Vertical FDI Revisited

Abstract

In this study, we explore how relative skilled-wage premia affect FDI. Contrary to previous studies based on factor endowment differences, we …nd 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 that relative skill-premia also a¤ect FDI activities that have previously been associated with horizontal FDI, i.e. local affiliate sales. Consequently, the potential e¤ects of changes in relative wage costs on international production reallocation within MNEs are large. In fact, we assess that the 8 % rise in the US skilled wage premium relative to the average host country from 1986 until 1994 has led to an increase in annual US a¢liate sales abroad amounting to about half a percentage point of US GDP.

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