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Macro determinants of FDIn inflows to Japan: An analysis of source country characteristics

Kimino, Satomi; Saal, David S.; Driffield, Nigel


Dr Satomi Kimino
Lecturer in International Business and Programme Director BA International Business

David S. Saal

Nigel Driffield


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. © 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd.

Journal Article Type Article
Publication Date Mar 1, 2007
Journal World Economy
Print ISSN 0378-5920
Electronic ISSN 1467-9701
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 30
Issue 3
Pages 446-469
APA6 Citation Kimino, S., Saal, D. S., & Driffield, N. (2007). Macro determinants of FDIn inflows to Japan: An analysis of source country characteristics. The World economy, 30(3), 446-469.
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