Measuring Horizontal and Vertical Foreign Direct Investment

Using firm-level data on U.S. multinationals, we find that affiliates created for vertical FDI motives seem to be larger and fewer—both within the firm and across affiliates—while affiliates that appear to be created for horizontal FDI motives are smaller and more common. Next, we build a model with heterogeneous firms that endogenously choose to create affiliates for vertical or horizontal reasons, and show that the model can qualitatively reproduce the patterns we document in the data. We use the model and the data to measure the costs of opening different types of affiliates: the costs of vertical versus horizontal FDI. We use the calibrated model to perform counterfactual exercises aimed at answering questions such as: How much does a country gain from lowering the barriers to vertical FDI, and to horizontal FDI? How do these gains change with country characteristics?