Vertical multinationals and host-country characteristics

We inquire into the question of what country characteristics, particularly, market size and labor-force composition, attract inward investment. This a pproach is motivated by the empirical observation that the poorest countrie s attract a far smaller share of world direct investment than their share o f income. Small markets receive less investment per capita than larger ones . We develop a model that generates both stylized facts in equilibrium, sug gesting the existence of a development trap for small, skilled-labor-scarce countries. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classif ication: F12; F23; O1.