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Deciding Factors in the Return on Foreign Direct Investment: ―A Comparison between Japan and the United States―

Author

Listed:
  • Sanae Ohno

    (Professor, Faculty of Economics, Musashi University)

  • Yui Suzuki

    (Professor, Faculty of Economics, Musashi University)

Abstract

In Japan, where the aging of society with a low birth rate is ongoing, it is important to increase the return on net external assets as a way to offset a decline in the amount of such assets. As a result of an increase in the share of foreign direct investment in recent years, the return on net external assets is expected to rise. However, the return on foreign direct investment by Japan has continued to be lower than the return on foreign direct investment by the United States. Some reports indicate that the return on foreign direct investment by the United States is being inflated as a result of tax avoidance practices. However, it is essential to improve the return through appropriate risk-taking without relying on tax avoidance practices amid growing international criticism of such practices. This research examines the deciding factors in the return on foreign direct investment by both Japan and the United States and compares the characteristics unique to the two countries. The research results suggest that US companies have a stronger tendency to choose investment destination countries in consideration of tax factors and that this tendency is likely to be reflected in the return on foreign direct investment. On the other hand, the results also suggest that although multinational companies face various risk factors in investment destination countries, US companies are securing higher excess returns in exchange for risk-taking.

Suggested Citation

  • Sanae Ohno & Yui Suzuki, 2020. "Deciding Factors in the Return on Foreign Direct Investment: ―A Comparison between Japan and the United States―," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 16(2), pages 197-222, February.
    • Handle: RePEc:mof:journl:ppr16_02_02
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    foreign direct investment; return on net external assets; corporate tax; macro risks; structural risk factors;
    All these keywords.

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F30 - International Economics - - International Finance - - - General

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