Estimating the Knowledge-Capital Model in a Four-Country Framework: Evidence from Japanese Multinational Firms

An empirical investigation with the extended knowledge-capital model is conducted. In the analysis, information on the FDI activities by Japanese firms in foreign countries published by RIETI is fully utilized. Based on the estimation results of pooling regression, we can conclude that the most important motivation for Japanese firms to have foreign affiliates is the size of the markets represented by GDP of both home and host countries among four types of operational strategies: horizontal MNEs; vertical MNEs; horizontal MNEs; and vertical MNEs. The larger the country size is, the more the foreign affiliates make sales. Another important motivation implies that Japanese firms prefer moderately large countries to start affiliate business. In the case when the host country is rich in skilled labor, Japanese firms choose a moderately small market compared to Japan.