What Drives FDI in Japan? A Time-Series Analysis of Geopolitical Risk, Economic Growth, and Trade Openness

Muhammad Faiq Ridzuan Nor Rafiza, Mohamad Dani Izwan Mohamad bdullah, Maisara Idrus, Nur Alia Amira Amirudin, Nur Azwani Mohamad Azmin, Ani Asmaa Ali

Abstract


This study examines the impact of geopolitical risk, economic growth (GDP), inflation, and trade openness on Foreign Direct Investment (FDI) inflows in Japan from 1994 to 2023. Recognizing Japan’s complex investment climate amid regional tensions and macroeconomic challenges, the research aims to identify key determinants influencing FDI. Utilizing annual secondary data and employing multiple linear regression with Ordinary Least Squares estimation, the model assesses the effects of geopolitical risk (GPR), GDP, inflation, and trade openness on FDI inflows. Results reveal that GDP and trade openness significantly promote FDI, while inflation volatility and heightened geopolitical risk deter investment. The model explains approximately 73% of FDI variation, highlighting a robust interplay between economic fundamentals and political uncertainties. Policy recommendations emphasize sustaining economic growth, enhancing trade liberalization, maintaining macroeconomic stability, and strategically mitigating geopolitical risks to boost Japan’s attractiveness for foreign investors. These insights contribute to informed policymaking under evolving global uncertainties.

Keywords: Foreign Direct Investment (FDI); Geopolitical Risk (GPR); Macroeconomic Indicators; Trade Openness; Japan Economic Policy

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