The Foreign Direct Investment (FDI) allows a country to invest and control business in another country. FDI has two types of data flow: horizontal and vertical (B. Blonigen et al., 2007). The horizontal motivation is the need to place the product nearer to the customer to avoid any trade costs. In contrast, vertical motivation is the need to have unskilled labour to produce large amounts of products at a lower cost. These motivations are shown as data flows in FDI, however, FDI has other data flows as well, and understanding this data can be difficult so the Knowledge-Capital Model is used as a powerful disentanglement tool to combine these two flows and make them understandable (Kristjánsdóttir, 2010). This paper will use the estimation of this model to measure Multinational Enterprise activity.
The Theory
Many multinational companies take advantage of the FDI to lower the cost of their products and invest in skilled and unskilled areas for this purpose. This represents their vertical motivation, and their horizontal motivation is placing the product near the target consumer to lower or avoid trade costs (Doraszelski & Jaumandreu, 2006).
The Method
The Knowledge-Capital Model will be used to measure the time-varying approach along with the application of the estimation method.
The Cases
The data available on OECDs was available from the years 1980 to 2004; huge amounts of data on OECDs were missing from the years 1980, 1981, and 2004 and due to incomplete data, these years were excluded, and data on OECDs was collected from the years 1982 to 2003 (OECD, 2020).
Dependent Variable
The dependent variable was the OECD (Organization for Economic Co-operation and Development), so for this, the bilateral stocks of FDI were collected from different OECD Organization for Economic Co-operation and Development for thirty OECD countries. This data is collected from 1982 to 2003, which gives us time (T) to 22 years. This data gave 870 countries, which, when divided by 30 OECD countries, gave 29 pairs of countries (Mariel et al., 2009).
FDI = (OECD Sample) x (Time)
The Independent (and Control Variables):
The independent variable data was the GDP, and it was measured using millions of U.S. dollars with prices (PPPs) at a constant and skill difference, which was obtained from the works of Lee and Barro (2000).
The Research Logic
The OECDs are the countries that provide labour to multinational companies, and they represent the vertical data flow. So, by calculating OECD’s skill difference and GDP, the FDIs can be calculated, which would, in turn, present data on Multinational Enterprise activity. This method can be applied to any multinational company to estimate the overall FDIs and revenues that it generates (B. A. Blonigen et al., 2003).
The Project Value
The project draws upon the works of Carr et al., who used this model to show how multinational enterprise activity can be calculated by estimating their knowledge-capital model (Carr et al., 2001). Currently, this research paper has used the broader OECD data to present some rough estimates; however, future research can be more streamlined by including one or more multinational companies to present more concrete evidence of cost reduction that is done through FDIs (Anghel, 2007).
The Works Cited
Anghel, B. (2007). A Knowledge-Capital Model Approach of FDI in Transition Countries. https://www.cerge-ei.cz/pdf/events/papers/070306_t.pdf
Barro, R., & Lee, J.-W. (2000). International Data on Educational Attainment Updates and Implications (NBER Working Paper No. 7911). National Bureau of Economic Research, Inc. https://econpapers.repec.org/paper/nbrnberwo/7911.htm
Blonigen, B. A., Davies, R. B., & Head, K. (2003). Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment. THE MULTINATIONAL ENTERPRISE, 93(3), 15.
Blonigen, B., Davies, R., Waddell, G., & Naughton, H. (2007). FDI in space: Spatial autoregressive relationships in foreign direct investment. European Economic Review, 51(5), 1303–1325.
Carr, D., Markusen, J., & Maskus, K. (2001). Estimating The Knowledge-Capital Model of the Multinational Enterprise. American Economic Review, 91, 693–708. https://doi.org/10.1257/aer.91.3.693
Doraszelski, U., & Jaumandreu, J. (2006). R&D and productivity: The knowledge capital model revisited. 46.
Kristjánsdóttir, H. (2010). Foreign Direct Investment: The Knowledge-capital Model and a Small Country Case. Scottish Journal of Political Economy, 57, 591–614. https://doi.org/10.1111/j.1467-9485.2010.00532.x
Mariel, P., Orbe, S., & Rodriguez, C. (2009). The knowledge-capital model of FDI: A time varying coefficients approach. Scottish Journal of Political Economy, 56, 196–212. https://doi.org/10.1111/j.1467-9485.2009.00480.x
OECD. (2020). OECD data. TheOECD. http://data.oecd.org
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