Japanese-controlled firms only establish backwards linkages with firms that are members of a keiretsu. However, backward linkages with domestically-owned suppliers should not be regarded as a necessary criterion for there to be net benefits to the United States from foreign-owned R&D activity.

As already noted, the main issue centering on keiretsu is that linkages among keiretsu members could result in undesirable levels of dominance by a keiretsu. There doubtlessly will be continuing discussions, with friction, at the official level between the United States and Japan regarding competition policy and the apparent willingness of the Japanese government to tolerate higher levels of industry concentration than are seen as desirable in the United States. But with respect to affiliates of Japanese keiretsu member firms operating directly in the United States market, there are unilateral actions that U.S. antitrust authorities could take to remedy anticompetitive practices. Thus, although these practices might very well be objectionable, the problems in many instance could be remedied via application of U.S. antitrust laws.

Even so, there will be cases where foreign ownership of a particular R&D activity or high technology will not be in U.S. national interests. Some of these will fall under the rubric of national security.8 But while legitimate national security exceptions exist, it is easy to envisage "national security" becoming a rationalization for xenophobic policies that serve no national interest, security or otherwise. Therefore, national security exceptions to an otherwise open policy towards foreign ownership of economic activity (including R&D activity) should be truly exceptional. While there are legitimate national security exceptions, the danger of allowing national security to be abused is almost surely far greater than the dangers to security of foreign ownership of firms operating in the United States. Where foreign ownership is disallowed in a specific case, the reasons for disallowing this ownership should be clear, specific, and compelling.


See the discussion in Chapter 5 of Edward M. Graham and Paul R. Krugman, Foreign Direct Investment in the United States, 2nd Edition (Washington, D.C.: The Institute for International Economics, 1991) and sources cited therein.

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