Types of FDI and Determinants of Affiliate Size : the Classification Makes the Difference

Kurzfassung/Abstract

This paper focuses on the role of classifying types of foreign direct investment (FDI) for analyzing the relevance of productivity for the size of cross-border investments in terms of the foreign subsidiary's workforce. We use a newly established firm-level data set of German multinational firms and their Czech affiliates that allows various categorizations into vertical FDI and horizontal FDI. Apart from data for conventional approaches to classify FDI types, the survey data include a self-assessment of the firms with respect to investment motives, and information on intra-firm trade. In order to correct for sample selection, we apply a two-step Heckman procedure by comparing multinational firms to companies without investment abroad. The results for the direct measures of FDI types confirm theoretical expectations and previous empirical literature and stand in marked contrast to the outcome for indirect measurement concepts. We conclude that one should be more cautious in interpreting differences between vertical and horizontal FDI when using approximative classification concepts.