Horizontal versus Vertical Foreign Direct Investment: Evidence from U.S. Multinationals

Using firm-level data, we document a new set of facts on the motives for foreign direct invest-ment. We find that the majority of affiliates are horizontal in nature, selling most of their output to unaffiliated parties in their host countries; most affiliates do not trade with other parties within the corporation. We show that the input-output coefficient between the industries of operation of the parent and the affiliate—a characteristic commonly used to identify a vertical relationship—is not related to the corresponding intrafirm flows of physical goods. We document that a key difference between horizontal and vertical affiliates is their size: Vertical affiliates are concentrated among a small number of large multinational corporations and, within them, only the largest affiliates engage in intrafirm trade. We are thankful for helpful comments from Laura Alfaro, David Atkin, Pablo Fajgelbaum, Fritz Foley, Nicholas Sly, and Stephen Yeaple, as well as seminar participants at several seminars and conferences. We would also like to thank William Zeile for help with the multinational affiliate data and comments on an early draft. Ruhl thanks the Nationa