The existence of long-run positive effects from outward FDI to GDP per capita is
consistent with the changes in the regional distributions of Japan’s FDI. In the 1970s,
Japanese firms invested mainly in Asia, but, in the 1990s Japanese firms placed more
emphasis on the European and North American countries (Dunning et al., 2007).
Dunning et al. (2007) suggest that there was a change in the focus of vertical FDI in
the 1970s to horizontal FDI in the 1990s for Japanese firms. Although there is a
concern that outward FDI may lead to relocation of production and employment
from Japan to the host countries, which may harm its economy, this paper suggests in
the long-run outward FDI related activities actually benefit the Japanese economy as
a whole, in terms of its positive effects on the income per capita. In the 1970s when
labour intensive activities were transferred to the host countries with abundant
resources and cheaper labour, the home activities of Japan became more skilled and
capital intensive. In the 1990s, Japanese firms gained from their presence in the
European and North American countries. These firms experienced technological
upgrading. Outward FDI has been used as a means to maximize the rents on the
accumulated knowledge and skill of Japanese firms (Blomstrom et al., 2001). Overall,
outward FDI related activities of Japanese firms improve the productivity of the
home activities which in turn contribute to the increase in the income per capita of
Japan.