Hunting High and Low for Vertical FDI

Recently the horizontal and vertical models of foreign direct investment (FDI) have been synthesized into the knowledge‐capital (KK) model. Empirical tests, however, find that the horizontal model cannot be rejected in favor of the KK model. I suggest this is because the empirical specifications are too restrictive for vertical FDI to manifest itself. Using an alternative specification, I find evidence of vertical FDI. In particular, when I use the stock of FDI I can reject the horizontal model in favor of the knowledge‐capital model and identify countries for which FDI is dominated by vertical investment.