Location choice in low-income countries: Evidence from Japanese investments in East Asia

- This paper examines the location choices of Japanese MNEs in low-income countries.
- The low-income host countries include East Asian developing countries.
- We estimate a four-stage nested logit model at the province level.
- For Japanese investors, ASEAN forerunners are countries replaceable by China.
- Overall, the mechanics of vertical FDI appear in FDIs in low-income countries.

Unlike most existing studies, this paper examines the location choices of multinational enterprises (MNEs) in low-income countries. Specifically, we investigate the location choices of Japanese MNEs among East Asian developing countries by estimating a four-stage nested logit model and a mixed logit model at the province level. Our findings are as follows. First, Japanese MNEs consider Cambodia, Laos, Myanmar, and Vietnam to be host countries different from China and the forerunners of ASEAN. In other words, for Japanese investors, ASEAN forerunners are countries replaceable by China. Second, the mechanics of vertical FDI are more likely to appear in FDIs in low-income countries. For example, rather than the market size of the host country, tariff rates on products from investing countries are more crucial location elements.