The Elusive Impact of Investing Abroad for Japanese Parent Firms: Can an Analysis of the Motives for FDI help?

Abstract

We investigate whether previous findings of only limited effects of investing abroad on the performance of firms can be explained by the aggregation of heterogeneous effects depending on the motive for foreign direct investment (FDI), sector and location. Our results suggest, in line with previous work, that on average outward Japanese FDI has limited effects (either positive or negative) on the activity of internationalizing firms. Fears of “hollowing out” effects seem to be more justified in the case of FDI to low income countries, in which case a contraction in employment, investment and exports is observed. By contrast, we observe a significant positive employment effect for FDI in services, presumably reflecting operational complementarities between the affiliate and the parent. There is also some evidence of labour productivity gains particularly from FDI in manufacturing in high GDP countries.