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Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment

Author

Listed:
  • Bruce A. Blonigen

    (University of Oregon Economics Department)

  • Ronald B. Davies

    (University of Oregon Economics Department)

  • Keith Head

    (University of British Columbia)

Abstract

A recent American Economic Review article by David L. Carr, James R. Markusen, and Keith E. Maskus (CMM) estimates a regression specification based upon the 'knowledge-capital' model of the Multinational Enterprise (MNE). The knowledge-capital model combines 'horizontal' motivations for FDI -- the desire to place production close to customers and thereby avoid trade costs -- with 'vertical' motivations -- the desire to carry out unskilled-labor intensive production activities in locations with relatively abundant unskilled labor. The CMM estimates pool inward and outward U.S. affiliate sales data from 1986 through 1994 and appear to support the knowledge-capital model of the MNE. We show that CMM's empirical framework mis-specifies the terms measuring differences in skilled-labor abundance, key variables that identify vertical MNE motivations. After correcting this specification error estimates no longer reject the horizontal model in favor of the knowledge-capital model. Instead, the data strongly support the predictions of the horizontal model of MNEs: affiliate activity between countries decreases as absolute differences in skill-labor abundance widen. Qualitatively identical results are also found using data that include a wider variety of parent and host countries, including data for the OECD.
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Suggested Citation

  • Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
    • Handle: RePEc:ore:uoecwp:2002-13
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    References listed on IDEAS

    as
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    2. David L. Carr & James R. Markusen & Keith E. Maskus, 2021. "Estimating The Knowledge-Capital Model of the Multinational Enterprise," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 5, pages 95-110, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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