September 1989

Determinants of Japanese Direct Investment in U.S. Manufacturing Industries

Catherine L. Mann


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

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Last Update: March 30, 2021