Intra-lndustry Foreign Direct Investment

In this paper, we use a unique firm-level dataset to characterize global patterns of multinational activity. Traditionally, the literature has distinguished between two forms of, and motivations for, multinational firms locating activities abroad. "Horizontal" foreign investment is understood to mean situating production facilities so as to avoid trade costs (James R. Markusen 1984; S. Lael Brainard 1993) and "vertical" investment represents firms' attempts to take advantage of cross-border factor cost differences (Elhanan Helpman 1984; Helpman and Paul Krugman 1985). Most research has found the bulk of foreign direct investment (FDI) to be horizontal. Our results suggest that data limitations have led the literature to systematically underestimate vertical FDI, which our dataset reveals to be far more prevalent than previously thought. To date, the central challenge for the literature has been the absence of a global source of firm-level data on the basis of which to distinguish between horizontal and vertical FDI. The requisite data would ideally include location, ownership, and intrafirm trading status of multi national enterprises at the plant level.1 Researchers have instead used multinational corporation (MNC) activity at the industry level or aggregate FDI flows from balance-of-payments statistics as a proxy for foreign firm activity. Empirical tests based on such consistently reject models that assume low transport costs and comparative advantage in favor of models in which market