Self-Protection: Fragmentation of Headquarter Services and FDI

I develop a simple model in which production of skill-intensive headquarter services are fragmented across borders in order to take advantage of complementarities between types of skilled labor. This setting indicates that FDI tends to come from and go to skill-abundant countries. It also yields an ambiguous effect of FDI on domestic relative wages. If the complementarities between skilled labor types are large enough, then increased FDI increases the wages of both skilled and unskilled labor in the home economy. Thus, this model predicts investment patterns comparable to the horizontal model but requires neither trade barriers nor reductions in home wages.