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Determinants of Japanese direct investment in U.S. manufacturing industries

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  • Catherine L. Mann

Abstract

The rapid rise in Japanese owned assets in the United States and the substantial fall of the dollar against the yen naturally raises the question of whether there is a causal relationship between Japanese direct investment and the yen/dollar exchange rate. ; This paper contributes in two ways to the analysis of the direct investment-exchange rate link. First, it presents a hybrid model of direct investment which incorporates insights from both portfolio balance models and industrial-organization-based models of direct investment. Second, it tests and compares these three models of direct investment using data for Japanese direct investment in 12 U.S. manufacturing sectors. ; The results suggest that familiar I-0 determinants of industry profitability attract Japanese direct investment into U.S. manufacturing. Lower raw material costs, more profitable investment opportunities (as measured particularly by growing markets, presence of valuable patents, and more highly concentrated production structure), as well as trade barriers all significantly increase Japanese direct investment in U.S. manufacturing industries. ; Portfolio balance factors also affect the demand for U.S. assets. Greater Japanese internal and external savings and reduced profitability of alternative assets (including ownership stakes in Japanese domestic industries) lead to significant increases in direct investment transactions in U. S. industries. ; There is no evidence that the exchange rate alone is a significant determinant of Japanese direct investment in U.S. manufacturing.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 362.

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Date of creation: 1989
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Handle: RePEc:fip:fedgif:362
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Keywords: Investments; Foreign - United States ; Japan;

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  1. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-83, June.
  2. Baldwin, Richard, 1988. "Hyteresis in Import Prices: The Beachhead Effect," American Economic Review, American Economic Association, vol. 78(4), pages 773-85, September.
  3. Kojima, Kiyoshi & Ozawa, Terutomo, 1984. "Micro- and Macro-Economic Models of Direct Foreign Investment : Toward a Synthesis," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 25(1), pages 1-20, June.
  4. Dunning, John H & Rugman, Alan M, 1985. "The Influence of Hymer's Dissertation on the Theory of Foreign Direct Investment," American Economic Review, American Economic Association, vol. 75(2), pages 228-32, May.
  5. Horst, Thomas, 1972. "Firm and Industry Determinants of the Decision to Invest Abroad: An Empirical Study," The Review of Economics and Statistics, MIT Press, vol. 54(3), pages 258-66, August.
  6. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
  7. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
  8. Guy V.G. Stevens & Robert E. Lipsey, 1988. "Interactions between domestic and foreign investment," International Finance Discussion Papers 329, Board of Governors of the Federal Reserve System (U.S.).
  9. Baldwin, Robert E, 1979. "Determinants of Trade and Foreign Investment: Further Evidence," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 40-48, February.
  10. Lipsey, Robert E & Weiss, Merle Yahr, 1981. "Foreign Production and Exports in Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 488-94, November.
  11. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  12. Dunning, John H, 1979. "Explaining Changing Patterns of International Production: In Defence of the Eclectic Theory," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 41(4), pages 269-95, November.
  13. Jamuna Agarwal, 1980. "Determinants of foreign direct investment: A survey," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(4), pages 739-773, December.
  14. Caves, Richard E, 1971. "International Corporations: The Industrial Economics of Foreign Investment," Economica, London School of Economics and Political Science, vol. 38(149), pages 1-27, February.
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Cited by:

  1. Guy V.G. Stevens, 1993. "Exchange rates and foreign direct investment: a note," International Finance Discussion Papers 444, Board of Governors of the Federal Reserve System (U.S.).
  2. Oscar Bajo Rubio, 1998. "An Industry Analysis of Foreign Direct Investment in Spanish Manufacturing, 1986-1992," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 9804, Departamento de Economía - Universidad Pública de Navarra.
  3. Oscar Bajo-Rubio & Carmen López-Pueyo, . "Foreign direct investment in a process of economic integration: The case of Spanish manufacturing, 1986-1992," Studies on the Spanish Economy 126, FEDEA.
  4. Stevens, Guy V. G., 1998. "Exchange Rates and Foreign Direct Investment: A Note," Journal of Policy Modeling, Elsevier, vol. 20(3), pages 393-401, June.
  5. Baek, In-Mee & Okawa, Tamami, 2001. "Foreign exchange rates and Japanese foreign direct investment in Asia," Journal of Economics and Business, Elsevier, vol. 53(1), pages 69-84.
  6. Ulgado, Francis M., 1997. "Location decision-making characteristics of foreign direct investment in the United States," International Business Review, Elsevier, vol. 6(3), pages 271-293, June.
  7. bouoiyour, jamal, 2007. "The Determining factors of foreign firect investment in Morocco," MPRA Paper 37030, University Library of Munich, Germany.
  8. Xiaming Liu & Haiyan Song & Yingqi Wei & Peter Romilly, 1997. "Country characteristics and foreign direct investment in China: A panel data analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(2), pages 313-329, 06.
  9. Bouoiyour, Jamal, 2007. "The determining factors of foreign direct investment in Morocco," MPRA Paper 37326, University Library of Munich, Germany.
  10. Kang Park, 2003. "Patterns and strategies of Foreign Direct Investment: the case of Japanese firms," Applied Economics, Taylor & Francis Journals, vol. 35(16), pages 1739-1746.
  11. Ulgado, Francis M. & Lee, Moonkyu, 2004. "The effects of nationality differences on manufacturing location in the US: a conjoint analysis approach," International Business Review, Elsevier, vol. 13(4), pages 503-522, August.
  12. repec:pra:mprapa:37325 is not listed on IDEAS

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