Trade Liberalization and FDI Strategy in Heterogeneous Firms: Evidence from Japanese firm-level data
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 to developed countries. To do this, we will examine the mechanics of HFDI and VFDI with shedding light on the role of trade costs. Our empirical analysis by estimation of a multinomial logit model of Japanese firms' FDI choices reveals that the reduction of tariff rates attracts even less productive VFDI firms. In contrast, their rise attracts even less productive HFDI firms. Since developing countries, particularly East Asian countries, have experienced a relatively rapid decrease in tariff rates, our results indicate that the increase of VFDI through tariff rate reduction has led to the recent relative surge of FDIs in developing countries.
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