Does Japanese Manufacturing FDI in ASEAN5 Facilitate Trade?

Abstract

manufacturing companies, but their expansion slowed in the early 2000s due to the rise of China. However, since the 2010s, amid tensions between Japan and China, as well as between the US and China, the ASEAN region has gained attention as an alternative destination. The paper analyzes the impact of changes in Japanese FDI in the manufacturing sector on trade between Japan and target countries. The analysis focuses on FDI in all 12 sectors of manufacturing in the five major ASEAN countries from 2007 to 2019 and estimates using gravity equations. Given the importance of distance variables in gravity equations, a random effects model is used for estimation. The results indicate that Japanese FDI in the transportation equipment, electronic equipment, and chemical and pharmaceutical industries had a positive correlation with trade with ASEAN5 countries, but no significant results were found in other sectors. Moreover, in transportation equipment and chemical and pharmaceutical industries, the import effect was greater than the export effect. With the Japanese government providing subsidies to manufacturing companies relocating production hubs to ASEAN from 2020 onwards, an increase in trade volume between these countries and Japan is expected in the future.