Empirical Analysis of Japanese Foreign Direct Investment on US Service Industries

The University Of Central Florida Board Of Trustees, Orlando FL

Investigators

Abstract

Most research on foreign direct investment (FDI) examines the manufacturing sector yet the service sector has been growing significantly over the last decade. For example, in the late 1980s, the average annual inflow of foreign acquisitions in services amounted to $22 billion, nearly three times the yearly amount in the first half of the decade and at a rate comparable with investments in manufacturing. Between 1983 and 1988, the worldwide stock of service foreign direct investment by Japan, West Germany, and France, increased by more than 20 percent per annum totaling $757 billion dollars. This suggests that the foreign presence in U.S. service sectors is expanding rapidly; however, research in this area remains sparse. This project involves planning research to answer three important questions related to Japanese foreign direct investment into U.S. service sectors: (1) Do volatile exchange rates deter Japanese service FDI? (2) Are Japanese plants less likely to fail if they invest in U.S. service industries that support their U.S. manufacturing operations, and (3) What determines whether a Japanese firm acquires a U.S. firm, builds a new plant in the U.S., or enters into a joint venture with a U.S. firm? This project aids in answering important questions regarding policy on Japanese FDI into the U.S. and U.S. competition with Japanese firms. Many services can only be delivered to foreign markets if they are produced in those markets, hence understanding the motives for service FDI and firm behavior after entry is imperative.