Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 579: Vertical FDI Revisited

Henrik Braconier , Pehr-Johan Norbäck () and Dieter Urban
Additional contact information
Henrik Braconier: National Institute of Economic Research, Postal: P.O. Box 3116, SE-103 62 Stockholm, Sweden
Pehr-Johan Norbäck: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Dieter Urban: London School of Economics and Political Science, Postal: Houghton Street, London WC2A 2AE, United Kingdom

Abstract: This study explores how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we find strong support for vertical FDI, in the sense that more FDI is conducted in countries where unskilled labor is relatively cheap. In addition, we find t hat relative skill-premia also affect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential effects of changes in the relative wage costs on international production reallocation within MNEs are large. In fact, if not for the 8% rise in the US skilled wage premium relative to the average host country between 1986-1994, annual US affiliate sales abroad in relation to US GDP would have been half a percentage point higher.

Keywords: Multinational Firms; Skilled-Wage Premium; New Trade Theory

JEL-codes: F13; F23; J31

46 pages, April 26, 2002

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