Abstract
This chapter investigates patterns of Japanese foreign direct investments (FDIs) using firm-level data on Japanese multinational enterprise (MNE) foreign subsidiaries. First, we present an overview of Japanese FDI and find stylized facts. For example, subsidiary sales and the number of investing countries are related to the scale of operation in Japan. Many foreign subsidiaries are engaged in export to neighboring countries and are categorized as export-platform-type FDI. Second, we present a model that extends the framework of Helpman et al. (Am Econ Rev 94(1):300–316, 2004) and accounts for overseas subsidiaries supplying goods to neighboring countries. Third, based on this model, we estimate the gravity model of MNE foreign subsidiary sales and find that the impact of the subsidiary’s distance from the host country on the number of subsidiaries (extensive margin) is very large compared to previous studies that used data from U.S. MNEs. In addition, the estimation models that use market potential instead of host country GDP have a higher explanatory power, suggesting that market potential plays an important role in explaining FDI patterns. In contrast, although the effect of market potential on average subsidiary sales (intensive margin) is significantly positive, its effect on the number of subsidiaries is negative and insignificant.
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Notes
- 1.
- 2.
This survey includes parent companies, which are Japanese corporations that, as of end of March, own or have previously owned overseas subsidiaries, excluding those in the financial and insurance industries or the real estate industry. Overseas subsidiaries are defined as foreign affiliates in which Japanese firms have invested capital of 10 % or more or as foreign firms in which Japanese foreign subsidiaries have invested capital of 50 % or more.
- 3.
This table aggregates the number of investing firms by referring to the entry year of foreign affiliates that were active from 1995 to 2006.
- 4.
Asian NIEs represent South Korea, Taiwan, Hong Kong, and Singapore. ASEAN 4 includes Thailand, Malaysia, Indonesia, and the Philippines.
- 5.
Blonigen (1997) investigated Japanese FDI in the United States from 1975 to 1992 and demonstrated that an appreciation of the yen accelerated Japanese FDI. He found that industries with a higher R&D intensity have been investing extensively since the appreciation of the yen enabled Japanese firms to acquire managerial resources through mergers and acquisitions or capital participation with U.S. firms.
- 6.
We obtained GDP from the World Development Indicator (the World Bank).
- 7.
In this table, for foreign subsidiaries in Europe, sales within European markets are regarded as domestic sales.
- 8.
- 9.
The data for distance are obtained from CEPII’s Gravity Dataset, which is publicly available at the CEPII web site (http://www.cepii.fr/anglaisgraph/bdd/gravity.htm). Basic statistics of the data used for estimation and correlations for explanatory variables are reported in Appendix.
- 10.
Since host-country specific factors such as distance are not included in a fixed effect model, we use a random effect model. We conduct a Breush–Pagan test and confirm that a random effect model performs better than pooling regression.
- 11.
If productivity dispersion is small, most firms respond to market size and distance in a similar manner. As a result, coefficients for extensive margin become sensitive. Note that a smaller productivity dispersion means a larger skew in parameter k for productivity distribution G.
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© 2014 Ryuhei Wakasugi
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Matsuura, T., Sato, H. (2014). Entry into Foreign Markets Through Foreign Direct Investment. In: Wakasugi, R. (eds) Internationalization of Japanese Firms. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54532-3_5
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DOI: https://doi.org/10.1007/978-4-431-54532-3_5
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