The Influence of Public Sentiment on FDI is Analyzed by Extending Payphone’s Gravity Model

Abstract

Since Trump initiated the trade war against China, the impact of politics on the economy has significantly increased. In recent years, as China's economic power has grown, diplomatic conflicts between China and Japan, as well as China and South Korea, have become more frequent and intense. From the diplomatic level, to expand the interests of countries, foreign trade is an indispensable part of every country's diplomacy. A very important index of foreign trade is foreign direct investment. Foreign direct investment (FDI) has been crucial to China’s rapid economic growth since the 1980s. As China’s key trade partners in East Asia, Japan and South Korea have invested over $1.5 trillion in FDI in China. National sentiment reflects people's views on politics from the perspective of the people and can also reflect political changes to a certain extent. Therefore, this study reflects the change of political change to economic development to a certain extent through the impact of national sentiment on economy. This article uses the gravity model to estimate how national sentiment affects the inward FDI flows from Japan and South Korea. This study highlights the national sentiment in both Japan and South Korea. While research shows a positive correlation between public sentiment towards China in these two countries, the coefficient results indicate that the overall impact of national sentiment on FDI is limited. This article mainly analyzes the relationship between national sentiment and FDI in South Korea and Japan and subdivides the different foreign policies of these two countries. Additionally, countries demonstrate different levels of sensitivity to sentiment, suggesting further-segmented policies should be taken into consideration. Investigating these different sensitivities is useful for China's different national policies towards its own country.