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The Impact of Policy Uncertainty on Inward Foreign Direct Investment: Evidence from Japan’s international investment agreements

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  • Mitsuo INADA
  • Naoto JINJI

Abstract

This study examines the effects of policy uncertainty (PU) on inward foreign direct investment (FDI). We contribute to the literature by addressing a key empirical challenge inherent in the staggered nature of signing international investment agreements (IIAs). We use microdata on foreign affiliates in Japan, combined with information on 27 IIAs between Japan and its partner economies that entered into force during 1995 and 2019. We find that PU primarily affects the intensive margin of inward FDI. Specifically, current reservations regarding most-favored-nation (MFN) treatment, when combined with national treatment (NT), reduce the ownership shares of parent firms. We also find that current NT reservations, as well as combined NT and MFN reservations, reduce employment by foreign affiliates. These results are robust, particularly for the subsample of foreign affiliates in the service sector. Finally, and in contrast to previous studies, we find no effects on the extensive margin.

Suggested Citation

  • Mitsuo INADA & Naoto JINJI, 2026. "The Impact of Policy Uncertainty on Inward Foreign Direct Investment: Evidence from Japan’s international investment agreements," Discussion papers 26017, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:26017
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