Department of Economics

Knowledge-Capital, International Trade and Foreign Direct Investment: A Sectoral Analysis

Working Paper #2010-11 – Knowledge-Capital, International Trade and Foreign Direct Investment: A Sectoral Analysis

Department of Economics

University of Delaware

Working Paper #2010-11

Knowledge-Capital, International Trade and Foreign Direct Investment: A Sectoral Analysis

Titus O. Awokuse, Keith E. Maskus and Yiting An

ABSTRACT

The knowledge-capital (KC) model of MNEs is now a widely adopted empirical approach to explaining the location and production decisions of global firms based on both horizontal and vertical motivations. While most of the existing studies have focused on highly aggregated national data, we extend this model to sectoral data consisting of broad manufacturing industries and explicitly account for the dynamic nature of international investment data. The empirical results from a dynamic panel data analysis indicate that that the predictions of the KC model regarding MNE behavior vary by the type of industry. Production processes in electronics and transportation-equipment are more characterized by efficient vertical specialization of R&D activities and assembly, while other sectors display more complex motivations.

JEL Codes: F14, F23, L23

Keywords: FDI, knowledge-capital model, exports, GMM

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