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The Impact of Policy Uncertainty on Foreign Direct Investment: Micro-Evidence from Japan's International Investment Agreements

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  • Naoto JINJI
  • Mitsuo INADA

Abstract

This study proposes an empirical strategy to identify the impact of policy uncertainty (PU) at the host economy-sector level on foreign direct investment (FDI) by exploiting the plausibly exogenous exemptions from certain obligations such as national treatment (NT) and the most favored nation (MFN) in international investment agreements (IIAs). To this end, the study evaluates how the activities of Japanese multinational enterprises (MNEs) and their foreign affiliates are affected by Japan’s 22 IIAs, including bilateral investment treaties and economic partnership agreements with investment provisions, over 1995–2016 at the microdata level. Our empirical strategy relies on differences in the PU changes that MNEs and their foreign affiliates face after an IIA enters into force, depending on whether the relevant sectors are exempted from NT and MFN in the IIA. We find that the PU regarding the MFN has a stronger effect on FDI than the PU regarding NT. In particular, the former PU discourages the establishment of new foreign affiliates and also reduces the capital investment by an affiliate. However, PU does not necessarily induce the exit of affiliates from the market.

Suggested Citation

  • Naoto JINJI & Mitsuo INADA, 2022. "The Impact of Policy Uncertainty on Foreign Direct Investment: Micro-Evidence from Japan's International Investment Agreements," Discussion papers e-21-010, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-21-010
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    Keywords

    policy uncertainty; international investment agreements; negative lists; foreign direct investment.;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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