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Choice for FDI and Post-FDI Productivity

  • ITO Yukiko
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    We highlight the difference between the service sector and the manufacturing sector in regard to the determinants for a firm to start FDI and the productivity growth it achieves. This paper analyzes two questions: (1) whether a certain level of productivity explains a Japanese firm's choice to be a multinational firm (by starting FDI), and (2) how the productivity of such a multinational firm changes over time after FDI. Using the longitudinal panel data on Japanese firms from 1980 to 2005, We trace some firm-level decisions over several decades. This research contributes to the discussions where empirical evidence is not yet profoundly available: how the TFP of the service and that of manufacturing sectors present difference for the choice of overseas activity, and how much productivity gain firms may achieve by intrafirm and cross-border reallocation of firm resources. We have found the following results: (1) compared by year and by industry, the TFP in manufacturing does not explain a firm's choice for starting FDI, but the TFP in the service sector does, then a low level of productivity deters a firm from pursuing FDI; (2) in the manufacturing sector, the size and profitability of firms are positive factors for their future choice in FDI, but these do not matter in the service sector; (3) after FDI, entrants in the service sector show 1.4 times higher annual productivity growth than those in the manufacturing sector. The productivity in service is also on average higher than that of selected domestic firms for counterfactuals.

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    File URL: http://www.rieti.go.jp/jp/publications/dp/07e049.pdf
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    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 07049.

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    Length: 26 pages
    Date of creation: Aug 2007
    Date of revision:
    Handle: RePEc:eti:dpaper:07049
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    1. Sofronis Clerides & Saul Lach & James Tybout, 1996. "Is "Learning-by-Exporting" Important? Micro-Dynamic Evidence from Colombia, Mexico and Morocco," NBER Working Papers 5715, National Bureau of Economic Research, Inc.
    2. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    3. Giorgio Barba Navaretti & Davide Castellani, 2003. "Investments Abroad and Performance at Home Evidence from Italian Multinationals," Development Working Papers 180, Centro Studi Luca d\'Agliano, University of Milano.
    4. Keith Head & John Ries, 2003. "Heterogeneity and the FDI versus Export Decision of Japanese Manufacturers," NBER Working Papers 10052, National Bureau of Economic Research, Inc.
    5. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Harvard Institute of Economic Research Working Papers 2118, Harvard - Institute of Economic Research.
    6. Eiichi Tomiura, 2005. "Foreign Outsourcing, Exporting, and FDI: A Productivity Comparison at the Firm Level," Discussion Paper Series 168, Research Institute for Economics & Business Administration, Kobe University.
    7. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2005. "Foreign Direct Investment and Domestic Economic Activity," NBER Working Papers 11717, National Bureau of Economic Research, Inc.
    8. Mary Amiti & Shang-Jin Wei, 2006. "Service Offshoring and Productivity: Evidence from the United States," NBER Working Papers 11926, National Bureau of Economic Research, Inc.
    9. Sourafel Girma & David Greenaway & Richard Kneller, 2004. "Does Exporting Increase Productivity? A Microeconometric Analysis of Matched Firms," Review of International Economics, Wiley Blackwell, vol. 12(5), pages 855-866, November.
    10. Alexander HIJZEN & INUI Tomohiko & TODO Yasuyuki, 2007. "The Effects of Multinational Production on Domestic Performance: Evidence from Japanese Firms," Discussion papers 07006, Research Institute of Economy, Trade and Industry (RIETI).
    11. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October.
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