How Does FDI Affect Performance at Home? An Activity-level Analysis for Japanese Electrical Machinery and Electronics Firms

Focusing on firms from the electrical machinery and electronics industry, this paper investigates the impact of foreign direct investment (FDI) on home productivity using activity-level data rather than, as most previous studies have done, firm-level data. Distinguishing between horizontal and vertical FDI (HFDI and VFDI), it is argued that VFDI changes the activities that firms are engaged in at home after the relocation of production, altering firms' production function. This means that a direct comparison of productivity at the firm-level before and after the relocation of production is inappropriate. Instead, in order to assess the impact of FDI on home productivity, it is necessary to use activity-level data. Doing so, we obtain results that are consistent with theoretical predictions: HFDI does not necessarily have a significant positive effect on home productivity in activities that parallel those conducted by affiliates abroad. On the other hand, VFDI significantly enhances productivity in activities that have an input-output relationship with the activity relocated abroad.