Japanese Investment and Technology Transfer: Report of a Workshop (1992)

What impact does direct investment by Japanese firms in the United States have on the flow of technology between the two countries? Increased Japanese investment in the United States during the latter half of the 1980s has sparked debate around a number of topics. High on the list is whether or not the enlarged Japanese presence in the American economy contributes to or detracts from the U.S. technology base, in general and in specific industries. Concerns have been raised about potential adverse impacts in a variety of areas, including the future competitiveness of U.S. high technology industries, military security, and the technical sophistication of processes and employees in “traditional” manufacturing.

During the postwar period technology flow between the two countries has predominantly been in one direction — from the United States to Japan. ¹ While many American observers believe that this was inevitable

and probably desirable for the first two or three postwar decades, continuation of the pattern is a matter of growing concern. The National Research Council's Committee on Japan has identified the acquisition of technological know-how from Japan as a national priority for the United States.² In light of the recognized role of foreign direct investment (FDI) in transferring technology from the “home country” of the investing firm to the “host country” in which the investment takes place, Japanese FDI might be expected to play a role in balancing the bilateral technology flow.³ The purpose of the workshop organized by the Committee on Japan was to assess the evidence in order to determine what can be said about linkages between Japanese investment and technology transfer to the United States.

The question is complex. Some commentators believe that foreign multinational corporations (MNCs), including Japanese firms, that perform high value-added manufacturing and R&D in the United States can make a greater contribution to the American economy than U.S.-owned companies that transfer manufacturing and R&D overseas.⁴ For example, technology transfer to the United States might be accomplished if the American manufacturing facilities of Japanese firms utilize management practices associated with high productivity and the rapid assimilation of new technology in their Japanese operations. The manufacture of critical components and the performance of R&D in the United States could spur technology development in general, raise the skills of the manufacturing work force and have a positive impact on technical labor markets. In the best-case scenario, the benefits of this technology transfer would not be limited to the Japanese-owned facilities themselves but would also diffuse to American firms in the same industry or geographical area.

Others assert that Japanese FDI does not generally result in technology transfer to the United States and in many cases serves as an efficient mechanism for Japanese companies to transfer more know-how back to Japan. According to this formulation, Japanese industry is on a “shopping spree” for U.S. high technology, and is conducting a raid on America's innovative capacity by buying small, high technology companies. ⁵ Capital-starved U.S. firms that cannot attract funding from banks or other

domestic sources are forced to make the best deal they can with large Japanese corporations. Critics argue that in many cases the Japanese firm obtains the small U.S. company's technology along with equity, brings the know-how back to Japan for further refinement within the parent company R&D system, and then divests itself of the U.S. firm or converts it into a marketing office.⁶ Those who hold a less negative view of Japanese investment in high technology companies assert that the motivations and effects are more complicated than this “cash for technology” scenario. Many believe that the combination of Japanese capital and the willingness of Japanese firms to invest in technology, both at home and abroad, may have beneficial effects on balance for the U.S. technology base.

Anecdotal evidence indicates that each of these formulations carries some validity — that Japanese investment in U.S. manufacturing is transferring technology and that Japanese investors are interested in acquiring U.S. firms with promising technology. But to what extent and in which industries? The workshop discussions confirmed that a more detailed analysis of Japanese FDI and technology transfer is needed and suggested areas that deserve attention.

This exercise is important for several reasons. If Japanese investment leads to higher productivity through technology transfer, it would strengthen the case for continuing the generally open investment policies presently in place in the United States. But if Japanese FDI does not bring a significant inward technology flow or leads to an even greater imbalance in U.S.-Japan technology relations, then it would strengthen the case for — at a minimum — developing incentives for Japanese companies to transfer technology to the United States. Some would adopt a more restrictive stance.

Military security concerns enter the picture as well. Many argue that foreign acquisitions of companies that have a unique capability to manufacture products important for military systems should be prohibited.⁷

Japanese acquisitions of firms in industries with both commercial and military markets, such as semiconductors, semiconductor manufacturing equipment, and machine tools, cause particular concern because some important industry segments are already dominated by Japanese companies. The fear is that dependence on Japan for particular products and technologies might leave the United States vulnerable during a crisis or have a negative long-term impact on the defense industrial base. ⁸ Yet if Japanese firms are the world's leaders in a product or technology, excluding them from producing here may reduce U.S. weapons quality and/or increase costs.

Also relevant is the growing tendency of the U.S. government to promote commercial technology development by supporting U.S.-based R&D consortia through subsidies and non-financial measures. Should it be possible for a Japanese company to acquire a U.S. firm that has a unique technological capability developed with U.S. government support?⁹ Excluding Japanese affiliates from such projects would hardly square with U.S. efforts to open Japanese R&D consortia to foreign participation. But the continuing perception that American-owned companies do not enjoy opportunities to participate in the Japanese economy equivalent to those Japanese firms enjoy in the United States is germane to this discussion. For if this imbalance in opportunity holds, it deprives U.S. firms of an important means to expand their access to Japanese technology.

This report of a workshop organized by the Committee on Japan, with assistance from the Office of Japan Affairs, brings together some of the highlights of the discussions. Chaired by I.M. Destler, member of the Committee on Japan and Director of the Public Policy and Private Enterprise Program at the University of Maryland's School of Public Affairs, the workshop was designed to provide a forum to explore the aggregate data on Japanese investment and technology transfer, to consider the industry-specific evidence in semiconductors, consumer electronics and automobiles, and to examinethe policy implications for the United States. The report was reviewed by individuals who made presentations at the workshop and members of the Committee on Japan, but it is not a consensus document or a conference proceedings.