Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment

Foreign direct investment (FDI) theory and empirical studies have generated mixed support for a link between exchange rates and FDI. This paper argues that exchange rate movements may affect acquisition FDI because acquisitions involve firm-specific assets which can generate returns in currencies other than that used for purchase. Using data on Japanese acquisitions in the United States across 3-digit SIC industries from 1975–1992, maximum-likelihood estimates from discrete dependent variable models support the hypothesis that real dollar depreciations make Japanese acquisitions more likely in U.S. industries, particularly those which more likely have firm-specific assets.