Fragmentation of headquarter services and FDI

This paper develops a model of foreign direct investment (FDI), in which the skilled labors of different countries are imperfect substitutes for one another. As a result, multinational firms combine them and FDI occurs without trade costs or factor-price differences. Additionally, FDI increases in the skilled-labor stock of either country. Data on U.S. FDI reveal patterns consistent with the model. The introduction of imperfectly substitutable skilled labors also yields domestic wage effects that can help to offset those previously recognized.