Computational Analysis of the economic impacts of Japan’s FDI in Asia

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Abstract

The Global Trade Analysis Project (GTAP) Model is used to analyze the possible impacts of Japan'sFDI in Asia in a multi-country, multi-sector, general equilibrium framework. The majority of existing anti-FDI arguments are either non-economic such as the “nationalist” and “dependence” approaches, or economic but short-term, partial-equilibrium arguments such as the “exporting employment”, and “balance of payments” stories that focus on the flow aspects of FDI. FDI, as a micro phenomenon, should not be blamed for negative macro outcomes such as a worsening trade balance that in principle is a reflection of a country's savings-investment imbalance. By focusing, instead, on the analysis of medium- to long-term general equilibrium impacts (stock impacts) of FDI, this paper tries to capture the growth and welfare impacts of Japan's FDI in Asia. Stock impacts analyzed in this paper are: 1) a capacity and output expansion in the recipient economies in Asia, matched by a reduced capital stock in Japan (stock effects); 2) an increase in productivity through technology transfer and spillover (technology effects); and 3) an increase in domestic investment driven by a higher expected rate of return on investment and larger domestic savings (cofinance effects). Following the existing dichotomy in the theories of FDI－those that assume perfect markets and the others based on imperfect markets－simulations are conducted under both industrial structures. Simulation results replicate the traditional transfer problem in real resources, and show that FDI is a positive-sum game. Larger gains are observed in the existence of scale economies. The results suggest the importance of two-way FDI flows for Japan in order to benefit from this game. The results also suggest that if FDI capital and technology are augmented by local investment (and savings), a possible secondary burden of transfer in real resources can be avoided.

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