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Potential for Inward Foreign Direct Investment in Japan

In: Globalization and Welfare Impacts of International Trade

Author

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  • Takeo Hoshi
  • Kozo Kiyota

Abstract

Promotion of inward foreign direct investment (FDI) into Japan has been an important policy in the Abenomics growth strategy. This paper examines if we observe positive impacts of the policy in the data. We first estimate a gravity model of bilateral FDIs using data for 35 OECD countries as destination countries. In estimating the model, we handle zero values for FDI stock explicitly. The model includes (origin and destination) country-specific effects as well as destination-country specific time trends. We take the model prediction as a reasonable counterfactual and compare that to the actual inward FDI stock for Japan. Although the actual inward FDI stock has been growing and is likely to achieve the goal of 35 trillion yen by 2020, the growth under the Abe administration has been comparable to or slightly lower than the counterfactual suggested by the estimated model. We also estimate the model without Japan as a destination country and use the estimated model to calculate the counterfactual level of Japan's inward FDI. Although we expect the gap between the counterfactual and the actual become narrower if Abenomics policy has been successful, we fail to find that. These results cast a doubt on the effectiveness of the Abenomics policies to encourage inward FDI at least as of 2015.
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Suggested Citation

  • Takeo Hoshi & Kozo Kiyota, 2018. "Potential for Inward Foreign Direct Investment in Japan," NBER Chapters, in: Globalization and Welfare Impacts of International Trade, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:14331
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    2. Ito, Banri, 2020. "Cross-border mergers and acquisitions and inter-urban gravity," MPRA Paper 103985, University Library of Munich, Germany.
    3. Rondeau, Fabien & Yoshida, Yushi, 2025. "Global value chains and exchange rate pass-through into the import prices of Japanese industries," Japan and the World Economy, Elsevier, vol. 74(C).
    4. Cho, Sungtaek & Kwak, Do Won & Lee, Hongshik, 2020. "Participation in the Kaesong Industrial Complex and its impact on productivity: South Korean textile firms’ experiences," Japan and the World Economy, Elsevier, vol. 53(C).
    5. Greaney, Theresa M. & Tanaka, Ayumu, 2021. "Foreign Ownership, Exporting and Gender Wage Gaps: Evidence from Japanese Linked Employer-Employee Data," Journal of the Japanese and International Economies, Elsevier, vol. 61(C).
    6. Banri Ito & Katsunori Shirai, 2024. "City-specific determinants of cross-border M&As: an inter-urban gravity approach," International Economics and Economic Policy, Springer, vol. 21(1), pages 65-88, February.
    7. Yasumasa Morito & Kenichi Ueda, 2024. "Bilateral Lucas Paradox," CARF F-Series CARF-F-581, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    8. Theresa M. Greaney & Kozo Kiyota, 2020. "Japan’s Outward FDI Potential," Working Papers 202005, University of Hawaii at Manoa, Department of Economics.
    9. Nathapornpan Uttama & Popkarn Arwatchanakarn, 2023. "How do economic complexity and productive capacities foster foreign direct investment flows? Evidence from the Asian economies," Economics Bulletin, AccessEcon, vol. 43(1), pages 629-643.
    10. Isao KAMATA, 2023. "Foreign Direct Investment and Labor Market Flexibility in Host and Source Countries," Discussion papers 23033, Research Institute of Economy, Trade and Industry (RIETI).
    11. Hock Tsen Wong, 2022. "Asymmetric Real Exchange Rate and Foreign Direct Investment Determinants: An Empirical Study of Malaysia," Capital Markets Review, Malaysian Finance Association, vol. 30(2), pages 19-37.
    12. Shiro Armstrong, 2021. "Economic Diplomacy and Economic Security under Abe," Asian Economic Policy Review, Japan Center for Economic Research, vol. 16(2), pages 283-299, July.
    13. Greaney, Theresa M. & Kiyota, Kozo, 2020. "Japan's outward FDI potential," Journal of the Japanese and International Economies, Elsevier, vol. 57(C).
    14. Ayumu TANAKA & Banri ITO & Naoto JINJI, 2022. "Individual Preferences Toward Inward Foreign Direct Investment: A Conjoint Survey Experiment," Discussion papers 22005, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • 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

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