Saving, Investment, and Capital Mobility: Lessons from Japanese Inter-regional Capital Flows

One of the most intriguing puzzles in international finance is the Feldstein-Horioka proposition (Feldstein and Horioka, 1980). As is well known, Feldstein and Horioka showed that in cross-country data, saving and investment rates have a correlation of nearly one. This, they interpret, is indicative of the international immobility of capital. If capital were fully mobile, then the level of investment in a (small) country should be largely determined by the international supply and demand for capital and not necessarily restricted by the domestic supply of capital, domestic saving. The increase in saving in one country should not change the international supply of capital noticeably; therefore, for a truly open economy, the level of investment in a country should not be affected greatly by its own saving rate. Feldstein and Bacchetta (1991) call the correlation coefficient of the investment rate on the saving rate, the ‘savings retention coefficient’.