Post on 10-Dec-2021
Proximity-Concentration vs. Factor Proportions Explanation: The Case of
Swedish Multinationals in the EU∗
Thomas MATHÄ
The School of Economic and Social Studies University of East Anglia
Norwich NR4 7TJ, United Kingdom Tel.: 0044 1603 593405, Fax: 0044 1603 250434
E-Mail: T.Mathae@uea.ac.uk
and
The European Institute of Japanese Studies Stockholm School of Economics
Box 6501, 113 83 Stockholm, Sweden
Abstract:
Both proximity-concentration trade-off and factor proportions explanations have been
forwarded to explain the existence of multinational enterprises. This paper analyses to what
extent the data supports these different explanations. A first empirical attempt is made to
distinguish explicitly between horizontally and vertically integrated multinationals. The
results indicate that horizontal multinationals are promoted if trade costs are large and R&D
intensity is low, while for vertical multinationals the opposite is the case. Further, both
horizontal and vertical multinationals are explained by small plant-level economies of scale
relative to domestic firm size, similarities in relative factor endowments, and large host
country sizes.
Keywords: Trade Costs, Country Size, Factor Endowments, Horizontal & Vertical
Multinationals
JEL Classification: F12, F21, F23
∗ I would like to thank Stephen Davies, Karolina Ekholm, Bruce Lyons, Erik Mellander, and Roger Svensson
for their helpful suggestions and comments, and to Per Thulin for data assistance. The author wishes to thank the DAAD and SI for financial support of this project and the Industrial Institute for Economic and Social Research for their hospitality.
1
1. Introduction: On both a regional and a global scale the importance of multinational enterprises and
Foreign Direct Investment have grown dramatically in recent decades. The global FDI stock
has increased fourfold between 1982 and 1994, and has doubled as a percentage of world
GDP to 9% (UNCTAD, 1997). Furthermore, the global FDI stock has grown three times the
rate of international trade and four times the rate of world GDP between 1960 and 1993
(European Commission, 1996). In 1995, global sales by affiliates outweighed world exports,
thus being the most dominant mode of servicing foreign markets. This picture is especially
pronounced in developed countries, which account for the predominant share of both FDI
outflows and inflows (UNCTAD, 1997).
Against this background it is thus not surprising that ‘new’ trade theory which
introduced economies of scale and product differentiation into general equilibrium trade
models, is now deemed to be an inappropriate reflection of reality, as multinationals are
excluded from the analysis. Starting with the early approaches of Helpman (1984) and
Markusen (1984), a new literature has emerged that takes account of the increasing
importance of multinational production in servicing foreign markets. Neither approach,
however, considers trade costs. Most of the newer models, which overcome this early
limitation, concentrate on horizontally integrated multinationals (e.g. Brainard, 1993;
Horstmann & Markusen, 1992; Motta, 1992; Markusen & Venables, 1996a,b, 1997, 1998).
One general proposition of these horizontal models is that multinational production is more
likely the smaller plant-specific economies of scale relative to firm-specific economies of
scale and trade costs. Firms must choose to trade-off proximity to customers, which saves
trade costs, with concentration of production at a single location to reap the benefits of plant-
level economies of scale.
Indeed stylised facts point towards horizontal multinationals being empirically far
more important than vertically integrated multinationals (e.g. Markusen, 1995). In the
Swedish context, however, it has been argued that the relationship between Swedish parents
and their European affiliates is mostly of a vertical nature (Andersson et al., 1996).
This distinction is important both theoretically and empirically, as horizontal
multinationals tend to arise if countries are similar in relative and absolute factor endowments
and if trade costs are medium to high, while vertical multinationals mainly arise if countries
are very different with respect to their relative factor endowments and if trade costs between
countries are low (Markusen, Venables, Konan & Zhang, 1996). Recent empirical tests of
2
both proximity-concentration trade-off hypothesis (Brainard, 1997; Ekholm, 1998) and the
factor proportions explanation of multinational sales (Brainard, 1993b; Ekholm, 1995, 1997)
failed to distinguish between the type of integration between parent and affiliate.1
The main objective of this paper is, thus, to make a first explicit attempt to analyse
whether these different theoretical predictions of horizontal vs. vertical multinationals are
supported by the data for EU countries. Secondly, separating horizontally from vertically
integrated MNEs also allows us to test the proximity-concentration trade-off hypothesis. As
only very few empirical tests have been conducted to test these general propositions, this
paper will help to show whether previous empirical findings are robust. This is especially
important as the countries in Brainard (1997) were chosen to “maximise diversity in
geographical coverage, income, production structure, and data coverage” (Brainard, 1997, p.
525). In choosing a relatively homogenous group of countries, as is the case for EU member
states, it will be important to see whether her empirical results are still supported.
In the empirical analysis we use plant and firm level data from Swedish multinationals,
collected on a quadrennial basis at the Research Institute of Industrial Economics in
Stockholm. In doing so we will restrict ourselves to already existing multinationals.2 Despite
its small economic size, Sweden appears to be one of the most multinational countries in the
world when compared to its economic size (Andersson et al., 1996).
The remainder of this paper is organised as follows. Section 2 will explore the
theoretical background. This will lead to the formulation of testable hypotheses. Section 3
presents the data and sources, while section 4 derives the econometric specification. Section 5
discusses the empirical results and the final section concludes.
2. Theoretical aspects: a. OLI Framework
Multinationals need to possess some kind of advantage over national firms, otherwise
they would not find it profitable to enter the foreign market. This is due to additional costs
1 The only paper that makes an attempt to distinguish between horizontal and vertical multinationals is
Brainard (1993b). She distinguishes between multinational sales destined for local sales and multinational sales destined for exports to the home country in an attempt to shed light on the poor performance of the factor proportions explanation of multinationals sales.
2 Firms in the sample may service individual countries in the EU either through exporting or through multinational production, or both simultaneously. However, due to the nature of this database firms are multinational in at least one of the EU member states, but not necessarily in all of them. Thus, a sample selection problem emerges in so far as purely national firms are excluded.
3
that have to be incurred when doing business abroad, such as transport and communication
costs, not to mention different national laws and regulation, language and customs.
A nice point of departure is the OLI approach developed by Dunning (1977, 1981),
which provides a useful organising framework. According to this approach firms need to
possess three advantages to become a multinational enterprise, namely ownership,
localisation, and internalisation advantages.
Firstly, potential multinationals need to possess ownership advantages or intangible
assets, which are firm-specific, such as, managerial expertise, patents, blueprints and
trademarks. These assets are to a large extent internationally mobile and allow firms to spread
production across national boundaries, as they give rise to multi-plant economies of scale (e.g.
Helpman, 1984; Markusen, 1984). Furthermore, these intangible assets often have public good
characteristics, which makes it difficult to appropriate their full return when contracting in the
market place (e.g. Williamson, 1981). As a result, firms may choose to internalise these
transactions costs. It should be stressed, however, that the notion of firm-specific assets is
primarily used to explain the existence of horizontally integrated MNEs. Vertically integrated
MNEs internalise the costs for intermediate products, thereby foregoing ex ante and ex post
contracting costs (e.g. Caves, 1996).
Secondly, firms have to possess some kind of localisation advantages to prefer
multinational production to exporting. For horizontal multinationals these localisation
advantages arise mainly due to savings in transport costs, tariffs and quotas. Given that there
are plant-level economies of scale, trade costs are necessary, as otherwise the firm would
always choose to produce at a single location and export to the foreign market. Thus, the cost
savings from local production in the foreign market have to be traded off against the potential
cost savings from producing in one single location (e.g. Brainard, 1993; Markusen &
Venables, 1996a,b, 1997, 1998). Plant-level economies of scale also give rise to a second
localisation advantage, the host country market size (e.g. Rowthorn, 1992; Brainard, 1993a;
Markusen & Venables, 1996a,b, 1997, 1998). The larger the host country market size, the
more likely it is that the firm will be able to produce at minimum average cost, or differently,
the more likely it is that the Minimum Efficient Scale (MES) of production can be reached.
While high trade costs have the tendency to encourage the existence of horizontal
multinationals, they discourage the existence of vertical multinationals. Vertical
multinationals fragment the production process, such that the respective production stage is
located in that country which is abundant in the production factor, which is used relatively
4
intensively at that stage (e.g. Helpman, 1984; Helpman & Krugman, 1985; Markusen,
Venables, Konan & Zhang, 1996). Vertical multinationals may, for example, produce
intermediate products, which are exported to the foreign country for further processing. The
final product is then transported back to the home country (e.g. Helpman & Krugman, 1985,
Ch. 13, Zhang & Markusen, 1996). Thus, low trade costs should facilitate the presence of
vertical multinationals. Moreover, the larger the difference of countries is with respect to their
relative factor endowments the more likely it is that vertical multinational will arise
(Helpman, 1984; Helpman & Krugman, 1985; Markusen, Venables, Konan & Zhang, 1996).
Thirdly, internalisation advantages arise due to the public good characteristic of
intangible assets. The firm may choose to transfer these assets within the organisation to avoid
their dissipation, which would otherwise occur due to opportunistic behaviour (e.g.
Williamson, 1981). Such dissipation can occur due to the impossibility of writing complete
contracts (e.g. Ethier, 1986) or due to licensees exploiting acquired knowledge about the
intangible asset after the end of the licensing period (e.g. Rugman, 1985, 1986; Ethier &
Markusen, 1996). Alternatively, licensees are tempted to free ride on the reputation of the firm
to gain short run profits (e.g. Horstmann & Markusen, 1987).3
b. Horizontal vs. Vertical Multinationals
Horizontal multinationals have received more attention in the theoretical literature than
vertical multinationals. This may accord to stylised facts, which point towards horizontal
multinationals being empirically more relevant than vertical multinationals (Markusen, 1995).
In the Swedish case, such a general statement may however be misleading, as the relationship
between Swedish parents and their EU affiliates is to a large extent of a vertical nature. For
example, the share of intermediates in total parent exports to their manufacturing EU affiliates
rose from 53% in 1986 to 75% in 1990 (Andersson et al., 1996). Even when related to total
parent exports to the EU, the share of intermediates is of a considerable magnitude; this share
rose from 12% in 1986 to 18% in 1990.
Hence, it is important to distinguish between horizontally and vertically integrated
multinationals, especially as some of the forces leading to the emergence of horizontal
multinationals are in sharp contrast to the forces leading to the presence of vertical
multinationals. In trying to identify testable hypotheses for the empirical part, I will mainly
draw on the results by Markusen, Venables, Konan & Zhang (1996), which to the best of my
3 For a review see Markusen (1995).
5
knowledge, provide the only theoretical framework that synthesises the emergence of both
horizontal and vertical multinationals.
Their model assumes that there are two countries producing two homogenous
products, with two factors of production, skilled and unskilled labour. Both factors of
production are mobile between sectors but immobile between countries. Sector one is
characterised by skilled labour being used in the firm-specific fixed cost, while a combination
of both production factors is used for the fixed plant set up costs. Unskilled labour is only
used in variable costs and transport costs between countries. In the second sector perfect
competition is assumed to prevail. This sector is taken as the numéraire.
Further assumptions for sector one are firstly that skilled labour requirements for
generation of multi-plant and plant-level economies of scale are identical for national
exporting firms and vertical multinationals. The only difference is that vertical multinationals
draw part of the skilled labour requirement from the host country. Thus, the nature of the
vertical MNE is similar to the treatment in Helpman (1984), i.e. production and trade in
intermediates are not considered.
Secondly, skilled labour requirements in fixed costs for horizontal MNEs is larger than
the skilled labour requirements for vertical MNEs or national firms. This is due to the fact that
horizontal MNEs operate two manufacturing plants, as opposed to vertical multinationals or
national firms, which operate only one plant. However, the skilled labour requirements in
fixed costs by horizontal multinationals are less than twice the requirement of vertical
multinationals or national firms. This reflects the joint-input characteristic of firm-specific
assets.
Thirdly, unskilled labour requirements are assumed to be identical for all plants and
are entirely drawn from the country where the plant is located. Lastly, it is assumed that there
is some small cost to separate headquarters from production.4
The results, as summarised in table 1 below, suggest firstly, that horizontal
multinationals tend to exist if firm-level economies of scale and trade costs are large relative
to plant-level economies of scale. This result appears in numerous horizontal models
(Brainard, 1993a; Horstmann & Markusen (1992); Markusen & Venables (1996a,b, 1997,
1998) and has also been confirmed in recent empirical studies by Brainard (1997) and Ekholm
(1998). The idea is that firms have to trade off the benefits of proximity to customers with the
concentration of production at a single plant. Proximity to customers saves transport costs,
4 This is to avoid degeneracy of the model.
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while concentration of production allows the firm to reap the benefits of plant-level
economies of scale. It is clear, however, that horizontal multinationals cannot arise if transport
cost are assumed to be negligible. This is due to the fact that by establishing a manufacturing
plant abroad, the horizontal multinational has to incur fixed plant set up costs without being
able to save transport costs by doing so.
Furthermore, horizontal multinationals are associated with similar relative and
absolute factor endowments. Again, these results are consistent with horizontal models of
Brainard (1993a) and Markusen & Venables (1996a,b, 1997, 1998). These predictions are also
supported by recent empirical evidence which comes to the conclusion that multinational
activity is mainly promoted by country size and factor endowment similarities (e.g. Brainard,
1997; Ekholm, 1998).
If countries become dissimilar with respect to relative factor endowments, then the
skilled labour abundant country will have a comparative advantage in producing goods in
sector one. In this case, single plant firms have an advantage over two-plant firms, as
horizontal multinationals locate production in the high cost factor market.
Table 1: Dominant of production regime and country characteristics
Production regime Hypothesis5 Characteristics
Horizontal multinationals
Hyp.1 Hyp.2 Hyp.3 Hyp.4 Hyp.5
• firm-level economies of scale are large relative to plant level economies of scale,
• countries are large, • trade costs are moderate to high, • countries are similar in relative factor endowments, • countries are similar in size.
Vertical multinationals
Hyp.6 Hyp.7
• trade costs are moderate to low, • countries differ significantly in relative factor
endowments. National exporting
firms
Hyp.8 Hyp.9
• trade costs are low and countries are similar in relative factor endowments and size,
• trade costs are moderate and countries are very different in size.
If countries become dissimilar with respect to country size, then the larger country will
have an advantage of producing goods in sector one due to a home market effect. Moreover,
the larger country will have a higher real price of skilled labour, which is due to the general
equilibrium constraint. This is assuming that production of the product in sector one is
relatively skilled labour intensive. In this case, multinational production has two cost
7
advantages over exporting; saving on transport costs and lower prices of skilled labour.
Allowing multinationals to enter raises the demand and price for skilled labour in the smaller
country. In this sense, multinationals reduce factor price differences. If country size
differences become too different, however, production in the smaller country can not be
sustained any more as output levels are too small to recoup fixed plant set up costs. This
explains the association of horizontal multinationals with similarity of absolute and relative
factor endowments.
If factor endowments and transport costs are such that two plant, i.e. horizontal
multinationals cannot be sustained, the question whether equilibrium is dominated by vertical
multinationals or national firms hinges on the fact of whether factor prices are equalised
internationally. If factor prices are virtually equalised then vertical multinationals cannot be
supported due to the cost disadvantage of splitting headquarters services and production. If
factor prices fail to equalise, vertical multinationals can enter as they fragment headquarter
services and production, such that headquarter services are located in the skilled labour
abundant country, while production takes place in the unskilled labour abundant country.
These results are consistent with the work by Helpman (1984), Helpman & Krugman (1985)
and Zhang & Markusen (1996).
There is only limited evidence for the factor proportions explanation of multinational
sales. Brainard’s (1993b) results reject the pure factor proportions explanation, although this
explanation seems to support multinational activity to some extent. In an attempt to separate
horizontally and vertically integrated multinationals, Brainard (1993b) finds that affiliate
production destined for exports back to the US differs from that destined for local sales. The
factor proportions hypothesis is generally supported in explaining the share exported back to
the US.6
Ekholm (1998) also finds some support for the factor proportions explanation in that
the share of the net outward foreign production to total foreign production is positively
increasing in capital per capita differences, and especially in human capital differences. Her
results are consistent with earlier obtained results, which indicated that that outward foreign
production is positively affected by the home country’s endowment in overall and human
capital (Ekholm, 1995, 1997).
5 Hypothesis 5 is not testable as the data only contains Swedish outward multinationality. Hypothesis 8 and 9
are not testable either, as the database does not contain purely national firms. 6 More precisely, the share of affiliate sales accounted for by exports back to the US increases in differences in
per capita endowments of capital, and illiterate labour, and decreases in differences in unskilled, literate labour, and transport costs.
8
Another important issue to be considered is the effect that both horizontal and vertical
multinationals have on trade volumes. Horizontal multinationals have the tendency to reduce
trade volumes between countries. This was suggested by models of Brainard (1993a),
Markusen & Venables (1996a,b, 1997, 1998).
For vertical multinationals, such a clear prediction is not possible. Firstly, investment
liberalisation followed by entrance of vertical multinationals may lead to the reversal of trade
flows. The reason is the geographical separation of the production stages, which results in the
home country importing the final product rather than exporting it, as would be the case with
national firms only.
Secondly, investment liberalisation may lead to increases in trade flows. There has
been a considerable debate in the literature as to whether exports and multinational production
are substitutes or complements. In the Swedish case, empirical evidence demonstrates some
complementarity between exports and multinational sales (Swedenborg, 1979, 1982;
Blomström et al., 1988). In contrast to these studies Svensson (1996) finds some evidence of
substitutability, which is especially pronounced for EU countries.
In theory, increases in trade flows are especially likely if one country is small and
skilled labour abundant, whilst the other country is large and unskilled labour abundant.
Indeed, it may be argued that this scenario reflects the case of Sweden. In such a case,
investment liberalisation has the effect of relaxing constraints in both the small and large
country. In the smaller country, production of the final product is constrained due to unskilled
labour scarcity and a small domestic market, while in the large country production of
headquarter services is constrained due to the high price of skilled labour. Thus, investment
liberalisation may lead to relocation of headquarter services to the small skilled labour
abundant country. Production would take place in the larger country, which exports the final
product to the small country, while the small country exports headquarter services to the large
country. As a result the volume of exports may increase.
One can detect surprisingly many stylised Swedish facts as presented by Andersson et
al. (1996) in this scenario. Firstly, Sweden is the home country of relatively many
multinationals, when compared to its country size. Secondly, the internationalisation process
of Swedish multinationals was characterised by expansion through foreign affiliates between
1970 and 1990. Thirdly, the relationship between parent and EU affiliate is to a large extent of
vertical rather than horizontal nature.
9
4. Data The data is taken from the database at the Research Institute of Industrial Economics in
Stockholm. This database contains information about individual Swedish multinationals and
their foreign operations.7 We consider the operations of Swedish multinationals in ten
individual EU member states. Ireland and Luxembourg had to be excluded. This is as
industrial variables were mainly taken from the STAN database (OECD, 1996), which does
not include either country. Data for Germany refers to West Germany prior to 1990 and to
united Germany from 1991 onwards. The variables are defined in million SEK and 1990
prices. The analysis covers the years 1974, 1978, 1986, 1990 and 1994. Earlier years had to be
excluded as the questionnaire prior to 1974 only asked about firms’ exports for countries
where foreign production was established. No survey was conducted in 1982.
The data set is pooled over these years. Interaction variables are used to test for
structural differences between horizontal and vertical multinationals.
5. Econometric specification Dependent variables:
The share of foreign production: AFFSHi,k,t
The dependent variable takes account of exports and multinational production being
simultaneously determined. It is defined as:
AFFSHPROD
PROD EXPi k ti k t
i k t i k t, ,
, ,
, , , ,
=+
The production volume of a multinational i in country k at time t, PRODi k t, , , is
defined as the sum of all affiliates’ total sales in country k at time t minus the sum of their
total imports from their parent company in Sweden at time t. Thus, we make an attempt to
disentangle affiliates’ production from pure resale activities of imported products. EXPi k t, , is
defined as firm i’s total exports to country k at time t. EXPi k t, , includes both exports of
finished products, which may be sold by the affiliate in country k, and intermediate products,
which are used by the affiliate for further processing.
The extent of vertical forward and backward integration: (VFBINTi,k,t)
7 For a complete documentation of the database see Andersson et al. (1996).
10
As alternative dependent variables, we use VFINT, VBINT, and VFBINT. These
variables are specifically designed to analyse the determinants of vertical integration between
parent and affiliate.VFBINT VFINT VBINTi k t i k t i k t, , , , , ,= + , with
VFINTIntermediate Exports to Affiliates
PROD EXPi k ti k t
i k t i k t, ,
, ,
, , , ,=
+
VBINTAffiliate Exports to Sweden
PROD EXPi k ti k t
i k t i k t, ,
, ,
, , , ,=
+
According to hypotheses 6 and 7 vertical multinationals arise if transport costs are low and
countries differ significantly in relative factor endowments. A typical feature of vertical
multinationals is that they engage in intra-firm trade of intermediate products. Furthermore,
the final product is then exported back to the home country, giving rise to trade flow reversals.
These two distinct features for vertical multinationals form part of the numerator
while total foreign sales are used in the denominator.8 This specification has the advantage
that we do not have to rely on an ad hoc distinction between horizontally and vertically
integrated multinationals. This dependent variable will allow us to treat vertical integration as
an entirely endogenous outcome of our determinants.
It is immediately apparent that both dependent variables may be censored. Censoring
of the dependent variable usually refers to a sample where some observations of the dependent
variable are not observed, while the independent variables are observed (e.g. Maddala, 1983;
Greene, 1993). This poses a problem in so far as estimation of the dependent variable by
ordinary least squares (OLS) will result in biased coefficient estimates. This problem can be
avoided by formulating a Tobit regression model, which accounts for censoring at both the
lower and upper tail.
AFFSH is censored at both tails, as firms export to EU countries, but are not
necessarily engaged in multinational production in these countries. Additionally, there are
cases, where the Swedish parent supplies the foreign market entirely via multinational
production, but not via exports from Sweden.9 The specification for AFFSH takes the
following form:
y ß xi i i* = ′ + µ , where yi
* is the real observed variable and
8 Note that both parts of the numerator are embodied in the denominator, as affiliate exports to Sweden is part
of affiliate production, while total exports to country k embodies the exports of intermediate products. 9 Unfortunately, we cannot account for any relationship between affiliates within the EU.
11
y yi i= * if 0 1< <yi*
yi = 0 if yi* ≤ 0
yi = 1 if yi* ≥ 1
As the dependent variables VFINT, VBINT, and VFBINT are only censored at the lower tail of
the distribution, the correction at the upper tail is not necessary.
Explanatory variables
Firm-level economies of scale: Research & Development intensity (R&D)i,t
The R&D to sales ratio is commonly used to explain the existence of multinationals. In
industries with high R&D expenditure, competition is more dependent on the exploitation of
firm-specific assets. Hence, firms with high R&D to sales ratio tend to supply the foreign
market by multinational production (Hypothesis 1). The R&D Intensity is defined as: The
ratio of total R&D expenditure to total sales by the parent company.
Plant level economies of scale and Swedish firm Size: LGj,t FIRMSIZEi,t
We use the above midpoint average plant size at the 3 and 4 digit level of the ISIC
classification, taken from the Swedish industry census of production, as our industry measure
of economies of scale. The years refer to 1975, 1978, 1987, 1990, and 1993. Thus, they
broadly correspond to the observations for the Swedish multinationals. In doing so we attempt
to ensure that the plants operate at or above the Minimum Efficient Scale of production.10
It is clear, however, that plant-level economies of scale on its own is not of much use
empirically. While in theory all respective horizontal and vertical multinationals are equal in
size, it is imminent that, in reality, this is not the case. Thus, plant-level economies of scale
are to be related to domestic firm size, FIRMSIZEi,t which is measured as a firm i’s total sales
in Sweden at time t.11 The nice intuition behind this measure is that it reflects whether the
firm has achieved the necessary economies of scale domestically. The larger the Swedish firm
size is relative to the plant-level economies of scale, the more likely it is that this firm will
turn multinational. The reason is simply that there is no great cost penalty of moving
production abroad, as the firm has exhausted the plant-level economies of scale domestically.
Hence, the coefficient of FIRMSIZE is expected to be positive, while we expect a negative
coefficient for LG (Hypothesis 1).
10 To reduce heteroskedasticity, variables are expressed in logarithmic form. This is indicated by the prefix L. It
was not possible to express all firm specific variables, such as R&D, in logs, as they contain zero values.
12
Trade Impediments: Industry specific trade costs (LTRADE)j,t
This measure of trade costs is also taken from Swedish industry statistics. The years
and the level of aggregation correspond to the years of our measure for economies of scale
measure. LTRADE reflects industry specific transport and packaging costs and is expressed as
a percentage share of total sales in industry j at time t. This measure has neither a distance nor
a country specific component. However, the measure varies over time. We expect this
measure to be positively related to the share of multinational production in foreign sales if
multinationals are horizontally integrated (Hypothesis 2). We expect a negative or
insignificant sign for vertically integrated multinationals (Hypothesis 6). This is as vertical
multinationals ship intermediates to their foreign production locations, which implies that
transport costs have to be low in the first place for foreign production to take place.
Country size: Gross Domestic Product (LGDP)k,t
GDP values for EU member states are taken from OECD National Accounts yearbook
(OECD, 1997). We expect that larger host country sizes favour multinational production
(Hypothesis 2).
Relative factor endowments: Relative Gross Domestic Product per Capita (LINCDIF)k,t
Similarly, the GDP per capita ratios for countries are taken from OECD National
accounts. It is defined as the absolute difference in the GDP per capita between country k and
Sweden at time t, where GDP per capita is expressed as a logarithmic transformation:
LINCDIFGDP POPULATION
GDP POPULATIONk tk t k t
SWE t SWE t,
, ,
, ,log
//
=
We expect this measure to be negatively related to the affiliate production share if
multinationals are predominantly horizontally integrated (Hypothesis 4) and positively related
to the affiliate production share if the relationship between parent and affiliate is mainly of a
vertical nature. (Hypothesis 7).
11 In the Industrial Organisation literature it is common to relate economies of scale to industry size. As we seek
to explain individual firms’ behaviour, it is more appropriate to relate economies of scale to firm size.
13
Technology differences: Relative Value Added per Employee (LVADIF)j,k,t
Technological differences between countries and industries do not appear in the
theoretical model. Nevertheless, it is clear that one of the reasons for vertical multinationals to
appear is to take advantage of higher productivity levels in the host country. Accordingly, we
will include a measure of relative productivity differences between member state k and
Sweden to account for such a motivation. This measure is calculated from the STAN
database. The measure is defined as the absolute difference in value added per employee in
industry j, country k and time t to the value added per employee in that industry in Sweden at
time t.
LVADIFVALUE ADDED EMPLOYEES
VALUE ADDED EMPLOYEESj k tj k t j k t
j SWE t j SWE t, ,
, , , ,
, , , ,log
//
=
Fixed Time Effects: DUM74, DUM78, DUM86, DUM90, DUM94
As the data set has been pooled over different time periods we include these time
dummies to control for the effect that some companies may appear more often in the sample
than others.
Vertical integration interaction variables: (Suffix -V)
We employ interaction variables to test for structural differences between horizontal
and vertical multinationals. The ultimate aim is to find a variable that discriminates between
horizontal and vertical integration, such that the information about the relationship between
the Swedish parent company and its affiliates in individual EU member states can be used.
The problem, though, is that such a variable is only observed if the parent has established an
affiliate in that country. Including such a variable as an explanatory variable in the regression
would not be appropriate. To avoid this problem we define a parent to be vertically integrated
with its EU affiliates if the share of exports in intermediates from parent to EU affiliates to
total EU affiliate production, labelled VFEU, is in excess of a certain value.12 VFEU is
defined as:
VFEUExport of Intermediates to Affiliates
PRODi t
i,k,tk
i k tk
,, ,
=∑
∑
12 Of course, such discrimination between horizontal and vertical multinationals comes at a cost in terms of lost
information.
14
We use alternative values to distinguish between horizontal and vertical
multinationals. This is done mainly to see whether the obtained results are robust. The most
extreme way is to regard Swedish multinationals as vertical multinationals as soon as
VFEU>0. In the other cases we choose to regard firms to be vertically integrated if either
VFEU exceeds the weighted sample median (VFEU=0.017)13
The variables that are expected to have different impacts on horizontal and vertical
multinationals are transport costs, the country size and the (dis-) similarity of factor
endowments. Large transport costs are expected to be positively significant for horizontal
multinationals, but negatively significant or insignificant in explaining the production share in
total foreign sales of vertical multinationals (Hypothesis 6 and 3). According to the theoretical
model, country size is only expected to have an effect on the foreign production share if firms
are horizontally integrated, but not if they are vertically integrated multinationals (Hypothesis
5). Finally, the existence of horizontal multinationals should be favoured by factor endowment
similarities, while vertical multinationals tend to emerge if countries are different with respect
to their relative factor endowments (Hypothesis 4 and 7).
6. Econometric results: Firstly, I will discuss the results for the specification (I). Thereafter, I report the results
for specification (II) and (III), which include interaction variables to test for structural
differences between horizontal and vertical multinationals. At last, I will report the results for
specifications (IV), (V), and (VI), which is concerned with the extent of vertical integration
between parents and their affiliates in the EU. All results are shown in Appendix 1 in the
respective tables.
Specification (I)
The results in specification (Ia) and (Ib) show firstly, that the share of foreign
production to total foreign sales tends to be high if plant-level economies of scale, trade costs
and host country size are large and if countries are similar in relative factor endowments. The
coefficients of the variables are significant at the 5%, 5%, 1% and 1% level, respectively.
Thus, these results show that the share of affiliate production of Swedish multinationals is
13 The difference between the simple and weighted sample median occurs, as the firms do not have foreign sales
in equally many member states. The simple sample median (VFEU=0.021) is biased towards firms with sales in many EU member states, while the weighted sample median corrects for this.
15
primarily explained by market access and proximity considerations (Hypothesis 2,3,4), and
not by the factor proportions explanation.
The coefficient of our proxy for plant-level economies of scale is positive significant at
the 5% level, which is contrary to the prediction. The sign of this coefficient is however
reversed, and significantly so, if the firm size in the domestic market, LFIRMSIZE, is included
as an additional variable (specification (Ic) and (Id)). This suggests firstly that plant-level
economies of scale variable LG picks up some other effect if the firm size is excluded.
Secondly, these results show clearly that what matters is that firms have achieved and
exhausted the economies of scale at the plant level in their home market in order to become
multinationals.
As a final remark, the coefficients of R&D intensity and sectoral productivity
differences between countries are negative, albeit both being insignificant. This suggest that
on aggregate neither firm-level economies of scale nor productivity differences seem to
significantly affect foreign production shares. However, as we will see in a short while, there
are significant differences between multinationals.
Specifications (II) and (III)
In specifications (II) and (III) we test whether there are structural differences between
horizontally and vertically integrated multinationals. In specifications (II) and (III),
multinationals are regarded as vertically integrated, as soon as VFEU>0 and VFEU>0.017,
respectively. The results suggest that there are some significant differences between
multinationals.
Firstly, we note that large host country sizes, relative factor endowment similarities,
large industry specific trade costs and a large firm size relative to plant-level economies of
scale, promote horizontal multinationals. All these coefficients are either significant at the 5%
or 1% level. Thus, these results nicely confirm the theoretical predictions for the emergence of
horizontal multinationals (Hypothesis 1,2,3,4). Again, the coefficient of the similarity in
productivity differences between industries in the host and home country does not seem to
contribute significantly to the foreign production share of horizontal multinationals.
One very interesting result is that a high R&D intensity has a negative effect on the
foreign production share of horizontal multinationals. The coefficient is negatively significant
at the 5% level or better in specifications throughout the specifications (II) and (III). This is
contrary to expectation. However, as Norbäck (1998) has demonstrated in the case for
16
horizontal multinationals, the expectation of a positive coefficient on R&D hinges on the
assumption that the technology transfer costs between parent and its affiliates are unrelated to
the magnitude of the R&D intensity. Relaxing this assumption and assuming instead that
technology transfer costs and the R&D intensity are positively related to each other, is
consistent with the expectation of a negative coefficient of R&D intensity on foreign
production shares.
Furthermore, the coefficient of R&DV is positively significant for vertical
multinationals throughout specifications (II) and (III). Thus, there is a significant difference
between predominantly horizontally integrated multinationals and multinationals which
exhibit a substantial degree of vertical integration between parent and affiliate. The coefficient
has to be interpreted relative to the coefficient of horizontal multinationals. Hence, a high
R&D intensity has a relatively larger effect on foreign production share for vertical
multinationals than for horizontal multinationals. The net coefficient is positive, however,
indicating that even in absolute terms high R&D intensity has a positive impact on the foreign
production share of vertical multinationals.14
The positive coefficient of R&D intensity for vertically integrated multinationals may
also indicate that their technology transfer costs are independent of the R&D intensity. This
would be the case, for example, if vertical multinationals embody the technology in the
exports of intermediates to their affiliates. This also enables them to reduce opportunistic
behaviour and may help to fully appropriate the returns of the undertaken research and the
new technology. Hence, for vertical multinationals, the technology transfer costs are
embedded in the trade costs that have to be incurred, while horizontal multinationals’
technology transfer costs may rise with the R&D intensity, as more technical personnel,
scientists and other managerial staff have to be sent to foreign affiliates to supervise
implementation of the firms-specific assets.
Moreover, plant-level economies of scale have a significantly smaller effect on vertical
multinationals than on horizontal multinationals. This result is, however, not robust across
specifications. Firstly, in specification (II) LGV is negatively significant at the 10%, 5% and
5% level in specifications (IIb), (IIc) and (IId), respectively. In specification (IIIa) and (IIIb)
LGV is negatively significant at the 1% level, while it is insignificant in specification (IIIc)
and (IIId). Hence, this seems to suggest that, for a given domestic firm size, larger plant-level
14 The R&D coefficient is positively significant at the 10% or better level in a separate regression, which
includes vertically integrated multinationals only. The results are available from the author upon request.
17
economies of scale have a relatively larger effect of reducing foreign production shares if
multinationals are vertically rather than horizontally integrated.
On the one hand, we would expect that plant-level economies of scale are more
important for horizontal multinationals, which is in accordance with the prediction by
Markusen, Venables, Konan & Zhang (1996). On the other hand, vertically integrated
multinationals may be more dependent on the exploitation of resource-based economies of
scale, which makes it difficult and extremely costly to relocate production geographically.
With regard to trade costs, the results indicate that their effect is significantly smaller
in the case of vertically integrated multinationals. This difference is especially pronounced in
specification (III), where the coefficient of LTRADEV is negatively significant at the 5% level
or better, while the coefficient is only significant at the 10% level for specifications (IIa) and
(IIb). This nicely confirms the expectation that horizontal multinationals emerge to forego
trade costs while vertical multinationals emerge despite incurring trade costs (Hypothesis 3,6).
This is because vertical multinationals engage in intra-firm trade in intermediates. Or
alternatively, their foreign affiliates export the final product to Sweden. In either case, it is
obvious that trade costs are incurred, which tend to erode the locational advantage of the host
country, such as lower factor prices or higher productivity levels. Thus, vertical multinationals
tend to emerge in industries which exhibit moderate to low trade costs.
There is no indication, however, that vertical multinationals arise as a result of factor
endowment differences. The coefficient of the interaction term LINCDIFV is positive except
in specification (IIIb), but it is never significant. Similarly, productivity differences between
respective industries in the host and the home country do not seem to significantly affect
foreign production shares.
Additionally, the host country size seems to play a more important role for vertical
multinationals than for horizontal multinationals. The coefficient of LGDPV is positively
significant at the 5% level or better, except for specification (IIa), where it is only significant
at the 10% level. According to the theoretical model, we would expect host country size to
have a smaller effect on production shares for vertical multinationals.
Specification (IV), (V), and (VI)
18
In this section we report the results for the determinants of vertical forward and/or
backward integration between parent and affiliate, rather than foreign production shares.
Using these alternative dependent variables gives additional insights.
Firstly, the predictions are more clear cut with regard to the extent of vertical
integration between parents and their affiliate than in the case of foreign production shares.
The reason for this is that foreign production shares are expected to be large if the equilibrium
is either dominated by horizontal multinationals or by vertical multinationals. However, the
conditions for the equilibrium regimes to emerge are very different, not to say opposed to each
other. Horizontal multinationals are expected to dominate if trade costs are moderate to high
and countries are similar in size and relative factor endowments, while vertical multinationals
are expected to dominate if trade costs are moderate to low and countries differ significantly
in relative factor endowments. The extent of vertical integration between parent and affiliate,
VFINT, VBINT, and VFBINT, is only expected to be of a high magnitude if trade costs are
moderate to low and if countries differ significantly with respect to the relative factor
endowments. In all other cases, either national exporting or horizontal multinationals
dominate in the equilibrium, which yields low intra-firm trade. This is a much sharper
prediction.
Secondly, we recall that one of the advantages in looking at the production shares was
that differences between horizontal and vertical multinationals could be examined. In doing
so, we were forced, however, to aggregate vertical integration between parents and their
affiliate to the EU level. Hence, vertical integration was not treated as the outcome of
individual country and industry specific characteristics, as desired, but rather as a firm-specific
characteristic. Hence, using the extent of vertical integration as a dependent variable will
allow us to review whether the previous analysis has severe shortcomings. Equally
importantly, vertical integration between parent and affiliate is regarded as an entirely
endogenous outcome of country and industry specific characteristics.
The results show that a high R&D intensity, has a positive effect on the extent of
vertical integration of Swedish multinationals. The coefficient is significantly positive at the
5% level and better for all regressions. This suggests that vertical multinationals embody their
technology and firms-specific assets in the intermediates that are exported to foreign affiliates.
In this way they may be able to reduce the dissipation of new technology. With regard to
backward integrated multinationals, the positive coefficient of R&D corresponds to the classic
Helpman (1984) case, where multinationals fragment production geographically in order to
19
take advantage of different factor endowments and factor prices. The primary task of the home
country is to provide headquarter services, such as R&D, to foreign production units.
The achievement of economies of scale is also an important determinant of vertical
integration. Both the coefficients of LFIRMSIZE and LG are significant at the 1% level,
except in specification (VIa) and (VIb), where the coefficient of LG is significant at the 10%
level only. Again, we notice the reversal of the sign of LG if the domestic firm size is
included.
Moreover, the results indicate very clearly that high trade costs deter vertical
integration of multinationals. The coefficient is negatively significant at the 10% level or
better for specifications (IVc, (Vc), (VIc), (IVd), (Vd), and (VId). This is especially
pronounced for vertical backward integrated multinationals. Thus, this confirms that vertical
multinationals tend to emerge in industries with low transport costs. As the results in
specification (II) and (III) have already indicated very clearly, this is significantly different to
horizontally integrated multinationals.
Large host country sizes have a highly significant effect on vertical integration. The
coefficient of LGDP is positively significant at the 1% level. This result is consistent with the
earlier obtained result in specifications (II) and (III), which suggested that large host country
size may favour vertical multinationals relative to horizontal multinationals.
Additionally, there is a strong suggestion that similarities in relative factor
endowments have a positively significant effect on vertical integration. The coefficient of
LINCDIF is negatively significant at the 1% level throughout specifications (IV), (V), and
(VI). Again, this result is consistent with earlier obtained results, but is contrary to the
theoretical prediction.
Moreover, vertical forward integrated multinationals are attracted by differences in
productivity levels. The coefficient of LVADIF is positively significant at the 5% level or
better in specification (IV). This confirms that geographical fragmentation of production
occurs to take advantage of industry-specific productivity, technology or labour cost
differences between the host and home country.15 To our surprise, the opposite seems to be
the case for backward integrated multinationals, where the coefficient of LVADIF is
negatively significant at the 10% level in specification (Vd). Reasons that may account for this
is that more and more Foreign Direct Investment is driven by acquisitions of independent
15 We chose to concentrate on absolute differences in value added per employee. As value added per employee
is highly correlated with the wage per employee, a positive coefficient of LVADIF may either result from
20
foreign firms, which in turn export to Sweden. Hence, a negative coefficient may be consistent
with acquisitions, which are mainly directed to competitors with similar products, and which
give the Swedish parent access to new markets and to new distribution networks.
Finally, as the results for specification (IV), (V), and (VI) are consistent with the
results obtained in specifications (II) and (III), we have reason to believe that using the
variable VFEU to discriminate between horizontal and vertical multinationals, did not
significantly affect the results.
Concluding Remarks
Recent developments in the new trade and investment literature suggest that there are
fundamental differences between horizontal and vertical multinationals. Horizontal
multinationals tend to emerge due to market proximity considerations, which have to be
traded off against concentration of production designed to reap the benefits of economies of
scale. Horizontal multinationals are favoured by similarities in country size, and relative factor
endowments. On the contrary, vertical multinationals fragment production into geographically
separate stages to exploit factor price, and thus relative factor endowment differences or
technologies. Due to resulting intra-firm trade in intermediates, vertical multinationals tend to
emerge if transport costs are low and relative factor endowment differences are large.
Previous empirical results suggest foreign production is mainly promoted by the
proximity-concentration trade-off considerations and to a minor extent by the factor
proportions explanation (Brainard, 1993b, 1997; Ekholm, 1995, 1997, 1998). These studies
fail, however, to distinguish between horizontal and vertical multinationals.
This paper makes a first explicit attempt to distinguish between horizontal and vertical
multinationals. In doing so we choose to focus on the EU affiliates of Swedish multinationals.
Importantly, and in contrast to stylised facts presented by Markusen (1995), Andersson et al.
(1996) have argued and shown that the relationship between Swedish parent and EU affiliates
is mainly of a vertical nature, which makes a distinction between horizontal and vertical
multinationals and their respective determinants relevant.
The results show firstly that there are significant differences between horizontally and
vertically integrated multinationals. There is some evidence that suggests that R&D intensity
has a positive effect on the foreign production share in foreign sales for vertical
multinationals, while there are strong signs that the opposite is true for horizontal
locating production abroad to take advantage of higher productivity levels or lower labour costs in the host
21
multinationals. Further, R&D intensity has a clear positive effect on the extent of vertical
integration of Swedish multinationals. The negative coefficient for horizontal multinationals
is consistent with the explanation forwarded by Norbäck (1998), who demonstrated that the
sign of the coefficient depends on the assumption of whether the transfer costs between parent
and affiliate are related or unrelated to the size of R&D undertaken. The results for vertical
multinationals suggest that technology and firm-specific assets are embodied in the
intermediates that are exported to the affiliates. In doing so, new firm-specific knowledge and
new technologies are kept in the home country, thereby reducing the possibility of their
dissipation to foreign competitors.
Moreover, a high share of multinational production is more likely if the firm has
achieved and exhausted the economies of scale on the plant-level in the home country. This is
consistent with the theoretical prediction, and with earlier results by Brainard (1997) and
Ekholm (1998). The exploitation of economies of scale is more important for vertical
multinationals, however. This may suggest that these multinationals depend on the availability
of cheap domestic resources, such hydro-electric energy, timber or ore. Hence, relocation of
production imposes relatively greater cost penalty for these firms.
Moreover, high trade costs tend to promote horizontal multinationals, while they have
a significantly smaller effect on vertical multinationals. The extent of vertical integration
between parents and their affiliates is significantly affected by the trade costs are that have to
be incurred, when shipping intermediates to foreign production units and/or shipping final
products back to Sweden.
With regard to country size and relative factor endowments, we note that both
horizontal and vertical multinationals tend to arise as if countries are large in size and similar
in their relative factor endowments. Host country seems also to be a relatively more important
determinant for vertical multinationals. In addition, the extent of vertical integration is also
entirely explained by factor endowment similarities. This suggest that the factor proportions
explanation of multinational sales is irrelevant for explaining Swedish multinationals in the
European Union. This reinforces the results obtained by Brainard (1993b, 1997) and Ekholm
(1998). Additionally, while Brainard (1993b) found some evidence that the share of foreign
production, which is exported back to the home country, is explained by the factor proportions
explanations, we could not find any such effect for Swedish multinationals in the EU.
country.
22
Lastly, the extent of vertical forward integration between parent and their affiliates is
increasing in sector-specific productivity differences between the host country and the home
country, while vertical backward integration is increasing by similarities therein.
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25 Appendix 1:
Tobit Estimates for Foreign Production Share without industry dummies
Dep. Var. AFFSH No. of obs. 1698 Threshold value Lower=0, Upper=1 Specification Ia Ib Ic Id Log likelihood -1347.5 -1347.5 -1273.4 -1273.0
Constant -4 608 *** -4 597 *** -3 902 *** -3 862 *** (-6,834) (-6.817) (-6.686) (-6.617)
R&D -0,425 -0.439 -0.429 -0.455 (-0,555) (-0.572) (-0.571) (-0.609)
LFIRMSIZE 0.269 *** 0.269 *** (10.585) (10.608)
LG 0,077 ** 0.077 ** -0.276 *** -0.278 *** (2,204) (2.202) (-6.566) (-6.622)
LTRADE 0,103 ** 0.103 ** 0.108 ** 0.107 ** (2,359) (2.326) (2.513) (2.489)
LGDP 0,270 *** 0.269 *** 0.228 *** 0.226 *** (6,504) (6.491) (6.439) (6.403)
LINCDIF -0,408 *** -0.389 *** -0.400 *** -0.347 *** (-3,512) (-3.014) (-3.923) (-3.103)
LVADIF -0.036 -0.104 (-0.321) (-0.987)
PERIOD74 0,191 * 0.194 * 0.319 *** 0.329 *** (1,869) (1.882) (3.146) (3.203)
PERIOD78 0,014 ** 0.014 0.069 0.068 (0,183) (0.179) (0.955) (0.953)
PERIOD90 -0,148 -0.147 ** -0.087 -0.082 (-2,107) (-2.079) (-1.360) (-1.292)
PERIOD94 -0,069 *** -0.063 -0.113 -0.096 (-0,867) (-0.758) (-1.548) (-1.286)
T-statistic in brackets. Estimates are heteroskedastic consistent. *, **, *** denotes significance at the 10%, 5%, and 1% level, respectively.
26
Tobit Estimates on Differences Between Horizontal and Vertical Multinationals: CUT-OFF POINT VFEU>0 CUT-OFF POINT VFEU>0 017
Dep. Var. AFFSH AFFSH No. of obs. 1698 1698 Threshold value Lower=0, Upper=1 Lower=0, Upper=1 Specification IIa IIb IIc IId IIIa IIIb IIIc IIId Log likelihood -1338.8 -1338.4 -1266.6 -1266.1 -1328.6 -1328.5 -1254.1 -1253.6
Constant -4 471 *** -4 408 *** -3 876 *** -3 828 *** -4 431 *** -4 433 *** -3 920 *** -3 892 *** (-6.723) (-6.612) (-6.789) (-6.657) (-6.872) (-6.845) (-6.946) (-6.859)
R&D -4.091 *** -4.045 *** -4.053 ** -4.036 ** -5.746 *** -5.743 *** -3.451 ** -3.441 ** (-2.821) (-2.807) (-2.182) (-2.164) (-4.195) (-4.186) (-2.151) (-2.123)
LFIRMSIZE 0.317 *** 0.319 *** 0.277 *** 0.277 *** (6.843) (6.856) (8.146) (8.114)
LG 0.135 ** 0.139 ** -0.152 ** -0.153 ** 0.188 *** 0.187 *** -0.179 *** -0.182 *** (2.388) (2.452) (-2.314) (-2.330) (4.010) (3.981) (-3.136) (-3.196)
LTRADE 0.219 *** 0.226 *** 0.214 ** 0.212 ** 0.253 *** 0.252 *** 0.185 *** 0.180 *** (3.023) (3.091) (2.425) (2.400) (3.996) (3.970) (2.837) (2.754)
LGDP 0.232 *** 0.225 *** 0.160 *** 0.157 *** 0.220 *** 0.220 *** 0.195 *** 0.196 *** (5.206) (5.043) (4.141) (4.012) (5.542) (5.520) (5.664) (5.626)
LINCDIF -0.531 *** -0.648 *** -0.606 *** -0.590 ** -0.404 *** -0.380 ** -0.428 *** -0.350 ** (-2.866) (-2.601) (-3.196) (-2.346) (-2.846) (-2.191) (-3.323) (-2.209)
LVADIF 0.156 -0.033 -0.037 -0.135 (0.803) (-0.171) (-0.238) (-0.927)
R&DV 4.637 *** 4.545 *** 4.254 ** 4.188 ** 7.841 *** 7.841 *** 4.686 ** 4.648 ** (2.677) (2.631) (2.091) (2.054) (4.522) (4.482) (2.541) (2.505)
LFIRMSIZEV -0.052 -0.054 -0.045 -0.044 (-1.130) (-1.169) (-1.171) (-1.152)
LGV -0.101 -0.105 * -0.162 ** -0.160 ** -0.185 *** -0.184 *** -0.107 -0.104 (-1.579) (-1.640) (-2.109) (-2.091) (-3.088) (-3.067) (-1.519) (-1.475)
LTRADEV -0.141 * -0.150 * -0.145 -0.143 -0.293 *** -0.291 *** -0.198 ** -0.193 ** (-1.629) (-1.719) (-1.458) (-1.441) (-3.445) (-3.420) (-2.305) (-2.244)
LGDPV 0.048 * 0.051 ** 0.081 *** 0.082 *** 0.067 *** 0.066 *** 0.054 ** 0.052 ** (1.878) (1.982) (3.071) (3.099) (2.735) (2.702) (2.356) (2.267)
LINCDIFV 0.175 0.336 0.285 0.321 0.016 -0.010 0.074 0.023 (0.890) (1.247) (1.490) (1.219) (0.094) (-0.047) (0.490) (0.121)
LVADIFV -0.237 -0.076 0.040 0.072 (-1.012) (-0.336) (0.189) (0.366)
PERIOD74 0.186 * 0.189 * 0.333 *** 0.342 *** 0.223 ** 0.224 ** 0.312 *** 0.320 *** (1.817) (1.833) (3.345) (3.394) (2.230) (2.226) (3.225) (3.278)
PERIOD78 0.018 0.017 0.092 0.091 0.058 0.059 0.090 0.090 (0.230) (0.216) (1.289) (1.279) (0.746) (0.747) (1.248) (1.244)
PERIOD90 -0.126 * -0.123 * -0.073 -0.068 -0.206 *** -0.206 *** -0.139 ** -0.135 ** (-1.800) (-1.744) (-1.153) (-1.080) (-2.880) (-2.861) (-2.140) (-2.076)
PERIOD94 -0.057 -0.056 -0.098 -0.082 -0.084 -0.081 -0.084 -0.068 (-0.705) (-0.669) (-1.334) (-1.098) (-1.051) (-0.977) (-1.137) (-0.907)
T-statistic in brackets. Estimates are heteroskedastic consistent. *,**, *** denotes significance at the 10%, 5%, and 1% level, respectively.
27
Tobit Estimates: The Extent of Vertical Integration Between Parent and Affiliate Vertical Forward Integration Vertical Backward Integration Vertical Forward and Backward Integration
Dep. Var. VFINT VBINT VFBINT No. of obs. 1698 1693 1693 Threshold value Lower=0, Upper=+infinity Lower=0, Upper=+infinity Lower=0, Upper=+infinity Specification IVa IVb IVc IVd Va Vb Vc Vd VIa VIb VIc VIdLog likelihood -370.6 -367.7 -310.6 -308.8 -259.8 -258.5 -136.7 -135.0 -445.4 -444.3 -349.8 -349.7
Constant -1 273 *** -1 304 *** -0 922 *** -0 933 *** -1 020 *** -1 023 *** -0 540 *** -0 539 *** -1 381 *** -1 375 *** -0 805 *** -0 805 *** (-6.361) (-6.490) (-6.038) (-6.082) (-7.408) (-7.428) (-5.491) (-5.495) (-7.211) (-7.087) (-5.626) (-5.591)
R&D 0.673 *** 0.714 *** 0.822 *** 0.860 *** 0.369 *** 0.352 ** 0.283 ** 0.265 ** 0.683 *** 0.703 *** 0.874 *** 0.881 *** (3.478) (3.660) (4.704) (4.875) (2.564) (2.432) (2.189) (1.994) (3.489) (3.569) (5.205) (5.229)
LFIRMSIZE 0.070 *** 0.070 *** 0.061 *** 0.060 *** 0.071 *** 0.071 *** (8.017) (8.072) (12.877) (12.770) (10.419) (10.426)
LG 0.024 *** 0.025 *** -0.067 *** -0.068 *** 0.019 *** 0.020 *** -0.068 *** -0.067 *** 0.016 * 0.016 * -0.079 *** -0.079 *** (2.742) (2.783) (-4.554) (-4.604) (2.591) (2.674) (-8.303) (-8.248) (1.874) (1.867) (-6.524) (-6.530)
LTRADE -0.018 -0.017 -0.020 * -0.020 * -0.020 ** -0.020 ** -0.023 *** -0.023 *** -0.015 -0.015 -0.023 ** -0.023 ** (-1.360) (-1.235) (-1.814) (-1.802) (-2.275) (-2.303) (-3.186) (-3.165) (-1.193) (-1.142) (-2.170) (-2.172)
LGDP 0.068 *** 0.069 *** 0.044 *** 0.045 *** 0.056 *** 0.056 *** 0.028 *** 0.028 *** 0.081 *** 0.081 *** 0.045 *** 0.045 *** (5.371) (5.485) (4.683) (4.743) (6.523) (6.523) (4.759) (4.743) (6.980) (6.827) (5.176) (5.139)
LINCDIF -0.121 *** -0.163 *** -0.098 *** -0.124 *** -0.099 *** -0.082 *** -0.088 *** -0.073 *** -0.146 *** -0.173 *** -0.130 *** -0.136 *** (-3.764) (-4.514) (-3.712) (-4.337) (-3.990) (-3.054) (-5.448) (-4.200) (-4.185) (-4.580) (-5.109) (-5.065)
LVADIF 0.076 *** 0.052 ** -0.038 -0.032 * 0.048 (*) 0.012 (2.580) (2.022) (-1.516) (-1.859) (1.575) (0.482)
PERIOD74 0.039 0.033 0.050 * 0.046 (*) 0.022 0.025 0.044 ** 0.046 *** 0.035 0.031 0.051 * 0.050 * (1.370) (1.169) (1.711) (1.584) (1.107) (1.259) (2.526) (2.667) (1.216) (1.055) (1.782) (1.728)
PERIOD78 0.023 0.023 0.024 0.025 0.003 0.003 0.011 0.012 0.006 0.006 0.010 0.010 (1.093) (1.117) (1.318) (1.348) (0.173) (0.196) (0.983) (1.022) (0.314) (0.309) (0.575) (0.571)
PERIOD90 -0.055 *** -0.059 *** -0.036 ** -0.039 ** -0.038 *** -0.036 *** -0.030 *** -0.028 *** -0.054 *** -0.056 *** -0.036 ** -0.037 ** (-2.856) (-3.020) (-2.221) (-2.372) (-2.868) (-2.710) (-3.014) (-2.821) (-2.988) (-3.109) (-2.360) (-2.403)
PERIOD94 -0.045 ** -0.058 ** -0.035 * -0.044 ** -0.025 * -0.018 -0.021 ** -0.015 -0.043 ** -0.051 ** -0.028 * -0.030 * (-1.994) (-2.546) (-1.872) (-2.295) (-1.688) (-1.222) (-2.052) (-1.481) (-2.100) (-2.464) (-1.728) (-1.787)
T-statistic in brackets. Estimates are heteroskedastic consistent. *, **, *** denotes significance at the 10%, 5%, and 1% level, respectively.