Do borders matter? Evidence from Japanese regional net capital flows

Are international borders barriers to capital flows? We use evidence on net capital Rows among regions within a country as a benchmark. For this purpo se we develop a data set of saving and investment rates of Japanese prefect ures. We find that the correlation between saving and investment rates is h igher for OECD countries than for Japanese regions in both time-series and cross-sectional data. After controlling for factors that are expected to co ntribute to a positive correlation in the absence of barriers to capital fl ows, we conclude that primarily long-term capital flows are hindered by nat ional borders, as reflected in the cross-sectional evidence.