Japanese FDI into U.S. service industries: Exchange rate changes and services tradability

Using the implications of the model of investment under uncertainty, this paper provides a systematic examination of the FDI-exchange rate relationship with respect to services taking into account the degree of tradability across services. Services have mainly been addressed in the literature as a sensitivity test by industry using aggregated service data identified as “nonmanufacturing”. Using data on Japanese FDI into 207 U.S. service industries, maximium-likehood estimates reveal that dollar appreciations are positively correlated with service FDI flows into the U.S. This positive correlation is stronger for non-tradable services versus tradable services. For tradable and non-tradable producer services, higher exchange rate uncertainty may lead to fewer FDI occurrences. On average, across all types of services, higher U.S. unit labor costs relative to Japan had a deterrent effect on Japanese service FDI as well. Finally, this paper also provides a useful benchmark to partition services by tradability.