We have revised and published "The Power of Non-Superpowers," Tomoo Kikuchi and Shuige Liu (https://doi.org/10.48550/arXiv.2209.10206).The paper proposes a game-theoretic model to investigate how non-superpowers with heterogenous preferences and endowments shape the superpower competition for a sphere of influence. Two superpowers play a Stackelberg game by providing club goods.Their utility depends on non-superpowers who form coalitions to join a club in the presence of externality. The coalition formation, which depends on the characteristics of nonsuperpowers,influences the behavior of superpowers and thus the size of their clubs. Our data-based simulations of the subgame perfect equilbirum capture how the US-China competition depends on other countries.
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We are working on "Does Foreign Equity Contribute to Economic Growth?" Tomoo Kikuchi, Satoshi Tobe, Duy Van Dang, and Quang Trung Nguyen.The paper constructs a panel dataset covering 56 countries from 1985 to 2017 and find a positive relationship between foreign equity investment and GDP growth with private investment being a mediator. The impact of foreign equity investmenton private investment peaks in two years before it fades out.

We investigate the relationship between bank FDI and manufacturing firm FDI
using a detailed firm-level dataset on outbound multinational activity from China that was contemporaneous with the global expansion of China's Big-5 banks. Adopting an event study approach that exploits information on years of entry across potential host countries, we find that the establishment of a Big-5 bank subsidiary or branch is associated with a significant increase in subsequent years in Chinese firms'likelihood to establish an overseas subsidiary in that host country. We present tests - including an instrumental variables strategy - that build a case that the relationship from China's bank FDI to firm FDI is causal in nature.

Portfolio investment by countries in East Asia isconcentrated in distant countries. This presents an anomaly as information costfor investment is considered to increase with distance. Using bilateralinvestment data of 92 reporting and 241 counterpart countries we estimate astructural gravity model to analyze the effect of distance on both equity anddebt investment. By interacting distance with heterogenous host country characteristicssuch as GDP and tax haven status, the distance coefficient for debt investment bycountries in East Asia becomes negative and significant converging to that of othercountries. This highlights the importance of the market size and tax incentivesfor debt investment by countries in East Asia. However, the distance coefficientfor equity investment by countries in East Asia becomes negative andsignificant only when we control for a foreign policy alignment index, which isconsidered to mitigate bilateral investment risk in a similar policy environment.Since foreign policy alignment tends to decrease with distance, the findingsuggests that foreign policy alignment increases equity investment in nearbycountries more than the proximity suggests and is a key for understanding equityinvestment by countries in East Asia.&nbsp;

Foreign equity, which is the net purchase ofequity by foreign residents, is an order of magnitude higher, even as apercentage of GDP, in OECD countries than in non-OECD countries. This presentsa version of the Lucas puzzle since OECD countries grow on average smaller thannon-OECD countries. Why doesn’t capital flow from rich to poor countries? We investigatethe relationship between foreign equity and GDP growth using a panel datasetcovering 56 countries from 1985 to 2017. We find that foreign equity increasesGDP growth through private investment growth in the whole sample and private investmentand TFP growth in OECD countries and in countries that are closer to technologicalfrontier. We use the interaction between regional foreign equity and the stockmarket capitalization as an instrumental variable to build a case that therelationship from foreign equity to GDP growth is causal in nature. Localprojection analysis shows that the impact of foreign equity on privateinvestment peaks in two-three years before it fades out, and that foreignequity increases the deviation from GDP growth trend and not the trend. Thefindings indicate that the investment by foreign residents in equity has asignaling effect that attracts investment from other investors and contributesto physical capital accumulation due to high marginal product of capital innon-OECD countries and intangible capital accumulation due external economiesof scale in OECD countries. &nbsp;&nbsp;&nbsp;

The distance between the reporting country and the counterparty country is significant in a basic gravity model for portfolio investment assets, FDI assets and gross exports when we cover all the reporting countries or when we select Korea, China, and the United States as a reporting country in our samples. When we select Japan as a reporting country, the distance is still significant for FDI assets and gross exports but not for portfolio investment assets. This shows the uniqueness of Japan's portfolio investments across countries: 1) it deviates from the world's "average" and 2) it cannot be explained by a basic gravity model that explains Japan's FDI asset allocation and exports. Based on these observations, this paper investigates factors including institutional qualities, risks of issuers, and sizes of bond and equity markets in counterparty countries that can explain and highlight the uniqueness of Japan's portfolio investment asset allocation across countries. Lastly, we estimate if Japan's portfolio investments have achieved above-average returns.

We study the relationship between foreign debt and GDP growth using a panel dataset of 122 countries from 1980 to 2015. We find that economic growth correlates positively with foreign debt and that the relationship is causal in nature by using the sovereign credit default swap spread as an instrumental variable. Moreover, using a local projection analysis we find that an increase in foreign debt leads to an increase in investment and then GDP growth in subsequent years. This indicates that foreign debt contributes to GDP growth through capital accumulation. On average, the sovereign default risk is lower and foreign debt is higher in OECD than non-OECD countries. This suggests that sovereign default risks are responsible for upstream capital flows - capital flows from poor to rich countries - that contribute to GDP growth in OECD countries. In our model foreign debt accounts at least partially for growth in OECD countries not explained by standard controls used in the growth regression literature. Foreign debt increases GDP growth by 0.4 percentage points on average accounting for 27 percent of economic growth from 1997 to 2015 in the US while it has no impact on GDP growth in China.&nbsp;&nbsp;