Has Abenomics Succeeded in Raising Japan's Inward Foreign Direct Investment?

• DOI: http://doi.org/10.1111/aepr.12211
• Published date: 01 January 2018
• Author: Takeo Hoshi
• Date: 01 January 2018

Has Abenomics Succeeded in Raising Japan’s

Inward Foreign Direct Investment?

Takeo HOSHI†

Stanford University

Japan is known to have an exceptionally low level of inward foreign direct investment (FDI).

The promotion of inward FDI is one of the policy goals of Abenomics structural reforms. This

present paper studies the accumulation of Japan’s inward FDI stock during the first 3 years of

Abenomics (2012–2015), and finds no evidence that Japan’s inward FDI stock increased more

than the trend before Abenomics started would have predicted. A comparison of the main poli-

cies for promoting inward FDI that have been implemented to the real and perceived impedi-

ments to inward FDI reveals that it may be advisable to shift the emphasis of the policy to

address more regulatory and administrative issues and to reduce the cost of doing business in

Japan.

Key words: abenomics, cost of doing business, economic growth, Japan’s inward FDI, regulation

JEL codes: F21, F23, O53

Accepted: 11 July 2017

1. Introduction

Abenomics has entered its fifth year. This is a good time to reflect on which parts of

Abenomics have worked, why there has been difficulties in achieving targets, and what

adjustments are necessary to ensure that current policy becomes more effective. This

present paper focuses on one specific policy in the third arrow of Abenomics: policy to

promote inward foreign direct investment (FDI). Promotion of inward FDI was one of

the many policies specified in the original growth strategy that was formulated in June

2013 (Headquarters for Japan’s Economic Revitalization, 2013). This present paper

examines how successful the policy has been and discusses what adjustments are nec-

essary to increase inward FDI and eventually to restore Japan’s economic growth.

This present paper was prepared for and presented at the 25th Asian Economic Policy Review

(AEPR) Conference held on April 8, 2017 in Tokyo.

The author thanks the conference participants, especially the editors of the journal, Takatoshi

Ito, Kazumasa Iwata, Colin McKenzie and Shujiro Urata, and the two designated discussants,

Kozo Kiyota and Marcus Noland, for their helpful comments. The author also thanks the partic-

ipants of the Japan Lunch at Asia–Pacific Research Center at Stanford University for their help-

ful comments. All remaining errors are my own.

†Correspondence: Takeo Hoshi, Walter H. Shorenstein Asia–Pacific Center, Stanford University,

Encina Hall, E301, Stanford, CA 94305-6055, USA. Email: tkohoshi@stanford.edu

© 2018 Japan Center for Economic Research 149

doi: 10.1111/aepr.12211 Asian Economic Policy Review (2018) 13, 149–168

The present paper is organized as follows. In the next section, we start by looking

at some basic characteristics of Japan’s inward FDI. We find that Japan’s level of

inward FDI is extremely low compared with other advanced economies. If inward FDI

contributes to economic growth, a low level of inward FDI implies that it is one of the

reasons for Japan’s stagnation. Then, the growth policy’s attention to inward FDI

would make perfect sense. To see this, Section 3 reviews some studies that examine the

relation between FDI and economic growth. In general, the empirical evidence for

growth enhancing effects of inward FDI is weak, which casts a doubt on the impor-

tance of FDI promotion as a growth policy. For Japan, however, there is a plausible

argument that suggests that raising inward FDI from their current low level is growth

enhancing. Even if inward FDI is growth enhancing, we need to understand what

determines the magnitude of FDI and how government policies can influence those

factors. Thus, Section 4 reviews some empirical studies on the determinants of FDI,

and Section 5 examines the content of Abenomics policy to promote inward FDI.

Section 6 asks the question posed by the title of this present paper, namely, has Abe-

nomics succeeded so far in raising Japan’s inward FDI by looking at the data on

Japan’s inward FDI. Section 7 concludes by speculating on the future success of FDI

policy in Abenomics.

2. Inward FDI to Japan

Figure 1 shows the (net) stock of inward FDI to Japan and other selected advanced

economies as percentages of gross domestic product (GDP) from 2005 to 2015. Japan

is clearly an outlier. While the inward FDI stock exceeds 20% in recent years for all

the five countries other than Japan, Japan’s inward FDI is still below 5% of GDP.

Another way to see the exceptionally low level of inward FDI to Japan is to look at

its share in the total inward FDI in the world. Figure 2 shows the inward FDI for the

six countries as their shares in the world inward FDI. It has been consistently around

1%. Japan’s share in 2015 (0.66%) is indeed below that in 2005 (0.89%), implying that

the growth of Japan’s inward FDI has been below the world average over the last

decade.

One reason why Japan’s inward FDI may be lower compared with other advanced

economies in Europe and North America is that Japan is geographically located far

from many sources of capital that moves internationally. Head and Ries (2005) show,

however, Japan’s inward FDI is still lower even compared with the expected level of

FDI given Japan’s geography and size of the economy. Following Head and Ries

(2008), they model FDI as the result of managers of one country bidding to acquire

production units in another country. In the gravitational version of their model, they

assume that the success probability of bids decreases as the distance between the coun-

try where the managers reside and the country where the production units are located.

Thus, a country that is located far from the locations of management talents would see

low inward FDI.

Has Abenomics Succeeded in Raising Japan’s Inward foreign direct investment? Takeo Hoshi

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