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Choice for FDI and Post-FDI Productivity

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  • Yukiko ITO

Abstract

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.

Suggested Citation

  • Yukiko ITO, 2007. "Choice for FDI and Post-FDI Productivity," Discussion papers 07049, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:07049
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    File URL: https://www.rieti.go.jp/jp/publications/dp/07e049.pdf
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    References listed on IDEAS

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    Cited by:

    1. Keiko ITO, 2011. "Entry of Foreign Multinational Firms and Productivity Growth of Domestic Firms: The case of Japanese firms," Discussion papers 11063, Research Institute of Economy, Trade and Industry (RIETI).
    2. Ayumu TANAKA, 2011. "Multinationals in the Services and Manufacturing Sectors: A firm-level analysis using Japanese data," Discussion papers 11059, Research Institute of Economy, Trade and Industry (RIETI).
    3. Ayumu TANAKA, 2012. "The Causal Effects of Exporting on Japanese Workers: A firm-level analysis," Discussion papers 12017, Research Institute of Economy, Trade and Industry (RIETI).
    4. Yasuyuki Todo, 2011. "Quantitative Evaluation of the Determinants of Export and FDI: Firm‐level Evidence from Japan," The World Economy, Wiley Blackwell, vol. 34(3), pages 355-381, March.
    5. Ayumu Tanaka, 2012. "Firm Productivity and Foreign Direct Investment in the Services Sector: A Firm-Level Analysis using Japanese Data," Discussion papers e-11-008, Graduate School of Economics Project Center, Kyoto University.
    6. Tanaka, Ayumu, 2013. "The causal effects of exporting on domestic workers: A firm-level analysis using Japanese data," Japan and the World Economy, Elsevier, vol. 28(C), pages 13-23.
    7. Hyun sung Kim & Ki bo Ku, 2010. "A Comparative Study on Japan's Outward FDI to Korea and China," International Area Studies Review, Center for International Area Studies, Hankuk University of Foreign Studies, vol. 13(2), pages 81-103, June.

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