Trade liberalization and FDI strategy in heterogeneous firms : evidence from Japanese firm-level data

This paper attempts to clarify the reasons for the rapid growth of FDI in developing countries, particularly East Asian countries, compared with that of FDI in developed countries. To do this, we will examine the mechanics of HFDI and VFDI with a view toward shedding light on the role of trade costs. Our empirical analysis by estimation of a multinomial logit model of Japanese firms; FDI choices reveals that the reduction of tariff rates attracts even less productive VFDI firms. In contrast, their rise attracts even less productive HFDI firms. Since developing countries, particularly East Asian countries, have seen a relatively rapid decline in tariff rates, our results indicate that the increase of VFDI through reductions in tariff rates has led to the recent relative surge of FDIs in developing countries.