Determinants of Different Modes of FDI: Firm-Level Evidence from Japanese FDI into the United States

7/30/2019 Determinants of Different Modes of FDI: Firm-Level Evidence from Japanese FDI into the United States

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Determinants o Diferent Modeso Japanese Foreign Direct Investmentin the United States

Joseph D. Alba, Donghyun Park, and Peiming WangNo. 197 | March 2010





ADB Economics Working Paper Series No. 197

Determinants o Dierent Modes

o Japanese Foreign Direct Investment

in the United States

Joseph D. Alba, Donghyun Park, and Peiming Wang

March 2010

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Abstract

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1 Caves (1971) and Graham and Krugman (1995) review theories o FDI based on industrial organization motives.2 Gibson (1995) examines the efect o bank health on domestic investment in Japan.



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3 Klein, Peek, and Rosengren (2002, Table 2) summarize Moody’s long-term deposit ratings or the 11 banks rom1986 to 1994. Moody’s ratings are unavailable or three o the 11 banks or 1986, 1987, and 1988.

4 The importance o rm size in FDI is explained in Caves (1971) and in Horst (1972). Both authors note that rmsize is important in both horizontal FDI and vertical FDI.




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5 Noguchi (1993) and Gao (2001) discuss the origins and implications o the use o zai’tech by Japanese rms.




IV. Model Specifcation and Empirical Results

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A. Probability o a Japanese Firm Undertaking FDI in the US

and the Rate o Total FDI

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Table 1: Logistic Regression or Probability o Japanese Firms Undertaking FDI in the US

Determinants

in π

Coecient

β1

t-stat P -value

aa1 -0.435 -3.160 0.002

aa2 -0.404 -1.580 0.113aa3 -0.677 -4.410 0.000a1 -0.535 -2.730 0.006a2 -0.630 -2.120 0.034lrw 0.432 2.930 0.003Rp 6.267 2.610 0.009ls 0.942 23.240 0.000ic2 -1.359 -5.490 0.000ic3 0.130 1.170 0.243ic4 -0.090 -0.560 0.577ic5 -3.300 -5.340 0.000ic6 -1.152 -2.540 0.011ic7 -0.194 -0.830 0.404ic8 -3.559 -5.840 0.000ic9 -1.179 -1.980 0.047

constant -10.679 -10.430 0.000

Note: Number o observations = 5298; log likelihood = -1510.01; likelihood ratio test statistic is 832.87, which has a χ2-distributionwith 16 degrees o reedom. dr1 and dr2 reer to single and multiple downgrades o the rm’s main bank.dlrw, drp, and dls reer to a one-standard deviation change in the rm’s relative wealth, prot, and rm size, respectively.ic stands or industry code.

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Table 2: Parameter Estimates, t-statistics, and P-values o the Zero-truncated Poisson

Regression or the Conditional Rate o FDI or Japanese Firms Undertaking FDI in the USFDI

Determinants

Coecient β2 t-stat P-value

dr1 -0.243 -2.110 0.035

dr2 -0.861 -3.010 0.030

dlrw 0.237 1.790 0.073

drp 3.501 0.890 0.372dls 0.584 1.330 0.183ic2 -0.649 -2.010 0.045ic3 -0.585 -5.120 0.000ic4 0.215 1.840 0.066ic5 0.142 0.270 0.791ic6 -14.462 -0.020 0.983ic7 0.276 1.580 0.114ic8 -14.422 -0.020 0.988ic9 -0.319 -0.480 0.631

constant 0.355 4.260 0.000

Notes: Number o observations = 627; log likelihood = -769.46; likelihood ratio test statistic is 175.35, which has a χ2-distributionwith 13 degrees o reedom. dr1 and dr2 reer to single and multiple downgrades o the rm’s main bank.dlrw, drp, and dls reer to a one-standard deviation change in the rm’s relative wealth, prot, and rm size, respectively.ic stands or industry code.

B. Eects o FDI Determinant on Choice o FDI Mode

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Table 3: Odds Ratios or Comparisons among Pairs o FDI Modes

FDI Determinants (xk,3)

dr1 dr2 dlrw drp dls

Comparisonδ

1 1Std=.350 Std=.011 Std=.097

M&A|Oβ k,M|O

-0.214 -0.266 -0.274 25.486 2.418

Exp(β k,M|O ×δ)

0.913 0.942 0.909 1.324 1.265

P-value 0.285 0.472 0.271 0.003 0.004

NP|Oβ k,N|O

-0.462 -0.287 -0.060 12.101 0.005

Exp(β k,N|O ×δ)0.630 0.750 0.979 1.142 1.001

P-value 0.090 0.524 0.848 0.247 0.996

JV|Oβ k,J|O

0.175 -0.554 0.066 17.410 0.981

Exp(β k,J|O ×δ)1.191 0.575 1.024 1.211 1.100

P-value 0.419 0.241 0.816 0.056 0.327

M&A|NPβk,M|N

0.248 0.021 -0.215 13.385 2.412

Exp(β k,M|N ×δ)1.281 1.022 0.928 1.159 1.265

P-value 0.402 0.967 0.526 0.239 0.046

M&A|JVβ k,M|J

-0.389 0.288 -0.341 8.076 1.436

Exp(β k,M|J ×δ)0.678 1.334 0.888 1.093 1.150

P-value 0.114 0.588 0.275 0.397 0.179

JV|NPβk,J|N

0.637 -0.267 0.126 5.308 0.976

Exp(β k,J|N ×δ)

1.890 0.766 1.045 1.060 1.100

P-value 0.040 0.653 0.732 0.658 0.463

M&A = merger and acquisition, NP = new plant, JV = joint venture, and O = other FDI.Note: dr1 and dr2 reer to single and multiple downgrades o the rm’s main bank. dlrw, drp, and dls reer to a one-standard

deviation change in the rm’s relative wealth, prot, and rm size, respectively. The combinations o M&A/O, NP/O,and JV/O are estimated using a multinomial logistic regression. These results are then used to calculate the pair-wisecomparisons o M&A/NP, M&A/JV, and JV/NP holding O constant. The parameter estimates o the other six pair-wisecomparisons mirror those o the corresponding pairs with the same P-values. For instance, β1,NP|M&A = – β1,M&A|NP =–0.248, and the P-value is also 0.402.




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Figure 1: Plot o Odds Ratios between Pairs o FDI Modes

dr1

0/1

dr20/1

dlrwStd Coe

drpStd Coe

dlsStd Coe

Logit Coecient Scale Relative to Category others

-.55 -.45 -.34 -.24 -.13 -.03 .08 .19 .29

.57 .64 .71 .79 .88 .97 1.08 1.2 1.34

NP

NP

M&A

O

O

O

O

O

JV

Factor Change Scale Relative to Category others

NP

NP

NP

JV

JV

JV

JV

M&A

M&A

M&A

M&A

M&A = mergers and acquisitions, NP = new plant, JV = joint venture, O = other FDI.Note: dr1 reers to one downgrade o the main bank’s credit rating; dr2 reers to multiple downgrades o the main bank’s credit

rating; dlrw reers to a one standard deviation increase in relative wealth; drp reers to a one standard deviation increase inprotability; dls reers to a one standard deviation increase in rm size.

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Figure 2: Relationship between Changes in FDI Determinants and Changes in Probabilitieso Undertaking FDI Modes

DR1-0/1

DR2-0/1

DLRW-STD

DRP-std

DLFS-std

Change in Predicted Probability or y

-.06 -.04 -.03 -.01 0 .02 .03 .05 .06

O

O

O

O

O

NP

NP

NP

M&A JV

M&A

M&A

M&A

M&A

JV

JV

JV

JVNP

NP

M&A = mergers and acquisitions, NP = new plant, JV = joint venture, O = other FDI.Note: DR1-0/1 reers to one downgrade o the main bank’s credit rating; DR2-0/1 reers to multiple downgrades o the main

bank’s credit rating; DLRW-std reers to one standard deviation increase in relative wealth; DRP-std reers to one standarddeviation increase in protability; DLFS-std reers to one standard deviation increase in rm size.

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Figure 3: Plot o Odds Ratios between Pairs o FDI Modes, Subsample o Firms in the Top

30% o Bonds-to-Liabilities Ratios

DR1

0/1

DR20/1

DLRWStd Coe

DRPStd Coe

DLFSStd Coe


-1.53 -1.25 -.96 -.68 -.39 -.11 .18 .46 .75

.22 .29 .38 .51 .68 .9 1.19 1.59 2.11

O

O

O

O

O


NP

M&A

JV

NP

M&A

JVNP

M&A

JV

NP

M&A

JV

NPM&A

JV






Figure 4: Relationship between Changes in FDI Determinants and Changes in Probabilities

o Undertaking FDI Modes, Subsample o Firms in the Top 30% o Bonds-to-Liabilities

Ratios

DR1-0/1

DR2-0/1

DLRW-std

DRP-std

DLFS-std


-.06 -.05 -.03 -.02 0 .01 .03 .04 .06

O

O

O

O

O NP

M&A JV

NP

M&A JV

NP

M&A

JV

NP

M&A

JV

NP

M&AJV



Figure 5: Plot o Odds Ratios between Pairs o FDI Modes, Subsample o Firms in the

Bottom 70% o Bonds-to-Liabilities Ratios

DR10/1

DR20/1

DLRWStd Coe

DRPStd Coe

DLFSStd Coe


-.99 -.79 -.59 -.4 -.2 0 .19 .39 .59

.37 .45 .55 .67 .82 1 1.21 1.48 1.8

O

O

O


O

O

NP

M&A

JV

NPM&A

NP

M&A

NP

M&A

JVM&A

JV

NP

JV

JV






Figure 6: Relationship between FDI Determinants and Changes in Probabilities o FDI

Modes, Subsample o Firms in the Bottom 70% o Bonds-to-Liabilities Ratios

DR1-0/1

DR2-0/1

DLRW-std

DRP-std

DLFS-std


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O

O

O

O

O

NP

M&A

JV

NP

M&AJV

NPM&A

JVNP

M&A

JV

NP

M&A

JV



V. Concluding Observations

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About the Paper

Joseph D. Alba, Donghyun Park, and Peiming Wang use rm-level evidence rom Japaneseoreign direct investment (FDI) into the United States to investigate the determinants o diferent modes o FDI. More specically, the empirical analysis examines the extent towhich the determinants o FDI such as rm size inuence the choice o one mode o FDIover another. The our major modes o FDI are merger & acquisition, joint venture, new plantand other modes.

About the Asian Development Bank

ADB’s vision is an Asia and Pacic region ree o poverty. Its mission is to help its developingmember countries substantially reduce poverty and improve the quality o lie o theirpeople. Despite the region’s many successes, it remains home to two-thirds o the world’spoor: 1.8 billion people who live on less than $2 a day, with 903 million struggling onless than $1.25 a day. ADB is committed to reducing poverty through inclusive economicgrowth, environmentally sustainable growth, and regional integration.

Based in Manila, ADB is owned by 67 members, including 48 rom the region. Its maininstruments or helping its developing member countries are policy dialogue, loans, equityinvestments, guarantees, grants, and technical assistance.

Asian Development Bank 6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippineswww.adb.org/economicsISSN: 1655-5252Publication Stock No. Printed in the Philippines

Documents

Determinants of Different Modes of FDI: Firm-Level Evidence from Japanese FDI into the United States