Do Firm and Country–Specific Factors Matter in Japanese FDI and Trade Links?

Our study investigates the firmand country-specific factors that affect the link between foreign direct investment (FDI) and trade. Specifically, we address the questions “do countryand firmspecific characteristics matter in Japanese FDI trade links?” and “do the counts and values of FDI that are often alternatively used in the empirical work convey the same message about this link?” Empirically, our work integrates the models employed by Head and Ries (1999) with Campa (1993) to specifically address country and firm specific heterogeneities in the Japanese FDI-trade link. The panel data nature of this study also allows us to focus on individual host country characteristics as potential FDI and trade determinants. We find that Japanese manufacturing and non-manufacturing outward FDI flows during 19891999 were trade creating. However, we were not able to reject country and time specific fixed effects. There was no strong correlation between the counts of new Japanese manufacturing FDI and the value of FDI committed by these firms. Yet the FDI-trade complementarity was observed whether the count of firms or the value of FDI committed by these firms is used as a dependent variable. The economic potential of a host country, factor costs, openness to trade, and the strength and volatility of a host country’s currency against Japanese Yen were important determinants of FDI inflow. JEL Codes: F14, F23