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Heterogeneous Impact of Trade Liberalization on Vertical FDI: Evidence from Japanese firm-level data

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  • HAYAKAWA Kazunobu
  • MATSUURA Toshiyuki

Abstract

This paper empirically explores the reason why a recent surge of foreign direct investment (FDI) to developing countries has been mainly driven by less productive firms. To this end, we present a simple model of FDI with vertical division of labor in a heterogeneous firm framework. From a theoretical point of view, in countries with low unskilled worker wages and low trade costs, firms with high productivity invest abroad and engage in international division of labor. Moreover, if trade costs have further reduced, the productivity cut-off level becomes lower and firms within the middle range of productivity will start investing in low wage countries. Our empirical analysis using logit estimation or a multinomial logit model of Japanese firms' FDI choices reveals that a reduction in tariff rates attracts even less productive vertical foreign direct investment (VFDI) firms. This result is consistent with a different definition of VFDI. Because developing countries, particularly East Asian countries, have experienced a relatively rapid decrease in tariff rates, our results indicate that the increase in VFDI through tariff rate reduction has led to the recent relative surge of FDIs in developing countries.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 13020.

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Length: 31 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:eti:dpaper:13020

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  1. Chen, Maggie Xiaoyang & Moore, Michael, 2009. "Location decision of heterogeneous multinational firms," MPRA Paper 33482, University Library of Munich, Germany.
  2. Caves, Douglas W & Christensen, Laurits R & Tretheway, Michael W, 1983. "Productivity Performance of U.S. Trunk and Local Service Airlines in the Era of Deregulation," Economic Inquiry, Western Economic Association International, vol. 21(3), pages 312-24, July.
  3. Hayakawa, Kazunobu & Matsuura, Toshiyuki & Motohashi, Kazuyuki & Obashi, Ayako, 2013. "Two-dimensional analysis of the impact of outward FDI on performance at home: Evidence from Japanese manufacturing firms," Japan and the World Economy, Elsevier, vol. 27(C), pages 25-33.
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  7. Fukao, Kyoji & Ishido, Hikari & Ito, Keiko, 2003. "Vertical intra-industry trade and foreign direct investment in East Asia," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 468-506, December.
  8. Gene M. Grossman & Elhanan Helpman & Adam Szeidl, 2003. "Optimal Integration Strategies for the Multinational Firm," Harvard Institute of Economic Research Working Papers 2024, Harvard - Institute of Economic Research.
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  10. Kazunobu Hayakawa & Toshiyuki Matsuura, 2010. "Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia," Keio/Kyoto Joint Global COE Discussion Paper Series 2010-008, Keio/Kyoto Joint Global COE Program.
  11. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  12. Yeaple, Stephen Ross, 2009. "Firm heterogeneity and the structure of U.S. multinational activity," Journal of International Economics, Elsevier, vol. 78(2), pages 206-215, July.
  13. Aw, Bee Yan & Lee, Yi, 2008. "Firm heterogeneity and location choice of Taiwanese multinationals," Journal of International Economics, Elsevier, vol. 75(1), pages 167-179, May.
  14. Kimura, Fukunari & Takahashi, Yuya & Hayakawa, Kazunobu, 2007. "Fragmentation and parts and components trade: Comparison between East Asia and Europe," The North American Journal of Economics and Finance, Elsevier, vol. 18(1), pages 23-40, February.
  15. Fukunari Kimura & Kozo Kiyota, 2006. "Exports, FDI, and Productivity: Dynamic Evidence from Japanese Firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 142(4), pages 695-719, December.
  16. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
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