International Finance Discussion Papers (IFDP)
September 1989
Determinants of Japanese Direct Investment in U.S. Manufacturing Industries
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.
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.