The Performance of Foreign Firms and the Macroeconomic Impact of FDI
In this paper, I examine the macroeconomic impact of inward FDI in Japan. From a general equilibrium point of view of the macroeconomy, probably the most important host country benefit of inward FDI is improvements in productivity caused by the inflow of managerial resources. In the first part of this paper, which is largely based on the results of Fukao, Ito and Kwon (2005), I review the evidence suggesting that inward FDI raises the average total factor productivity of firms in Japan. In the second part, using a general equilibrium model of an open macroeconomy, I simulate the macroeconomic impact of an increase in the inward FDI stock. The results suggest that if Prime Minister Abe's goal on inward FDI, which is to increase the inward FDI stock to 5 percent of GDP by the end of 2010 is achieved, this will help to raise Japan's GDP by 0.226 percent and real wage rates by 0.156 percent. Dividend payments abroad by foreign-owned firms and the fall in Japan's foreign investment income caused by the inflow of capital (or the decline in capital outflows), will make the increase in Japan's GNP (which includes net foreign investment income) smaller than the increase in GDP. The increase in GNP will be 0.125 percent of GDP.
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