The post-war phase of Japanese overseas investment began in the mid-1950s and rapidly grew in volume through the 1960s, especially within the Asian region. By the mid-1970s it had become large enough to become a political issue in several ASEAN states. By the end of the decade, the flow of investment funds from Japan exceeded the flow from the United States. Against this background, Japanese direct investment became a topic for academic study, both in the home and host countries.

In the 1960s and 1970s, analysis of overseas investment by Western economists had focused on the multinational firm, the major agent of overseas investment from the United States and elsewhere. The initial Japanese studies of Japanese overseas investment marked a deliberate departure from this approach. They explicitly rejected the micro-economic study of the firm in favour of a framework based on comparative advantage.

This chapter reviews three approaches to overseas investment. First, it briefly summarizes the major interests of Western economists concerned with the multinational firm. Second, it reviews the Japanese contribution, starting with the major work of Kojima, and continuing with criticisms of, and extensions to, this approach by other Japanese and non-Japanese economists. Third, it indicates the main trends of analysis in studies by economists from the host countries within ASEAN.

While differing widely in theoretical concerns and conclusions, all these approaches share one general aspect in common; they all focus heavily on determinants of the supply of foreign investment, and have neglected a general framework for the analysis of the demand for foreign investment. The final section of the chapter introduces a framework for integrating demand into the analysis.

Western approaches to the theory of foreign investment

Traditional trade theory treated foreign direct investment as a form of international movement of capital (Ohlin 1933). Differences in the relative factor endowment ratios of capital and labour among countries caused differences in the rate of return to capital as represented in the level of interest rates.