Explaining Japanese Foreign Direct Investment in Latin America, 1979-1992

Author(s): John P. Tuman and Craig F. Emmert

Source: Social Science Quarterly , September 1999, Vol. 80, No. 3 (September 1999), pp.
539-555
Published by: University of Texas Press

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Explaining Japanese Foreign Direct
Investment in Latin America, 1979-1992*

John P. Tuman, Texas Tech University

Craig F. Emmert, Texas Tech University

Objective. This study seeks to explain the variation in Japanese foreign direct in-
vestment (FDI) in Latin America between 1979 and 1992. The analysis focuses on
twelve countries: Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador,
Honduras, Mexico, Paraguay, Peru, Uruguay, and Venezuela. Methods. A multi-
variate regression model is used to test the effects of political and economic
determinants. The effects of the independent variables are estimated using ordinary
least squares (OLS) with panel corrected standard errors. Results. The findings sug-
gest that market size, economic adjustment policies, and certain types of political
instability have influenced Japanese FDI in the region. Official development assis-
tance and a number of macroeconomic variables (e.g., real gross domestic product,
yen appreciation, size of the skilled workforce, inflation, and imports and exports)
were found to have little explanatory power. Conclusions. While previous studies
have emphasized economic determinants, our results suggest that both political and
economic variables are important in understanding Japanese investment behavior
in Latin America.

During the 1980s and early 1990s, Japan deepened its economic ties
with Latin America. Trade between Japan and several Latin American
countries increased modestly throughout this period. Perhaps more impor-
tant, however, was the strong growth in Japanese foreign direct investment
(FDI) in the region. Following a brief hiatus in the wake of the 1982
debt crisis, Japanese investment flows to Latin America resumed and were
concentrated primarily in Brazil, Mexico, Venezuela, and Argentina
(Horisaka, 1993: 59, 72-73; Inter-American Development Bank, 1993: 26;
CEPAL, 1 995). According to recent estimates, Japanese FDI in Latin

* Direct all correspondence to John P. Tuman, Department of Political Science, Texas

Tech University, Lubbock, TX 79409-1015 (e-mail: jtuman@ttu.edu). For purposes of repli-
cation, the data used in this study may be obtained from the authors on request. The
authors thank Aie-Rie Lee, Jeffry A. Frieden, Robert Sterken, Irwin Morris, and Jorge
Bracero for assistance. We also thank the SSQ manuscript reviewers and editors for their
helpful comments.

SOCIAL SCIENCE QUARTERLY, Volume 80, Number 3, September 1999

©1999 by the University of Texas Press, P.O. Box 7819, Austin, TX 78713-7819

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 540 Social Science Quarterly
America should continue to grow, alth
tain countries (Inter- American Deve
Business International, 1993).
The growth of Japanese FDI in Latin A
plications for the region's government
U.S. multinational corporations rema
America, Japanese firms have emerged a
throughout the region (Stallings and Sz
ment in Latin America may threaten t
firms ( Business International, 1993: 31)
America has become a salient issue in bilateral relations between the
United States and Japan (Székely, 1991; Horisaka, 1993; Stallings and
Székely, 1993; Katada, 1997). At the same time, unless governments in
Latin America secure FDI from Japan and other industrialized countries,
they may face difficulties consolidating market-oriented reforms, whose
success hinges on high levels of foreign investment. For this reason, policy
makers in Latin America have sought to understand the bases of Japanese
investment decisions.
Despite the significance of this issue, the determinants of Japanese FDI
in Latin America remain poorly understood. The extant literature has
suffered from two limitations. First, analysts have neglected to use sophis-
ticated statistical methods in their studies of Japanese investment behavior
in the region. While a number of hypotheses regarding Japanese FDI in
Latin America have been proposed by various analysts (e.g., Komiya and
Wakasugi, 1991; Inter-American Development Bank, 1993; Horisaka,
1993; Stallings and Székely, 1993), the validity of these claims has not been
tested in the comparative literature.1 Moreover, most researchers have
failed to assess the impact of the various economic and political variables
on Japanese multinational firm behavior (e.g., Inter-American Develop-
ment Bank, 1993; Eaton and Tamura, 1994). In particular, even though a
number of countries experienced periods of economic adjustment and po-
litical conflict during the 1980s, the effects of these variables on Japanese
FDI have not been examined.
In this article, we attempt to explain the variation in Japanese FDI in
Latin America. Using a pooled cross-sectional time-series data set, we de-
velop a multivariate model that examines the impact of macroeconomic
and political variables on Japanese FDI in twelve countries: Argentina,
Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Mexico,
Paraguay, Peru, Uruguay, and Venezuela. By examining the effects of
changes in domestic politics along with macroeconomic variables, we hope

1 Eaton and Tamura (1994) used sophisticated statistical methods, but they did not exam-
ine the effects of political variables. In addition, the Inter-American Development Bank
(1993) excluded Japanese FDI flows from its statistical analysis of OECD FDI in Latin
America.

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Japanese Foreign Direct Investment in Latin America 541

to develop a richer, more complete understanding of the behavior of

Japanese multinational firms in the region. The time frame for the study,
1979 to 1992, covers a critical period of economic and political transition,
when many regimes abandoned import-substitution industrialization poli-
cies in favor of trade liberalization, export-oriented development, and
policies designed to spur investment and growth.

Theoretical Approach

In the literature of international political economy, firms are often as-

sumed to behave as profit maximizers (Frieden, 1991). This assumption
implies that multinational firms will invest in a country only when the ex-
pected returns from such an investment exceed alternatives that could be
gained from investing in other countries or the home market. Nevertheless,
there remains disagreement about the factors that influence the relative ad-
vantages of investments in developing countries. Some theories claim that
macroeconomic variables affect the potential attractiveness of the recipient
country.2 In contrast, political approaches stress the effects that domestic
and international political trends can have on the FDI behavior of multi-
national firms. In what follows, we briefly contrast these two major
approaches.
Economic Models

Market Potential A number of economic models have been developed to

explain the FDI decisions made by multinational firms. A prominent ap-
proach focuses on the tendency of Japanese companies to seek markets
with the strong potential for growth (Horisaka, 1993; Eaton and Tamura,
1994). Developing countries with large populations and high real GDP per
capita should generate higher sales and profits for the multinational firm.
Therefore, one might expect Japanese firms to invest in larger, wealthier
developing countries. Some studies have found empirical support for a re-
lationship between population and Japanese FDI (Eaton and Tamura,
1994: 9). In addition, previous research indicates that growth in real GDP,
and higher levels of real GNP/GDP per capita, are associated with
Japanese FDI in Latin America and other developing areas (Frey, 1984:
80-81; Billet 1991; Horisaka, 1993: 72; Inter- American Development
Bank, 1993: 43; Eaton and Tamura, 1994: 9). The potential attractiveness
of a market is also conditioned by inflation. Because inflation often leads

2 For examples, see Bhagwati, Dinopolous, and Wong (1992) and Eaton and Tamura
(1994). Some studies combine macro- and microeconomic variables (e.g., Trevino and
Daniels, 1994; Yamada and Yamada, 1996); others focus on firm-level variables (e.g., Vernon,
1966; Teece, 1986). While clarifying the foundations of firm behavior, transaction cost and
other micro theories do not yield very good explanations of the cross-national variation in
FDI. Rather, these theories seek to explain why firms engage in FDI instead of undertaking
other strategies. The paucity of data also makes it difficult to test these approaches.

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 542 Social Science Quarterly
to economic instability and reduces sal
inflationary economies (Frey, 1984).
Trade and Resource Dependency . The
country of a multinational firm may be
try's market potential and attractivenes
that exports should be an important pr
(1994: 580) argue that risk-averse firms
potential for growth; if returns from exp
follow with FDI to establish production
that links multinational firm behavior to
and Reich (1997: 6-7, 17) argue that Jap
a strong state that emphasized the nee
through outward FDI. Both of these arg
FDI to be associated with exports from
While studies of the relationship betw
scarce, Eaton and Tamura (1994) and Gr
and U.S. FDI tended to follow exports.
vide evidence of intrafirm exports betw
their subsidiaries. By contrast, Trevino
lationship between Japanese exports an
Japan is also dependent upon imports
Stallings and Székely, 1993). Consequen
vated to invest in resource-abundant countries in order to extract natural
resources for export to Japan, where they bring high returns (Horisaka,
1993: 53-56; Eaton and Tamura, 1994). Japan traditionally has imported
raw materials from resource-abundant countries in Latin America, includ-
ing Brazil, Chile, and Peru (Horisaka, 1993: 52-53; Stallings and Székely,
1993). Overall, then, Japanese FDI may be a function of imports from
Latin America.
Skill Levels and Costs of Production . An approach that is comple-
mentary with Market Potential suggests that the characteristics of the
workforce and costs of production influence the level of FDI in the recipi-
ent country. Skill levels in the recipient country may be an important factor
in FDI decisions (Frey, 1984; Eaton and Tamura, 1994). When a multina-
tional firm employs a relatively skilled labor force, the firm should
experience gains in productivity and product quality. As a result, sales will
tend to increase, and the company may be able to export successfully if
productivity reaches globally competitive levels.
In addition, the real appreciation of the Japanese yen is viewed as a key
variable that changed external production costs after 1985 (Komiya and
Wakasugi, 1991: 55; Yamada and Yamada, 1996: 49; Sianesi, 1995). In
particular, "[t]his extensive and quick strengthening of the yen brought
about a sharp, widespread decline in the cost of production in host coun-
tries relative to Japan, including the initial cost of investment" (Komiya
and Wakasugi, 1991: 55). One might therefore expect the appreciation of

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Japanese Foreign Direct Investment in Latin America 543

the yen relative to a recipient country's currency to be associated with

higher levels of Japanese FDI in that country.
Government Adjustment Policies . Some analysts emphasize the effects
of governmental economic adjustment policies on FDI. In Latin America,
many countries implemented structural adjustment programs (SAPs) in the
1980s to respond to the debt crisis. Once implemented, SAPs sought to
achieve financial stability by reducing domestic demand, imposing wage re-
straint and fiscal austerity, and by promoting exports (Haggard and
Kaufman, 1992). After the initial period of adjustment, governments often
modified SAPs to induce FDI into the country (Lustig, 1992: 28-60,
125-29). Governments implemented investment incentives, including re-
duced corporate tax rates, the privatization of state enterprises, and
relaxed controls on capital movements (Haggard and Maxfield, 1996:
35-38, table 1).
Despite the lack of evidence regarding the effects of SAPs on FDI, one
might expect two responses from multinational firms to the debt crisis and
adjustment. First, during the adjustment period, SAPs should create disin-
centives for investment, particularly if FDI is oriented toward the domestic
market. Indeed, to the degree that adjustment achieves stabilization
through a contraction of real incomes, firms seeking consumer markets
will tend to be driven off. However, in the post-adjustment period, FDI
should increase because the introduction of FDI incentives cheapen initial
investment and production costs, and increase the security of nonliquid as-
set holders.

Political Models

Domestic Political Instability. Political explanations argue that the rela-

tive attractiveness of recipient countries is influenced by domestic and
international political trends. For example, certain types of regime change
may produce instability and reduce FDI. Following defeat in a foreign war,
military rulers may be forced to exit power rapidly in the absence of a
negotiated pact regarding the post-transition regime.3 Under these condi-
tions, a new regime emerges before the framework of property rights, legal
processes, and civilian-military relations has been negotiated. Concerned
that legal processes and economic rights are not well-defined, firms may
temporarily avoid investing in such countries.4
Other forms of instability can threaten property rights and undermine
sales in the domestic market. The emergence of revolutionary movements

3 An "impacted regime transition" occurs when the military is forced to relinquish power
without a pact establishing rules over property rights, participation, and amnesty for the mil-
itary (Karl, 1990). In Latin America, defeat in foreign war was a key factor in generating an
unpacted regime change (e.g., Argentina, 1982-83) (O'Donnell, 1986). Although other fac-
tors might produce the same outcome, defeat in foreign war is the only variable having this
effect among the cases in this study.
4 Most transitions in Latin America (except Argentina) involved negotiation between the
opposition and authoritarian leaders. See Karl (1990) and Loveman (1994).

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 544 Social Science Quarterly
(or civil wars) in recipient countries oft
tional firms, particularly if revoluti
support through nationalist appeals tha
nation." Companies could therefore be
countries that are experiencing revolut
Howell and Chadwick, 1994). Similarly,
experiencing a civil war spreads to its ne
may become less politically stable. As n
into civil wars, firms disinvest to prote
Finally, intense periods of political ins
may also create uncertainty about the s
consideration for firms holding nonliqu
Foreign Aid . Some approaches focus on
development assistance (ODA) and FDI
theories of international politics have a
sistance (ODA) is given primarily to imp
interests of the donor countries (Gilpi
Taylor, 1998: 298-99). In the case of Jap
tional economic interests have played a
1991; Orr and Koppel, 1993). Regard
Japanese aid decisions, ODA may create
in recipient countries and this, in turn
1984). Governments that receive ODA m
eign investment regimes that support t
based in the donor countries. For the mo
include relaxed controls on capital mov
and safeguards for the property right
with the donor countries.

Data, Variables, and Methods

The dependent variable for our study is net FDI in millions of U.S. dol-
lars for each recipient country for each year. We have included for analysis
all countries that received at least $10 million of Japanese direct invest-
ment (or disinvestment) between 1979 and 1992: Argentina, Brazil, Chile,
Colombia, Costa Rica, El Salvador, Honduras, Mexico, Paraguay, Peru,
Uruguay, and Venezuela.5 We obtained the data on net FDI from the
5 The $10-million-dollar threshold is lower than ones used in other studies (e.g., Inter-
American Development Bank, 1993, which employs a $100-million-dollar threshold). By
using this criterion, we increase the number of countries in our study, and we generate a set
of cases that vary significantly from one another on the independent variables. Using a lower
threshold would not provide sufficient variation in FDI within countries over time to allow
us to explain changes from year to year. In addition, the OECD excludes investments in the
Bahamas, Panama, and others because they don't meet the criteria for FDI (Inter- American
Development Bank, 1993: 2, 42).

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Japanese Foreign Direct Investment in Latin America 545
TABLE 1

Japanese FDI in Latin America, 1979-1992 (in $ U.S. millions)

Foreign Net
Country Direct Investment Disinvestment Investment
Argentina 281.51 50.35 231.16
Brazil 2,920.89 0.00 2,920.89
Chile 155.64 35.09 120.55
Colombia 108.07 14.19 93.88
Costa Rica 22.80 17.02 5.78
El Salvador 14.31 12.58 1.73
Honduras 10.06 17.48 -7.42
Mexico 1,466.07 259.71 1,206.36
Paraguay 13.37 3.80 9.57
Peru 138.40 363.15 -224.75
Uruguay 12.25 3.29 8.96
Venezuela 279.01 16.96 262.05
Total 5,422.38 793.62 4,628.76

Source: OECD (1995).

OECD (1995). This data set offer

sources of information. First, t
net FDI from OECD countries to
government sources in Latin Am
pare because of differences in t
(Inter-American Development Ba
offers the only complete time s
OECD countries) for the period
of net FDI in the twelve countri
the amount of FDI received varie
received $3 billion and Mexico o
ceived from approximately $2 m
both experienced net disinvestme
We constructed a model to exp
American countries from 1979 t
ables intended to test hypotheses
trade, size of the skilled workfo
ment policies, foreign aid, and po
Designed to measure the size of
dent variable is the population of
of market potential is real GDP
lagged one year. We use the per
minimize the problem of multic
among independent variables tha
analysis. The third indicator of m

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546 Social Science Quarterly
GDP per capita, lagged one year. The da
per capita, and real GDP change is the
sure of market potential is inflation.
variation of consumer prices in each cou
flation variable is logged to limit the i
were obtained from the International M
To examine the effects of imports and
of current trade activity. The first is tota
U.S. dollars) into Japan from the recipi
total exports per capita (in millions of U
cipient country, in the preceding ye
variables is the IMF (various years).
To measure the size of the skilled wor
measure, the proportion of the populat
secondary school. This surrogate mea
(e.g., Frey, 1984). The source for this d
ESCO (1995), and U.S. AID (1996).6
To examine the effects of production c
annual yen exchange rate relative to cu
given in the previous year. Because mo
U.S. dollars, we have employed "cross-r
ation against Latin American currencies
yen-dollar and local currency-dollar ex
an appropriate proxy measure often us
The data for this variable were obtaine
distortion of results from extreme valu
Next, we employed two variables to m
adjustment. One is a dummy variable
adjustment period itself, 0 in other yea
(post-adjustment period) coded 1 for y
riod and 0 for other years. The compar
prior to the economic adjustment perio
periods from Kahler (1992: 109, table 2
(New York Times , Los Angeles Times
Journal , and Christian Science Monit
place by the end of the first economic q
as an adjustment period year. If it was
lowing year as the first year of the ad
plan was in place for any part of a yea

6 Data was missing in 15 percent (26 of 168) of

gaps involved only one to two years. For years in w
ure from the preceding available year. Since th
change in enrollment rates over the entire period,
enrollment rates varied significantly from those of
/Personal communication with Professor Jeffry A

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Japanese Foreign Direct Investment in Latin America 547
riod, we coded that year as an adjustment year, and the following year as
the first year of the post-adjustment period.8
We use four variables to measure the effects of political instability. The
first instability variable is defeat in foreign wars and unpacted regime tran-
sition.9 This is a dummy variable, lagged one year, coded 1 for countries
experiencing a defeat in foreign war and unpacted regime transition, and 0
otherwise. Argentina was the only country in our study that experienced
defeat in foreign war, Falklands/Malvinas in 1982, and an unpacted regime
transition in 1983 (O'Donnell, 1986: 8; Karl, 1990). The second variable
is annual civilian and combatant deaths caused by revolutionary move-
ments, lagged one year. The data are taken from Clodfelter (1992) and
Stockholm International Peace Research Institute (various years).10
The third instability variable is contagion. For this variable, we include
the number of attacks carried out by a military against rebel forces based
in a neighboring country. Honduras and Costa Rica were the only cases in
this study that experienced contagion. The data were obtained from the
News Database and Stockholm International Peace Research Institute
(1985).
The fourth instability variable is coups d'etat. For coups, we use total
successful and attempted coups d'etat in each case, lagged by one year. The
source for coup data is the News Database. For the countries in this study,
attempted and/or successful coups (during this period) occurred in
Argentina, El Salvador, Honduras, Paraguay, Peru, and Venezuela. Finally,
to measure the impact of foreign aid, we use ODA per capita from Japan
to the recipient country in the preceding year. The source for this data is
the OECD (1995).

Analysis

Because our data set includes observations from twelve countries for a
fourteen-year period, it can be described as a pooled cross-sectional time
series. Such data sets are prone to the problem of autocorrelation, i.e., cor-
relation among error terms within the same unit (country) over time. The
preferred means of coping with this problem is to include a lagged depen-
dent variable. We have done this by including the level of FDI in the
previous year as an independent variable in our model (see Beck and Katz,

8 Using these coding rules, we developed the following economic adjustment periods:
Argentina, 1984-90; Brazil, 1985-90; Chile, 1983-88; Colombia, 1983-86; Costa Rica,
1983-88; El Salvador, 1990-91; Honduras, 1990-91; Mexico, 1983-88; Paraguay, 1984,
1990-91; Peru, 1983-87; Uruguay, 1990-91; Venezuela, 1986-89.
9 We operationalize unpacted transitions to include cases where the military is defeated and
forced to exit without an agreement over property rights, political processes, and amnesty for
the military.
10 The movements include ELN (National Liberation Army), M-19 (the April 19
Movement), and EPL (Popular Liberation Army) in Colombia; Sendero Luminoso (Shining
Path) and Tupac Amaru (Tupac Amaru Revolutionary Movement) in Peru; and the FMLN
(Farabundo Marti National Liberation Front) in El Salvador.

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548 Social Science Quarterly
TABLE 2

Determinants of Japanese FDI in Latin America, 1979-1992

Independent Variable b t
FDI (t-i) -.01 .06
Population (millions) (t-i) 1.57** 3.67
Real GDP per capita (t-i) .01 1.28
Change in real GDP per capita (percent) (t- 1 ) -1.15 1.16
Inflation (logged) (t-i) -7.24 1.03
Exports per capita (t- 1 ) - .07 .36
Imports per capita (t- 1 ) - .02 .06
Secondary school enrollment (percent) (t-i) -.32 .73
Yen exchange rate (logged) (t-i) -.74 .57
Economic adjustment period -28.64** 2.63
Post-adjustment period -7.22 .53
Falklands War/unpacted regime transition (t-i) -49.30* 2.04
Revolutionary movement deaths (hundreds) (t- 1 ) - .23* 2.25
Attacks/incursions (t-i) -2.01 1.28
Coup/attempt (t-i) 19.76 1.67
ODA per capita (t-i) 1.28 1.25
Intercept 21.20 1.68
F value (df = 16/151) 9.20**
Adjusted R2 .44
Note: Entries are OLS regressio
standard errors (see Beck and
* p < .05; ** p < .01 (two-tailed

1995, 1996). A second pr

data sets is heteroscedastic
time-point (year). To cope
employed ordinary least s
rors" (see Beck and Katz
analysis in Table 2.
For the most part, the re
over 40 percent of the va
ing the study period.11 M
clearly the most importan
in levels of FDI. Once the e
GDP per capita,12 real GD

11 To test for multicollinearity

We regressed each independent
moderate R2 s (maximum adjuste
tractable problem. We also estim
variables and compared the resu
sented in Table 2. Thus, we are
multicollinearity.
12 The coefficient for real GDP
nificance under a lenient stand

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Japanese Foreign Direct Investment in Latin America 549
size of the skilled workforce, and yen exchange rate have no impact. The
coefficients for some variables display unexpected signs and are all small
and statistically insignificant.
The results in Table 2 indicate that economic adjustment policies have
had a substantial effect on FDI. It should be recalled that the variables in
our model allow for comparison of levels of FDI during economic adjust-
ment and post-adjustment periods to FDI levels prior to the adjustment
period. The coefficient for the adjustment period is large, negative, and
statistically significant. The size of the coefficient means that, on average,
the countries in our study received approximately $29 million less per
year in FDI during periods of economic adjustment compared to the pre-
adjustment period. While the coefficient for the post-adjustment period is
negative, it is much smaller and is not statistically significant. This means
that the countries receiving relatively high levels of FDI in the earlier years
of our study experienced decreased investment during the period of ad-
justment, and then rebounded after the adjustment period was over.
We can see this pattern more clearly, and note some differences among
the countries in our study, if we compare the levels of FDI for each of the
countries during the pre-adjustment, adjustment, and post-adjustment pe-
riods. Figure 1 presents this comparison.
As Figure 1 shows, the basic pattern fits in Argentina, Brazil, Mexico,
and Costa Rica - although for Brazil, the "rebound" is rather modest. The
effects of the adjustment period for Colombia and Venezuela are also rela-
tively strong. They received little FDI in the earlier years of our study,
received more during the adjustment period, and then received much more
in the post-adjustment period. In these seven countries, then, the economic
adjustment plans were moderately successful. However, Chile, Peru, El
Salvador, Honduras, and Paraguay failed to receive increased investment.
While the reason for this in Chile is unclear, for the remaining countries
the explanation appears to be political instability and/or late adjustment.
El Salvador and Peru experienced instability that overlapped with their ad-
justment period. As late adjusters, El Salvador, Honduras, and Paraguay
may have appeared less attractive compared to countries that had already
implemented reforms.
The results in Table 2 also illustrate that political instability may create
an unfavorable investment climate.13 The variable for unpacted regime
transition is large, negative, and statistically significant. Although Argen-
tina is the only case that experienced this form of instability, the impact
was important. Argentina's defeat in the Falklands/Malvinas war, and
its subsequent unpacted transition, resulted in a net disinvestment of $49

demonstrate a meaningful effect for real GDP, they point to the potential importance of the
variable.
13 In separate trials, we ran the full model with a variable for antigo vernment riots. The
variable was not significant, and the results of the model did not change.

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 FIGURE 1

Economic Adjustment and Japanese FDI

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Japanese Foreign Direct Investment in Latin America 551

million in 1983 and 1984. Similarly, revolution has a negative and signifi-
cant effect on FDI. Among the countries in our study, the impact of
political violence is clear in El Salvador and Peru, but less clear in
Colombia. In El Salvador, the escalation of violence led to strong disin-
vestment in the early 1980s; no investment occurred until the war ended.
Political violence in Peru began in 1982, when Sendero Luminoso initiated
a campaign that sought to overthrow the state (McClintock 1985). Peru
received positive net investment in 1983 and 1984. However, the country
received no FDI for two years during the conflict, and experienced net dis-
investment for six years, from 1985 to 1992, a period of escalating
political violence. The effects of instability were so strong that, although a
reform-minded president of Japanese ancestry (Alberto Fujimori) assumed
office in 1990, there was net Japanese disinvestment in 1991 and 1992. 14
Nevertheless, in Colombia the effects of revolution are unclear. Between
1984 and 1986, increasing revolutionary violence led to Japanese disin-
vestment. After 1987, however, FDI and violence were positively correlated
in certain years. Possibly, the effects of instability were dampened by the
success of Colombia's adjustment program, thus increasing the confidence
of Japanese multinational firms.
The statistical analysis indicates that coups d'etat and contagion are not
significant.15 As expected, contagion is negatively associated with FDI.
The coefficient for coups displays an unexpected sign, however, which sug-
gests that firms do not view military action as a threat to stability.16
Finally, Japanese ODA displays the expected sign, but does not achieve sig-
nificance under conventional standards.17

Conclusion

The goal of this study was to explain the variation in Japanese FDI in
Latin America. The findings suggest that potential market size (popula-
tion), adjustment policies, and political instability have influenced the
14 To assess the effects of President Fujimori's election in Peru, we included a control vari-
able for Fujimori in separate trials. The variable was not statistically significant, and the
results of the overall model did not change. Any increase in FDI since 1994 was probably due
to the capture of Sendero1 s leader, Abimael Guzmán, in September 1993.
15 The coefficient for contagion approaches statistical significance under a very lenient stan-
dard ( p < .10, one-tailed test). Although our findings do not demonstrate an effect for this
variable, the results suggest that the variable might be important.
16 Although the variable is not significant under conventional standards, it approaches sig-
nificance under a more lenient test ( p < .05, one-tailed test). There are two possible reasons
for the unexpected finding regarding coups. Firms may react differently to successful coups
and unsuccessful coups. In separate trials, we ran models with variables for attempted coups
and successful coups. The coefficients for both variables were positive but not significant, and
the results of the model did not change. A second possibility is that firms are supportive of
military rule because military regimes protect property rights.
17 Under a more lenient standard, the variable approaches statistical significance (p < .10,
one-tailed test). Our results support the possibility that ODA influences Japanese FDI.

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 552 Social Science Quarterly
behavior of Japanese firms in the reg
only qualified support for economic m
Tamura, 1994; Sianesi, 1995).
What are the implications of this stu
ables on the behavior of Japanese f
widely. Although the theoretical liter
the relationship between FDI and po
Japanese FDI have focused solely on e
the political determinants of investme
In addition, the economic factors in
across different regions of the develo
tion and a skilled workforce have bee
Asia, our findings suggest that these
America. The significance of exchang
lated to the fact that Japanese FDI th
Wakasugi, 1991: 55; Sianesi, 1995). The
on the competitiveness of export-orien
to pay greater attention to them. In c
have used Mexico as an export platfor
in Latin America has been oriented to
text, market size plays a greater role
analysts studying Japanese firms migh
of variables that are specific to differ
A broader implication concerns the e
the 1980s, the IMF and other interna
neoliberal reforms would spur FDI
Development Bank, 1997). However, o
run, adjustment often led to less Jap
were quite modest. In seven countries
was lower than the amount received
this suggests, then, is that adjustment
successful in bringing Japanese invest

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