Sep 18, 2014 Report No：14-16
We analyze the impacts of a sharp fall Japanese of foreign direct investment (FDI) to China that occurred after the worldwide financial crisis in 2009. The study is conducted by means of a three-region (Japan, China, and the rest of the world (ROW)) recursive dynamic computable general equilibrium (CGE) model with multinational enterprises (MNEs) driven by FDI. Our simulation experiment showed that the FDI fall would cause price rises of Japanese affiliates’ goods and a depreciation of the renminbi. These two forces with the FDI fall would heavily reduce exports and production of Japanese MNE affiliates, while increasing those in Chinese manufacturing. This, however, does not mean that China would be a gainer, because it would experience a contraction in its service sector. Its losses in its service sector would exceed the gains in the manufacturing sectors. Therefore, overall China would lose due to the FDI fall.