The Knowledge-Capital Model of FDI: A time varying coefficients approach∗

The present article reexamines some of the issues regarding the Know-ledge-Capital Model that encompasses both horizontal and vertical Foreign Direct Investment described in detail in the literature. The empirical sup-port for this model is however a mixture. This article proposes a new way of estimating coefficients by allowing them to vary over time. The estima-tion results obtained using data from fourteen European countries for the period from 1982 to 2004 confirm that these coefficients cannot be consid-ered constant over time and that the vertical component of the Knowledge-Capital Model is relevant even in the context of European countries with relatively similar endowments