Discussion Papers In Economics
And Business

DETERMINANTS OF THE INITIAL DECISIONS BY JAPANESE FIRMS
TO UNDERTAKE FOREIGN DIRECT INVESTMENT

Yutaka Horiba
Kazuo Yoshida

Discussion Paper 03-09

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANDETERMINANTS OF THE INITIAL DECISIONS BY JAPANESE FIRMS
TO UNDERTAKE FOREIGN DIRECT INVESTMENT

Yutaka Horiba
Kazuo Yoshida

Discussion Paper 03-09

April 2003

この研究は「大学院経済学研究科・経済学部記念事業」
基金より援助を受けた、記して感謝する。

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANDETERMINANTS OF THE INITIAL DECISIONS BY JAPANESE FIRMS
TO UNDERTAKE FOREIGN DIRECT INVESTMENT

By
Yutaka Horiba
Graduate School of Economics
Osaka University
And
Kazuo Yoshida
Graduate School of Economics
Nagoya City University

APRIL 2003

Abstract: This paper investigates the empirical determinants of the initial FDI entry decisions
by Japanese firms to enter into the U.S and Taiwanese markets. The study is basedon a full-sample survey of firms listed on Japanese stock exchanges and is for theperiod 1976-2000. We find that a number of macro/financial as well as micro(company-specific) variables are highly significant in explaining the observed entry
pattern.
JEL Classification: F2, F3
Keywords: Japanese foreign direct investment_______________________*Corresponding author. Fax: +81-66-850-5274
E-mail address: horiba@econ.osaka-u.ac.jp

1. Introduction
Japanese foreign direct investment (FDI) has attracted much attention during the past quarter
century as the country has become one of the largest suppliers of FDI in the world. Despite thedifficulties encountered in the post-bubble adjustment of the past decade, the Japanese economy
ranks second in the world in its output production, and also as the source country for cumulative
in-bound FDI into the United States.
Economists have focused on various aspects of Japan’s FDI, and there is now a large
literature on this topic.1 Most of the empirical literature on Japanese FDI has used fairly
aggregative industry-level or macro data. In contrast, there have been relatively few studies thatuse company-level data, and those that do pertain to only a handful of manufacturing industries.
The motivation of this study is to undertake a full-sample survey of all firms listed on all eight
Japanese Stock Exchanges (Tokyo, Osaka, Nagoya and five other minor local exchanges) overthe period 1976-2000. We carefully checked the data source discussed below to find if, andwhen, each company made the first FDI entry. We then test the statistical link between theobserved pattern of the initial FDI decisions and some of the financial and non-financial
variables that have appeared in separate literature.
Given the complexity and the diversity of issues and hypotheses that have been offered in theliterature, our approach is an eclectic one that combines a number of explanatory variables, but
focusing specifically on the initial FDI entries. Our motivation is to focus on the initial decisions,rather than on the value of FDI as in most other studies that do not differentiate between theinitial move and subsequent ones for further investment. Once the commitment is made with the1

See Caves (1993) for the literature survey and the reference citations. The works that have appeared inprint since then that are relevant here include Pugel, Kragas and Kimura (1993), Trevino and Daniels(1994), Azrak and Wynne (1995), Kojima (1995), Yamawaki (1995), Eaton and Tamura (1996), Kogut
and Chang (1996), Belderbos and Sleuvaegen (1996, 1998), Kumar (1998), and Barrell and Pain (1999).

2

initial entry, the well-known hysteresis effect takes hold that alters the incentives structure of
FDI to at least some extent.2 We avoid that complication by excluding from our observations
subsequent re-investment decisions.
2. Hypotheses
We list below hypotheses to be examined in this study, along with a brief justification andbackground for each. In the statistical section that follows, the issue is whether, and to what
extent the proffered explanations have relevance for the initial FDI decisions.
(a) Research and Development
The technology asset possessed by a multinational firm plays a key role in the theory of FDI.
The firm can overcome natural disadvantages in operating in a foreign country if it has anopportunity to capitalize on an internationally transportable intangible asset it owns. From theinternalization perspectives in the theory of multinational enterprise these intangible assets canbe broad, encompassing goodwill, reputation and organizational skills in general that the firm
essentially owns. But in particular, technology as proxied by R&D expenditures has been foundto be a significant determinant of Japanese (as well as Western countries) FDI in a number of
empirical analyses that have been conducted.3(b) Exchange Rate
The link between exchange rates and FDI has been debated extensively. On the theoreticalgrounds, if the international capital market is reasonably open and efficient, changes in theexchange rate may fail to impart a systematic cost-of-capital bias to either domestic or foreign
investors, as the risk-adjusted expected returns tend to be equalized across investments
2

See Dixit (1989), Kulatilaka and Kogut (1996), and Kogut and Chang (1996).

3

The more recent literature on R&D and Japan’s FDI includes Kogut and Chang (1991, 1996), Drakes
and Caves(1992), Trevino and Daniels (1994), Pugel, Kragas and Kimura (1996).

3

regardless of their national origin. To the extent that the exchange rate impacts on the current
account balance of payments, it does affect the capital account as a whole. However, it leaves
the composition of the capital account that includes FDI indeterminate.4
On the other hand, changes in the exchange rate impart a wealth bias on the value of
foreign assets such that depreciation of the dollar, for example, allows Japanese firms to acquire
dollar-denominated assets more cheaply than previously.5 This will result in a direct link
between exchange rates and FDI from the cost-of-acquisition standpoint. Indeed, empiricalstudies have generally supported the link between exchange rates and Japanese FDI.6(c) Liquidity
It is generally accepted that liquidity matters in investment decisions.7 It matters because
firms face finance constraints that increase the costs of external finance relative to internalfinance on account of asymmetric information between borrowers and lenders, or simply becauseof transaction costs involved in generating external finance. Liquidity may also contain useful
information regarding the future profitability of the firm, thus impacting on current investment
decisions. Whereas those links are well established on the theoretical grounds, the current
controversy pertains to the measurement problem. In particular, how does one capture thefinance constraints of the firm? Does the empirical relationship between cash flow and corporate
investment adequately reflect the presence of the firm’s financial constraints? The evidence is
4This argument dates back to Mundell (1968).

5

Froot and Stein (1991) argue that FDI is information-intensive in the sense of asymmetric information,and that it is subject to different financing requirements than portfolio investment that may be readilyfinanced with external funds.

6

See Caves (1989), Froot and Stein (1991), Drake and Caves (1992), and Kogut and Chang (1996).
However, exceptions are Ray (1988) and Healy and Palepu (1993).

7

See Chirinko (1993) and Chirinko and Schaller (1995) for reference citations in this rapidly expanding
literature.

4

not clear, and there is an on-going controversy on this question.8 The issue that is relevant to thisstudy, then, is whether there is an empirically meaningful relationship between the firm’s
liquidity as represented by cash flow and its decision to invest abroad.
(d) Business Groups
One of the most frequently mentioned “unique” aspects of Japan’s business system are theinter-firm relationships known as kigyo keiretsu. Literally translatable as enterprise affiliation, it
is a network of companies drawn typically from different industries and a primary bank as lenderand leader of the group (horizontal keiretsu). Alternatively, the network may be more narrowly
focused in an industry (e.g., the auto industry), comprising subcontractors and the main
contractor (vertical keiretsu). The networking encourages cooperation through mutual crossshareholding among member companies, mutual assistance and information-sharing.9
Presumably, it is easier to undertake FDI for the first time if some of the member companies
have already made that move and are willing to share information about the host country’s
market. It will lower the fixed cost of entry in the host country by reducing the uncertainty risk,
and it may also relax the capital constraints.10(e) Agency Cost
An extensive finance literature suggests that corporate diversification including FDI has bothbenefits and costs for shareholders. With respect to FDI, the evidence is mixed as to whether
international operations enhance firm value. Some of the earlier literature demonstrated both ontheoretical and empirical grounds that there is a positive valuation effect for multinational firms
8

See Kaplan and Zingales (1997) and Fazzari, Hubbard and Petersen (2000) for the opposing views.

9

It should be noted, however, that this practice may not be particularly profitable. See Weinstein andYaheh (1995), for example, for the more recent evidence. They argue that the keiretsu was not collusive
and that the individual firms remained competitive.

10

See Hoshi, Kashyap and Scharfstein (1991) for the capital constraint argument.

5relative to purely domestic ones from having the option to operate internationally.11 On the other
hand, the more recent literature finds evidence that points in the opposite direction.12
In a parallel development emphasizing agency cost, an explanation has been offered as to why
firms diversify internationally even as it decreases the market valuation of the firm. The agency
cost hypothesis posits in the principal-agent context that diversification may benefit managers forvarious reasons including prestige that comes from managing an internationally diversified firm,managerial compensation that may be tied to firm size, and the perception that managers may
become more indispensable on account of an overseas exposure. Denis, Denis and Sarin (1997),
for example, find empirical evidence that shows that the firm’s diversification is in fact related
negatively to the extent of managerial equity ownership in the firm they manage. The issue weinvestigate here is whether the likelihood of Japanese corporate decisions to make an FDI entry
is related to managerial equity ownerships, the underlying question being whether Japanese firms
behave similarly to the U.S. firms in this respect.
(f) Firm Size and Years in Operation
FDI typically entails a substantial overhead investment at the entry point, requiring the firm
to be of a sufficient size to be able to raise the necessary capital. Most of the studies related to
the firm size question confirms a positive association between firm size and FDI. As noted by
Caves (1993, p.289), an intriguing issue related to the size question is how small and mediumsized Japanese subcontractors have undertaken FDI following their main contractor. A
tangential issue may be the length of time the firm has been in operation before deciding toextend its operations overseas. In this context, the number of years elapsed since the firm’s

11

Errunza and Senbet (1981, 1984), Kim and Lyn (1986).

12

See in particular Christophe (1997) and Denis, Denis and Yost (2002).

6

inception serves as a proxy for the firm’s cumulative experience and the human capital
associated with that experience.
(g) Exports and FDI
In the standard Heckscher-Ohlin trade model the substitutive relationship between trade andinternational factor movement is emphasized. The substitutive relationship stems from theargument that in a world characterized by perfect competition and no transportation cost,international equalization of factor prices may be achieved at equilibrium either through tradewith no international factor movement, or through factor movement with no trade.13 Concerning
trade and foreign investment, however, empirical evidence that has been accumulated during thepast thirty years suggests that the two are complements.14
An evolutionary model of trade and investment emphasizes that a firm first gains foothold in
the host country’s market by exporting its product. Only when the firm accumulates sufficient
information through its export experience that profitable opportunities exist for investment, does
the firm ratchet up its commitment to that market through FDI. Does there in fact exist astatistically significant relationship between previous exports and the initial FDI decisions fromthe full-sample Japanese firms?

3. Statistical Model and the Data
We apply the partial maximum-likelihood hazard-rate estimation model to assess thelikelihood of a firm to make the initial move to invest abroad. Let hij(t) be the hazard rate at time13

See Mundell (1968).

14

See the extensive references cited in Drake and Caves (1992).

7

t, representing the transition rate from the no-FDI state i to the FDI state j at time t. The
multivariate Cox proportional hazard model assumes that hij(t) is of the exponential form,hij(t) = ho(t) exp[βX(t)]where ho(t) denotes the baseline hazard rate that is unspecified but is assumed to be identical forall states. The column vector X contains time-varying covariates and β is the corresponding row
vector of coefficients to be estimated. The proportional hazard model specifies the probability of
the firm’s initial FDI to be the likelihood that the observed incidence of FDI should haveoccurred, given the hazards of all firms in the risk set. This leads to the partial likelihood
function to be maximized as follows:exp( βX i ) ki]
i =1 ∑ exp( βX j )nL( β ) = ∏ [jε Rwhere R is the risk set containing all censored firms as of the beginning of each calendar year t,
and ki = 1 if a firm makes the FDI move during t, and ki = 0 otherwise. Hence, information
about past decisions enters into the calculation of the risk set, and this allows for the conditional
probability estimation.15
The sample period is 1976-2000. The sample contains 2,417 companies that were listed on
the Japanese stock exchanges during this period. Of these, 537 companies made the initial FDI
move destined to the U.S., by far the largest destination country for Japanese firms. The largest
destination area in Asia was Taiwan, with the total of 309 companies making the initial move
during this period. For the comparative purpose, we estimate the model for each of these two
economies separately.

15

The estimates obtained from this partial maximum-likelihood estimation are both consistent andasymptotically normally distributed. See Cox and Oakes (1984).

8

The company-by-company data on FDI, taken from Toyo Keizai Shinposha’s Kaigai
Sinshutsu Kigyo Soran (2001), are for green-field and acquisition (20% or higher equity
acquisitions) investments. There were relatively few firms that had invested in either country
prior to 1976, causing no serious left-censoring problem in the estimation.
The measurement of explanatory variables used in the study and the respective data source
follows. The explanatory variables are entered into the estimation equation with the lag of one
year.
RD:

Research and development spending divided by the firm’s total value added.
Source: Nikkei NEEDS Zaimu Data (CD-ROM), 2000.

CASH: Total cash flow is evaluated as income after tax + depreciation allowances + provisions
for the future lump-sum retirement benefit payments – net increase in inventory –increase in accounts receivable + increase in accounts payable; the total cash flow is thendivided by the firm’s total assets to arrive at our CASH variable. (We include dividends
in the cash flow on the ground that Japanese managers have a large discretion over thedividend policy that is not subject to the pressure from stockholders to the extent that
the U.S. firms are. Indeed, the dividend rates are low in Japan, and in reality, inclusion
or exclusion of dividends makes little difference to the statistical results that follow.)
Source: ibid.
SIZE: The relative size of the firm is measured as the firm’s total sales divided by the industry
total sales. Source: ibid.
YRS:

The number of years the firm was in operation since its inception. The inception year isfrom Toyo Keizai Shinposha, Kaisha shiki-ho (Quarterly Company Reports), No.3, 2001.

KEI:

Horizontal keiretsu. KEI = 0 if the firm did not belong to one of the six major groups9

(Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-ichi). For a member firm, KEI =the proportion of the group members that are already operating in the host country.
Source: Toyo Keizai Shinposha, Kigyo keiretsu soran, 1994.
RET:

Vertical keiretsu. RET = 1 if the leading firm in the group was operating in the hostcountry at the time the subcontracting firm made the initial FDI in that country.
Source: ibid.

OWN: The proportion of the firm’s outstanding shares owned by the current managers. Source:
Nikkei NEEDS Zaimu, op. cit.
EXCH: The real effective exchange rate of the Japanese yen. Source: International Monetary
Fund, Financial Statistics, 2002.
EXPO: Exports from Japan to the host country, proxied by the proportions of the industry
total output exported to the host country. Toyo Keizai’s company files do not contain
information on company exports. We use this proxy on the assumption that theJapanese firm’s business decision on the initial foreign investment is influenced by theindustry’s overall export orientation. Source: Data on exports by industry are takenfrom OECD’s International Trade by Commodity Statistics, various issues.
INT:

Capital intensity defined by the firm’s tangible fixed assets divided by the number of
employees. One abnormality of Japan’s FDI noted by Ray (1988) is that whereas theinvestment pattern of Japanese firms tracks the Western countries’ pattern in key
variables such as R&D and industry concentration, Japanese investments differ in thatthey are not capital-intensive. We include this variable to see if that finding may holdrelevance in the present study. Source: Nikkei NEEDS Zaimu, op. cit.

10

4. Statistical Results
The table presents the estimation results obtained for Japanese FDI in the U.S. and Taiwan,
respectively. In both cases, R&D, cash flow, the relative size, horizontal as well as verticalkeiretsu, export orientation and the real exchange rate are found to have statistically significant
influence on the likelihood of the initial FDI decisions with the “correct” sign. The degree ofconsistency obtained in the statistical results between the two disparate economies of the U.S.
and Taiwan is remarkable. Appendix table 1 presents the correlation matrix for the explanatory
variables, and it is evident that there is no serious multi-collinearity problem.
The agency cost hypothesis, on the other hand, does not hold up. The result is statisticallyinsignificant in both cases. Therefore, there is little support to the notion that the FDI decisions
are influenced by managerial ownerships of the firm’s equities. To the extent that there is anempirical support for this hypothesis for U.S. firms, our findings indicate an indirect support to
Aoki’s (1988) argument that in Japanese firms the interests of managers, stockholders andworkers employed by the firm tend to merge as stakeholders in sharp contrast to U.S. firms.
Likewise, there is little statistical support for the length-of-time hypothesis. On the other
hand, there is some support for the factor-intensity argument. The coefficients of the capitallabor ratio are negative in both instances, and highly significant in the case of Taiwan. Thissuggests that controlling for the other variables in the model, labor-intensive firms are more
likely to invest than capital-intensive firms. Surprising as this finding may initially seem, it does
agree with the fact that a large portion of Japanese FDIs are by small and medium-sized businessestablishments.16 This tendency for labor intensity is particularly strong in the case of Taiwan,

16

In an earlier study of Japanese FDI in the U.S., Ozawa (1979) found that as much as one half ofJapan’s FDIs were by small and medium-sized firms.

11where service-oriented and other labor-intensive industries are more prevalent in FDI activities.
They are there, presumably to take advantage of cheaper wages prevailing in Taiwan.

5. Summary and Conclusions
We have brought together a host of financial and non-financial explanations to bear on theinitial decisions made by Japanese firms to invest abroad. Based on the full-sample dataspanning the last quarter of the 20th century, a period in which the Japanese economy underwent
a turbulent transformation from a high growth to a distinctly low growth period that included thebursting of a major speculative bubble, we find that it is remarkable that some of the financial/macro variables do as well as they do in explaining the individual firms’ initial FDI entry
decisions, whether these decisions pertain to investment into the U.S. or Taiwan. Companyspecific variables such as R&D, liquidity as proxied by cash flow, the relative firm size, andmemberships in keiretsu groups are also found to be quite relevant. On the other hand, theagency cost hypothesis that has been offered to explain the behavior of U.S. firms is found to belargely irrelevant in addressing the Japanese FDI decisions. The convergence of Japanesebusiness practice and behavioral pattern to that of the western nations has been noted in manystudies, but with respect to the FDI, that trend certainly is not across the board.

12References
Aoki, M. (1988). Information, incentives, and bargaining in the Japanese economy. Cambridge:
Cambridge University Press.
Azrak, P., & Wynne, K. (1995). Protectionism and Japanese direct investment in the UnitedStates. Journal of Policy Modeling, 17, 293-305.
Barrell, R., & Pain, N. (1999). Trade restraints and Japanese direct investment flows. European
Economic Review, 43, 29-45.
Belderbos, R., & Sleuwaegen, L. (1996). Japanese firms and the decision to invest abroad:business groups and regional core networks. Review of Economics and Statistics, 78, 214-220.
Belderbos, R., & Sleuwaegen, L. (1998). Tariff jumping DFI and export substitution: Japaneseelectronics firms in Europe. International Journal of Industrial Organization, 16, 601638.
Caves, R. E. (1989). Exchange rate movements and foreign direct investment in the UnitedStates. In D.B. Audretsch & M.P. Claudon (eds.), The Internationalization of US Markets(pp. 199-228). New York: New York University Press.
Caves, R.E. (1993). Japanese investment in the United States: lessons for the economic analysis
of foreign investment. The World Economy, 16, 279-300.
Chirinko, R.S. (1993). Business fixed investment spending: modeling strategies, empiricalresults, and policy implications. Journal of Economic Literature, 31, 1875-1911.
Chirinko, R.S., & Schaller, H. (1995). Why does liquidity matter in investment equations?
Journal of Money, Credit and Banking, 27, 527-548.
Christophe, S.E. (1997). Hysteresis and the value of the U.S. multinational corporation.
Journal of Business, 70, 435-462.

13

Cox, D., & Oakes, R. (1984). The Analysis of Survival Data. London: Chapman and Hall.
Denis, D.J., Denis, D.K., & Sarin, A. (1997). Agency problems, equity ownership, and corporate
diversification. Journal of Finance, 52, 135-160.
Denis, D.J., Denis, D.K., & Yost, K. (2002). Global diversification, industrial diversification,and firm value. Journal of Finance, 57, 1951-1979.
Dixit, A. (1989). Hysteresis, import penetration, and exchange rate pass-through. Quarterly
Journal of Economics, 104, 205-228.
Drake, T.A., & Caves, R.E. (1992). Changing determinants of Japanese foreign investment in
the United States. Journal of the Japanese and International Economies, 6, 228-246.
Eaton, J., & Tamura, A. (1996). Japanese and U.S. exports and investment as conduits of growth.
NBER Working Paper, 5457.
Errunza, V.R., & Senbet, L.W. (1981). The effects of international operations on the market
value of the firm: theory and evidence. Journal of Finance, 36, 401-417.
Errunza, V.R., & Senbet, L.W. (1983). International corporate diversification, market valuation,and size-adjusted evidence. Journal of Finance, 39, 727-743.
Fazzari, S.M., Hubbard, R.G., & Petersen, B.C. (2000). Financing constraints and corporate
investment: response to Kaplan and Zingales. Quarterly Journal of Economics, 115, 695705.
Froot, K.A., & Stein, J.C. (1991). Exchange rates and foreign direct investment: an imperfectcapital markets approach. Quarterly Journal of Economics, 106, 1191-1217.
Healy, P.M., & Palepu, K.G. (1993). International corporate equity acquisitions: who, where,
and why? In K.A. Froot (ed.), Foreign Direct Investment (pp.231-250). Chicago: Universityof Chicago Press.

14

Hoshi, T., Kashyap, A., & Scharfstein, D. (1991). Corporate structure, liquidity and investment:
evidence from Japanese industrial groups. Quarterly Journal of Economics, 106, 33-60.
Kaplan, S.N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide usefulmeasures of financing constraints? Quarterly Journal of Economics, 112, 169-215.
Kim, W.S., & Lyn, E.O. (1986). Excess market value, the multinational corporation, and Tobin’s
q-ratio. Journal of International Business Studies, 17, 119-125.
Kogut, B., & Chang, S.J. (1991). Technological capabilities and Japanese foreign direct
investment in the United States. Review of Economics and Statistics, 73, 401-413.
Kogut, B., & Chang, S.J. (1996). Platform investments and volatile exchange rates: direct
investment in the U.S. by Japanese electronic companies. Review of Economics andStatistics, 78, 221-231.
Kojima, K. (1995). Dynamics of Japanese direct investment in East Asia. Hitotsubashi Journalof Economics, 36, 93-124.
Kulatilaka, N., & Kogut, B. (1996). Direct investment, hysteresis, and real exchange rate
volatility. Journal of the Japanese and International Economies, 10, 12-36.
Kumar, N. (1998). Multinational enterprises, regional economic integration, and export-platformproduction in the host countries: an empirical analysis for the US and Japanese corporations.
Weltwirtschaftliches Archiv, 134, 450-483.
Mundell, R.A. (1968). International Economics. New York: Macmillan Company.
Ozawa, T. (1979). International investment and industrial structure: new theoretical implications
from the Japanese experience. Oxford Economic Papers, 31, 72-92.
Pugel, T.A., Kragas, E.S., & Kimura, Y. (1996). Review of Economics and Statistics, 78 , 208213.

15

Ray, E.J. (1988). The determinants of foreign direct investment in the United States, 1979-85.
In R.C. Feenstra (ed.), Trade Policies for International Competitiveness (pp. 53-77).
Chicago: University of Chicago Press.
Trevino, L.J., & Daniels, J.D. (1994). An empirical assessment of the preconditions of Japanesemanufacturing foreign direct investment in the United States. Weltwirtschaftliches Archiv,
130, 576-599.
Yamawaki, H. (1995). Patterns of entry by Japanese multinationals into the U.S. and European
manufacturing industries. In D. Encarnation and M. Mason (eds.), Japanese Direct
Investment in Unified Europe. Oxford: Oxford University Press.
Weinstein, D.E., & Yafeh, Y. (1995). Japan’s corporate groups: collusive or competitive?
An empirical investigation of keiretsu behavior. Journal of Industrial Economics, 43, 359376.

16

Table. Cox Regression for Initial Entry FDI Decisions, 1976-2000_________________________________________________________________________________________________________________________
Taiwan-bound FDI
Covariates
U.S.-bound FDI
2
Coefficient
Wald χ (p-stat) Transition Rate Summary
Coefficient
Wald χ2(p-stat) Transition Rate Summary
RD
CASH
SIZE
YRS
KEI
RET
OWN
EXCH
EXPO
INT

0.304
0.117
0.167
-0.0212.052
0.412-0.060-0.0800.361-0.124179.2 (0.000)
6.6 (0.010)
28.0 (0.000)
0.2 (0.673)
101.0 (0.000)
11.5 (0.001)
1.3 (0.250)
228.1 (0.000)
102.0 (0.000)
2.6 (0.106)

1.35
1.12
1.18
0.97
7.78
1.51
0.94
0.92
1.43
0.88

0.088
0.152
0.179
0.077
2.134
0.480
-0.001-0.0840.197-0.433

10.3 (0.001)
6.4 (0.011)
26.6 (0.000)
1.5 (0.220)
22.7 (0.000)
6.9 (0.008)
0.0 (0.986)
122.3 (0.000)
15.3 (0.000)
8.3 (0.004)

1.09
1.16
1.19
1.08
8.44
1.61
0.99
0.91
1.21
0.64

-2logL
9728.45747.9Chi-square
892.3
257.9
Degrees of freedom
10
10Significance level<0.0001<0.0001_________________________________________________________________________________________________________________________

Appendix Table 1. Correlation Matrix for the 10 Covariates_________________________________________________________________________________________________________________________
Regression for the U.S.
Regression for Taiwan__(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)(1) RD(2) CASH(3) SIZE(4) YRS(5) KEI(6) RET(7) OWN(8) EXCH(9) EXPO(10) INT

1.00

-0.01

0.02

0.07

0.06

-0.01

-0.05

-0.03

0.05

-0.03

1.00

-0.01 -0.03

-0.03

0.05

0.03

-0.01

0.02

1.00

0.06

0.18

-0.02

1.00

0.14
1.00

0.03

0.03

0.08

0.02 -0.04

-0.01

0.27

-0.03

0.04

1.00 -0.01

-0.03

-0.02

0.06

0.04

0.00

0.01

0.02

-0.10 -0.02 -0.05

0.23

1.00

0.10

0.25

-0.04

-0.12

-0.01

-0.06

0.24

-0.02

-0.36

-0.04

0.04

0.02

1.00

0.18

-0.02

-0.35

-0.03

0.09

0.03

0.02

-0.11 -0.03

-0.01

0.06

1.00

0.01

-0.12

0.01

0.02

0.13

1.00

-0.15 -0.02 0.16

-0.01

1.00

-0.11

-0.01

0.09

-0.05

1.00

0.02

-0.11

-0.08

1.00 -0.01

0.01

1.00

0.03

-0.08 -0.07

1.00-0.02 0.01
1.00

1.00

0.00

-0.13

1.00 -0.14

1.00

1.00

_________________________________________________________________________________________________________________________

Appendix Table 2. Distribution of FDI Firms by Industry and Period

1976-80
Agriculture, forestry and fisheries
20MiningFood and food products
2
Textiles2
Pulp and paper2
Chemicals
15
Petroleum and coal products0
Rubber, glass, stones
1
Primary metals
3
Metal products
4
Machinery (non-electric)
12
Electric machinery
19
Transportation equipment
54
Precision machinery
Other manufacturing
12
Construction
Electricity, gas, water
04
Commerce
Real estate
0
4Transportation and Communications
Other services
0
82
Total

For the U.S
81-85 86-90 91-95
0
1
0
1
0
1
6
7
6
4
3
1
2
3
0
11
33
13
2
2
0
3
10
3
3
13
5
2
5
2
17
19
10
21
21
8
9
27
1
2
4
1
6
3
4
6
15
3
0
0
1
6
13
7
1
2
0
4
10
2
4
3
5
110
194
73

96-2000 total
1
4
2
4
4
25
3
13
1
8
11
83
0
4
4
21
3
27
3
16
11
69
8
77
5
47
1
12
7
21
2
28
0
1
9
39
0
3
1
21
2
14
78
537

1976-80
0
0
0
0
0
5
1
2
0
2
2
5
7
3
0
0
0
3
0
0
1
31

81-85
0
0
0
0
0
6
0
1
1
0
5
4
5
0
1
1
0
4
0
2
1
31

For Taiwan
86-90 91-95
0
0
1
0
9
4
4
1
1
1
15
5
1
0
12
3
7
1
3
0
11
11
24
6
6
2
1
2
3
2
5
2
0
0
17
16
0
0
4
0
2
0
126
56

96-2000 total
0
0
0
1
1
14
0
5
0
2
5
36
2
4
3
21
1
10
3
8
7
36
17
56
4
24
1
7
3
9
1
9
0
0
14
54
0
0
3
9
0
4
65
309