Journal of the Japanese and International Economies
Foreign direct investment and trade in Japan: An empirical analysis based on the Establishment and Enterprise Census for 1996☆
Introduction
According to the standard theory Caves, 1982, Dunning, 1988, foreign direct investment is a form of long-term international capital movement accompanied by investors' intangible assets, such as the stock of technological knowledge accumulated by R&D or the accumulation of marketing know-how from past advertising activity. The host country is expected to benefit from the inflow of such intangible assets. Especially in the case of the service sector, since many services are not tradable, customers in one country cannot enjoy the advanced services of foreign firms, if these do not establish affiliates in that country. Being aware of this issue, the Japanese Government has lifted its regulations and made efforts to promote inward FDI in recent years.1 Although FDI in Japan is increasing rapidly, the FDI stock in Japan is still very small.
In spite of the importance of FDI in Japan, Japan's official statistics on inward FDI have many drawbacks in comparison with US statistics as we will discuss in the next section.2 Probably due to the deficiency of data, there are not many empirical investigations of why FDI in Japan is so small. In this paper, we compile new statistics on the employment of Japanese affiliates of foreign firms (JAFF) in Japan at the 3-digit industry level for the year 1996. Our new statistics are based mainly on micro-data of the Establishment and Enterprise Census of Japan, which is conducted by the Japan Management and Coordination Agency. Using our statistics, we compare FDI in Japan with FDI in the United States at the 3-digit industry level. We also compare FDI in Japan with Japan's outward direct investment and Japan's international trade in goods and services.
According to our new statistics, actual foreign activities in Japan are much greater than those reported in METI's (the Ministry of Economy, Trade and Industry, formerly the Ministry of International Trade and Industry, MITI) survey, Gaishi-kei Kigyo Doko Chosa (Survey on Trends of Business Activities by Japanese Subsidiaries of Foreign Firms). However, we found that foreign activities in Japan are substantially smaller than those in the United States. Moreover, compared with the US, inward FDI in Japan is concentrated in a limited number of industries, such as motor vehicles and parts, electric equipment and computers, drugs and medicines, wholesale trade, eating and drinking places, retail trade, and financial intermediary services.
Since our statistics are compiled at the 3-digit industry level, we can use them for cross-industry regressions. We estimate an empirical model explaining the determinants of Japan's inward FDI penetration. We find that inward FDI penetration is closely related to several characteristics of industries. In the manufacturing sector, Japan's inward FDI penetration is relatively high in industries that have a higher research and development intensity, capital intensity, and skilled-labor intensity. On the other hand, in the service sector, Japan's inward FDI penetration is relatively high in industries that have a higher market concentration ratio, a lower presence of government activities, and a lower presence of official restrictions on inward FDI. We find that the presence of keiretsu does not have significant negative effects on FDI penetration.
The paper is organized as follows: In the succeeding section, we discuss existing data on Japan's international transactions of goods and services through affiliates and explain how we compiled our new statistics on JAFF. In Section 3, we provide a general overview of FDI in Japan. In Section 4, we undertake an econometric investigation of the determinants of Japan's FDI penetration at the 3-digit industry level.
Section snippets
Existing data on FDI in Japan and compilation of the new statistics
Probably the most commonly cited statistics on Japan's inward direct investment are those provided by the Ministry of Finance (MOF, 1999; the data are also available in OECD, 1999).3 According to these data, Japan's outward direct investment stock in the
Characteristics of inward FDI in Japan
According to our new statistics, JAFF with 33.4% or more foreign ownership in the non-manufacturing sector employed 308,000 workers in 1996, which is nearly five times greater than the number reported in MITI (1999). In the case of the manufacturing sector, JAFF with 33.4% or more foreign ownership employed 176,000 workers in 1996, which is 1.1 times greater than the number reported in MITI (1999). The underestimation of METI's survey is crucial in the case of the service sector (Table 2).
Using
Econometric analysis of determinants of FDI in Japan
As we have seen in the previous section, there are significant differences in inward FDI penetration in the various industries and in Japan and the United States. Is Japan more closed to inward FDI compared with other countries? And, what industry characteristics affect the FDI penetration of each industry? In this section we conduct an empirical study of this.
Conclusions
In this paper we compiled new statistics on the employment of Japanese affiliates of foreign firms (JAFF) in Japan at the 3-digit industry level for the year 1996, using micro-data of the Establishment and Enterprise Census of Japan. According to our new statistics, JAFF with 33.4% or more foreign ownership in the service sector employed 308,000 workers in 1996, which is nearly five times greater than the number reported in MITI (1999). In the case of the manufacturing sector, JAFF with 33.4%
Acknowledgements
The authors are grateful for the comments by Sadao Nagaoka, Fukunari Kimura, Robert M. Stern and other conference participants. The authors thank an anonymous referee for important suggestions on an earlier draft.
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The previous version of this paper was presented at the CGP-2 Conference, Analytical issues in the trade, foreign direct investment, and macro/financial relations of the United States and Japan, on May 18–19, 2001, at Keio University, Tokyo, Japan.