinational activity in (unskilled) labor intensive industries suggests a limited potential for spillover effects.