The Impact of Policy Uncertainty on Foreign Direct Investment in Services: Evidence from firm-level data and the role of regional trade agreements

Author Name INADA Mitsuo (Miyazaki Municipal University) / JINJI Naoto (Faculty Fellow, RIETI)
Creation Date/NO. March 2023 23-E-021
Research Project Studies on Foreign Direct Investment and Multinationals: Impediments, Policy Shocks, and Economic Impacts
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This study quantifies the role of regional trade agreements (RTAs) in reducing policy uncertainty (PU) on foreign direct investment (FDI) in services. PU regarding local rules and regulations discourages foreign investors from entering the service sector. Service chapters in RTAs become a fresh ingredient in quantifying such PU in host countries by creating legally bound commitments. Focusing on these commitments, this study evaluates how the activities of foreign affiliates of Japanese multinational enterprises are affected by the service chapters in RTAs with sector-specific commitments, such as market access (MA), national treatment (NT), and most favored nation (MFN) signed by Japan between 1995 and 2018. We find that a reduction in PU regarding MFN encourages the establishment of new foreign affiliates. We also find that a reduction in PU regarding NT increases the ownership ratio of foreign affiliates. These findings highlight a new and vital role for RTAs in the extensive and intensive margins of FDI in services.