Potential for Inward Foreign Direct Investment in Japan

Promotion of inward foreign direct investment (FDI) into Japan has been an important policy in the Abenomics growth strategy.  This paper examines if we observe positive impacts of the policy in the data.  We first estimate a gravity model of bilateral FDIs using data for 35 OECD countries as destination countries.  In estimating the model, we handle zero values for FDI stock explicitly.  The model includes (origin and destination) country-specific effects as well as destination-country specific time trends.  We take the model prediction as a reasonable counterfactual and compare that to the actual inward FDI stock for Japan.  Although the actual inward FDI stock has been growing and is likely to achieve the goal of 35 trillion yen by 2020, the growth under the Abe administration has been comparable to or slightly lower than the counterfactual suggested by the estimated model.  We also estimate the model without Japan as a destination country and use the estimated model to calculate the counterfactual level of Japan’s inward FDI.  Although we expect the gap between the counterfactual and the actual become narrower if Abenomics policy has been successful, we fail to find that.  These results cast a doubt on the effectiveness of the Abenomics policies to encourage inward FDI at least as of 2015.