Working Paper No. 03-14

Vertical Multinationals, Industry Characteristics, and Endogenous Technology Spillover
Kazuhiko Yokota
November 2003

ABSTRACT

In this paper, we build a model of vertical multinational firms with endogenous spillover that explains recent empirical questions; why developing courtries have little technology transfer from foreign direct investment (FDI) and why only low-tech sectors benefit from technology spillover. To explain these questions, we emphasize industry characteristics as well as country characteristics in a small open general equilibrium framework. The model has two main results. First, vertical multinationals and local firms behave differently across industries depending on the level of skilled labor abundance. Second, the degree of competition between multinational and local firms explain the degree of benefits from FDI and why only low-tech sectors have spillover effects in developing countries.

JEL classification: F12; F14; F23; O12; O33
Keywords: Vertical multinational firms; Industry characteristics; Technology spillover; Skilled and unskilled labor; Economic development

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