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Re-Estimating The Knowledge-Capital Model: Evidence From Japanese And U.S. Multinational Enterprises

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This paper re-estimates the knowledge-capital model by James Markusen (2002) to study market access and factor endowment explanations of Foreign Direct Investment (FDI). The author adds to the literature by combining consistent datasets on Japanese and U.S. MultiNational Enterprises (MNE) in the period 1989-2002. To reduce potential bias, the prior specification of the knowledge-capital model is augmented with a number of additional control variables and estimated with a system GMM estimator. In the pooled sample, the author finds that both market access and relative skill endowments matter for the pattern of foreign affiliate sales. When separately estimating Japanese and US samples, the evidence shows that Japanese MNEs are encouraged by relative unskilled-labor abundance in a host country, consistent with a vertical motive of FDI.