In this section, the macroeconomic up-and-downs of the Japanese FDI is observed, based on Annual Report of the International Finance Bureau, (Ministry of Finance, Government of Japan). Table(2-1) shows that the year around 1990 draws the line between the increasing and the decreasing trend of the Japanese FDI in North America. This observation is compatible with Graham and Krugman(1995).
Table(2-1): The Japanese FDI in North America in the manufacturing sector
(Notice): E is an exchange rate.
(Sources of data): Annual Report of the International Finance Bureau(Ministry of Finance, Government of Japan)}
Table(2-1) shows that the most dramatic increase of FDI inflows in North America happened during the six-year period 1985-90, with an equally dramatic slowdown thereafter in the early 1990s. At dollar base, the year 1990 witnessed the highest FDI flows(9793 million dollars). At yen base, the year 1989 experienced the biggest FDI surge(1369 billion yen). Although there is a bit difference in the peak year of FDI between the dollar- and yen-based FDI, in both cases we can observe the dramatic rising trend from 1985 to 1989(1990) and its declining trend from 1989(1990) to 1993. A more close look at table(2-1) will reveal the fact that the decreasing rate of FDI in the early 1990s is larger in yen-base than in dollar-base.
What brought about this kind of FDI movement? There are some explanations. Economic Planning Agency(1995-a) and Ministry of International Trade and Industry(1995) attribute the rising movement of FDI in the late 1980s and its declining movement in the early 1990s to the movement of the real exchange rate(yen/US dollar). It is true that there is a strong correlations between the real exchange rate and the Japanese outward FDI movement. But this kind of explanation is not sufficient in the following two sense.
Firstly, EPA(1995-a) and MITI(1995)'s explanations say nothing but the fact there is a strong correlation between the exchange rate and the FDI. Economically speaking, it dose not explain how the exchange rate's movement affects the FDI. Moreover, from only the fact above, one cannot tell which is the cause and which is the effect, the exchange rate or the FDI. It is not possible to say that the exchange rate is the major determinant of the FDI.
Secondary, there are few theoretical foundations in EPA(1995-a)'s and MITI(1995)'s explanations above . In most cases, empirical researches tend to be without theoretical foundations. As an empirical researcher of macro- and international economics, the author must say this kind of attitude toward the empirical study is not welcome. More theoretically based empirical researches are strongly needed.
In the next section, the simple theoretical model, on which the following empirical study is based, is introduced.