Japan's outward FDI potential

Abstract

While Japan's outward FDI stock is historically high, it is not necessarily clear whether there is untapped growth potential, given the economic size of Japan and that of partner countries. This paper examines whether Japan's actual outward FDI stock is high or low relative to the FDI predicted by the gravity model using the outward FDI patterns of all OECD nations, which we call counterfactual FDI. The results indicate that the ratio of Japan's actual to counterfactual FDI is the highest among the OECD countries as of the year 2015. The regional distribution of Japan's actual to counterfactual FDI favors Southeast Asian nations, South Africa and the US. These results imply that Japan has no unrealized potential for outward FDI.