Institutional quality, the level of development and Japanese outward foreign direct investment

Abstract

This paper studies the determinants of Japanese direct investment worldwide and in different country groups. We derive our research hypotheses from the Knowledge-Capital Model and test them empirically using the PPML model and statistical data for 179 target countries between 1995 and 2019. We examine the role of a host’s institutional quality in affecting the cost of FDI. We show that institutional quality matters in attracting Japanese FDI for developed, developing, and transitioning economies. We find the effect of institutional quality to be more pronounced in the latter group of countries, especially concerning industries characterized by high asset-specificity.