Analysis of Factors Influencing Inward Foreign Direct Investment in OECD Countries Using a Gravity Model

In Japan, the level of inward foreign direct investment (FDI) is extremely low compared to other countries. The FDI-to-GDP ratio stands at 8.3%, significantly below the OECD average of 63%. Since investment is essential for attracting skilled talent, advanced technology, and abundant capital, the Ministry of Economy, Trade and Industry (METI) is actively formulating and implementing various policies to promote inbound investment in collaboration with relevant stakeholders.

Despite existing research that quantitatively analyzes various factors influencing inbound investment, including institutional, cultural, and economic factors, many aspects regarding which factors most significantly promote FDI remain unclear. However, by utilizing data to explore these factors, Japan can better address its weaknesses in attracting foreign investment and leverage its strengths.

Against this backdrop, this study analyzes the determinants of bilateral FDI using data on the stock of bilateral direct investment among OECD member countries as the dependent variable, employing a gravity model for the analysis. The Poisson pseudo-maximum likelihood estimation method is adopted. Among the various explanatory variables considered—such as distance, economic size, and the presence of free trade agreements (FTAs)—the study particularly focuses on two key aspects discussed with relevant departments within METI: the corporate tax rate and industrial structure.

Regarding the corporate tax rate, it is believed that lower rates reduce business costs, creating an incentive to invest in countries with lower tax rates than the home country. Therefore, the analysis looks not only at the tax rate of the host country but also at the difference in tax rates between the two countries. Regarding industrial structure, the study uses the share of manufacturing value added in GDP as an explanatory variable. It is posited that countries with a higher ratio of services and a strong financial hub aspect tend to attract more investment, while those with a higher share of manufacturing may struggle to attract foreign investment. Given Japan's relatively high manufacturing ratio compared to other countries, this may hinder its ability to attract investment.

In conclusion, the findings suggest that the difference in corporate tax rates between countries has a greater elasticity effect on investment than the tax rate of the host country itself, and that a high share of manufacturing may be disadvantageous in terms of attracting foreign investment.