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FDI in Emerging Economies: An analysis in a firm heterogeneity model

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  • ITO Koji

Abstract

In recent years, Japanese manufacturers in both competitive and less competitive sectors have penetrated emerging economies, and sales in 2008 by Japanese affiliates established via foreign domestic investment (FDI) exceeded Japan's revenues from exports. To consider this phenomenon and the significance of FDI for emerging economies, this study constructs a two-country model featuring two factors of production, two industries (with different factor intensities), and firm heterogeneity. Thereafter, the study numerically analyzes trends in FDI by industry and examines how the economies of both countries are affected. Results of the analysis show that highly productive firms favor FDI. That is true whether their industries make intensive use of a scarce factor of production or use a more abundant factor intensively. Compared to the situation in which only export is possible, FDI increases competition among firms in both industries. Real wages and welfare increase as a result. On the other hand, low-productivity firms are forced to exit, and the number of firms decreases. This analysis also shows that FDI could work to help prevent a decline in real revenues of industries that make intensive use of a scarce factor of production.

Suggested Citation

  • ITO Koji, 2011. "FDI in Emerging Economies: An analysis in a firm heterogeneity model," Discussion papers 11055, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:11055
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    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, May.
    3. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June.
    4. Markusen, James R. & Venables, Anthony J., 1998. "Multinational firms and the new trade theory," Journal of International Economics, Elsevier, vol. 46(2), pages 183-203, December.
    5. Hayakawa, Kazunobu & Matsuura, Toshiyuki, 2011. "Complex vertical FDI and firm heterogeneity: Evidence from East Asia," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 273-289, September.
    6. TODO Yasuyuki, 2009. "Quantitative Evaluation of Determinants of Export and FDI: Firm-level evidence from Japan," Discussion papers 09019, Research Institute of Economy, Trade and Industry (RIETI).
    7. WAKASUGI Ryuhei & TODO Yasuyuki & SATO Hitoshi & NISHIOKA Shuichiro & MATSUURA Toshiyuki & ITO Banri & TANAKA Ayumu, 2008. "The Internationalization of Japanese Firms: New Findings Based on Firm-Level Data," Discussion papers 08036, Research Institute of Economy, Trade and Industry (RIETI).
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