Does immigration crowd out foreign direct investment inflows? Tradeoff between contemporaneous FDI-immigration substitution and ethnic network externalities

- Immigrants have the demerit of reducing inward FDI temporarily.
- Immigrants enhance FDI inflows in the longer term due to ethnic network externalities.
- Total effects need to be evaluated through a tradeoff between contemporaneous substitution and longer-term complementarity.
- Contemporaneous adverse effects could dominate positive network effects in the short term.

This study examines the dynamic interactions between immigration and inward foreign direct investment (FDI) using bilateral data on these indicators between Japan and each of the 29 countries/economies of origin for both FDI and immigrants into Japan during 1996-2011. Although literature shows a positive FDI-migration relationship, I distinguish between short- and long-term effects of immigration, and show a contemporaneous negative relationship between FDI and immigration. The results show that immigration flows discourage FDI inflows (FDI-migration substitution), although larger immigration stocks induce FDI inflows (ethnic network externalities). Therefore, total effects need to be evaluated considering a tradeoff between contemporaneous substitution and the longer-term complementarity from network effects. While inward FDI promotion and immigration enhancement are often suggested as solutions to resolving shortages in domestic savings and labor, our results have implications for addressing the increasingly daunting policy issue of population aging.