A macroeconomic model of direct investment in foreign affiliates of Japanese firms

This paper analyses the operations of the Japanese multinational corporations in the world economy by constructing and estimating a Japanese foreign direct investment system. This system models the determinants of manufacturing foreign direct investment (FDI), the trade between Japan and her overseas affiliates as well as the sales of the manufacturing subsidiaries and those of the trading subsidiaries. The error-correction modelling techniques are adopted for estimation in order to capture both the short- and long-run adjustment processes. Finally, simulations are conducted on the model to analyse the effects of changes in the world economy. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: P23; F21; F15; C22.