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Policy Update 047

Inward Foreign Direct Investment as a New Growth Paradigm: Empirical evidence from Japan

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Kathryn C. IBATA-ARENS

IBATA-ARENS, Kathryn

Former Visiting Scholar, RIETI
Associate Professor, Department of Political Science, DePaul University

Abstract

A puzzle has confounded observers of the Japanese economy in recent years—despite its strong innovative capacity, why has Japan failed to produce significant new business growth? This paper argues that Japan, historically closed to inward foreign direct investment (FDI), has an opportunity to pursue a new growth strategy through greater openness to foreign firms. This paper provides an overview of the population of foreign-owned firms in Japan and traces the growth in their establishment over the last 30 years, paying special attention to trends in the 2000s. Utilizing a unique, extensive set of data compiled from macro and micro level data from the Statistics Bureau, the Ministry of Internal Affairs and Communications (MIC), the Ministry of Economy Trade and Industry (METI), and Teikoku Data Bank (TDB), descriptive statistics compare domestic and foreign firms in three establishment cohorts (1980s, 1990s, 2000s) over a number of measures, including sales, capital, employment, and profit. Findings indicate that foreign-owned firms, particularly those established in the 2000s in Japan, are more efficient with capital and are lower credit risks than domestic firms. Furthermore, foreign firms employ more workers over time. As such, foreign firms have become agents of institutional change and new growth in Japan, presenting opportunities for Japan to improve its absorptive capacity to inward FDI and foreign business, netting positive returns for firms and the Japanese economy.

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