The Determinants of the Location of Foreign Direct Investment by Japanese Small and Medium-sized Enterprises (in Japanese)

Shujiro Urata and Hiroki Kawai

Economic Analysis, 2000, vol. 158, 3-21

Abstract: The empirical results of the determinants of FDI location by Japanese firms show that both supply-side and demand-side factors in the host countries are important determinants. Supply- side factors include abundance of low-wage labor, availability of good infrastructure and good governance, while an important demand-side factor is the presence of sizable local market. Industrial agglomeration, which has both supply-side and demand-side elements, has an important influence on the decision making by Japanese firms. A comparison of the results obtained for SMEs with those for large firms reveals that SMEs are more sensitive to local conditions in making their decision on FDI, especially when they make investments in developing countries. Specifically, SMEs regard the availability of low-wage labor, well-developed infrastructure, and industrial agglomeration much more importantly than large firms. Greater sensitivity of SMEs to local economic conditions in their decision making concerning FDI location can be explained by their limited availability of financial and human resources and high dependence on overseas production in their business. Recognizing the need to develop SMEs in developing countries to promote economic growth, policy makers in developing countries should attract foreign SMEs to undertake FDI in their countries by providing a very attractive business environment.

Date: 2000
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