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U.S. Working Group Conclusions, Recommendations, and Executive Summary

BENEFITS OF FOREIGN DIRECT INVESTMENT

Conclusion One: The available evidence indicates that, in almost all cases, foreign direct investment (FDI) is beneficial for investing firms and host countries, and the importance of multinational corporations (MNCs) in the world economy will continue to expand

The joint task force focused its study on high-technology and other manufacturing industries, because those industries are and will continue to be central to U.S.-Japan technological and economic policy issues.

Through direct investment, U.S. industry has transferred critical technologies and skills to Japan for many years. One example from early in the century is Western Electric's formation of NEC as a joint venture. Prominent postwar examples are IBM and Texas Instruments. Although by 1980 Japan had lifted most formal restrictions, inward direct investment has remained very low because of the legacy of those restrictions and continuing informal barriers, as well as the current high cost structure in Japan that discourages direct investment in manufacturing.1

More recently, Japanese manufacturing investments in the United States have begun to deliver benefits to the U.S. economy, mainly by demonstrating the applicability of Japanese manufacturing management techniques in the American setting, through the expansion of productive capacity and contributing to a more competitive environment. An increasing number of U.S.-Japan technology-oriented strategic alliances involve reciprocal, mutual benefits, in contrast to established patterns. The openness of the U.S. economy has attracted world-class manufacturers from around the world—a unique advantage that will benefit U.S. competitiveness into the next century.

Today, nations across the globe are moving toward a more open and positive approach regarding MNCs and FDI, a trend that has been reinforced by recent international agreements and new institutions, such as the World Trade Organization (WTO), the Asia Pacific Economic Cooperation (APEC) forum, and the North American Free Trade Agreement (NAFTA). Both the United States and Japan have important responsibilities to sustain this progress toward open and liberal trade and investment throughout the word. In addition to their participation in international forums, the United States and Japan can provide leadership through their domestic economic policies, including efforts to reduce continuing large current account imbalances. Japan, perhaps, faces the larger challenge here. Trends in currency values ultimately are set by the market, as well as in the long-term move with the demand and supply of currencies as reflected by current account balances, long-term capital flows, and other factors.



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Global Economy, Global Technology, Global Corporations 1 U.S. Working Group Conclusions, Recommendations, and Executive Summary BENEFITS OF FOREIGN DIRECT INVESTMENT Conclusion One: The available evidence indicates that, in almost all cases, foreign direct investment (FDI) is beneficial for investing firms and host countries, and the importance of multinational corporations (MNCs) in the world economy will continue to expand The joint task force focused its study on high-technology and other manufacturing industries, because those industries are and will continue to be central to U.S.-Japan technological and economic policy issues. Through direct investment, U.S. industry has transferred critical technologies and skills to Japan for many years. One example from early in the century is Western Electric's formation of NEC as a joint venture. Prominent postwar examples are IBM and Texas Instruments. Although by 1980 Japan had lifted most formal restrictions, inward direct investment has remained very low because of the legacy of those restrictions and continuing informal barriers, as well as the current high cost structure in Japan that discourages direct investment in manufacturing.1 More recently, Japanese manufacturing investments in the United States have begun to deliver benefits to the U.S. economy, mainly by demonstrating the applicability of Japanese manufacturing management techniques in the American setting, through the expansion of productive capacity and contributing to a more competitive environment. An increasing number of U.S.-Japan technology-oriented strategic alliances involve reciprocal, mutual benefits, in contrast to established patterns. The openness of the U.S. economy has attracted world-class manufacturers from around the world—a unique advantage that will benefit U.S. competitiveness into the next century. Today, nations across the globe are moving toward a more open and positive approach regarding MNCs and FDI, a trend that has been reinforced by recent international agreements and new institutions, such as the World Trade Organization (WTO), the Asia Pacific Economic Cooperation (APEC) forum, and the North American Free Trade Agreement (NAFTA). Both the United States and Japan have important responsibilities to sustain this progress toward open and liberal trade and investment throughout the word. In addition to their participation in international forums, the United States and Japan can provide leadership through their domestic economic policies, including efforts to reduce continuing large current account imbalances. Japan, perhaps, faces the larger challenge here. Trends in currency values ultimately are set by the market, as well as in the long-term move with the demand and supply of currencies as reflected by current account balances, long-term capital flows, and other factors.

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Global Economy, Global Technology, Global Corporations Recommendations The United States can contribute to expanding the benefits of FDI in the global economy by providing leadership in a variety of international economic institutions and initiatives. The United States also must avoid protectionist and discriminatory policies at home while pursuing more open markets abroad. As it recovers from its lengthy recession, Japan can make the most important contribution to its own long-term prosperity and to overall stability and growth in the world economy by aggressively striving to reduce the current account surplus, including significantly reducing public and private sector barriers to imported products and services. Japan also can contribute in international forums by providing leadership in promoting open trade and investment. Despite conditions that constitute significant barriers to FDI in Japan, U.S. MNCs should resist the temptation to “bypass Japan.” Despite the necessity in many cases for high initial investments, promising opportunities exist for U.S. companies in a variety of industries, and prospects are likely to improve. In addition, a presence in Japan often is critical for the strategic purpose of challenging Japanese competitors on their home turf, both through preventing Japanese firms from earning extranormal profits in the home market and as a mechanism for staying abreast of technological and business trends. EQUAL ACCESS AND NEW RULES OF THE ROAD Conclusion Two: Because trade and investment issues inherently are intertwined, an integrated effort to liberalize trade and investment with the long-term goal of equal access to markets and economies is the only guarantee for long-term stability and expansion of the global trade and investment systems. Despite greater progress toward free and open investment flows, the historical experience of U.S. and Japanese approaches toward FDI and foreign participation in the domestic economy indicates that a variety of approaches is possible. In addition, domestic systems affecting the microeconomy—in regulation, intellectual property, competition policy, R&D subsidies, corporate finance and other areas —have a significant impact on market access and direct investment flows. While continuing to work toward broad multilateral progress in realizing the principle of national treatment, the United States should pursue new initiatives that go beyond this principle toward the goal of “equal access” to market and innovation systems. Conditions of equal access will prevail when MNCs of equal competitive strength—including management skill and effort, technological capabilities, and other factors— have an equal opportunity to participate in markets and innovation systems globally, wherever they are based. Although establishing the principle of equal access involves a number of practical difficulties, will take significant effort, and can be accomplished only in the long term, the United States must begin this effort with other like-minded countries, perhaps beginning in the developed world. The U.S. working group believes that all developed countries, including Japan, have an interest in achieving equal access through domestic reforms and collegial international negotiations, and that real progress toward equal access would help to prevent acrimonious bilateral trade disputes in the future.

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Global Economy, Global Technology, Global Corporations Equal access should be measurable on a sector or economy-wide basis, but ensuring equal access does not mean adopting market share targets and emphatically does not mean guaranteeing equal results. The primary mechanism of ensuring equal access would be international negotiations aimed at effective convergence in policies and private practices governing aspects of national microeconomic management. Such negotiations could be undertaken on a comprehensive or system-specific basis. An example of the former would be a world investment treaty negotiated under the auspices of the Organization for Economic Cooperation and Development (OECD) or the WTO. An example of the latter would be international harmonization in intellectual property protection— a system with a large impact on the returns on innovation and MNC activities. Recommendations In addition to pursuing broad global progress toward open trade and investment based on the principle of national treatment, the United States should explore and pursue initiatives with like-minded nations in a variety of forums aimed at going beyond national treatment toward equal access by MNCs to market and innovation systems. Harmonization of intellectual property protection systems, including enforcement, should be a particular priority in working toward a convergence of systems and equal access. Despite the significant differences in perspective remaining between the two countries on intellectual property issues, the United States and Japan have a strong commonality of interest in promoting strong, global protection of intellectual property. The U.S. and Japanese governments should pursue, as a top priority, the goal of world patent harmonization. BEST PRACTICES Conclusion Three: MNCs and international organizations have increased their efforts, in recent years, to define “best practices” for MNCs operating in host countries. Elements of thedefinitions developed are relevant to scientific and technological relationships. By continuing these efforts to define best practices, MNCs can gain insights that help them conduct innovative activities abroad in ways that serve their own long-term interests and lead to enhancing the innovative capabilities of host countries. U.S. working group members' experience shows that the primary areas where MNCs make technological contributions to host countries are in helping to create a more competitive environment, thereby raising standards for domestic firms and in enhancing host country capabilities by engaging in a full line of business activities, such as creating productive capacity, working with local suppliers, hiring and training local technical personnel, and performing substantial R&D activities locally. A significant part of this contribution generally is accomplished through effective long-term management that leads to business success. For both Japanese MNCs operating in the United States and U.S. MNCs operating in Japan, success generally has involved the application of superior technology and other business innovations to local market needs; it is a process in which learning and adaptation generally are required. The Japanese working group has developed a list of key determinants of business success, which constitutes a useful start in defining “best practices.” It would have been desirable to go beyond this to discuss more concretely how MNC business practices affect

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Global Economy, Global Technology, Global Corporations innovation in host countries, but different perspectives on the project prevented this. The U.S. working group has outlined some possible approaches in the body of this report. MNCs in both the United States and Japan have made efforts to better define and implement policies of corporate social responsibility in their global operations. As discussed in the report, several of these principles, such as the commitment to undertake business activities and exercise authority locally to the extent possible, should lead to significant technological benefits for host countries. The U.S. working group believes that, in particular, accelerated movement toward utilization of U.S. suppliers by Japanese MNCs would bring expanded mutual benefits.2 In addition, MNCs that enjoy significant benefits from access to a host country's technology and research base and that wish to be seen as local companies may have a long-term interest and obligation to contribute to sustaining that asset. This could be accomplished by conducting a significant amount of fundamental, published research locally; by maintaining a consistent level of contributions to host country educational and research institutions on a non-quid pro quo basis; and by managing host country R&D facilities and high-technology subsidiaries so that they retain their competencies over the long term. Recommendation The United States and Japan—at the government, industry, and individual company levels—should continue efforts to understand the growing technological implications of foreign direct investment and should incorporate their insights regarding technological contributions into the development of concepts for corporate responsibility and the management policies of their companies. UNDERSTANDING AND MANAGING OUR DIFFERENCES Conclusion Four: Growing technological and economic competition and cooperation between the United States and Japan are facts of life. At the political and corporate levels, however, U.S. and Japanese leaders continue to hold very different concepts of interdependence, which are likely to persist. These differences affect MNC interactions and the overall bilateral relationship. Recently, some elements of the business and opinion leadership in both the United States and Japan, reflecting fatigue and frustration over prolonged and often acrimonious bilateral trade negotiations, have appeared to be increasing their focus on domestic issues and developments in Asia and decreasing their focus on the U.S.-Japan relationship. Although such a trend probably is natural in the short term, building a U.S.-Japan relationship that delivers long-term mutual benefits is an important interest of both countries. The debate over the realities and relative merits of Japanese, American, and other varieties of capitalism, launched by opinion leaders in Japan and by foreign commentators, should be rejoined and continued in a wider context so as to increase mutual understanding and find common ground. A useful focus for such an expanded dialogue is the concept of kyosei, or symbiosis, which constitutes a major theme of the Japanese working group's report. Many in Japan continue to see their nation as fundamentally vulnerable and dependent on foreign markets, foreign raw materials, and the security alliance with the United States. A major goal for Japanese public and private sector leaders in recent years has been to structure interdependent relationships, including business alliances with U.S. companies, that would help

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Global Economy, Global Technology, Global Corporations preclude denial of market access and other actions detrimental to Japan's vital interests. Many of these arrangements aimed at “comprehensive security” take place in the market but have a rationale that transcends pure market forces. Many Americans have expressed concern over growing dependence on Japan in such areas as critical components, advanced materials, and advanced production equipment. Trends that Japanese observers might see as the expansion of healthy interdependence often are interpreted by Americans as an indication of unilateral loss of U.S. independence. Traditionally, Japanese government and business have had a more cooperative relationship than has been the case U.S. government and business. But under way in both countries is political and economic change, with possible implications for these traditional patterns. Trends in this area will affect all aspects of U.S.-Japan relations, as well as the future direction of the world economy. Recommendations It is imperative for the United States and Japan to continue and to expand private sector exchanges on issues related to trade, the world economy, direct investment, and technological competition and cooperation on a bilateral and multilateral basis, as appropriate. Needed is a greater mutual understanding of the differing assumptions and goals of Americans and Japanese regarding interdependence and national interests, particularly in light of ongoing changes in both countries. New institutions, such as APEC, can play a useful role in increasing private sector interactions, particularly regarding critical issues on which the current information base is thin or nonexistent. One possibility is an APEC-organized program of targeted information collection and exchange on trends in Asia Pacific production, trade, and investment, including the role of MNCs, in important industries such as electronics and automobiles. The United States, Japan, and APEC can play roles in meeting the larger need for international coordination and harmonization of trade and investment data. NOTES AND REFERENCES 1 An expanded discussion of these issues can be found in Chapter 3 of the U.S. working group in this report. 2 An expanded discussion of this point can be found in Chapter 4 of the U.S. working group in this report.