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3 Foreign Direct Investment and the U.S.-Japan Economic and Technological Relationship
3 Foreign Direct Investment and the U.S.-Japan Economic and Technological Relationship
Pages 24-39
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From page 24... ...
Policies and corporate strategies toward foreign direct investment (FDI) in both countries have played a major role in shaping this structural context.
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From page 25... ...
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 airea`dy operating in Japan to withdraw.8 The outbreak of World War IT marked a complete suspension in bilateral commercial relations, as enemy MNC assets were seized by both governments.
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From page 26... ...
Some have asserted that a lack of effort and interest on the part of U.S. and other foreign companies was mainly responsible for the high level of licensing and the low level of direct investment by foreign companies over the postwar period.'5 However, recently, most scholars studying the development of key Japanese industries support the assertion that public-private cooperation in dealing with foreign MNCs was critical in facilitating a greater arms-length flow of technology into lapan.'6 26
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From page 27... ...
Other strong companies, such as Du Pont, were allowed to establish 50-50 or minority-owned joint ventures during the 1950s and 1960s.~9 Companies without the technology or political clout to achieve even limited entry through joint ventures were left with technology licensing as the most feasible way of gaining a return in Japan on their technological investments. Fairchild, after being rebuffed when it sought to establish operations in Japan in the late 1950s, licensed its fundamental planar process for integrated circuit manufacturing to NEC.20 In the Fairchild case, as well as other critical technologies, there is evidence that MITI's role in approving licensing arrangements allowed Japanese firms to negotiate lower royalties with foreign companies than would have been the case had they acted on their own.
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U.S. FDT Position; Total and Top Five Host Countries, Year End Historical Cost, billion dollars 1983 1988 1994 Total 207.8 Total 335.9 Total 612.1 Canada 44.3 Canada 62.7 U.K.
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economy as a whole.30 As might be expected of a country recovering from a devastating war, early in the postwar period Japan targeted its capital almost exclusively at domestic investment opportunities, first for rebuilding the economy and then for rapid growth. Economic policies and institutions were created to encourage savings and the flow of these savings to targeted manufacturing industries.3' The FECL that played a large part in restricting entry by foreign MNCs also restricted the outward flow of capital: individual Japanese direct investments abroad required government approval.
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manufacturing to Mexico and Southeast Asia.39 Still, Japanese companies in these manufacturing industries continue to have a significant presence in the United States. TABLE 3-2 Foreign Direct Investment Positions; Historical Cost Basis, billion dollars 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Japanese FDI in the United States Total 16.0 19.3 26.8 34.4 51.1 67.3 83.1 93.8 97.5 96.2 103.1 Manufacturing 2.5 2.7 3.6 5.0 11.1 15.6 17.1 18.3 18.3 17.7 18.7 U.S.
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I 1 TABLE 3-4 Sectoral Distribution of U.S.-lapan Foreign Direct Investment Positions; 1994 Year End Historical Cost, billion dollars U.S. Position Japanese Position in Japan in United States Petroleum 6.10.3 Manufacturing 15.818.7 Food products 1.1.9 Chemicals 3.63.5 Metals 0.31.1 Machinery 5.6 Nonelectric machinery 4.4 Electric machinery 1.7 Transport equipment 1.8 Other manufacturing 2.97.6 Wholesale trade 6.835.7 Retail trade 1.1 Banking 0.410.2 Finance, insurance, real estate 6.4 Finance 12.8 Insurance 0.8 Real estate 9.8 Services 0.512.4 Other 0.91.3 Total 37.0103.0 SOURCE: U.S.
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manufacturing industries, such as steel, machine tools, and tires. Another category of Japanese direct investment in the United States, with implications for technology flow between the two countries, became quite visible and common during the late 19SOs.
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manufacturers and eventually to deterioration in the trade balance. ~ addition to this general concern about the high-technology activities of foreign MNCs, specific attention has focused on their R&D relationships with U.S.
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investment environment, Japanese companies have experienced a number of difficulties, particularly recently, which raises questions about how they will respond in the future. A number of Japanese subsidiaries in the United States have had difficulty in achieving profitability in recent years.43 In a survey released in 1994, Japanese MNCs mentioned several conditions that have caused difficulties;44 over half of the companies responding mentioned the harsh, competitive environment in the United States.
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The U.S. economy almost certainly will remain far more open to foreign participation through direct investment and trade than the Japanese economy.
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TABLE 3-7 Selected Formal Restrictions on Foreign Direct Investment and Exceptions to National Treatment by Japan and the United States, 1993 Sector/Area Japan United States Agricultural, forestry, and a fisheries fisheries l Mining/oil industry l a leasing public land restricted Leather and leather products a manufacturing l Financial services | reciprocity conditions reciprocity conditions Air transport | two-thirds domestic ownership three-quarters domestic I required ownership required Atomic energy production l Maritime transport l l Goverrunent subsidies/ | reciprocity conditions for purchasing | Advanced Technology Program Telecommunications I a a Broadcasting | a a National security/public order | n a a General restrictions exist. SOURCE: Compiled by National Research Council Office of Japan Affairs from Organization for Economic Cooperation and Development, National Treatment for Foreign-Controlled Enterprises (Paris: OECD, 1993~.
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" Paper prepared for Wharton Conference on Foreign Direct Investment in Japan: Why So Small and How to Encourage, October 1994, pp.
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Measures for Promoting Foreign Direct Investment in Japan. Tokyo: MITI.
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1994. "Foreign Direct Investment in the United States: 1992 Benchmark Survey Results." Survey of Current Business.
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