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Reverse Imports, Foreign Direct Investment and Exchange Rates

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Abstract

This paper investigates systematic linkages among "reverse imports", foreign direct investment, and exchange rates. We have in mind the competition in the Japanese market of a Japanese multinational firm and a Chinese domestic firm. Products are differentiated based on Japanese consumers' brand name recognition. The model shows that yen appreciation leads to an increase in Japanese FDI in China and "reverse imports", and a decrease in Japanese domestic production. Due to the barriers in brand name, the exports of the Chinese firm may fall, because the increase of reverse imports may erode the market share of Chinese firm, even though total exports from China increase. Further, we find that yen appreciation may improve the profits of the Japanese firm and welfare in Japan under reverse imports, against conventional wisdom. The predictions of the model fit well with the actual figures, and shed light on the current, heated China debate.

Suggested Citation

  • Yuqing Xing & Laixun Zhao, 2003. "Reverse Imports, Foreign Direct Investment and Exchange Rates," Working Papers EMS_2003_03, Research Institute, International University of Japan.
    • Handle: RePEc:iuj:wpaper:ems_2003_03
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    Cited by:

    1. Jung Wan Lee & Tantatape Brahmasrene, 2020. "Exchange Rate Movements and Structural Break on China FDI Inflows," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 14(2), June.
    2. Rui Mao & Mengying Xing & Xiaohua Yu, 2021. "Quality response to real exchange rate shocks: A panel SVAR analysis on China's agricultural exports," Agricultural Economics, International Association of Agricultural Economists, vol. 52(5), pages 719-731, September.
    3. Yuqing Xing, 2008. "Sino-Japanese Relations: The Dimensions of Trade and FDI," Working Papers EMS_2008_06, Research Institute, International University of Japan.
    4. Laixun Zhao & Yuqing Xing, 2003. "Currency Devaluation and Global Outsourcing," Working Papers EMS_2003_04, Research Institute, International University of Japan.
    5. Yuqing Xing & Guanghua Wan, 2004. "Exchange Rates and Competition for FDI," WIDER Working Paper Series RP2004-64, World Institute for Development Economic Research (UNU-WIDER).
    6. Yu Ma & Xinqian Du, 2022. "Exchange rate factors, income levels, and investment abroad: An empirical study based on a sample of emerging economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1711-1730, April.
    7. Yuqing Xing & Guanghua Wan, 2006. "Exchange Rates and Competition for FDI in Asia," The World Economy, Wiley Blackwell, vol. 29(4), pages 419-434, April.
    8. Takagi, Shinji & Shi, Zongying, 2011. "Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008," Japan and the World Economy, Elsevier, vol. 23(4), pages 265-272.
    9. Jota Ishikawa & Yoshimasa Komoriya, 2010. "Stay Or Leave? Choice Of Plant Location With Cost Heterogeneity," The Japanese Economic Review, Japanese Economic Association, vol. 61(1), pages 97-115, March.
    10. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    11. Tiblets Nguse & Betgilu Oshora & Maria Fekete-Farkas & Anita Tangl & Goshu Desalegn, 2021. "Does the Exchange Rate and Its Volatility Matter for International Trade in Ethiopia?," JRFM, MDPI, vol. 14(12), pages 1-18, December.
    12. Jung Wan Lee, 2015. "Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea," Asian Economic Journal, East Asian Economic Association, vol. 29(1), pages 73-90, March.
    13. Lee Branstetter & Nicholas Lardy, 2006. "China's Embrace of Globalization," NBER Working Papers 12373, National Bureau of Economic Research, Inc.
    14. XING, Yuqing, 2006. "Why is China so attractive for FDI? The role of exchange rates," China Economic Review, Elsevier, vol. 17(2), pages 198-209.
    15. Nishiyama, Hiroyuki & Yamaguchi, Masao, 2010. "Foreign direct investment, international trade, and firm heterogeneity," Economic Modelling, Elsevier, vol. 27(1), pages 184-195, January.
    16. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., 2008. "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-21.

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    More about this item

    Keywords

    Reverse Imports; FDI; Exchange Rate; Brand Name; China;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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