Japanese Foreign Direct Investment Research Articles

Japanese Foreign Direct Investment, Employment and International Migration in East Asia

Unlike other developed countries, Japan achieved high economic growth without relying on foreign workers to supplement domestic labor. The appreciation of the yen against the US dollar after the Plaza Agreement in 1985 triggered the inflows of foreign workers and outflows of Japanese foreign direct investment. The increase of Japanese foreign direct investment to East Asia played an important role in the region's economic development. In particular, the relocation of labor-intensive operations and the transfer of highly developed technology contributed to job creation, which might have helped reduce migration pressure from East Asia to Japan. The importation of foreign labor in Japan has stalled with recent high unemployment rates. The Japanese government should make a concrete and transparent national policy on foreign labor as the Japanese population continues to age and shrink.

Firm-Specific Assets and the Link Between Exchange Rates and Japanese Foreign Direct Investment in the United States: A Reexamination

Blonigen has studied the Japanese foreign direct investment (FDI) in the United States using panel count models and data for 1975-92. He reports the overall finding that appreciation of Japanese yen had a positive impact on Japanese FDI in the U.S.A. This paper reexamines the robustness of this conclusion using Blonigen's data and a family of econometric models, finite mixture panel count models, that are more flexible and also appear to provide an improved fit to the Blonigen data. Although our results broadly support his conclusions regarding the link between the exchange rate and Japanese FDI in the U.S.A. our approach also highlights the considerable diversity in the response of FDI to exchange rate variations.

American factory - Japanese factory

There are fashions in the academic world; and they come and go. In the 1980s, it was fashionable to talk about the 'miracle' of Japanese factory management in light of the successful achievement of its 'lean production' methods. Rather belatedly, the world realized that Japanese manufacturing of machinery, especially motor-vehicle production, demonstrated the highest levels of production efficiency, product quality and speed in new model development. Careful field studies discovered that there were indeed differences in managerial practices between Japanese and (say) US factories, which were directly responsible for the significant divergence in economic performances. Notable characteristics peculiar to Japanese machine factories included: (1) a system of parts procurement which drastically reduced inventories of parts and components for both assemblers and parts suppliers; (2) widely adopted total quality control (TQC) operations, which, having originated in the statistical quality control advocated and introduced to Japan by William Edwards Deming, had practically eliminated product defects from Japanese factory sites; and (3) strong networks of parts suppliers, who maintained long-lasting, stable relationships, typically with a single assembler despite a heavy stress on efficiency.' The timing of this intellectual fashion overlapped with the period when Japanese foreign direct investment was on the rise, accelerating awareness in the outside world of the distinct features of Japanese-style factory management. This undoubtedly was an added factor that contributed to heating up the popularity of the subject. The fashion came to a sudden halt, however, when the Japanese economic bubble burst in the early 1990s. In a trice, Japan lost not only a substantial portion of her accumulated wealth, but also

Japanese direct foreign investment and the Asian financial crisis

This paper examines the extent to which the Asian currency crisis of 1997–1998 impacted upon the behaviour of Japanese foreign direct investment (FDI) in the manufacturing sector. Much literature has claimed that transnational corporations (TNCs) are unlikely to be firmly embedded in the host countries where they operate. If this is the case, then Japanese firms in Asia might have exhibited a high degree of disinvestment or plant closure and transfer of operations to other countries following the onset of the financial crisis. Although the events surrounding the Asian crisis and subsequent recovery are still unfolding, FDI data, surveys of Japanese firms, and initial reactions by Toyota Motor Corporation and Matsushita Electric Industrial were reviewed to examine this proposition. In general, the evidence suggests that Japanese TNCs have not fled Asia bur rather they responded in the following manner. First, flows of Japanese FDI into Asia overall held steady throughout fiscal year 1997–1998, although it was set to decline thereafter, at least for the short term. Second, at the level of individual corporations, there is some evidence to show that major firms have maintained their operations, and that they have shifted to an export-orientation so as to earn income from their Asian production in overseas currencies. Third, the survey evidence points to a long-term commitment to Asia by Japanese transnationals.

Foreign exchange rates and Japanese foreign direct investment in Asia

We show that an appreciation of the yen against the dollar and against the Asian currencies significantly increases Japanese foreign direct investment (FDI) in Asia. Also, a depreciation of the Asian currencies against the dollar, while not significantly affecting the FDI in aggregate manufacturing, have a significant positive impact in the export-oriented electrical machinery sector. The labor productivity differential has a significant impact on FDI in most sectors but the direction of the effect varies across sectors. Also, there is evidence that a higher import tariff rate or wage rate in the host country significantly decreases Japanese investment in Asia.

EXPLAINING THE EU-ASEAN INTRA-INDUSTRY TRADE THROUGH JAPANESE FOREIGN DIRECT INVESTMENT: The case of high-tech industries

Although the reasons why firms choose to invest in the world's different geographical regions are by now well documented, what is less known is the nature and extent of the interdependency of trade between, on the one hand, subsidiaries of firms located in the same geographical region and, on the other, trade between these subsidiaries and those located in other geographical regions. This study analyses the role Japanese foreign direct investment (FDI) plays in enhancing intra-industry and interregional trade and finds support for the thesis that it is of significance.

A macroeconomic model of direct investment in foreign affiliates of Japanese firms

This paper analyses the operations of the Japanese multinational corporations in the world economy by constructing and estimating a Japanese foreign direct investment system. This system models the determinants of manufacturing foreign direct investment (FDI), the trade between Japan and her overseas affiliates as well as the sales of the manufacturing subsidiaries and those of the trading subsidiaries. The error-correction modelling techniques are adopted for estimation in order to capture both the short- and long-run adjustment processes. Finally, simulations are conducted on the model to analyse the effects of changes in the world economy.

Research Issues in Japanese Foreign Direct Investment

Since the mid-1980s Japan has been one of the world's leading sources of foreign direct investment (FDI) reflecting the continuing internationalisation of Japanese corporations. This paper provides a broad survey of trends in Japanese FDI in the postwar period and considers its motivations and determinants in the economic literature. One problem that emerges is that the underlying statistical database often limits an explanation of the industrial and geographical distribution of Japanese FDI. While the Ministry of Finance statistical series on Japanese FDI is the most commonly used data source, detailed information on investment by industry and country has not been easily available for long time periods or even particular years. The author has assembled a broad ranging collection of MOF statistics on FDI and examines the potential for using this resource to better understand the reasons for Japanese investment. A case study of Japanese real estate FDI is used to illustrate the research possibilities opened up by this approach.

Japanese Foreign Direct Investment in Electrical Machinery and Appliances in the United States: A Combined Industrial Organization and Location Theory Approach

We analyse the effects of both ownership and location advantages on the size of foreign direct investment, by combining industrial organization and location theory approaches. The estimated results employing a truncated distribution model show that the parent company's managerial resources and the external economies in a located region between them determine the FDI size of Japanese electrical machinery and appliances firms. This result suggests that empirical studies, applying only the industrial organization theory approach, need to be complemented by the location theory approach.

Shifting comparative advantage in Asia: new tests of the “flying geese” model

This paper updates the Rana/Fukasaku (RF) analysis and also (as far as data availability permits) includes foreign direct investment (FDI) in the analysis. The paper examines whether the evolving trade and FDI patterns of the Asian economies support the “flying geese” pattern of development. In addition, the impact of the Plaza Accord 1 will also be examined. The layout of the paper is as follows. A “revealed” comparative advantage index is discussed and empirical tests of shifts in comparative advantage and the “flying geese” theory are reviewed in Section 2. Section 3 contains a detailed description of the “flying geese” paradigm and its underlying economic implications. This is followed by a discussion of methodology in Section 4, where the export-share “revealed” comparative advantage index 2 and Spearman’s rank correlation coefficients are analyzed in order to identify the dynamic changes in comparative advantage in various countries and track the shifts in comparative advantage in the region. FDI ratios are also be calculated to identify the sectors that receive the most of Japanese FDI and evaluate its consistency with the theory. The results are presented in Section 5 and Section 6 provides a summary of the findings and some comments on the present currency crisis and economic problems faced by the region.

Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States.

A Subnational Analysis of Japanese Direct Investment in Canada

AbstractThis study examines longitudinal aspects of Japanese foreign direct investment in Canada. In looking at the longitudinal aspects, the focus was on a descriptive analysis of entry and exit rates and on an econometric analysis of the determinants of subsidiary survival and exit. In these analyses, we find that exit rates are related to subsidiary‐level variables such as business size, expatriate employment levels, equity‐ownership levels, and entry mode. The sector and region in which the investments are made is also related to subsidiary survival, with manufacturing‐sector subsidiaries located in Ontario being the least likely to exit. The results of our study suggest that region and industry interact, both to draw investment to a region and to influence the likeli‐hood of survival of foreign‐owned businesses. Further‐more, the focus on regional issues for Canada shows that even within a small open economy, subnational (interprovincial) variance can have important effects on the characteristics and performance of foreign direct investment.RésuméLa présente étude porte sur l'évolution des investissements directs japonais à l'étranger, réalisés au Canada. De façon plus précise, cette recherche s'intéresse, sur une base longitudinale, à l'analyse descriptive des taux d'entrée et de sortie ainsi qu'à l'analyse économétrique des facteurs expliquant la survie ou la sortie de filiales japonaises. A la lumière de ces analyses, il ressort que les taux de sortie sont influencés par certaines caractéristiques des filiales telles que la taille, la proportion d'expatriés, la part du capital‐action et le mode d'entrée. Le secteur et la région où l'investissement s'effectue influencent également les chances de survie d'une filiale; la probabilité la plus faible de quitter le pays appartiendrait aux filiales manufacturières situées en Ontario. Les résultats de l'étude suggèrent que la région et l'industrie interagissent de façon à attirer les investissements dans une région donnée et à influencer les chances de survie de compagnies appartenant à des intérěts étrangers. Ces résultats sur les disparités régionales du Canada suggèrent que, měme à l'intérieur d'une économie de marché restreinte, la variance sous‐nationale (ou interprovinciale) peut avoir d'importantes répercussions sur les caractéristiques et la performance des investissements directs à l'étranger.

Foreign Direct Investment and the Flying Geese Model: Japanese Electronics Firms in Asia-Pacific

This paper is a critical examination of the ‘flying geese’ and ‘billiard ball’ models of foreign direct investment (FDI) and their ability to explain the spatial expansion of Japanese electronics multinationals (MNCs) in Asia-Pacific countries from 1985 to 1996. Data on Japanese FDI are analyzed in this region at the aggregate, sectoral, and firm level. The paper commences with a review of the flying geese model, especially that version which interprets Japanese FDI as a catalyst for Asian development, and the billiard ball metaphor which suggests a mechanism for host countries to ‘catch up’ with Japan. The authors then turn to an analysis of Japanese FDI in Asia-Pacific together with employment data for fourteen major firms. This allows an evaluation of the two models in terms of recent geographical patterns of investment and employment growth by electronics MNCs. A special case study of Matsushita Electric Industrial Co. Ltd (MEI) helps flesh out the evolving geography of Japanese electronics firms in Asia-Pacific. Although the results support the overall patterns suggested by the two models, the authors argue that metaphors and analogies such as flying geese and billiard balls should not be used casually and as a substitute for analysis.

Characteristics and performance of Japanese foreign direct investment in latin America

This paper describes the characteristics of Japanese foreign investment in Latin America. In examining FDI patterns, we identify the countries and industries most attractive to Japanese multinational corporations, the preferred modes of entry, and the post-entry performance of these subsidiaries. We find that most Japanese FDI has occurred in Brazil and Mexico, that joint ventures are the most common mode of entry, and that performance varies by country and mode. The observations have implications for three groups of executives: managers of non-Latin American firms, managers of Latin American firms, and public policy makers.

The Determinants of the Location of Foreign Direct Investment by Japanese Small and Medium-sized Enterprises

Japanese manufacturing small and medium enterprises (SMEs) have actively undertaken Foreign Direct Investment (FDI) in Asia since the mid-1980s. FDI contributes to economic growth of the FDI recipient countries, as it brings in not only financial resources for investment but also technologies and managerial know-how, which are important factors for promoting economic growth. Recognizing these benefits of receiving FDI, policy makers in developing countries have formulated various strategies to attract FDI. This paper examines the factors in the host countries that would attract FDI by Japanese SMEs. Our results show the importance of both supply-side and demand-side factors in the recipient countries for attracting FDI by Japanese SMEs. Supply-side factors include abundance of low-wage labor, availability of well-developed infrastructure, and good governance of the host government, while an important demand-side factor is the presence of sizable local market. In addition, Japanese SMEs regard industrial agglomeration, which has a element of both supply and demand factors, as an important factors making FDI decision. Supply-side factors are found to be important for attracting Japanese FDI in developing countries, while demand-factors play a role in attracting Japanese FDI in developed countries. A comparison of the results for SMEs to those for large firms reveals that SMEs are more sensitive to the conditions in the host countries in making their FDI decision. In particular, SMEs regard the availability of low-wage labor, well-developed infrastructure, and industrial agglomeration as important elements much more than large firms. High sensitivity of SMEs to local economic conditions in their decision on FDI location may be explained by their limited availability of financial and human resources and high dependence on overseas production in their business. In light of these findings, we conclude that countries interested in hosting FDI have to provide a very attractive business environment.

The Pattern of Japan’s ODI into ASEAN and New Miyazawa Initiative

Southeast Asian Economies have grown remarkably since the sharp yen appreciations in 1985. And it happened alongside the formation of strong economic linkages in the region. Since the late 1980's, the yen appreciation have induced the increase of Japanese foreign direct Investment (FDI) and intra-industry trade in ASEAN, strengthening the so-called 'Asian growth dynamism' with Japanese manufacturer's overseas expansion. However, the rapid growth of South-east Asia countries has suddenly come to halt in 1997, and ASEAN countries faced a difficult economic situation as a result of the financial crisis in the East Asia. Hoping to form closer ties with Southeast Asian economies and become increasingly interdependent, Japanese government has supported more than half of the US$30bn earmarked to ASEAN countries in the first stage of the New Miyazawa Plan. Also, the announcement of a second stage has made it clear that the emphasis has changed from direct financial assistance to indirect assistance for forming regional bond market and wider use of Yen. With a view to this goal, the International Cooperation Bank (ICB) was formed in October, 1999 and would provide a guarantee for bonds that the ASEAN countries would issue. The result of this analysis demonstrates that Japan intend to promote the internationalization of the Yen through the financial assistance of the New Miyazawa Plan to ASEAN although the proposal for an Asian Monetary Fund (AMF) had been rejected as a result of US intervention

Restructuring East Asian exchange rate regimes

This paper investigated the degree of misalignment of the East Asian currencies against the U.S. dollar and against the Japanese yen under a de facto dollar-pegged exchange rate regime (January 1995 to May 1997). We found that overvaluation against the yen started in the Malaysian ringgit and the Philippine peso from January 1996 and the Thai baht from June 1996. Although the Indonesian rupiah and the Korean won against the yen were still undervalued in May 1997, degree of misalignment of both currencies narrowed from April 1995. Large withdrawal of Japanese claims after the financial crisis reduced Japanese bank lendings from $123.8 billion to $85.9 billion in end-June 1998. In 1998, Japanese Foreign Direct Investment (FDI) to East Asia fell as much as 44% from the previous year. In conclusion the paper stresses the importance of the stability in yen/dollar exchange rate to avoid large volatility in Japanese capital flow.

Motives for Japanese DFI Survey, analysis, and implications in light of the Asian crisis

This paper assesses the motives for Japanese outward direct foreign investment (DFI), drawing on a comprehensive private-sector survey (Toyo Keizai) of parent companies of foreign subsidiaries. It shows that the motivations behind Japanese DFI outflows are many and varied, with “securing market share” constituting the most salient motivation. DFI as a means of avoiding trade frictions is relevant only in developed countries in five industries, including transportation equipment, machinery, and electronics. Motivations are found to differ between developed and developing host economies, as expected.JEL classification: F2

Firm Size and Determinants of Foreign Direct Investment

This paper studies the locational determinants of foreign direct investment (FDI) by Japanese manufacturing firms in seven Asian countries by utilizing the 1993 survey data. I show that different size-groups of firms react to different factors in the host country in making the foreign investment decisions. Low labor cost and sufficient infrastructure encourage small firms to invest in a certain country while, for large firms, market size of the host country and strategic considerations (e.g., whether competitors invested in the country or not) are most important for their locational decisions. Overall, availability of cheap labor is not necessarily an important factor for Japanese FDI in Asia.

Beschäftigungswirkungen von Auslandsinvestitionen: das Beispiel Japan

Abstract This article offers an analysis of the domestic employment effects of foreign direct investment (FDI) for Japan between 1991 and 1996. After reviewing the current discussion in and outside Japan, the direct effects of Japanese overseas investment on trade, domestic production and employment are presented and discussed, based on detailed data provided by the MITI. The results show that Japanese FDI had strong positive effects on domestic production and employment by stimulating exports of capital goods nearly equaling negative effects by export displacement and rising imports. Taking into account indirect effects as well as the fact that most FDI does not really substitute exports but takes place only as an outcome of import barriers and a regional shift of location advantages, it is argued that Japanese FDI had a clear positive overall effect on domestic employment so far. The low degree of production abroad by international standards even implies a special need for the Japanese industry to further accelerate the shift of production activities abroad to accelerate structural changes at home that ensure a high level of employment and wages in the long run.