Vertical Multinationals and Host-Country Characteristics

The literature on multinationals and developing countries has examined the causalityquot; running from direct investment to changes in country characteristics (wages skills, etc.) and also the opposite direction of causality, from existing country characteristics toquot; inward direct investment. This paper contributes to the second line of research the question of what country characteristics, particularly market size and labor-forcequot; composition, attract inward investment. This approach is motivated by the empiricalquot; observation that the poorest countries attract a far smaller share of world direct investment thanquot; their share of income. Small markets receive less investment per capita than larger ones. Wequot; develop a model that generates both stylized facts in equilibrium, suggesting the existence of aquot; development trap for small, skilled-labor-scarce countries