FUKAO Kyoji (Faculty Fellow) /ITO Keiko
In spite of the importance of FDI in Japan, Japan's official statistics on inward FDI have many drawbacks in comparison with U.S. statistics. Using micro data of the Establishment and Enterprise Census of Japan, we compile new statistics on the employment of Japanese affiliates of foreign firms (JAFF) in Japan at the 3-digit industry level for the year 1996. According to our new statistics, JAFF with 33.4% or more foreign ownership in the service sector employed 308,000 workers in 1996, which is nearly five times greater than the number reported in MITI (1999a). In the case of the manufacturing sector, JAFF with 33.4% or more foreign ownership employed 176,000 workers in 1996, which is 10% greater than the number reported in MITI (1999a). The underestimation of MITI's survey is substantial in the case of the service sector. Using our statistics, we compare FDI in Japan with FDI in the United States at the 3-digit industry level. We also compare FDI in Japan with Japan's outward direct investment and international trade in goods and services.
Using our cross-industry statistics, we also estimate an empirical model explaining the determinants of Japan's inward FDI penetration. We found that the determinants of Japan's inward FDI penetration are very different for the manufacturing sector and the service sector. In the manufacturing sector, advantages in managerial resources and factor intensity were significant. In the service sector, policy variables were significant. This result implies that by eliminating its restrictions on inward FDI and reducing government activities, Japan can increase inward FDI in service sector. In the case of the keiretsu variables, we did not get significant results in both the manufacturing and the service sectors. This suggests that keiretsu does not act as an impediment to inward FDI in Japan.