Macro Determinants of FDI Inflows to Japan: An Analysis of Source Country Characteristics

24 Pages Posted: 1 Mar 2007

See all articles by Satomi Kimino

Satomi Kimino

Aston University - Aston Business School

David S. Saal

Aston University - Aston Business School

Nigel L. Driffield

Aston University - Aston Business School

Abstract

This paper examines the source country determinants of FDI into Japan. The paper highlights certain methodological and theoretical weaknesses in the previous literature and offers some explanations for hitherto ambiguous results. Specifically, the paper highlights the importance of panel data analysis, and the identification of fixed effects in the analysis rather than simply pooling the data. Indeed, we argue that many of the results reported elsewhere are a feature of this mis-specification. To this end, pooled, fixed effects and random effects estimates are compared. The results suggest that FDI into Japan is inversely related to trade flows, such that trade and FDI are substitutes. Moreover, the results also suggest that FDI increases with home country political and economic stability. The paper also shows that previously reported results, regarding the importance of exchange rates, relative borrowing costs and labour costs in explaining FDI flows, are sensitive to the econometric specification and estimation approach. The paper also discusses the importance of these results within a policy context. In recent years Japan has sought to attract FDI, though many firms still complain of barriers to inward investment penetration in Japan. The results show that cultural and geographic distance are only of marginal importance in explaining FDI, and that the results are consistent with the market-seeking explanation of FDI. As such, the attitude to risk in the source country is strongly related to the size of FDI flows to Japan.

Suggested Citation

Kimino, Satomi and Saal, David S. and Driffield, Nigel L., Macro Determinants of FDI Inflows to Japan: An Analysis of Source Country Characteristics. World Economy, Vol. 30, Issue 3, pp. 446-469, March 2007. Available at SSRN: https://ssrn.com/abstract=966543 or http://dx.doi.org/10.1111/j.1467-9701.2007.01001.x

Satomi Kimino (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom
+44 0121 204 3000 (Phone)

HOME PAGE: http://www.abs.aston.ac.uk/newweb/staff/detail.asp?sfldStaffID=D0000100

David S. Saal

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

Nigel L. Driffield

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

HOME PAGE: http://www.abs.aston.ac.uk/newweb/staff/Default.asp#E&S

Register to save articles to
your library

Register

Paper statistics

Downloads
15
Abstract Views
1,236
PlumX Metrics