Trends and Characteristics of Foreign Direct Investment in Japan

Inward foreign direct investment (FDI) in Japan is expected to contribute to the Japanese economy, but an empirical analysis on its causes and consequences has not been widely conducted partly because of a lack of comprehensive panel data on foreign firms. This paper seeks to construct a panel dataset on foreign firms for the years 1995-2011 by carefully correcting and improving firm-level data published by the Ministry of Economy, Trade and Industry. Based on the dataset, we find that: (1) foreign firms' presence increased rapidly during 1995-2007; (2) the growth of foreign firms was larger in wholesale, retail, telecommunications, and other services sectors; (3) direct investment from East Asian economies such as China, Korea, and Taiwan increased recently; (4) foreign firms concentrated in Tokyo in terms of the headquarters location, but the spatial concentration in Tokyo was relatively weaker in terms of the establishment location; (5) greenfield investment has been the most frequent mode of entry to the Japanese market since 2002.