Global risk as a determinant of FDI a case study of Japan-to-China FDI behaviour

Abstract

This paper goes over the rise of geopolitical tensions in recent years and what events may have been the root cause of the rising risks. We explain how geopolitical risk differs from political risk and we go over the factors that play a role in determining the FDI inflows of a country, underlining the mechanism behind each one. After that we include a case study of Japan to China FDI flows, where we utilize a time series model to estimate the effects that Japan’s geopolitical risk, China’s geopolitical risk, Japan’s economic policy uncertainty, China’s economic policy uncertainty, Yuan-to-Yen exchange rates, Japan’s inflation rate, and China’s GDP growth rate have on Japan-to-China FDI flows. We execute a sequence of diagnostic tests, and conclude that China’s GDP growth rate and the Yuan/Yen exchange rates are statistically significant in explaining our dependent variable, though a small R-squared statistic may show our results are not very accurate. We end the paper with some concluding remarks and explain the implications the findings may have for government policies.