Comment on “Has Abenomics Succeeded in Raising Japan's Inward Foreign Direct Investment?”

• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1111/aepr.12212
• Author: Marcus Noland

Comment on “Has Abenomics Succeeded in

Raising Japan’s Inward Foreign Direct

Investment?”

Marcus NOLAND†

Peterson Institute for International Economics and East-West Center

JEL codes: F21, F23, O53

Accepted: 28 July 2017

Cross-country evidence indicates that Japan hosts little inward foreign direct investment

(FDI), even after taking into account its size and geographical or cultural distance from

potential investors. Hoshi (2018) is a judicious empirical assessment of the impact of

Abenomics on Japan’s ability to attract inward FDI, and, by extension, increase the

nation’s rate of economic growth. Hoshi reaches a skeptical conclusion as to whether

Abenomics has contributed to increasing inward FDI. The Abenomics target goal for

FDI may be attained, but according to Hoshi’s analysis, the goal has been set too low

and its achievement does not require any positive impact of Abenomics policies.

That skepticism may well be justified. However, before accepting this conclusion it may

be worth making the simple observation that insufficient time may have elapsed for the

effects of Abenomics to manifest. The policy initiative was first announced in 2013, but some

of the measures discussed in the present paper were introduced as recently as May 2016. It is

possible that Abenomics will eventually work as intended, but it is just too early to tell.

Hoshi correctly observes that from a theoretical perspective the impact of inward

FDI flows on growth is ambiguous and the empirical literature generally concludes that

inward FDI flows are only growth-enhancing conditional on financial sector develop-

ment and outward orientation. The latter is particularly important, insofar as a plausi-

ble theoretical example of immiserizing capital inflows is FDI induced into a protected

capital-intensive import-competing sector (Bhagwati & Srinivasan, 1983). The samples

used by much of the empirical literature cited by Hoshi include developing countries

where capital inflows into a protected sector of comparative disadvantage is a real

problem, or are restricted to FDI into the manufacturing sector.

Therefore, it is not evident that this cross-country evidence is entirely applicable to

Japan. While exchange in differentiated products is pervasive in modern economies,

one would not necessarily expect Japan to gain a lot from foreign investment in its

dominant sector either directly or via interfirm externalities and spillovers. Yet even in

this relatively inauspicious setting, analysis of firm-level Japanese data indicates that

there are significant benefits to foreign investment in the manufacturing sector.

†Correspondence: Marcus Noland, Peterson Institute for International Economics and East-West

Center, 1750 Massachusetts Avenue NW, Washington, DC 20036, USA. Emai l: mnoland@piie.com

© 2018 Japan Center for Economic Research 169

doi: 10.1111/aepr.12212 Asian Economic Policy Review (2018) 13, 169–170