Trade liberalization in Asia and FDI strategies in heterogeneous firms: Evidence from Japanese firm-level data

Kazunobu Hayakawa, Toshiyuki Matsuura

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This article clarifies the reasons for the recent rapid growth of foreign direct investment (FDI) in developing countries, particularly Asian countries. For this purpose, we theoretically and empirically examine the mechanics of both horizontal FDI and vertical FDI (VFDI) to shed light on the role of trade costs. Our empirical analysis using a logit or multinomial logit model of Japanese firms' FDI choices reveals that the tariff reduction in Asian countries has lowered the productivity cutoff for VFDI. This result indicates that since developing countries, particularly Asian countries, have experienced a relatively rapid decrease in tariff rates, the increase in VFDI through tariff reduction led to the recent surge of FDI in developing countries.

Original languageEnglish
Article numbergpu033
Pages (from-to)494-513
Number of pages20
JournalOxford Economic Papers
Issue number2
Publication statusPublished - 2015 Apr 1



  • D24
  • F23

ASJC Scopus subject areas

  • Economics and Econometrics

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