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Reverse Imports, Foreign Direct Investment and Exchange Rates

Yuqing Xing and Laixun Zhao

No EMS_2003_03, Working Papers from Research Institute, International University of Japan

Abstract: This paper investigates systematic linkages among "reverse imports", foreign direct investment, and exchange rates. We have in mind the competition in the Japanese market of a Japanese multinational firm and a Chinese domestic firm. Products are differentiated based on Japanese consumers' brand name recognition. The model shows that yen appreciation leads to an increase in Japanese FDI in China and "reverse imports", and a decrease in Japanese domestic production. Due to the barriers in brand name, the exports of the Chinese firm may fall, because the increase of reverse imports may erode the market share of Chinese firm, even though total exports from China increase. Further, we find that yen appreciation may improve the profits of the Japanese firm and welfare in Japan under reverse imports, against conventional wisdom. The predictions of the model fit well with the actual figures, and shed light on the current, heated China debate.

Keywords: Reverse Imports; FDI; Exchange Rate; Brand Name; China (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2003-08
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Citations: View citations in EconPapers (3) Track citations by RSS feed

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https://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2003_03.pdf First version, 2003 (application/pdf)

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Journal Article: Reverse imports, foreign direct investment and exchange rates (2008) Downloads
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