During the recent decade of declining foreign direct investment (FDI) barriers, small domestic firms disproportionately contracted while large multinational firms experienced a substantial growth in Japan’s manufacturing sector. This paper quantitatively assesses the impact of FDI globalization on intra-industry reallocations and its implications for aggregate productivity. We calibrate the firm-heterogeneity model of Eaton, Kortum, and Kramarz (2011) to micro-level data on Japanese multinational firms facing fixed and variable costs of foreign production. Estimating the structural parameters of the model, we demonstrate that the model can strongly replicate entry and sales patterns of Japanese multinationals. Counterfactual simulations show that declining FDI barriers lead to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. A hypothetical 20 % reduction in FDI barriers yields a 30.7 % improvement in

During the past decade of declining FDI barriers, small domestic firms disproportionately contracted in size while large multinational firms experienced substantial growth in Japan’s manufacturing sector. This paper quantitatively assesses the impact of FDI globalization on intra-industry reallocations and aggregate productivity. We calibrate the firm-heterogeneity model of Eaton, Kortum, and Kramarz (2011) to micro-level data on Japanese multinational firms. Estimating the structural parameters of the model, we demonstrate that the model can strongly replicate the entry and sales patterns of Japanese multinationals. Consistent with the structural changes observed in the historical data, the counterfactual simulations suggest that declining FDI barriers leads to a disproportionate expansion of foreign production by more efficient firms relative to less efficient firms. The numerical results suggest that over the last decade, FDI globalization generated spectacular improvements in aggregate productivity. The model is also used to quantitatively explore reductions in FDI policy-related barriers of foreign taxes and FDI regulations. The simulations suggest that further liberalization of FDI policy barriers would lead to significant improvements in