Industrial Policy in Asia

This paper examines three types of industrialization that have occurred in East Asia: the Japanese, Chinese and generic Asian models. Industrial policies in Japan and the Republic of Korea (ROK) initially protected local companies from foreign investors by imposing high tariffs on foreign investors. But Japan began introducing liberalization policies to attract foreign direct investment (FDI) in the 1960s, and the ROK began to welcome foreign technology in the 1970s. Meanwhile, the governments of the ASEAN countries and Taiwan established export-processing zones (EPZ) to invite FDI by offering preferential treatment, such as tax deductions and exemptions. China adopted similar industrial policies and also established EPZs, attracting the capital and know-how of multinationals and thereby strengthening the international competitiveness of local enterprises. This paper reaches the following three conclusions. First, it would have been difficult for East Asian countries to grow without FDI. Second, central governments were a crucial factor in these countries' growth strategies. Third, EPZs offering preferential treatment can effectively enhance aggregate growth in developing countries, and the Asian experience shows that this strategy can be applied to other countries that satisfy certain preconditions.

Empirical global value chain analysis in electronics and automobile industries :An application of Asian international input-output tables

This study aims to examine the international value distribution structure among major East Asian economies and the US. The mainstream trade theory explains the gains from trade; however, global value chain (GVC) approach emphasises uneven benefits of globalization among trading partners. The present study is mainly based on this view, examining which economy gains the most and which the least from the East Asian production networks. Two key industries, i.e., electronics and automobile, are our principle focus. Input-output method is employed to trace the creation and flows of value-added within the region. A striking fact is that some ASEAN economies increasingly reduce their shares of value-added, taken by developed countries, particularly by Japan. Policy implications are discussed in the final section.

Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia

In this paper we statistically test the validity of the mechanics of complex VFDI in Japanese machinery FDI to East Asia; we do this by estimating a multiple-spatial lag model. From the theoretical point of view, in complex VFDI, the production activity of affiliates in a given country is positively related to that in neighboring countries which have large differences in factor prices with the given country. Our empirical results show that such mechanics of complex VFDI work in Japanese FDI to East Asia, and that they work more strongly in the MNEs with higher productivity. These results have an important implication for the policies of developing countries in attracting FDI.

FDI and Export Participation of Local Firms in Africa: The Case of the Kenyan Garment Industry

FDI in the garment sector has been the single case of large-scale manufacturing investment in African low-income countries since the 1990s. While FDI has triggered the development of local industries in many developing countries, it has not yet been realized in Africa. This paper describes the spillover process in the Kenyan garment industry and investigates the background of local firms' behavior through firm interviews and simulation of expected profits in export market. It shows that credit constraint, rather than absorptive capacity, is a primary source of inactive participation in export opportunity. Only firms which afford additional production facilities without sacrificing stable domestic supply may be motivated to start exporting. However, in comparison with successful Asian exporters, those firms were not as motivated as Asian firms due to the large gap in expected profits.

Globalization and productivity : a survey of firm-level analysis

Recent empirical studies which utilize plant- or establishment-level data to examine globalization's impact on productivity have discovered many causal mechanisms involved in globalization's impact on firms' productivity. Since these pathways have been broad, there have been few attempts to summarize the several and detailed mechanisms of self-selection and learning at the same time. This paper examines seven pathways so that the clear-cut consequences of the broad picture of globalization become visible. This strategy is useful for detecting missing links within and across the existing studies as well as for finding possible synergy effects among different mechanisms. Insightful policy implications may be derived from the comprehensive comparisons between the seven different pathways of globalization.

The role of home and host country characteristics in FDI: firm-level evidence from Japan, Korea and Taiwan

There is a large and growing empirical literature that investigates the determinants of outward foreign direct investment (FDI). This literature examines primarily the effect of host country characteristics on FDI even though home country characteristics also influence the decision of firms to invest abroad. In this paper, we examine the role of both host and home country characteristics in FDI. To do so, we constructed a firm-level database of outward FDI from Japan, Korea, and Taiwan. Our empirical analysis yields two main findings. First, host countries with better environment for FDI, in terms of larger market size, smaller fixed entry costs, and lower wages, attract more foreign investors. Second, firms from home countries with higher wages are more likely to invest abroad. An interesting and significant policy implication of our empirical evidence is that policymakers seeking to promote FDI inflows should prioritize countries with higher wages.

Investment promotion agencies: do they work?

In this paper, we examine the role of investment promotion agencies (IPAs) in promoting outward FDI from Japan and Korea. Looking at two home countries enables us to control for both country-pair time-invariant characteristics and host country time-varying characteristics. Our empirical results suggest that home-country IPAs tend to be more effective in promoting outward FDI in politically risky host countries. However, this finding depends on whether the home-country firm is listed or unlisted. More specifically, we find that the positive effect of home country IPAs on outward FDI in politically risky countries is limited to unlisted home- country firms, which are widely assumed to be less competitive and productive.

A two-dimensional analysis of the impact of outward FDI on performance at home: evidence from Japanese manufacturing firms

This paper empirically investigates two areas of changes in firm behavior and performance at home before and after investing abroad. The first change is dependent upon the type of foreign direct investment (FDI): horizontal FDI or vertical FDI. The second change is dependent upon the firm’s domestic activities: production activities or non-production activities. From a theoretical standpoint, the impact of outward FDIs differs not only by type, but according to the firm’s activities. By exploiting two types of firm-level data that enable us to distinguish between production and non-production activities, our paper provides a detailed picture of the intra-firm changes in behavior and performance that occur as a result of production globalization.

Simulating heterogeneous multinational firms

This paper develops a micro-simulation framework for multinational entry and sales activities across countries. The model is based on Eaton, Kortum, and Kramarz's (2010) quantitative trade model adapted towards multinational production. Using micro data on Japanese manufacturing firms, we first stylize the empirical regularities of multinational entry and sales activity and estimate the model's structural parameters with simulated method of moments. We then demonstrate that our adapted model is able to replicate important dimensions of the in-sample moments conditioned in our estimation strategy. Importantly, it is able to replicate activity under an economic period with a far different level of FDI barriers than was conditioned upon in our estimation sample. Overall, our research highlights the richness of the simulation framework for performing counterfactual analysis of various FDI policies.

Domestic, vertical, and horizontal multinationals : a general equilibrium approach using the "knowledge capital model"

One of the key factors behind the growth in global trade in recent decades is an increase in intermediate input as a result of the development of vertical production networks (Feensta, 1998). It is widely recognized that the formation of production networks is due to the expansion of multinational enterprises' (MNEs) activities. MNEs have been differentiated into two types according to their production structure: horizontal and vertical foreign direct investment (FDI). In this paper, we extend the model presented by Zhang and Markusen (1999) to include horizontal and vertical FDI in a model with traded intermediates, using numerical general equilibrium analysis. The simulation results show that horizontal MNEs are more likely to exist when countries are similar in size and in relative factor endowments. Vertical MNEs are more likely to exist when countries differ in relative factor endowments, and trade costs are positive. From the results of the simulation, lower trade costs of final goods and differences in factor intensity are conditions for attracting vertical MNEs.

Export platform FDI and firm heterogeneity

This paper investigates theoretically and empirically firms' productivity ranking among traditional horizontal foreign direct investment (HFDI), pure platform FDI (PFDI), and complex platform FDI (CFDI). Using data on Japanese outward FDI, we define firms conducting HFDI or PFDI as those Japanese firms that maintain production affiliates only in the U.S. or Mexico, respectively. The firms for CFDI are defined as having production affiliates in both the U.S. and Mexico. The theoretical illustration shows that the CFDI firms should have the highest productivity when trade costs between the U.S. and Mexico are low. By carefully disentangling firms' self-selection effects from learning-by-investing effects, we find some evidence consistent with this hypothesis for a period of relatively low trade costs. Our results indicate the importance of trade costs in developing countries with neighboring markets in attracting foreign investment by highly productive multinational firms.

Heterogeneous multinational firms and productivity gains from falling FDI barriers

During the past decade of declining FDI barriers, small domestic firms disproportionately contracted while large multinational firms experienced a substantial growth in Japan’s manufacturing sector. This paper quantitatively assesses the impact of FDI globalization on intra-industry reallocations and aggregate productivity. We calibrate the firm-heterogeneity model of Eaton, Kortum, and Kramarz (2011) to micro-level data on Japanese multinational firms. Estimating the structural parameters of the model, we demonstrate that the model can strongly replicate the entry and sales patterns of Japanese multinationals. Counterfactual simulations show that declining FDI barriers lead to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. A hypothetical 20% reduction in FDI barriers is found to generate a 30.7% improvement in aggregate productivity through market-share reallocation.

Can FDI promote export diversification and sophistication of host countries? : dynamic panel system GMM analysis

Recent trade literature highlights the importance of export diversification and upgrading in fostering faster and sustainable economic growth. This study investigates the impact of FDI inflow and stock on the level of export diversification and sophistication in host country's export baskets. By utilizing the dynamic panel data model, we find that the five-year lagged FDI inflow correlates positively with both export diversification and sophistication, and FDI stock makes the positive contribution to export sophistication. These findings provide support for the possibility of successful capabilities transfer to and building by local firms. We also find that these positive impacts of FDI exist only in developing countries.

Spatial spillovers from FDI agglomeration : evidence from the Yangtze River Delta in China

Foreign firms have clustered together in the Yangtze River Delta, and their impact on domestic firms is an important policy issue. This paper studies the spatial effect of FDI agglomeration on the regional productivity of domestic firms, using Chinese firm-level data. To identify local FDI spillovers, we estimate the causal impact of foreign firms on domestic firms in the same county and similar industries. We then estimate a spatial-autoregressive model to examine spatial spillovers from FDI clusters to other domestic firms in distant counties. Our results show that FDI agglomeration generates positive spillovers for domestic firms, which are stronger in nearby areas than in distant areas.