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The Role of Trade Costs in FDI Strategy of Heterogeneous Firms: Evidence from Japanese Firm-level Data

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  • Toshiyuki MATSUURA

    (Toshiyuki MATSUURA Institute of Economic and Industrial Studies, Keio University, Japan)

  • Kazunobu HAYAKAWA

    (Kazunobu HAYAKAWA Bangkok Research Center, Japan External Trade Organization, Thailand)

Abstract

This paper attempts to clarify the reasons for the rapid growth of FDI in developing countries, particularly East Asian countries, compared with that of FDI in developed countries. To do this, we will examine the mechanics of HFDI and VFDI, in order to shed light on the role of trade costs. Our empirical analysis by estimating a multinomial logit model of Japanese firms f FDI choices reveals that the reduction in trade costs between host and home countries attracts even less productive VFDI firms. In contrast, it does not attract HFDI firms. Since developing countries, particularly East Asian countries, have experienced a relatively rapid decrease in trade costs with Japan, our results indicate that the increase in VFDI through trade cost reduction has led to the recent relative surge of FDIs in developing countries.

Suggested Citation

  • Toshiyuki MATSUURA & Kazunobu HAYAKAWA, 2012. "The Role of Trade Costs in FDI Strategy of Heterogeneous Firms: Evidence from Japanese Firm-level Data," Working Papers DP-2012-04, Economic Research Institute for ASEAN and East Asia (ERIA).
  • Handle: RePEc:era:wpaper:dp-2012-04
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    1. Chen, Maggie Xiaoyang & Moore, Michael O., 2010. "Location decision of heterogeneous multinational firms," Journal of International Economics, Elsevier, vol. 80(2), pages 188-199, March.
    2. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2007. "Estimating models of complex FDI: Are there third-country effects?," Journal of Econometrics, Elsevier, vol. 140(1), pages 260-281, September.
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