The vertical investment controversy: Re-estimating the knowledge-capital model for different types of FDI

The knowledge-capital model acknowledges that FDI has both vertical as well as horizontal elements. However, there is much controversy with regard to the empirical relevance of vertical FDI. We re-investigate this issue by looking at FDI at a more disaggregated level, using data on bilateral FDI in manufacturing and services for a number of industrialised countries. Our results are strongly supportive of a vertical FDI component within manufacturing. However, for service FDI our estimation results only give support to horizontal FDI. These findings clearly indicate that, once we take the heterogeneity in types of FDI into account, we can draw a more differentiated picture than previous studies providing evidence for vertical investment in manufacturing but not in services FDI. JEL classification: F23