This paper addresses the empirical estimation of the "knowledge-capital" model of the Multinational Enterprise (MNE), which combines horizontal and vertical motivations for Foreign Direct Investment (FDI). The authors critique the work of Carr, Markusen, and Maskus (CMM), who estimate a regression specification based on the knowledge-capital model using U.S. affiliate sales data from 1986 to 1994. They argue that CMM's empirical framework mis-specifies the terms measuring differences in skilled-labor abundance, a key variable in identifying vertical MNE motivations. After correcting this specification error, the data no longer support the knowledge-capital model but strongly support the horizontal model, which predicts that affiliate activity between countries decreases as absolute differences in skill-labor abundance widen. The findings are robust to alternative specifications using both U.S. and OECD data. The authors conclude that the horizontal model, which assumes that headquarter services and production use factors in the same proportions, is more consistent with the empirical evidence than the knowledge-capital model.This paper addresses the empirical estimation of the "knowledge-capital" model of the Multinational Enterprise (MNE), which combines horizontal and vertical motivations for Foreign Direct Investment (FDI). The authors critique the work of Carr, Markusen, and Maskus (CMM), who estimate a regression specification based on the knowledge-capital model using U.S. affiliate sales data from 1986 to 1994. They argue that CMM's empirical framework mis-specifies the terms measuring differences in skilled-labor abundance, a key variable in identifying vertical MNE motivations. After correcting this specification error, the data no longer support the knowledge-capital model but strongly support the horizontal model, which predicts that affiliate activity between countries decreases as absolute differences in skill-labor abundance widen. The findings are robust to alternative specifications using both U.S. and OECD data. The authors conclude that the horizontal model, which assumes that headquarter services and production use factors in the same proportions, is more consistent with the empirical evidence than the knowledge-capital model.