Outward foreign direct investment and employment in Japan’s manufacturing industry

This paper uses the input–output analysis to investigate the impact of Japan’s outward foreign direct investment (FDI) on domestic production and employment in the manufacturing industry. With the expansion of Japan’s overseas business, there is a fear that the production of overseas affiliates will replace parent country’s export and output. As a consequence, it will cause job losses in the home country, especially in labor-intensive manufacturing industry. On the other hand, outward FDI also has export promotion effect on domestic economy of the home country. Parent enterprises need to export capital and intermediate goods for the construction and production of affiliates abroad in the early stage of outward FDI. This effect will enhance the export and employment of the home country. The results of this paper suggest that the negative impact of export substitution effect and inverse import effect is greater than the positive impact of export promotion effect from 2000 to 2014, which means that the total effect of Japan’s outward FDI is negative and it causes the decrease in domestic production in Japan’s manufacturing industry. As a result, it leads to the unemployment in Japan, which is called the “Hollowing-Out” effect. Also, this paper compares the calculation result of the period 2000–2014 with the period of 1990–1999 and finds that the “Hollowing-Out” of Japan has become more serious in recent years with the increase in Japan’s outward FDI. It is necessary to change the structure of economy in Japan to alleviate the unemployment problem caused by outward FDI.