Entry into foreign markets through foreign direct investment

This chapter investigates patterns of Japanese foreign direct investments (FDIs) using firm-level data on Japanese multinational enterprise (MNE) foreign subsidiaries. First, we present an overview of Japanese FDI and find stylized facts. For example, subsidiary sales and the number of investing countries are related to the scale of operation in Japan. Many foreign subsidiaries are engaged in export to neighboring countries and are categorized as export-platform-type FDI. Second, we present a model that extends the framework of Helpman et al. (Am Econ Rev 94(1):300-316, 2004) and accounts for overseas subsidiaries supplying goods to neighboring countries. Third, based on this model, we estimate the gravity model of MNE foreign subsidiary sales and find that the impact of the subsidiary's distance from the host country on the number of subsidiaries (extensive margin) is very large compared to previous studies that used data from U.S. MNEs. In addition, the estimation models that use market potential instead of host country GDP have a higher explanatory power, suggesting that market potential plays an important role in explaining FDI patterns. In contrast, although the effect of market potential on average subsidiary sales (intensive margin) is significantly positive, its effect on the number of subsidiaries is negative and insignificant.