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Journal of Comparative Economics 35 (2007) 509–519
www.elsevier.com/locate/jce
Foreign direct investment and macroeconomic risk
Yothin Jinjarak ∗
Division of Economics, Nanyang Technological University (NTU), S3-B2A-代写澳洲论文06, Singapore 639798
Received 16 January 2007; revised 10 May 2007
Available online 23 May 2007
Jinjarak, Yothin—Foreign direct investment and macroeconomic risk
Motivated by the macroeconomic fluctuations and policy regime switches frequently observed in developing
countries, this paper provides cross country-industry evidence on the links between a host country’s
macro risks and foreign direct investment (FDI) activities. For each industry I measure vertical FDI share as
a ratio of exports to a parent country relative to local sales by foreign affiliates. Using a panel sample from
1989 to 1999, I find that FDI activities of US multinationals in industries with higher share of vertical FDI
respond disproportionately more to negative effects of macro-level demand, supply, and sovereign risks.
However, when institutional quality and total FDI share of the host country are sufficiently low, the merits
of cross-industry vertical versus horizontal FDI in response to macro risks disappear. Journal of Comparative
Economics 35 (3) (2007) 509–519. Division of Economics, Nanyang Technological University (NTU),
S3-B2A-06, Singapore 639798.
© 2007 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.
JEL classification: E32; F21; F23; F40; L16; P51
Keywords: Horizontal and vertical FDI; Institutions; Macroeconomic volatility; Multinationals
1. Overview
What is the main driving force of foreign direct investment (FDI)? This paper adds to a series
of literatures studying the association between institutions, macroeconomic risks, and FDI.1
* Fax: +65 67946303.
E-mail address: YJinjarak@ntu.edu.sg.
1 Another strand of literature focuses on static conditions under which vertical FDI is more efficient than horizontal
FDI. There, vertical FDI arises when a multinational firm fragments its production process internationally, locating each
stage of the production in the host country where it can be done at the least cost. Hummels et al. (2001) and Yi (2003)
0147-5967/$ – see front matter © 2007 Association for Comparative Economic Studies. Published by Elsevier Inc. All
rights reserved.
doi:10.1016/j.jce.2007.05.002Y. Jinjarak / Journal of Comparative Economics 35 (2007) 509–519 511
vertical FDI is applicable to all affiliates operating abroad for each industry.3 The dissimilarity
across industries is apparent: a ratio of exports back to US relative to local sales by foreign
affiliates of industries below the 25th percentile (Utilities, Information, Food, Services) is, on
average, 44 percent smaller than that of industries above the 75th percentile (Mining, Industrial
Machinery, Transportation Equipment, and Computer Products). In the next section, I investigate
empirically the implication of this dissimilarity by projecting cross country-industry patterns of
FDI activity onto a vector of macro risks.
2. Estimation
To quantify the differential impact of macro risks on vertical versus horizontal FDI activities,
I estimate the following equation:
FDI Activity of Industry j in Host Country k
= Constant+β1...m · Country Indicators+ βm+1...n · Industry Indicators
+