Comparative analyses of U.S. and Japanese overseas direct investment

Gene Huang, University of Pennsylvania


This dissertation examines the distribution patterns and identifies the determinants of U.S. and Japanese foreign direct investment (FDI) by industry and by region. Chapter One points out the need for a comparative FDI study. Chapter Two reviews relevant literature and summarizes key results of previous empirical work. Chapter Three is an up-to-date multilateral comparison of U.S. and Japanese FDI. Comparisons are made by region and by industry. A generally similar distribution pattern of U.S. and Japanese FDI is observed. Chapter Four shows that a gravity-type FDI model can be derived by a partial equilibrium method. It argues that the characterization of Dunning's eclectic-type FDI theory corresponds well to the gravity model. Chapter Five applies the gravity model to pooled U.S. data. The estimation results strongly support the eclectic theory. The results show that U.S. GDP, the sales of U.S. affiliates abroad, and GDP of host countries have strong positive influence. Negative impact of transaction costs is found. The results also suggest that labor costs of U.S. affiliates abroad play a significant role only when profitability is taken into account. Traditional unit labor cost fails to explain U.S. FDI. Moreover, the estimation results suggest that U.S. FDI is a complement of exports. In addition, the results suggest the existence of a strong capital adjustment process for U.S. FDI, especially for the case of developed countries. Cost of capital and exchange rates are not found to have significant impact. Chapter Six is the Japanese counterpart of Chapter Five. The estimation results show that the change of Japanese GDP and the sales of Japanese affiliates abroad have significant positive impact. Transaction costs, measured by the square root of distance, appear to be a push factor for Japanese FDI in wholesale-retail, finance, insurance, and real estate industries, but have a negative impact on manufacturing and mining investment. Traditional unit labor cost, a productivity measure, works well in the Japanese case. The estimation results show that high unit labor cost in Japan pushes Japanese FDI abroad. Cost of capital and exchange rates, the two variables found not to be effective in the U.S. case, are found to have significant influence on Japanese FDI outflows. Higher Japanese domestic interest rates raise the borrowing costs of Japanese investors, and in turn discourage Japanese FDI activities. The appreciation of the Japanese yen enhances the credit of Japanese investors and reduces the relative value of foreign assets, hence encouraging Japanese FDI activities. In contrast to the U.S. case, Japanese FDI is found to be a substitute for exports. Moreover, an equally strong capital adjustment process exists for both the case of developed countries and developing countries. Chapter Seven summarises the major findings in this study and makes several suggestions for future work.

Subject Area

Finance|Business costs|Economics

Recommended Citation

Huang, Gene, "Comparative analyses of U.S. and Japanese overseas direct investment" (1992). Dissertations available from ProQuest. AAI9308594.