Western powers at that time, the foreign signatories enjoyed extraterritorial legal authority in these settlements, and Japan's authority to set its own tariffs was limited.5

Japan liberalized treatment of foreign investment somewhat in 1899, with the revision of the unequal treaties. Although restrictions remained—for example, foreigners were not allowed to own land in Japan until 1926—the 1899 to 1930 period was marked by a relatively open stance on the part of the Japanese government and private sector toward FDI. This reflected recognition in Japan of the need to attract greater inflows of foreign capital and technology to support rapid economic development. U.S.-based high-technology companies of the time, such as Victor Talking Machine, Western Electric, and Ford Motor Company, invested in Japan, often with Japanese partners, and achieved great success. But, even during this period, characterized by one scholar as the “door ajar,” FDI in Japan was rather low in comparative international terms: FDI stocks in China were roughly 20 times those of Japan in 1930.6

While American and other foreign multinationals were establishing positions in Japan early in this century, Japanese companies, such as Yokohama Specie Bank, Ltd., and Mitsui Bussan, were establishing their first U.S. subsidiaries. In contrast to investments in Japan by foreign MNCs, many of which involved local manufacturing with extensive training and technology transfer, Japan's prewar FDI by banks and trading companies was focused on facilitating and controlling the flow and financing of Japan's imports and exports. For example, Japanese flag carriers transported two-thirds of Japan's imports and three-quarters of Japan's exports during the 1930s.7 Much of Japan's manufacturing FDI was directed at China.

By the 1930s Japanese industry had made significant strides in international competitiveness, and the Japanese economy maintained solid growth throughout the prewar decade. Although the economic environment provided foreign investors with ample incentive to invest, increasingly restrictive Japanese government policies, often strongly influenced by the private sector, discouraged new investments and forced most American companies already operating in Japan to withdraw.8 The outbreak of World War II marked a complete suspension in bilateral commercial relations, as enemy MNC assets were seized by both governments.

  • Since World War II formal and informal restrictions on imports and inward direct investment have depressed foreign participation in the Japanese economy. However, during the 1950 to 1980 period, a number of U.S. companies with superior technology, management, and the ability to mobilize political support in the Japanese business community overcame these obstacles and achieved long-term success. But in many instances the preference of Japanese government and industry for arms-length technology transfers in lieu of product imports or FDI prevailed. Although U.S. FDI in Japan has increased since barriers were lowered (particularly since 1980), foreign participation in the Japanese economy through FDI and direct imports remains low.

In Japan the policy framework for the regulation of FDI was established in two laws enacted during the U.S. Occupation but that continued in force with only minor modifications for the following two decades. The Foreign Investment Law (FIL) of 1950 regulated the acquisition, by foreign investors, of stocks and proprietary interests in Japan; required validation of technological assistance contracts longer than 1 year; and controlled loans between foreign investors and Japanese persons, where foreign exchange was a consideration.9 The Foreign Exchange and Foreign Trade Control Law (FECL) of 1949 governed international transactions

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