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Working paper

Why Do Japanese MNEs Enter and Exit Foreign Markets?

RIETI Discussion Paper Series 20-E-055. RIETI DP. Research Institute of Economy, Trade & Industry, 2020. No. 20-E-055.
Deseatnicov I., Fujii D., Kucheryavyy K., Saito Y.
This paper examines the FDI entry and exit behavior of Japanese multinational enterprises (MNEs) in foreign markets using firm-level panel data for the period of 1995-2015. We construct “sales verticalness” and “purchase verticalness” for each country, which is a novel index to measure the degree of connection with Japan in terms of overseas affiliate sales and procurement and present several stylized facts. Unlike exporter dynamics, the exit rates of FDI are much lower, but increase with market-specific age, implying larger sunk costs pertaining to FDI. At the country level, the exit rates of FDI increase with distance whereas entry rates show no correlation. Sales verticalness declines with distance exhibiting gravity, while purchase verticalness does not. Probit regression analysis of firm entry and exit of FDI reveals that a firm’s past experience of exporting raises the probability of FDI entry and lowers the probability of exit in the region implying that learning by exporting reduces the uncertainty entailed in FDI. Sales verticalness promotes entry and lowers exit propensity after controlling for country characteristics such as GDP and distance. In contrast, purchase verticalness discourages entry and raises exit propensity.