FIRM-SPECIFIC ASSETS AND THE LINK BETWEEN EXCHANGE-RATES AND FOREIGN DIRECT-INVESTMENT

Foreign direct investment (FDI) theory and empirical studies have gene rated mixed support for a link between exchange rates and FDI. This pa per argues that exchange rate movements may affect acquisition FDI bec ause acquisitions involve firm-specific assets which can generate retu rns in currencies other than that used for purchase. Using data on Jap anese acquisitions in the United States across 3-digit SIC industries from 1975-1992, maximum-likelihood estimates from discrete dependent v ariable models support the hypothesis that real dollar depreciations m ake Japanese acquisitions more likely in U.S. industries, particularly those which more likely have firm-specific assets. (JEL F21, F23, F31 )