Foreign exchange rates and Japanese foreign direct investment in Asia

Abstract

We show that an appreciation of the yen against the dollar and against the Asian currencies significantly increases Japanese foreign direct investment (FDI) in Asia. Also, a depreciation of the Asian currencies against the dollar, while not significantly affecting the FDI in aggregate manufacturing, have a significant positive impact in the export-oriented electrical machinery sector. The labor productivity differential has a significant impact on FDI in most sectors but the direction of the effect varies across sectors. Also, there is evidence that a higher import tariff rate or wage rate in the host country significantly decreases Japanese investment in Asia.