Trade restraints and Japanese direct investment flows

Abstract

This paper analyses the factors determining the scale and location of Japanese foreign direct investment (FDI) over the 1980s. We use a pooled cross-section time-series annual data set covering investment in the individual EC countries and the United States. Our results suggest that, controlling for market size and relative labour costs, investment was significantly influenced by trade protection measures, and in particular by the level of anti-dumping actions initiated in the last decade. An additional effect from the cost of finance in Japan is found, suggesting that the tightening of monetary policy in Japan in 1989/90 contributed significantly to the observed slowdown in FDI in the early 1990s.