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Foreign direct investment as a long-term capital flow channel: Evidence from Japan

Year: 2025

Type: article

Abstract: This paper investigates the role of foreign direct investment (FDI) in accounting for the long-term trend of capital flows under demographic changes. For this purpose, we incorporate horizontal FDI under the proximity-concentration trade-off into a two-country DSGE model and conduct a quantitative analysis using long-term Japanese data for capital flows since the 1960s. The quantitative analysis finds that the transition dynamics solely driven by demographic changes well account for the long-term trend of capital flows and that multinational firms’ endogenous decision on FDI in response to population aging is key to explaining the long-term trend.

Source: Journal of International Economics

DOI: 10.1016/j.jinteco.2025.104158

Authors: Naohisa Hirakata, Mitsuru Katagiri

Institutions: Bank of Japan, Waseda University

Language: English

Topic: Global Financial Crisis and Policies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $4,300