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Role of Foreign Direct Investment as a Long-term Capital Flow Channel

Author

Listed:
  • Naohisa Hirakata

    (General Manager, Niigata Branch, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp))

  • Mitsuru Katagiri

    (Associate Professor, Faculty of Business Administration, Hosei University (E-mail: mitsuru.katagiri@hosei.ac.jp))

Abstract

This paper investigates the role of foreign direct investment (FDI) in accounting for the long-term trend of capital flows under demographic changes. For this purpose, we incorporate horizontal FDI under the proximity-concentration trade-off into a two-country DSGE model and conduct a quantitative analysis using long-term Japanese data for capital flows since the 1960s. The quantitative analysis finds that the transition dynamics solely driven by demographic changes well account for the long-term trend of capital flows and that multinational firms' endogenous decision on FDI in response to population aging is key to explaining the long-term trend.

Suggested Citation

  • Naohisa Hirakata & Mitsuru Katagiri, 2024. "Role of Foreign Direct Investment as a Long-term Capital Flow Channel," IMES Discussion Paper Series 24-E-05, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:24-e-05
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    References listed on IDEAS

    as
    1. Krueger, Dirk & Ludwig, Alexander, 2007. "On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 49-87, January.
    2. Sposi, Michael, 2019. "Evolving comparative advantage, sectoral linkages, and structural change," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 75-87.
    3. McGrattan, Ellen R. & Prescott, Edward C., 2009. "Openness, technology capital, and development," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2454-2476, November.
    4. Goldstein, Itay & Razin, Assaf, 2006. "An information-based trade off between foreign direct investment and foreign portfolio investment," Journal of International Economics, Elsevier, vol. 70(1), pages 271-295, September.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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