Vertical Foreign Direct Investment: Evidence from Japanese and U.S. Multinational Enterprises

Foreign direct investment (FDI) has rapidly increased in developing countries since the 1990s, but formal evidence for vertical FDI has been surprisingly mixed. This paper empirically reconsiders the factor-proportions hypothesis by exploring the role of host countryfs relative skill endowments in offshore production of multinational enterprises (MNEs). Using panel data on sales of foreign affiliates by Japanese and U.S. MNEs in the 1990s, I find that relative skill abundance has a large negative impact on Japanese affiliate sales, but little effects on U.S. affiliate sales. Robust to a wide variety of sensitivity checks, the results strongly support vertical FDI in the case of Japanese MNEs, but not U.S. MNEs. Because the dominant view in favor of horizontal FDI against vertical FDI in the previous literature results primarily from U.S. data, I empirically demonstrate that data sources on MNEs could partly explain weak evidence for vertical FDI.Multinational firms, foreign direct investment, skill endowments

Re-estimating the Knowledge-Capital Model: Evidence from Japanese and US Multinational Enterprises

This paper re-estimates the knowledge-capital model by James Markusen (2002) to study market access and factor endowment explanations of foreign direct investment (FDI). I add to the literature by combining consistent datasets on Japanese and U.S. multinational enterprises (MNE) in the period 1989-2002. To reduce potential bias, the prior specification of the knowledge-capital model is augmented with a number of additional control variables and estimated with a system GMM estimator. In the pooled sample, I find that both market access and relative skill endowments matter for the pattern of foreign affiliate sales. When separately estimating Japanese and US samples, the evidence shows that Japanese MNEs are encouraged by relative unskilled-labor abundance in a host country, consistent with a vertical motive of FDI. In contrast, U.S. MNEs concentrate on skill abundant countries, which is in favor of horizontal FDI. These findings imply that combining datasets on multinational activities with heterogeneous motives of FDI is critical for finding evidence of the knowledge-capital model.Multinational firm, foreign direct investment, market access, factor endowment

Transport costs, distance, and time : evidence from the Japanese Census of Logistics

Geographic distance is a standard proxy for transport costs under the simple assumption that freight fees increase monotonically over space. Using the Japanese Census of Logistics, this paper examines the extent to which transport distance and time affect freight costs across shipping modes, commodity groups, and prefecture pairs. The results show substantial heterogeneity in transport costs and time across shipping modes. Consistent with an iceberg formulation of transport costs, distance has a significantly positive effect on freight costs by air transportation. However, I find the puzzling results that business enterprises are likely to pay more for short-distance shipments by truck, ship, and railroad transportation. As a plausible explanation, I discuss aggregation bias arising from freight-specific premiums for timely, frequent, and small-batch shipments.Japan, Transportation, Costs, Transport cost, Transport time, Distance, Logistics, Selection bias

The size distribution of all Cambodian establishments

This paper presents empirical evidence on the size distribution of all Cambodian establishments in the nonfarm sector for 2009. Small- and large-scale establishments account for the largest share of employment, pointing to a “missing middle†that is commonly observed in developing countries. The analysis provides little evidence for Zipf’s law because Cambodian industry is characterized by a more dense mass of small establishments than the Zipf distribution would predict.Cambodia, Industry, Small and medium-scale enterprises, Employment, Size distribution, Establishments

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.Japan, International business enterprises, Foreign investments, Manufacturing industries, Industrial management, Multinational firms, FDI, Firm heterogeneity, Investment Liberalization

The size distribution of all Cambodian establishments

This paper describes the size distribution of all Cambodian establishments for 2009, showing that small- and large-scale establishments accounted for the largest share of employment. We find limited evidence for Zipf's law because Cambodian industry is characterized by a more dense mass of small establishments than the Zipf distribution would predict.Size distribution; establishments; Zipf's law; Cambodia

Determinants of inbound tourists in Cambodia : a dynamic panel data approach

Understanding the determinants of tourism demand is crucial for the tourism sector. This paper develops a dynamic panel model to examine the determinants of inbound tourists to Siem Reap airport, Phnom Penh airport, and land and waterway borders in Cambodia. Consistent with the consumer theory of tourism consumption, a 10% increase in the origin country GDP per capita is predicted to increase the number of tourist visits to Siem Reap airport by 5.8%. A 10% increase in the real exchange rate between the origin country and Cambodia is predicted to decrease the number of tourist visits by 0.89%. In contrast, the number of foreign tourists in a previous period has little effect on the number of foreign tourists in the current period. Additionally, the determinants are different by the mode of entry to Cambodia

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.Mexico, Japan, United States, Foreign investments, Foreign affiliated firm, Exports, Costs, Export platform, FDI, Firm heterogeneity, Trade costs

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.International business enterprises, Foreign investments, Multinational firms, FDI, Firm heterogeneity, Simulation, Model validation

The impact of foreign firms on industrial productivity : evidence from Japan

With a newly constructed dataset on foreign firms in Japan for the period 1995-2008 from firm-level surveys, this paper estimates the impact of foreign firms on industrial productivity at the regional level. A Bayesian-model averaging approach is taken to account for model uncertainty resulting from various linkages between foreign firms and domestic industries. The results show that the foreign firms may contribute to industrial efficiency directly through their above-average productivity and indirectly through positive spillovers in intra-industry and local backward linkages. Forward linkages with foreign firms may have a negative impact on industrial productivity. However, these impacts depend on the nationality and entry mode of foreign investors. Aggregating foreign firms may mask their distinctive impacts on productivity