An Empirical Assessment of the Factor Proportions Explanation of Multi-National Sales

Abstract

This paper provides empirical evidence that challenges the factor proportions explanation of multinational activity. The same tests on intra-industry ratios and total volumes that were used to demonstrate that a substantial part of trade is explained by factor proportions and income similarities rather than differences are applied to affiliate sales with surprisingly similar results. Some support for the factor proportions hypothesis is derived by comparing affiliate production destined for export to the parent's market, which is the category of activity most likely to be motivated by factor proportions considerations, with that destined for sale in the local market. Affiliate production destined for export home is moderately more responsive to factor proportions differences. However, the two types of activity differ more in their responses to transport costs and destination market income.Overall, the evidence suggests that only a small part of multinational activity into and out of the US in the late 1980s can be explained by factor proportions differences.JELNos. F12, F21, F23

A Review of the Empirical Literature on FDI Determinants

“…An earlier empirical paper by Brainard (1993b) examined whether US affiliate sales back to their US parents were sensitive to factor proportion differences using bilateral country data and also found little support of this. Yeaple (2003b), however, runs a specification similar in spirit to Brainard with US MNE affiliate activity, but interacts factor endowment differences with industry factor intensities and then uncovers vertical motivations (as well as horizontal motivations).…”

General-Equilibrium Approaches to the Multinational Firm: A Review of Theory and Evidence

“…We refer to these as "vertical" models, although some discussion of the terminology is needed. An alternative would be to use Brainard's (1993b) term and refer to these models as "factor-proportions explanations" for multinational activity. Helpman (1984) modeled a sector (X) as having two activities, a headquarters activity that produces blueprints, management, and the like, and a production activity.…”

Vertical foreign direct investment: Evidence from Japanese and U.S. multinational enterprises

“…Prior research, including Carr, Markusen, and Maskus (2001), Braconier, Norbäck, and Urban (2005a), and Davies (2008), shows that multinational activity is positively related to differences in relative skilled-labor abundance across countries, consistent with vertical FDI. In contrast, another set of research such as Brainard (1993Brainard ( , 1997, Maskus (2001, 2002), and Blonigen, Davies, and Head (2003), finds that multinational production is negatively correlated with relative skill differences.…”

“…4 While market-access and factor-seeking motives are equally prominent reasons for FDI in theory, early empirical studies such as Brainard (1993Brainard ( , 1997, Ekholm (1998), Maskus (2001, 2002), provide little support for vertical FDI, but strong evidence in favor of horizontal FDI. Brainard (1993Brainard ( , 1997 investigates the market-access and factor-proportions explanations of multinational production by exploring U.S. data on affiliate sales disaggregated by country and industry for 1989. She finds that trade costs increase affiliate sales both absolutely and relative to trade, but cross-country differentials in income per worker reduce affiliate activities.…”