The Japanese outward foreign direct investment skyrocketed in the late 1980s, but it has been declining since the year around 1990. The dramatic increase in the late 1980s is generally understood to be in great part due to the appreciation of yen. This paper tries to explain this large up and down by introducing a more general framework both theoretically and empirically. In particular, this paper hypothesizes that (the difference of) marginal productivity of capital of foreign production and domestic production plays a significant role in determining the fluctuation. The empirical studies in this paper support this hypothesis, indicating that the marginal productivity of capital invested for the production in North America was a significant determinant of the Japanese FDI there from 1984 through 1993. The marginal productivity of capital invested for domestic production in Japan, on the other hand, is not verified as an important determinant of the FDI in this empirical study. One must, however, be careful in assessing this empirical result because there are lots of assumptions that must be considered.
Keywords: Foreign direct investment; Dynamic optimizations of MNCs; Marginal productivity of capital
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