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The Political Economy of Transition: Japanese Foreign Direct Investments in the 1980s

Published online by Cambridge University Press:  13 June 2011

Young-Kwan Yoon
Young-Kwan Yoon
Affiliation:
Seoul National University, Seoul, Korea.
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Abstract

The issue of Japanese foreign direct investment (FDI) has attracted scant attention because of its relative insignificance to the Japanese economy before the 1980s. In the 1970s only a few analysts explained the Japanese FDI behavior from a macroeconomic perspective. This paper argues that there has been a noticeable change in the nature of Japanese FDI in the 1980s, a position that supports the traditional microeconomic explanation based on the oligopolistic market theory. This convergence toward the “Western” style of FDI reflects a fundamental shift of the Japanese economy from a trade-oriented economy to one that is foreign investment—oriented. However, as the experiences of two hegemonic states (Great Britain and the United States) have shown, foreign investment is not the best economic strategy from a long-term perspective. Preliminary evidence in recent years indicates that increasing FDI affects Japan's productivity growth negatively by weakening both the production base and the various sources of Japanese competitiveness.

Type
Research Article
Information
World Politics , Volume 43 , Issue 1 , October 1990 , pp. 1 - 27
Copyright
Copyright © Trustees of Princeton University 1990

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References

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24 Ibid., 176–77.

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30 “Japan in America,” Business Week, July 14, 1986, p. 46.

31 More than 90% of total sales of Japanese production in North America and Europe was for the local market in 1987. The ratio was as much as 60% in Southeast Asia. See Economic Planning Agency (fn. 28), 202, Table 3–2–10(1).

32 Ministry of Finance, “Foreign Direct Investment by Industry,” as quoted in Katsuaki, Onishi, “Kaigai Shinshutsu no Kyuzo de Keizaiwa ‘Kūdoka’ Shinaika” [No “hollowing-out” of the economy in spite of the rapid foreign expansion?], Keizai (May 1989), 48–57Google Scholar, at 49, and Nakatani (fn. 29), 90.

33 Nakatani (fn. 29), 90.

34 See the survey “‘Sihon Yushutsu Koku’ ka, Ginkō no Kokusaika oyobi Kyatchi Appu” [Becoming a capital-exporting country: Internationalization of banks and catch-up], Keizai Kenkyū (July 1986), 258–75, at 271, Table 18. Data show that there is a consistency in the distribution between manufacturing investments and investments in finance and insurance. See p. 272, Table 19.

35 Abegglen, James C. and Stalk, George JrKaisha, the Japanese Corporation (New York: Basic Books, 1985), 246.Google Scholar

36 A good example is the synthetic fiber industry. See Yoshino (fn. 16), 267. Yoshino argues that this trend began around 1975.

37 Ibid., 266–68.

38 Abegglen and Stalk (fn. 35), 246.

39 Sadayuki, Sato, “Nihon Keizai mo ‘Kūdoka’ no Osore: Shindankai Mukaeru Nihon Kigyo no Takokuka” [The fear of the hollowing-out of the Japanese economy: Toward a new stage of multinationalization of Japanese business], Ekonomisto, February 4, 1986, p. 18.Google Scholar See also “Japan Picks Winners to Hurdle the Fences,” Far Eastern Economic Review, September 4, 1986, p. 61.

40 “Will Japan Really Change?” Business Week, May 12, 1986, p. 49.

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43 See Abegglen and Stalk (fn. 35), 252; Lincoln, Edward J., “Comment,” in Pugel, Thomas A. and Hawkins, Robert G., eds., Fragile Interdependence: Economic Issues in U.S.-Japan Trade and Investment (Lexington, MA: Lexington Books, 1986), 163Google Scholar; Okimoto, Daniel I. and Inoguchi, Takashi, “Introduction,” in their The Political Economy of Japan, vol. 2, The Changing International Context (Stanford, CA: Stanford University Press, 1988), 8.Google Scholar However, the characteristics of Japanese FDI will not necessarily remain defensive in the future. Once begun, FDI will gain momentum because of the oligopolistic competition among large firms, and the behavior of Japanese FDI will become more offensive.

44 See MITI (fn. 42), 182.

45 I have argued elsewhere from a macrohistorical perspective that social and institutional rigidity caused the excessive export of capital from Great Britain before World War I and from the United States in the 1960s and 1970s; see Yoon (fn. 5). Rigidity may be defined as a “resistance to needed change” or a “tendency of excessive risk-averseness.” As a society matures, such characteristics as originality, inventiveness, and flexibility—which enabled innovations in productive methods, technology, and managerial skill in the earlier period—tend to disappear. See also Cipolla's, Carlo M. discussion on “Conservative Mentality,” in Cipolla, , ed., The Economic Decline of Empire (London: Methuen, 1970), 7–11Google Scholar, and Olson, Mancur, The Rise and Decline of Nations (New Haven: Yale University Press, 1982).Google Scholar For the relationship between state and society, see Katzenstein, Peter J., “International Relations and Domestic Structure: Foreign Economic Policies of Advanced Industrial States,” International Organization 30 (Winter 1976)CrossRefGoogle Scholar, and Krasner, Stephen D., Defending the National Interest (Princeton: Princeton University Press, 1978).Google Scholar

46 From 1978 to 1984 fiscal spending, as measured by the structural (high employment) budget deficit, was tightened from – 4.9% of GNP to – 1.3%. See Fred Bergsten, C. and Cline, William R., The United States-Japan Economic Problem (Washington, DC: Institute of International Economics, 1985), 29–30.Google Scholar

47 This tendency of declining periodicity of major powers in the history of the international system was noticed by Doran, Charles F., “War and Power Dynamics: Economic Underpinnings,” International Studies Quarterly 27 (December 1983), 419–41.CrossRefGoogle Scholar According to Doran, this phenomenon can be explained by the nature of technology and its impact on industrial and commercial change. See esp. pp. 434–35.

48 The same analogy can be applied to the case of the United States. There is an imbalance between the American mind and institutions and the country's wealth. Caught by the inertia of the past, the American government and people keep consuming more than they can afford.

49 There is no clear evidence that the recent boom in domestic demands in 1988 and 1989 was caused by institutional reforms. Rather, the boom seems to be a temporary phenomenon resulting from the appreciation of the yen and cyclical factors. See “The Consumption Boom in Japan,” Tokai Monthly Economic Letter 125 (June 1989), as quoted in Japan Update (Autumn 1989), 9–14.

50 I use this term keeping Gerschenkron's usage in mind. Such distinctive characteristics of industrial latecomers as the speed of industrialization, productive and organizational structure of industry, and etatist ideologies can be understood as the result of creative response to or application of the past route of industrial revolution of the forerunner countries. See Gerschenkron, Alexander, Economic Backwardness in Historical Perspective (Cambridge: Harvard University Press, 1962), 6–11, 22–29.Google Scholar

51 For examples of parallel arguments, see Keynes, J. M., “Foreign Investment and National Advantage,” The Nation and the Athenaeum 35 (August 9, 1924), 584–87Google Scholar; Frankel, Marvin, “Home versus Foreign Investment: A Case against Capital Export,” Kyklos 18 (March 1965), 411–33CrossRefGoogle Scholar; Gilpin, Robert, U.S. Power and the Multinational Corporation (New York: Basic Books, 1975)CrossRefGoogle Scholar; Pollard, Sidney, “Capital Exports, 1870–1914: Harmful or Beneficial?” Economic History Review 38 (November 1985), 489–514Google Scholar; and Kennedy, William P., Industrial Structure: Capital Markets and the Origins of British Economic Decline (Cambridge: Cambridge University Press, 1987).Google Scholar

52 The trend toward financially oriented management was encouraged even more by foreign portfolio investments since the 1980s. It is clear, however, that the procedure of FDI itself brings its own mechanism to bear on this trend, as we can see from the American experience of offshore production in electronics and other industries in the 1960s and 1970s. Evidence suggests that a similar mechanism is at work in the case of Japanese FDI.

53 “Employment Opportunities Follow Production Bases out of Japan,” Japan Economic Journal, July 19, 1986, p. 17.

54 See the two graphs that show the negative relationship between local production and exports (color TV in the United States and VTR in the EC market) in MITI (fn. 42), 193.

55 Japan External Trade Organization (JETRO), Sekai to Nihon no Kaigai Chokusetsu Tōshi [The world's and Japan's foreign direct investments], 1988, 41.Google Scholar

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62 These ten companies are known to have annual sales of 20–40 billion yen each. See “Exporters Attempt New Businesses, Takeovers, to Combat High Yen,” Japan Economic Journal, May 24, 1986, p. 1.

63 For the increasing ratio of outsourcing, see Economic Planning Agency (fn. 28), 215. It was reported that the unemployment rate in Japan had risen to 3% in January 1987, the highest level since monthly reporting began in 1953. See “Mounting Conflict over Trade Looms for U.S. and Japan,” New York Times, March 9, 1987, p. D4.

64 Abegglen and Stalk (fn. 35), 257.

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68 The calculation is based on International Monetary Fund, International Financial Statistics (July 1972), 210–13Google Scholar; (January 1978), 204–7; (August 1982), 240–43; (June 1986), 286–89. (Application of the exchange rate is based on the average annual par rate/market rate, except for 1965.) See Table 1.

69 “Nihon Keizai Shimbun Survey: Corporate Heads See Hollowing-Out of Industry Due to Shift Overseas,” Japan Economic Journal, June 7, 1986, p. 1.

70 See “Hitachi Chemical to Keep Research at Home, Shift Production Overseas,” Japan Economic Journal, October 18, 1986, p. 21.

71 Reich (fn. 42), 21.

72 Economie Planning Agency (fn. 28), 124–26.

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74 Baranson, Jack, The Japanese Challenge to U.S. Industry (Lexington, MA: Lexington Books, 1981), 100–102, 129–30Google Scholar; Okimoto, Daniel I., Sugano, Takuo, and Weinstein, Franklin B., eds., Competitive Edge: The Semiconductor Industry in the U.S. and Japan (Stanford, CA: Stanford University Press, 1984), 62–64Google Scholar; Millstein, James E., “Decline in an Expanding Industry: Japanese Competition in Color Television,” in Zysman, John and Tyson, Laura, eds., American Industry in International Competition (Ithaca, NY: Cornell University Press, 1984), 112, 114–17Google Scholar, 120–21, 136–38.

75 Baranson (fn. 74), 101. See also Millstein (fn. 74), 106–7.

76 World Developing Industry and Technology, Inc., “Sources of Competitiveness in the Japanese Color Television and Tape Recorder Industry,” a study for the U.S. Department of Labor (October 1978), 21Google Scholar, as quoted by Millstein (fn. 74), 127.

77 Baranson (fn. 74), 101. See also Millstein (fn. 74), 115, and Okimoto, Sugano, and Weinstein (fn. 74), 64.

78 Both manufacturers and purchasers of semiconductors agreed that during the mid- to late 1970s, quality levels delivered by Japanese firms were superior to those delivered by U.S. firms. See U.S. Congress, Office of Technology Assessment, International Competition in Electronics (Washington, DC: Government Printing Office, 1983), 230.Google Scholar For a quality test of Japanese and American chips by Anderson, Richard W. of Hewlett-Packard, , see “Japan Makes Them Better,” Economist, April 26, 1980, p. 55.Google Scholar

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80 “19 Inch Color TVs,” Consumer Reports (January 1981), 34.

81 Knickerbocker emphasized the dynamic aspect of oligopolistic competition leading to foreign direct investments instead of focusing on the static aspect, as did most oligopoly explanations. See Knickerbocker, F. T., Oligopolistic Reaction and Multinational Enterprise (Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1973)Google Scholar, esp. chaps. 2 and 3.

82 Compared with the British and American experiences, the Japanese case shows an important difference in foreign investment behavior. In the British case, foreign portfolio investments by financiers were predominant. In the American case, FDI by industrialists was predominant. In the Japanese case, however, foreign portfolio investments were still predominant in the late 1980s, and an important portion was being made by industrialists. For instance, in 1982, 34% of the total investment in foreign securities was accomplished by private nonfinancial corporation. See Economic Planning Agency, Keizai Hakusho 1986: Kokusaiteki Chöwa o Mezasu Nippon Keizai [Economic white paper 1989: Japanese economy aiming at international harmony] (Tokyo: Ōkura-shō Insatsukyoky, 1986), 565.Google Scholar This is a new phenomenon in the history of foriegn investments, one that has not yet attracted much attention.

83 See “Japan's Foreign Investment: Home Is Where the Hurt Is,” Economist, November 9, 1985, p. 94.

84 “‘Zai-tech’ Boom,” Japan Economic Journal, March 29, 1986, p. 6.

85 Ibid.

86 “Companies Increasingly Turn to ‘Zaitech’ to Combat Profit Fall,” Japan Economic Journal, June 6, 1987.

87 Japan Times, February 5, 1988.

88 Wall Street Journal, September 28, 1987, p. 25, and Japan Economic Journal, September 19, 1987, p. 6.

89 Profits from investments abroad are projected to be $400 billion by 1990. See “Setting Sun? Japan Inc.'s Rise Holds the Seeds of Its Fall,” Washington Post, June 22, 1986, p. C1.

90 Business Week (fn. 40), p. 58.

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92 Gilpin, , The Political Economy of International Relations (Princeton: Princeton University Press, 1987), 330.CrossRefGoogle Scholar

93 “Setting Sun?” (fn. 89).