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The Role of Trade Costs in FDI Strategy of Heterogeneous Firms: Evidence from Japanese Firm-level Data

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  • Toshiyuki MATSUURA

    (Toshiyuki MATSUURA Institute of Economic and Industrial Studies, Keio University, Japan)

  • Kazunobu HAYAKAWA

    (Kazunobu HAYAKAWA Bangkok Research Center, Japan External Trade Organization, Thailand)

Abstract

This paper attempts to clarify the reasons for the rapid growth of FDI in developing countries, particularly East Asian countries, compared with that of FDI in developed countries. To do this, we will examine the mechanics of HFDI and VFDI, in order to shed light on the role of trade costs. Our empirical analysis by estimating a multinomial logit model of Japanese firmsf FDI choices reveals that the reduction in trade costs between host and home countries attracts even less productive VFDI firms. In contrast, it does not attract HFDI firms. Since developing countries, particularly East Asian countries, have experienced a relatively rapid decrease in trade costs with Japan, our results indicate that the increase in VFDI through trade cost reduction has led to the recent relative surge of FDIs in developing countries.

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Bibliographic Info

Paper provided by Economic Research Institute for ASEAN and East Asia (ERIA) in its series Working Papers with number DP-2012-04.

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Length: 42 pages.
Date of creation: 01 Jun 2012
Date of revision:
Handle: RePEc:era:wpaper:dp-2012-04

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  1. Maggie Xiaoyang Chen & Michael Owen Moore, 2009. "Location Decisions of Heterogeneous Multinational Firms," Working Papers 2009-17, The George Washington University, Institute for International Economic Policy.
  2. Badi H. Baltagi & Peter Egger & Michael Pfaffermayr, 2005. "Estimating Models of Complex FDI: Are There Third-Country Effects?," Center for Policy Research Working Papers 73, Center for Policy Research, Maxwell School, Syracuse University.
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