Role of Foreign Direct Investment as a Long-term Capital Flow Channel

Naohisa Hirakata and Mitsuru Katagiri
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Mitsuru Katagiri: Associate Professor, Faculty of Business Administration, Hosei University (E-mail: mitsuru.katagiri@hosei.ac.jp)

No 24-E-05, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

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.

Keywords: Capital flows; Demographic changes; Foreign direct investment (FDI) (search for similar items in EconPapers)
JEL-codes: F12 F23 F32 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-age, nep-dge, nep-fdg, nep-ifn, nep-int, nep-mon and nep-opm
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