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Heterogeneous multinational firms and productivity gains from falling FDI barriers

  • Arita, Shawn
  • Tanaka, Kiyoyasu

During the past decade of declining FDI barriers, small domestic firms disproportionately contracted while large multinational firms experienced a substantial growth in Japan’s manufacturing sector. This paper quantitatively assesses the impact of FDI globalization on intra-industry reallocations and aggregate productivity. We calibrate the firm-heterogeneity model of Eaton, Kortum, and Kramarz (2011) to micro-level data on Japanese multinational firms. Estimating the structural parameters of the model, we demonstrate that the model can strongly replicate the entry and sales patterns of Japanese multinationals. Counterfactual simulations show that declining FDI barriers lead to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. A hypothetical 20% reduction in FDI barriers is found to generate a 30.7% improvement in aggregate productivity through market-share reallocation.

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File URL: http://ir.ide.go.jp/dspace/bitstream/2344/1113/1/ARRIDE_Discussion_No.324_arita.pdf
File Function: First version, 2012
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Paper provided by Institute of Developing Economies, Japan External Trade Organization(JETRO) in its series IDE Discussion Papers with number 324.

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Date of creation: Feb 2012
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Publication status: Published in IDE Discussion Paper. No. 324. 2012.2
Handle: RePEc:jet:dpaper:dpaper324
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