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Reverse Imports, Foreign Direct Investment and Exchange Rates

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Abstract

This paper investigates systematic linkages among "reverse imports", foreign direct investment, and exchange rates. We have in mind the competition in the Japanese market of a Japanese multinational firm and a Chinese domestic firm. Products are differentiated based on Japanese consumers' brand name recognition. The model shows that yen appreciation leads to an increase in Japanese FDI in China and "reverse imports", and a decrease in Japanese domestic production. Due to the barriers in brand name, the exports of the Chinese firm may fall, because the increase of reverse imports may erode the market share of Chinese firm, even though total exports from China increase. Further, we find that yen appreciation may improve the profits of the Japanese firm and welfare in Japan under reverse imports, against conventional wisdom. The predictions of the model fit well with the actual figures, and shed light on the current, heated China debate.

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File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2003_03.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2003_03.

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Length: 28 pages
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2003_03

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Keywords: Reverse Imports; FDI; Exchange Rate; Brand Name; China;

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Cited by:
  1. Lee Branstetter & Nicholas Lardy, 2006. "China's Embrace of Globalisation," Working Papers id:640, eSocialSciences.
  2. Nishiyama, Hiroyuki & Yamaguchi, Masao, 2010. "Foreign direct investment, international trade, and firm heterogeneity," Economic Modelling, Elsevier, vol. 27(1), pages 184-195, January.
  3. Xing, Yuqing & Wan, Guanghua, 2004. "Exchange Rates and Competition for FDI," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., . "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society.

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