North American Integration and the Location of Foreign Direct Investment
(with Karine Torosyan)
Abstract:
The knowledge-capital (KC) model of multinational activity is highly nonlinear and nonmonotonic. Yet, empirical studies of the model have relied on a linear parametric specification. Results of these studies have produced mixed evidence, mostly stemming from the weak support of its vertical component. This paper adopts a much more flexible framework, using additive nonparametric regression to obtain empirical evidence on the KC model. We use a new backfitting procedure, the local linear smooth backfitting of Mammen et al. (1999), to estimate the model. Our preliminary results reveal significant nonlinearities, but are often consistent with the theoretical predictions. In particular, the results support the hypothesis that higher relative skill endowments of home countries raise affiliate activity, at least as long as skill abundance does not become too great.
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