R&D Investment and Overseas Production: An Empirical Analysis of Japan's Electric Machinery Industry Based on Corporate Data

Kyoji Fukao, Toshiyasu Izawa, Morio Kuninori and Toru Nakakita
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Toshiyasu Izawa: Graduate School of Economics, Hitotsubashi University
Morio Kuninori: Research Institute of Capital Formation, Japan Development Bank
Toru Nakakita: Associate Professor, Faculty of Economics, Toyo University, and The Japan Institute of International Affairs

Monetary and Economic Studies, 1994, vol. 12, issue 2, 1-60

Abstract: This paper studies determinants of the decision to invest abroad. Among them, we follow the current mainstream theory of foreign direct investment so as to emphasize the stock of technological knowledge. We explicitly solve the optimal geographical composition (i.e. domestic vs. abroad) of the total production of companies. The analysis suggests that the relationship between technological knowledge and overseas production depends on relative prices of factors of production at home and abroad and on the elasticity of substitution between them. It is especially shown that under certain realistic assumptions, companies with a larger stock of technological knowledge have a lower proportion of production in developing countries, but have a higher proportion in developed countries exclusive of Japan. We test this hypothesis using corporate data of Japan's electric machinery industry. The empirical results are consistent with the theory. Besides the stock of technological knowledge, the paper investigates the explanatory power of other factors, such as company size, advertising intensity, and horizontal keiretsu.

Date: 1994
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Working Paper: R&D Investment and Overseas Production: An Empirical Analysis of Japan's Electric machinery Industry Based on Corporate Data (1994)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imemes:v:12:y:1994:i:2:p:1-60

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