SIER Working Paper Series

An exploration of Korean MNCs’ foreign affiliate-level data reveals that a significant portion of manufacturing foreign affiliates sell both to related and unrelated firms at the same time. We refer to this as hybrid vertical FDI. We rationalize the presence of hybrid vertical FDI by modifying the otherwise standard property–rights model of global sourcing with the subsidiarylevel option of supplying inputs to unrelated customers in addition to related firms. Given the positive production externality from serving additional customers—that is proportional to the MNC’s productivity—and the costs of getting such benefit—that are increasing in relationship-specificity of the outsourced inputs, the model predicts a couple of testable hypotheses that are robustly confirmed by our subsequent empirical analysis.