Foreign Direct Investment and Exchange Rate Pass-through: Export Pricing Behaviors of Japanese Multinational Corporations

We examine the effect of foreign direct investment by exporters on a price of their exporting products. We propose several theoretical models of foreign direct investment for both vertical market structure and horizontal expansions of plants. The features of models considered include partial ownership, bargaining power, multiple investments and capacity constraints. Existing empirical researches of foreign direct investment are mostly presented with macroeconomic aggregated data. Our micro survey data offers explanations for purpose of foreign direct investment, indicating for either distribution subsidiary, production subsidiary, or both. By distinguishing the purpose of investment, different hypothesis for the effects of foreign direct investment on exchange rate pass-through can be tested. We find significant effects of foreign direct investments for both distribution subsidiary and production subsidiary. Moreover, foreign direct investments in a European country are shown to affect exchange rate pass-through of other European countries whereas investments in an Asian country do not affect the pricing behavior in other Asian countries.