To What Degree does Policy Uncertainty Affect Foreign Direct Investment? Micro-evidence from Japan's International Investment Agreements

Author Name INADA Mitsuo (Miyazaki Municipal University) / JINJI Naoto (Faculty Fellow, RIETI)
Creation Date/NO. March 2020 20-E-022
Research Project Studies on Foreign Direct Investment and Trade in Relation to FDI
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This study proposes an empirical strategy to identify the impact of policy uncertainty (PU) at the sector level on foreign direct investment (FDI) by exploiting plausibly exogenous exemptions from certain obligations such as national treatment and most favored nation treatment in International Investment Agreements (IIAs). To this end, the study evaluates at the micro-data level how activities of Japanese multinational enterprises (MNEs) and their foreign affiliates are affected by Japan's forming 22 IIAs, including both Bilateral Investment Treaties (BITs) and Economic Partnership Agreements (EPAs) with investment provisions, during the period 1995-2016.Our empirical strategy relies on differences in the changes of PU that MNEs and their foreign affiliates face after an IIA entered into force, depending on whether their sectors are exempted from certain obligations in the IIA or not.We find evidence that PU actually matters for FDI. In particular, we find that signing an IIA stimulates FDI, which is measured by capital investment by foreign affiliates, through a reduction in PU, although the impact depends on the content of the IIA. We also find that an IIA may affect MNEs' FDI to the partner economy in their global FDI strategy.

Forthcoming: Inada, Mitsuo, and Naoto Jinji. "The impact of policy uncertainty on foreign direct investment: Micro-evidence from Japan's international investment agreements," Review of International Economics.