Role of Past Experience and Intra-firm Trade in FDI Decisions

To what extent do multinational firms consider past experience of exporting and future expectations of intra-firm trade when they engage in outward foreign direct investment (FDI) activities? How do trade costs affect these decisions? Recent literature has shown that FDI entry decisions depend on past export experience in a potential destination. In addition, due to the growth of global value chains, intra-firm trade in both directions (from parent company to affiliate, and from affiliate to parent company) has been shown to have an important effect on affiliate sales' patterns. In this paper, we examine how both mechanisms shape Japanese multinational enterprises' (MNEs) outward FDI activity. We use firm-level data from two basic surveys of Japanese companies: the Basic Survey of Japanese Business Structure and Activities and the Basic Survey on Overseas Business Activities for the period 1995-2015, and we look for evidence that FDI entry decision into a country is a function of past export experience and future expectations of intra-firm trade. We also consider firms' attributes, market attractiveness, barriers to entry, and other factors that can impact FDI entry decision. The results of our analysis have important implications for economic policy since they can shed light on alternative ways to promote inward and outward FDI activity by Japanese firms.