Horizontal vs . Vertical FDI : Revisiting

————————————————————————————————— Using confidential data from the Bureau of Economic Analysis, we document a new set of facts regarding the behavior of U.S. multinational firms. First, we find that intra-firm trade is concentrated among a small number of large affiliates. The median affiliate reports no shipments to the parent, and directs the bulk of its sales to unrelated parties in its country of operation. In this sense, “horizontal” rather than “vertical” FDI seems to better capture the role of most U.S. affiliates abroad. Second, multinational firms often own vertically linked affiliates, as defined by the input-output coefficients between their respective industries of operation. These vertical chains, however, are not associated with a corresponding intra-firm flow of physical goods between upstream and downstream units of production. Our findings suggest that a comparative advantage of multinational corporations is their ability to transfer intangible—rather than physical—inputs along vertically linked production units. ———————————————————————————————————————We are thankful for helpful comments from Pablo Fajgelbaum and participants at the SED and the EEA 2011 meetings. We would also like to thank William Zeile for help with the multinational affiliate data and comments on an early draft. Ruhl thanks the National Science Foundation for support under grant SES-0536970. The statistical analysis of firm level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintain legal confidentiality requirements. The views expressed are those of the authors and do not reflect official positions of the U.S. Department of Commerce.