The merits of horizontal versus vertical FDI in the presence of uncertainty

Joshua Aizenman, Nancy Marion

Research output: Contribution to journalArticlepeer-review

87 Scopus citations

Abstract

We examine the impact of uncertainty on vertical and horizontal FDI. Our model shows that greater supply uncertainty reduces the expected income from vertical FDI but increases the expected income from horizontal FDI. Greater demand uncertainty adversely affects the expected income under both production modes. Uncertainty about predatory actions by the host country is more costly to the multinational under vertical than under the horizontal mode. We examine sales by foreign affiliates of U.S. parent companies. Conditioning on host-country characteristics thought to influence FDI, we find evidence that volatility and sovereign risk have a greater negative impact on vertical FDI than on horizontal FDI.

Original languageEnglish
Pages (from-to)125-148
Number of pages24
JournalJournal of International Economics
Volume62
Issue number1
DOIs
StatePublished - 1 Jan 2004
Externally publishedYes

Keywords

  • Horizontal and Vertical FDI
  • Sovereign risk
  • Supply and demand uncertainty

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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