Macro Determinants of FDI Inflows to Japan: An Analysis of Source Country Characteristics

Abstract

This paper examines the source country determinants of FDI into Japan. The paper highlights certain methodological and theoretical weaknesses in the previous literature and offers some explanations for hitherto ambiguous results. Specifically, the paper highlights the importance of panel data analysis, and the identification of fixed effects in the analysis rather than simply pooling the data. Indeed, we argue that many of the results reported elsewhere are a feature of this mis-specification. To this end, pooled, fixed effects and random effects estimates are compared. The results suggest that FDI into Japan is inversely related to trade flows, such that trade and FDI are substitutes. Moreover, the results also suggest that FDI increases with home country political and economic stability. The paper also shows that previously reported results, regarding the importance of exchange rates, relative borrowing costs and labour costs in explaining FDI flows, are sensitive to the econometric specification and estimation approach. The paper also discusses the importance of these results within a policy context. In recent years Japan has sought to attract FDI, though many firms still complain of barriers to inward investment penetration in Japan. The results show that cultural and geographic distance are only of marginal importance in explaining FDI, and that the results are consistent with the market-seeking explanation of FDI. As such, the attitude to risk in the source country is strongly related to the size of FDI flows to Japan. Copyright 2007 The Authors Journal compilation 2007 Blackwell Publishing Ltd .

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“…Likewise, in equation (1) G it represent GDP per capita; FDI it is net inward foreign direct investment in current US$, EXPit is exports (trade) and ε it is stochastic term. Moreover, the stochastic term ε it is contained w it which is time invariant and accounts for any not observable singular source country-specific effect which is not included in the econometric model and µ it is supposed to be white noise (Kimino et al 2007;Azam and Ather, 2015). Furthermore, equation (1) states that the impacts of FDI inflows and exports on economic growth are expected to be positive in the study.…”

Has Abenomics Succeeded in Raising Japan's Inward Foreign Direct Investment?

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“…Kimino et al (2007) examine the determinants of FDI inflows to Japan specifically, and find that some variables that many cross-country studies have found to be important determinants do not influence FDI flows into Japan once source country fixed effects are accounted for. For example, the exchange rate, exchange rate volatility, the borrowing cost differential, and the labor cost differential all lose their power to explain the pattern of FDI inflows (Kimino et al, 2007, Table 3). The only variables that are robust seem to be the gravity model related variables (GDP and distance), exports from the source country, source country risk, and cultural distance.…”

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