Effects of Exchange-Rate and Political Environment on Japanese Outward FDI: a panel data analysis
Foreign Direct Investments (FDI) represent an important economic phenomenon in the current global society. The activities of Multinational Enterprises (MNC) have considerably influenced a variety of economic processes. Through FDI MNCs get access to new markets, lower prices of resources and other benefits that can strengthen their competitive position in global markets. On the other hand, host countries can benefit not only from the inflow of additional capital, but also from improved managerial and technological knowledge in the national economy, and access to international business culture and practice. As a consequence one can observe improved productivity in many sectors that welcome FDI.
This paper attempts to answer a question about the role of financial and institutional risks for MNCs, and particularly, of the exchange-rate level and political factors in Japanese outward FDI. Empirical analysis uses data of 30 developed and developing countries for the period 1995–2009.
A regression model is constructed on the basis of the OLI (ownership, location and internalization) advantages and general equilibrium theoretical models. Exchange-rates and political factors are included as additional explanatory variables, as well as market potential, wages, skilled workforce endowments, investment cost and openness.
We found that the model with real exchange-rate, political factors and traditional explanatory variables reasonably explains recent Japanese outward FDI flows and reveals new patterns in its behavior depending on the economic development stage. These findings are highly important from a policy prescription perspective as the host countries’ governments could consider exchange-rate, political stability and the stage of economic development together when prescribing policies for attracting FDI.
Key wordsforeign direct investment multinational corporations political environment exchange rate
JEL ClassificationF-21, International Investment Long-Term Capital Movement, F-23, Multinational Firms International Business
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Earlier versions of this paper were presented at various Conferences and Workshops, including JEPA (Kwansei Gakuin Univ.), EUIJ (Pusan), GLOPE II (Waseda Univ.), Graduate Workshop (Waseda Univ.), WEAI (San-Francisco). We would like to express our sincere thanks to Professors Shujiro Urata, Fukunari Kimura, Young-Ryeol Park, Yi Chae-Deug, Kenichiro Tamaki, Koji Takase, Hisatoshi Tanaka, Hideki Konishi, Ueda Atsuko, John Devereux, Nathan Cook and Lein Lein Chen, and other participants for their critical but constructive comments and suggestions, which improved the paper considerably. The usual disclaimer applies.
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