Causes of Japanese firms' direct investments in US manufacturing industries

Abstract

A composite model is developed to investigate the determinants of new Japanese direct foreign investments in the US. The time period of study is 1976 to 1990, observing 11 types of US manufacturing industries. An autoregressive model is employed in the empirical estimation process using a set of panel data. It is found that the higher Japanese gross savings and lower after-tax industry profit rates cause a larger amount of Japanese direct investment. An expected depreciation of the real exchange rate and/or low exchange rate induced a larger amount of direct investment. Larger economies of scale at the corporate level (such as a higher R&D intensity) as well as higher non-trade barriers stimulate a larger amount of direct investment. Cultural distance did disadvantage Japanese FDI in the US.