Multinationals and the National Interest:

Playing by Different Rules

September 1993

OTA-ITE-569

NTIS order #PB93-231314
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Multinationals and the

National Interest: Playing by Different Rules, OTA-ITE-569 (Washington, DC: U.S. Government Printing Office, September 1993).

For sale by the U.S. Government Printing Office

Supcrintendent of Documents. Mail Stop: SSOP, Washington. DC 20402-9328

ISBN 0-16 -041943-3
F oreword

o

ver the past 25 years, technology differences have steadily decreased among

competing firms of different nations. The technological superiority of an IBM,

AT&T, or Boeing has been offset by the rise of capable competitors worldwide.

The traditional U.S. advantages of privileged access to broad, deep, and liquid

capital markets, as well as large economies of scale and scope, have similarly leveled off.

These changes reflect major shifts in the structure of the world economy. In the

broadest sense, the globalization of business, communications, and transportation is

transforming the post-WWII system of international trade and investment. At the same

time, profound asymmetries have developed in the rules of different nations that influence

and regulate the activities of multinational enterprises (MNEs).

In the post-cold war period, the structure of multinational industry is evolving far

more rapidly than the rules that govern its conduct. The policy challenge is to manage and

defuse escalating trade frictions in ways that promote growth and ensure a fair and

sustainable distribution of advanced technology and manufacturing assets among

competing national economies. MNEs are central to this process because they are

international conduits of technology and goods and services; they also provide the quality

jobs and capital that support economic growth and high standards of living.

The interests of MNEs, however, do not always conform to those of the United

States. The United States wants MNEs to conduct core business operations here, to

interact with local firms to create employment and wealth, and to retain the benefits of that

wealth for U.S. citizens. But MNEs are understandably less concerned with advancing

national goals (which may conflict among different nations) than with pursuing objectives

internal to the firm-principally growth, profits, proprietary technology, strategic

alliances, return on investments, and market power.

Surely there must be some balance or compromise that can be reached between

maximizing efficiency at the level of the firm, and the need of host governments to ensure

that firms act in ways that contribute to national well-being. Although companies and

governments may pursue different objectives, there is no irreconcilable incompatibility

between the interests of MNEs and those of nations.

This assessment was requested by the Senate Committee on Commerce, Science,

and Transportation and the Senate Committee on Banking, Housing, and Urban Affairs.

This is the first of two reports, It is intended as an introduction to and overview of the

issues that affect multinational firms and the U.S. technology base. The final report, to be

published in 1994, will present additional analysis and policy options related to issues

raised in this report.

(7’+- -

Roger C. Herdman, Director

III
A dvisory Panel

Lawrence M. Friedman

Chairman

Marion Rice Kirkwood Professor

of Law

Stanford Law School

Jay Chai

Chairman and CEO

Itochu International

Alfred Chandler

Straus Professor of Business

History, Emeritus

Harvard Business School

Lance Compa

Administrative Officer

Washington-Baltimore

Newspaper Guild

Stanley J. Fidelman

Senior Vice President, Engineering,

Safety and the Environment

Merck

R. Scott Fosler

President

National Academy of Public

Administration

William Greider

National Editor

Rolling Stone

Richard W. Heimlich

Corporate Vice President for

International Strategy

Motorola

Robert J. Hermann

Vice President, Science and

Technology

United Technology Corp.

Jeffrey Leonard

President

Global Environment Fund

Theodore J. Lowi

John L. Senior Professor of

American Institutions

Cornell University

David A. Markle

Vice President, Advanced

Technology

Ultratech Stepper

Oscar B. Marx, Ill

Vice President Automotive

Components Group

Ford Motor Co.

William D. Mulholland

Bank of Montreal

Indra Nooyi

Vice President, Strategy and

Planning

Asea Brown and Boveri

James F. Rill

Partner

Collier, Shannon, Rill, and Scott

Richard B. Samuels

Ford International Professor

Director of MIT Japan Program

Massachusetts Institute of

Technology

Peter Schavoir

IBM Director of Strategy

IBM

Steven Schlossstein

Resident

SBS Associates

Harley Shaiken

Associate Professor, Department of

Communication

University of California, San Diego

Raymond Vernon

Clarence Dillon Professor of

International Affairs, Emeritus

John F. Kennedy School of

Government

Andrew W. Wyckoff

Head of the Economic Analysis

section

Directorate for Science, Technology

and Industry

Organisation for Economic

Co-operation and Development

NOTE: OTA appreciates andis gratejhlfor the valuable assistance an. dthoughtfid cra”tiquesprovidedby the advisory panel members. The panel

dbes not, however, necessarily approve, disapprove, or endorse this report. OTA assumesfull responsibility for the report and the accuracy

of its contents.

iv
P roject Staff

Peter D. Blair, Assistant Director, OTA

Energy, Materials, and International Security Division

Audrey B. Buyrn, Program Manager

Industry, Technology, and Employment Program

William W. Keller, Project Director

Kenneth E. Freeman

David Rosenfeld

Lucian Hughes

PRINCIPAL CONTRACTORS

Carol V. Evans

Louis W. Pauly

Simon Reich

CONTRACTORS

Paul N. Doremus

David J. Eichberg

Jacques Hymans

Takashi Mashiko

Elizabeth Sheley

Gregory S. Tsarnas

ADMINISTRATIVE STAFF

Carol A. Bock

Diane D. White
contents

1 The Importance of Multinational Enterprises 1

Background and Additional Considerations 6

About This Report 11

Major Findings 13

Policy Discussion 15

2 Multinational Industry and National Differences 21

The Structure of Multinational Industry 22

National Differences 29

Asymmetries in Government Policies, Ownership, and

Control 33

3 Foreign Direct Investment 43

Chapter Findings 44

FDI in the United States 47

Asymmetries in National Policy Regimes 68

4 Japanese Multinational Enterprises in the United

States 81

Chapter Findings 83

Keiretsu 86

What are the Keiretsu? 87

Domestic Content of Japanese-Owned U.S. Production 94

Japanese Investment in Small U.S. High-Tech Firms 99

Japanese MNEs and U.S. University Research 106

vii
5

6

International Strategic Alliances 115

Chapter Findings 116

What are International Strategic Alliances? 117

Recent Trends in International Strategic Alliances 117

Type of Collaboration By Region 121

Why International Strategic Alliances are on the Rise 121

Why MNEs Enter Into Strategic Alliances 123

How Governments Shape The Formation and Content of ISAs 126

How Successful are International Strategic Alliances? 129

Multinational Enterprises and Global Capital

Markets 135

Chapter Findings 140

Government Policies and Financial Markets 142

Financial Markets and MNEs 144

Financial Market Structures: A Primer 147

Capital Decontrol and Financial Integration 149

Financial Integration and National Structures 153

MNEs and Multilateral Cooperation 157

INDEX 159

VIll
The

Importance of

Multinational

Enterprises

M

ultinational enterprises (NINEs) are business organizations that underpin much of the U.S. economy and the

international system of trade and investment. They are

increasingly global in their origins, sourcing, communications, production, and outlook. The foreign affiliates of MNEs

control a substantial portion of the world economy, perhaps as

much as one-quarter of all economic activity in their host

countries. Intrafirm trade, that is, goods and services exchanged

among parent companies and their foreign subsidiaries, may

account for more than 40 percent of U.S. imports and 35 percent

of U.S. exports. 1 Because they are so important and powerful,

MNEs evoke a wide range of concerns from home governments,

host governments, rival fins, and strategic partners.

Intensifying competition among firms in almost every sector

of the international economy is changing the structure of

multinational industry (see chapter 2). At the same time,

increasing competitiveness concerns and trade frictions

among nations have led to a heightened awareness of the

activities of MNEs. Because MNEs are the major force in

international trade and are deeply enmeshed in local economies,

they are influential in national politics and essential to industry.

But because they span national borders, many MNEs are less

concerned with advancing national goals than with pursuing

1

1 See notes 21,22, and 23 below. In 1990, worldwide sales of foreign affiites in host

countries reached an estimated $5.5 trillion as compared with approxima tely $4 trillion

in total world exports of goods and nonfactor services. See United Nations Conference

on Trade and Dexdopment, Frogramme on Translational Corporations, World fnvestmertt Report 1993 (New York NY: United Nations, 1993), p. 13.

1
2 I Multinationals and the National Interest: Playing by Different Rules

objectives internal to the firm-principally

growth, profits, proprietary technology, strategic alliances, return on investment, and

market power. MNEs are highly flexible and

can take many different forms (see table l-l).

Congress is concerned about MNEs for several

reasons. In the broadest sense, the globalization

of business, transportation, and communications is disrupting the post-World War II

system of international trade and, in the

post-Cold War period, threatens to increase

trade friction among nations to unmanageable

levels. As tough talk on trade escalates between

the United States and its principal trading partners, pressure builds for a coordinated response

from Congress, the Administration, and U.S.

business leaders. MNEs are increasingly the focus

of this debate because they are international

conduits of goods and services as well as major

providers of the technology, jobs, and capital that

support high standards of living in the industrialized nations.

At a more fundamental level, Congress should

be concerned when the interests of MNEs, both

domestic- and foreign-based, increasingly diverge from those of the United States. Foreign

MNEs that penetrate U.S. markets, make few

investments, and drive local firms from the

marketplace cannot be considered national assets.

Affiliates of foreign-based MNEs that import

high percentages of complex parts for assembly

operations, that do not provide commensurate

pay, benefits, and training for American workers,

and that extract excessive subsidies from state and

local governments are not acting in the national

interest. Similarly, if a U.S.-based firm principally operates screwdriver assembly plants in the

United States, exports critical technology development functions, and moves most or all of its

production facilities abroad to take advantage of

low wages and lax environmental standards, it

would not be acting in the Nation’s interest.

As a further complication, the distinction

between foreign and U.S. companies is breaking

down. As U.S.-based MNEs commit ever more

Table 1-1—Types of Multinational Enterprises (MNEs)

For purposes of this report, OTA has identified and analyzed

six principal types of MNEs. They are not intended to be rigid

or mutually exclusive, but instead to capture the major

differences that are relevant to the development of public

policy. The six types of MNEs listed below are described in

greater detail in chapter 2.

Resource-based MNEs

organize around the extraction of natural resources, or

agricultural products, and their processing for sale in

the industrialized countries.

Export-oriented MNEs

maintain the preponderance of their production and

R&D base in their domestic market. Export high

value-added products to other national markets, often

through intrafirm trade. Typically establish final

assembly, service, support, sales and marketing

operations abroad.

Regional MNEs

optimize their activities, including production, around a

regional market but have not yet achieved significant

sales and operations outside their region of origin.

Translational MNEs

have begun to locate production facilities globally, but

still depend heavily on their domestic market and

operations for their competitive position, economies of

scale and scope, key production operations, and R&D.

Global MNEs

replicate much of the full value-added chain, including

substantial product development and research

operations, in more than one national or regional

market.

Distributed MNEs

optimize the location of their sourcing, production, and

R&D on a global basis.

SOURCE: Office of Tdnology Assessment, 1993.

resources to foreign affiliates, and foreign-based

firms produce and invest in America, the question

of what constitutes an American company for

purposes of public policy becomes even more

critical. The rapid expansion of the number and

scope of international strategic alliances among

MNEs adds complexity to this already difficult

question (see chapter 5).

What do nations want from multinational

enterprises? In the end, the United States wants

MNEs to conduct business here and interact

with local firms in ways that generate and

retain wealth and quality jobs within its
Chapter l–The Importance of Multinational Enterprises 13

borders. This is what all nations generally want

and increasingly demand from MNEs. For the

United States, it translates most immediately into

high-wage, high-value jobs for Americans, indigenous technology development, advanced manufacturing that draws on local talent, an expanding

tax base, and ultimately, generalized economic

well-being. The connection between the location of technology leadership, both product

and process, and the health of national economies and living standards is becoming ever

more apparent to governments.

The answer to the policy question of what

should constitute an American company is tied

not so much to the ownership or home base of

particular MNEs, but rather to how a firm affects

the well-being and standard of living in the local

and national communities where it operates. In

this view, MNEs should be considered American if and when they act in the national

interest, and as American companies, they

shouId be entitled to a higher standard of

consideration.

The ultimate test of whether the United

States should contemplate requiring standards

of performance from foreign companies would

be its willingness to see the same standards

applied to U.S.-based firms operating abroad.

In that case, the objective would not be to

maximize benefits for the United States, but

rather to reach a balance in trade and investment

that did not confer large advantages on one nation

at the expense of others. Some analysts note that

creating such a regime would require joint development of performance standards among the

principal trading countries, with the intent to

avoid unilateral actions that might heighten trade

conflict. Within that general approach, they

suggest, it would then be appropriate to require

foreign-based MNEs that enjoy the benefits of a

nation’s markets and national infrastructure to act

in ways that contribute to the national interest of

the host nation.

These concerns arise for two reasons. First, in

some industrialized nations, increasing globalization of research and development (R&D)

and production is detaching firms from their

national origins. As competition heats up within

the Triad of North America, Europe, and Japan,

many MNEs seek global economies of scale, and

efficiencies of R&D, production, sales, and service, tied not to particular nations, but located

within different national markets around the

world. Because U.S. firms were first to globalize

their operations in large numbers, this process is

particularly pronounced for the United States.

Second, some very large firms organize their

operations around what might be termed a “globalization’ strategy, that is, around vertically

integrated supplier networks, both in their home

base and with respect to their foreign assembly

operations. These MNEs tend to retain higher

value-added R&D and production functions at

home, and to export sophisticated parts and

components to their foreign subsidiaries. Typically, they exert strong influence over their

supplier networks, often requiring them to take on

substantial design and engineering responsibilities, and help absorb losses when business is bad.

Many analysts associate this model most closely

with Japanese-based MNEs and their affiliated

keiretsu business groups. (See chapter 4 for a

discussion of the keiretsu system.)

Most corporate managers and analysts argue

that setting up the full value-added chain in all

principal markets-from R&D through manufacturing and after-sales service-would be highly

inefficient and probably impossible, given existing networks of facilities and supplier relationships. The trend, they contend, is precisely the

opposite, toward dispersed sourcing and greater

international division of labor at all levels of

business operations. Many managers believe

they cannot remain competitive unless they

have access to low-cost components, highquality labor, and flexible production arrangements-wherever and whenever these are available. These concerns cannot and should not be

taken lightly.
4 | Multinationals and the National Interest: Playing by Different Rules

But these concerns can also be overemphasized. They reflect the needs of managers in

particular companies to meet specific corporate

objectives. And they do not give sufficient credit

to the ability of MNEs to adjust and reconfigure

to meet changing economic and political conditions. The U.S. economy (or any other, for that

matter) cannot remain competitive unless MNEs

that sell and conduct business in America also

contribute to its research and technology base,

employment, manufacturing capabilities, and

capital resources. (See chapter 6 for a discussion

of MNEs and international capital markets.)

Recognizing these requirements, many industrialized countries have imposed local content

rules and have set up technology promotion

programs that encourage companies to implement

strong local commitments. Such rules have decreased penetration of key sectors in several

European countries by Japanese exports, and have

forced U.S. and Japanese companies to adopt

more locally oriented production strategies as a

condition of market access. Surely there must be

some balance or compromise that can be reached

between maximizing efficiency at the level of the

firm, and the needs of host governments to ensure

that firms act in ways that contribute to national

well-being.

Although companies and governments may

pursue different objectives, the interests of MNEs

and those of nations are not necessarily incompatible. Governments can and do offer inducements

or impose sanctions that encourage MNEs to act

in ways that further the national interest. And

companies, for their part, can adjust their approach, commitment, and investments to meet

local economic and political conditions, particularly if constraints and opportunities are applied

fairly and uniformly.

Problems occur when the rules of different

nations that affect MNE behavior diverge from

one another, or when one nation favors MNEs

based in its own territory, or discriminates against

the products and affiliates of foreign-based fins,

and the target country does not. Solutions may lie

Figure l-l—Percent Shares of Employment, Sales,

and Total Assets of Foreign Affiliates in the United

States and Japan, 1989

Total assets

Sales

Employees

20.4

F- 1.2

3.8 D

0.5

Foreign affiliates

in the U.S.

Foreign affiliates

in Japan

I 1 ! r

o 5 10 15 20 25

Percent share

SOURCE: Ministry of International Trade (MITI), “Measures for Pm

motlng Foreign Direct Investment in Japan,” January 1992, ohart 6; as

taken from MITI, “Survey of Foreign Affiliates in Japan”; Ministry of

Finance (MoF), “Corporate Business Statlstlcal Annual Report”; U.S.

Department of Gmmerce, Survey of Current Business.

either in no discrumination or in reciprocal and

equal discrimination. The key is to keep the

system of MNE business from interacting with

the system of nation states in ways that create

unfair advantages for some national economies at the expense of others or, in the extreme,

set one nation against another. Despite recent

progress at the 1993 G-7 Economic Summit,

obstacles to harmonizing trade and investment

regimes remain substantial.

The present system of international trade and

investment can be characterized as one in which

the interests of nations and MNEs have been

drawn too tightly (as in Japan) or, conversely,

have been allowed to drift too far apart (the U.S.

case). This is the result of basic asymmetries, both

in the different national systems of policy that

regulate trade and investment, and in the organization of business (and business practice) within

the Triad of modern industrial economies. Ultimately, widely divergent policy systems and

business practices among trading nations may

disrupt the international economy.
Chapter l–The Importance of Multinational Enterprises | 5

At one extreme, the United States has permitted and encouraged foreign companies to take

advantage of extraordinary access to its markets

for trade and investment purposes. Even in the

automobile sector, for example, where voluntary

export restraints were employed in the 1980s to

limit Japanese imports, the United States permitted unfettered foreign direct investment (FDI),

which helped the Japanese automakers capture

even more of the U.S. car market. Thus, foreign

affiliates in the United States account for a

signtificant share of total U.S. assets, sales and, to

a lesser extent, employment (see figure l-l). In

1992, Japan’s direct investment position in the

United States reached $96.7 billion, exceeding

that of any other nation,2 (Chapter 3 discusses

FDI and the special case of Japan.)

Moreover, the United States has constrained

the cooperation of competing U.S. companies

through pervasive antitrust legislation and litigation. For much of the post-World War II period,

the United States championed the system of free

and open trade, and to that end, tolerated some

unfair trade practices of both developing and

industrialized nations. 3 Foreign-based MNEs,

operating from a protected home base, have

amassed capital and technology sufficient to

mount highly sophisticated and successful

assaults on key elements of important American industrial sectors and markets, such as

automobiles, machine tools, semiconductors, and

consumer electronics. At the same time, they have

also contributed to the quality and low cost of

goods available in the United States. In the automobile sector, there is no doubt that the competitive challenge of Japanese auto companies has

forced improvements in product quality and

production efficiency at GM, Ford, and Chrysler.

Figure l-2—inward Flows of Foreign Direct

Investment into Selected Countries, 1981-1992

70-

/ \

60- +“

Into the U.S. r

\

5 0

J

/ \

4 0

/

\

u)

g 30” Into

10-

-10

1981 82 83 84 85 86 87 88 89 90 91 92

NOTE: Data are calculated orI historical cost basis and are h nominal

dollars. Reinvested earnings were not included In statistics for France,

Germany, and Japan. Differences in data andealcadatlon mayaecount

for discrepancies between OECD and Department of Commerce

statistics.

SOURCE: Organization for Economic Cooperation and Development

(OECD), International Direct Investment Policies and Trends in the

1980s (Pans, 1992), p. 15, table 3; OECD, Rnancia/ Market Tren&,

June 1993, p. 44, table 1.

At the other extreme, Japan has restricted

foreign investment and imports, and has permitted foreign MNEs limited access to its markets,

typically only through joint ventures with Japanese partners.4 (See figure 1-2 for a comparison of

FDI flows into Japan and several other Organization for Economic Cooperation and Development

(OECD) countries, and figure 1-3 for a comparison of the domestic sales of foreign affiliates in

the same countries.) Proprietary technology has

often been extracted as a condition of market

access. As a prominent Japanese industrialist

wrote in 1993, “Japan has much to do to open

its domestic market. . . Although overt protectionism has been curbed, it is clear that many

2 U.S. Department of Cornmeree, Bureau of Economic Analysis, “U.S. Net Investment Position, 1992,” press release, June 30, 1993, p.

8 and table 3. See fig. 3-3 inch. 3 of this report.

s For a survey of foreign trade barriers, see (If&e of the United States Trade Representative, Z993 Trade Estimate Report on Foreign Trade

Barriers, Mar, 31, 1993.

4 For a description of unfair trade practices directed toward Japa see Industrial Structure Council, Uruguay Round Committee,

Subeomrnittee on Unfair Trade Policies and Measures, Report on Unfair Trade Policies by Major Trading Partners, May 11, 1993. The

Industrial Structure Council is the official advisory body to the Japanese Minister of Internatiorud Trade and Industry.
6 I Multinationals and the National Interest: Playing by Different Rules

Figure 1-3--Foreign Affiliates’ Share of Domestic

Sales In Selected Countries, 1986

France

U.K.

Germany

Us .

Japan

o

~~

5 10 15 20 25 30

Percentage

SOURCE: C. Fred Sergsten and Marcus Noland, Reconu/ab/e Differences? United States4aparJ Eeonornlc Conflict (Washington DC:

Inetitute for International Eeanomice), 1992, p. 66, table 3.3.

foreign products still have trouble with entry

into and distribution in the Japanese market.”5 Foreigners have often found it extremely

difficult to invest in Japan, whereas Japanese

investors have found many opportunities abroad.

(See figure 1-4, which shows the trends in the

position of inward and outward Japanese foreign

direct investment, and figure 1-5, which offers a

comparison of inward and outward direct investment in selected countries on a per capita basis.)

In Japan, then, the conception of national interest

is tightly coupled to preserving market and

investment opportunities for Japanese-based companies, although in recent years, “overt protectionism’ has played a less important role than

nontariff and structural barriers to foreign products and investment.

The policy questions turn on two issues: l)how

to achieve a rough balance between the needs of

MNEs to achieve global efficiency on the one

hand, and the need of nations to retain technical

and industrial competitiveness on the other; and

2) the exact mechanisms to be deployed for the

distribution of advanced R&D and manufacturing

capabilities among competing economies.

Greater coordination among the advanced

industrial nations is probably required to

harmonize the rules of business and of trade

and foreign investment. Until that can be

accomplished, however, Congress may wish to

consider a range of policy instruments based on

the notion of specific reciprocity. Such policies

could facilitate the transition to a more global and

internationally consistent set of rules for the

conduct of international business. (Specific reciprocity is addressed in the Policy Discussion

section at the end of this chapter.)

BACKGROUND AND

CONSIDERATIONS

As technology and

ADDITIONAL

industrial power diffuse

around the globe, fewer of the largest MNEs (as

ranked by sales) are based in the United States

(see figure 1-6). Since the late 1960s, U.S.-based

companies have dropped steadily from the list of

the 500 largest fins, at a rate of about 6 firms per

year or about 150 firms altogether. They have

been displaced largely by Japanese firms. During

the same period, however, the number of Europeanbased MNEs on the list increased moderately, and

in 1991 edged past the number of U.S. firms. The

aggregate sales of U.S.-based companies on the

list were also exceeded in 1991 by the Europeans,

and competition from the Japanese companies

continued to escalate (see figure 1-7).

Foreign MNEs, primarily based in Japan and

Europe, have thoroughly penetrated most sectors

of the U.S. economy, putting pressure on indigenous firms, acquiring some, weakening many,

and forcing others to become more efficient or

exit the competition. This pattern is reminiscent

of the extension of U.S.-based firms to European

markets in the 1960s. Nevertheless, sustained

concern has focused on the activities of Japanesebased MNEs in the United States, ranging from

5 Akio Morita, ‘“Ibward a New World Economic Order, ’ The Atlantic Monthly, June 1993, pp. 90,96.
Chapter l–The Importance of Multinational Enterprises! 7

Figure 1-4-Japanese Direct Investment Position Abroad and Foreign Direct Investment Position

in Japan, 1980-1992

250 I

!

D JaPane~e ~

wect investment abroad

200 m FOreign d

Irect investment in Japan

I

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

—

—

1991 1992

NOTES: Data are calculated on a historical cost basis and are not adjusted for inflation. Amounta for 1992 are Bank of Japan estimates.

SOURCE: MITI, “Measuree forl%motlng Foreign Direct Investment in Japan, ’’January 1992, charts 1 and 3; Bank of Japan, &lance ofhfon?hly

Payments, March 1993.

Japanese investment in small, high-technology

start-ups and university research programs, to the

domination of whole industries by Japanesebased MNEs (see chapter 4). While U.S. firms are

major players in most industries in Europe, they

have, with some important exceptions, faced

significant barriers to investing and gaining

market share in Japan.

The competitiveness of U.S.-based MNEs is

not necessarily the principal concern. Many

analysts contend that the issue of national ownership or origin of firms is less important than the

contributions that all firms, foreign and domestic,

make to a nation’s economy. In this view,

governments should be concerned with funding

basic research, educating a skilled workforce,

improving infrastructure, and providing a stable

fiscal and monetary environment attractive to

MNEs. In practice, however, governments have

structured trade, investment, financial, monetary,

and industrial policies to benefit their economies

and to create advantages for their firms, both at

home and abroad.

This has led to broad asymmetries and increasing divergence in the national policy regimes of

Europe, the United States, and Japan that, taken

together, constitute the rules of the game for the

conduct of multinational business. In the area of

foreign direct investment, to cite one example, the

United States and Britain typically have applied

free market principles to the inward and outward

flow of investment capital. The other major

trading nations, particularly Japan, have imposed

a variety of restrictions and conditions on FDI.

While France and Italy have consistently applied

limitations, Japanese restrictions appear to be

qualitatively different and even structural in

character.

MNEs, for their part, have responded to asymmetries in market access or ease of investment by

configuring their operations differently, for example, by engaging in minority joint ventures or

licensing technology and marketing rights to

indigenous firms in more exclusive national

markets. But asymmetries in the rules of multinational business have not affected all firms to the

same degree. MNEs based in Japan, for example,

enjoy easy access to both Japanese and American

markets, but many U.S.-based MNEs, while

facing barriers in Japan, must still battle Japanese

and European competition for market share in the

United States. Such imbalances in market access
8 I Multinationals and the National Interest: Playing by Different Rules

Figure 1-5-Per Capita Inward and Outward Direct Investment Position in Selected Countries, 1990

Japan

Us .

U.K.

Germany

SOURCE:

-1631 _ Outward FDI

U Inward FDI

3577

1425 9

t

1

I

1716

1 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

1990 U.S. dollars

MITI, “Measures for Promoting Foreign Direct Investment in Japan,” January 1992, charts 4; MITI, “Measures for Promoting Foreign

Direct Investment in Japan,” Sept. - Dec. _1992, &arts 1,2 and 2.2; as taken from Bank of Japan, Ba/ance ofhfonthly Payments; U.S. Departrne-nt

of Commerce, Survey of Current Business; Bank of England, C2uartedy Bulletin; Deutsche Bundesbank, h.forIth/y Report.

and in national treatment are partially reflected in

the stubborn U.S. trade deficit with Japan, which

has persisted despite substantial devaluation of

the dollar against the yen. The concern is that in

some nations, sanctuary markets have been preserved for indigenous fins, and that the participation of foreign-based companies, far from

being free and open, has been structured to serve

the host government’s conception of the national

interest.

The question arises: Why has the United States

tolerated asymmetries in market access and investment with some of its trading partners, when

such practices create disadvantages for U. S.-

based MNEs and, in the long term, can inflict

damage on important sectors of the U.S. economy

and technology base? The answer is part history

and part ideology, and goes beyond the question

of MNEs. In the immediate post-World War II

decades, the U.S. economy and technology base

dominated the world. The United States championed the system of free and open international

trade, in large measure by opening its own

economy to imports and foreign investment, even

if nations with less developed economies did not

reciprocate. Since many companies in Europe and

Japan could not have withstood head-to-head

competition with U.S.-based MNEs, foreign countries with recovering economies took steps to

protect and subsidize infant industries, establish

trade barriers, and regulate FDI.

Policymakers in the United States tended to

view these developments as necessary for the

recovery of the war-torn European and Asian

economies, and for the establishment and maintenance of a global trading system that could

support an increasing gross domestic product

(GDP) and standard of living in both advanced

and developing nations. For over three decades,

the Bretton Woods system generally increased the

wealth of the advanced industrial nations, and

enabled remarkable economic progress among

newly industrialized countries.

But since the early 1970s, the technology assets

and industrial power of Japan, and to a lesser

extent Europe, have grown to challenge and even

surpass the United States in many areas. During

the 1980s, the commitment to free and open trade,

and the fear of igniting trade wars or a globa1

recession, limited U.S. policy initiatives to a

patchwork of ad hoc, protectionist policies. These

were often designed to aid U.S. firms in industries

like steel, textiles, automobiles, and machine

tools, and culminated in the Super 301 provisions
Chapter l–The Importance of Multinational Enterprises | 9

Figure 1-6-World’s 500 Largest Firms by Region

of Origin, 1966-1991

350 ~ ‘- ‘ ‘-—- ‘

- ‘- “–--— 1

United States

300 /

i

~ 250 I

$200

~

All Europe

g

6 150 – –– k -- – “ – – – – –

5

n

Japan

E 100 Other North

2

‘\ 5(-J - - -’,, - -

- - -

,’

of

—-

Figure 1-7-Sales of World’s 500 Largest Firms by

Region of Origin, 1966-1991

2,00 0

1,800 4

United States h

1

4

,600 i

,400

1

,200

,000

1

Other North

American

800

600-,

400-

1966 1971 1976 1981 1986 1991

NOTE: Firms are ranked by sales as listed in the International Fortune

500. Some analysts suggest that this figure would be less dramatic if

adjusted for exchange rate fluctuations.

SOURCE: OTA database compiled from annual reports, Fortune 500

International, and Standard and Poor’s Register.

of the Omnibus Trade and Competitiveness Act

of 1988.6 Despite these measures, for most of the

1980s, the U.S. manufacturing base continued to

erode and the U.S. standard of living slipped, both

in absolute terms and relative to our major trading

partners. 7

Concern about MNEs is heightened when firms

based in a single nation or region appear to win

more than their expected or fair share of the global

economy, and the suspicion persists that nationalist policies helped them to do so. In the late 1960s,

for example, European journalists and policymakers

warned that if the ‘‘invasion” of Europe by

American MNEs was not stemmed, Europe would

become a subsidiary, with industrial and technological development directed by MNEs based in

the United States. In words echoed in recent

1966 1971 1976 1981 1986 1991

NOTE: Sales are calculated in nominal dollars. Some analysts suggest

that this figure would be less dramatic if adjusted for exchange rate

fluctuations.

SOURCE: OTA database compiled from annual reports, Fortune 500

International, and Standard and Poor’s Register.

discussions of Japanese investment in the United

States, one journalist described the “assault” in

Europe by U.S.-based MNEs: “Most striking of

all is the strategic character of American industrial penetration. One by one, U.S. corporations

capture those sectors of the economy most

technologically advanced, most adaptable to

change, and with the highest growth rates. ’

This view helped mobilize government policies intended to foster indigenous European

technology development and industrial competitiveness. Most of the major industrial powers of

Europe created national champions, protected

their infant industries, restricted inward FDI,

sponsored government-funded R&D programs,

and subsidized essential industries. This pattern

continues within the European Community (EC),

6 Super 301 authorized the U.S. Trade Representative to retaliate against trading partners for persistent unfair trading practices, but has now

lapsed due to sunset provisions in the 1988 legislation,

7 On the erosion of the U.S. manufacturing base, see U.S. Congress, office of Technology Assessrnen~ Making Things Betier: Competing

in Manufacturing, OTA-ITE-443 (Washingto@ DC: U.S. Government Printing Office, February 1990); and on the relative decline of the U.S.

economy, see U.S. Congress, OffIce of Technology Assessment Competing Econonu”es: America, Europe, and the Pacific Rim, O’IA-lTE-498

(Washington DC: U.S. Government Printing OffIce, October 1991).

8 Jean-Jacques Servan-Schreiber, The American Challenge (New York NY: Anthenium, 1968), p. 12.
10 I Multinationals and the National Interest: Playing by Different Rules

with the implementation of EC directives that

extend R&D subsidies and preferential government procurement to EC firms. That these policies encourage firms to establish production

within the EC is supported by evidence of the

continued high rate of FDI, despite recessionary

conditions. 9

In contrast, the U.S. Government appears not to

have articulated a strategic concept of the national

interest. It has, instead, continued to define the

national interest in terms of the more global

objective of promoting free and open trade and

investment among the advanced industrial nationsand has deviated from these principles only under

extreme pressure from special interests. As the

U.S. technological and industrial lead diminishes

relative to its trading partners, this approach is

proving more difficult to sustain.

The interests of all nations ought to be fairly

straightforward-quality jobs, a rising standard

of living, technology and industrial development,

ensured rights of workers and consumers, and a

high-quality environment at home and globally.

But the interests of nations diverge when there is

a zero-sum economic game; for example, during

a sustained global recession, or when one or more

advanced industrial nations adopts a mercantilist

perspective on world trade. They can also diverge

over time when differences in the policy systems

of disparate nations or regions become too

extreme, when the principle of national treatment

is applied by some states and not by others, and

when MNEs doing business in one country can

operate with considerably more latitude than in

other countries.

As compared to nations, the interests of MNEs

are far more situation-oriented and linked to

opportunity. The specifics differ from industry to

industry and from firm to firm within particular

sectors. Because of their internal flexibility and

ability to adapt to external circumstances, MNEs

can reconfigure their operations and assets to

meet the requirements of markets and host

governments around the world. Increasingly they

seek skilled labor, intellectual resources, finished

components, capital, and physical infrastructure

in different national jurisdictions. In this sense,

they are well-equipped to deal with the various

asymmetries among the policy regimes of Europe, Japan, and the United States. What they fear

most is unpredictable change, change that can

take the form of shifting market factors, government regulation, or labor relations-such as the

violent labor upheavals in South Korea in 1988

and 1989. Such changes can force MNEs to

abandon established strategies, and thereby internalize the costs of adjustment, either as direct

financial losses or as lost opportunities. Firms

desire what only nations can provide: a stable and

predictable political and economic environment

conducive to international business.

In specific cases, the interests of MNEs and

nations may diverge sharply. From a firm’s

perspective, moving assets abroad may be necessary to meet competition that has access to

lower-wage labor, less onerous taxes, government support for R&D, or even a protected home

market. But from a policy perspective, the firm

may represent part or all of a key national asset.

Because of their ability to adjust to a wide range

of external factors, many MNEs can play one

national political jurisdiction off against another.

Their motivation to do so may increase as global

competition heats up and once-proprietary technologies become widely diffused around the

world.

Some analysts believe that globalization of

MNEs may collectively exert a steady downward

pressure on wages, environmental standards,

health and safety, and worker benefits. Some are

concerned about the erosion of democratic principles, as decisions made in corporate boardrooms

and among trade negotiators increasingly affect

g FDI flows into the EC from non-EC countries were apprmi.mately $86 billion in 1990, $67 billion in 1991, and $70 billion in 1992

(estimate). Bank for International Settlements, 63rd Annual Reporr, 1993.
Chapter l—The Importance of Multinational Enterprises I 11

workers and consumers around the world.l0 This

scenario echoes the more parochial conditions of

19th century America, when one state lost major

firms or whole industries to another state. The

difference today is that the winners might not

reside in the United States.

While the social impact of MNEs is not the

focus of this study, policymakers are finding that

the debate increasingly extends beyond narrow

questions of economic advantage. As the European nations are now discovering, the dynamics

of cost competition in the global economy can set

up a basic and continuing conflict with the social

standards long advocated by governments in

industrial societies. These include worker benefits, environmental quality, and progressive tax

codes, among others. To the extent that global

finance and production function in a relatively

unregulated environment, this conflict may be

inescapable, not just for the United States but for

competitor nations as well. The Office of Technology Assessment (OTA) has recently addressed

these issues with regard to the proposed North

American Free Trade Agreement.11

The structure of multinational industry is

undergoing a transformation, and it is transforming national economies with it. The change is

characterized by globalization of markets and

some fins, widespread excess capacity in mature

industries, a tendency toward consolidation in

many (but not all) sectors, deepening international cooperation and competition among fins,

decreasing product-cycle times, and rapidly escalating costs of technology development. The

potential consequences of these changes are

unclear. Nevertheless, many NINEs appear to be

moving toward a more widely distributed pattern

of sourcing, foreign investment, and strategic

alliances with other firms. (See chapter 5 for an

overview of international strategic alliances.)

Their reasons are complex: some seek to

optimize global resources, some to hedge against

unfavorable national policies; others hope to

reduce technical, financial, and market risks.

Responding to these changes presents enormous

challenges both to nations and to companies. The

principal concern is that MNEs are too important to national and global well-being to have

this process proceed in a totally ad hoc manner, and that doing so could lead to economic

dislocation and heavy costs of adjustment for

nations and companies alike.

ABOUT THIS REPORT

This report is the frost publication of OTA’s

assessment of Multinational Firms and the U.S.

Technology Base. It was requested by the Senate

Committee on Commerce, Science, and Transportation and the Senate Committee on Banking,

Housing, and Urban Affairs. The major findings

of this report are presented immediately following this section. Although the findings suggest a

number of policy options, this chapter does not

propose specific policies for congressional consideration, but instead it presents a framework for

a discussion of new and largely untried approaches to international trade and investment.

The final report of this project, to be published in

1994, will propose specific policy options in the

context of particular industries.

The goal of this assessment is not to formulate

a series of unilateral national regulations, although that course should not be dismissed out of

hand, but to suggest a framework for concerted

multilateral action to construct a system of

international commerce--one that constrains mercantilism, balances interests among nations and

between nations and fins, and facilitates business conditions conducive to international commerce. Fundamental to such a system is the

10 will~ Greider, who will Tell the people: The Betrayal of Amen’can Democracy (New York, NY: shOII & Schust~, 1992),

pp. 377-378.

11 us, conwe~~, Office of T&~o]og Assessment, u,s..&fe<~ico Trade: pul/inL, Apart or I’ull;ng Together?, 1~-545 (w~hitlgto~ DC:

U.S. Government Printing Office, October 1992).
12 Multinationals and the National Interest: Playing by Different Rules

maintenance of a high standard of living in the

industrialized world and the continued improvement of less developed economies. This would

have to be accomplished in the context of the

protection of the rights of labor and convergence

toward higher environmental standards throughout the world.

The problems besetting the system of international business and trade are exceedingly complex. The structure of multinational industry is

evolving far more rapidly than the rules that

govern its conduct. And, as already stated, the

policy approaches of major industrialized nations

have diverged significantly in ways that may

ultimately undermine the post-World War II

system of international trade and investment.

With these thoughts in mind, this first report

should be read as a primer, which develops a

common understanding around which future policy issues and choices can be articulated.

The body of the report, chapters 2 through 6,

describes and analyzes some of these issues,

starting with an overview of the way in which

multinational industry is organized and has developed over the past 25 years (ch. 2). Chapter 3

provides a comparative framework upon which to

evaluate worldwide foreign direct investment.

The chapter analyzes the critical policy differences between the United States, Japan, and the

European Community, as well as the costs and

benefits of the current U.S. policy of national

treatment. The difficulties presented to foreign

firms trying to invest in Japan are provided as a

special case. Chapter 4 concentrates on the

activities of Japanese MNEs in the United

States-activities that have been the focus of

discussion and congressional debate over the past

several years. Chapter 5 addresses the growth of

strategic international business alliances, and

their implications for the evolution and regulation

of multinational commerce. The final chapter

traces the emergence of global capital markets

during the past two decades and examines some

of the principal implications for MNEs and

policymakers. Each of the chapters begins with a

brief summary that is followed, when appropriate,

by the major findings of the particular chapter.

This report concentrates on large-scale MNEs,

many of which appear on the Fortune 500

international list, although it does not exclude

analysis of smaller companies with overseas

subsidiaries. The OTA database, on which several

of the tables and figures rely, is comprised of

basic statistics on the 500 largest MNEs in the

world .12 The emphasis on large MNEs stems from

their ability to marshal tremendous economic,

technological, and political resources. Some of

these companies can mobilize technology on a

scale matched by only a few nations. Individually,

some MNEs are powerful enough to affect

significantly the balance of trade among nations

in particular industries.

The report also concentrates on manufacturing

NINEs, although it does not exclude services or

other sectors of international commerce .13 This is

due to the critical linkages among technology

development, advanced manufacturing, and the

competitiveness of nations, as well as the established concerns about the relative decline of

manufacturing in the United States.14 It is also

partly in response to concerns expressed about

manufacturing by the congressional committees

that requested this assessment. This report draws

extensively on the analysis and findings of

previous OTA work, particularly on Competing

Economies, which addressed America’s comIZ me ~~~e, WMA con~ abut 40,000 data pints, was drawn from three sources: StdStiCS publkki from 1%6 UKOU@ 1991 fi the

Internationid Fortune 500 List; data purchased from Standard& Poors; and data culled from over 500 annual reports of major corporations.

13 For m ove~ew of the s~i~ sector, see U.S. Congress, Office of Technology Assessmen4 Internafi”onal competition itI i$e?VkeS,

OTA-ITE-328 @ihShi@O~ DC: U.S. hV ernment Printing 0f31ce, July 1987).

14 ~r mom dew on problems associated with manufacturing in the United States, see Muking Things Better, op. Cit., fOOtQOte 7.

15 Competing Economies, op. cit., foo~ote 7.
Chapter l—The Importance of Multinational Enterprises I 13

petitiveness problems as compared with Japan

and the European Community .15

MAJOR FINDINGS

Finding 1:

The modern MNE is a highly flexible and

adaptable form of business organization. It can

take many different forms (see table l-l). MNEs

configure and reconfigure their operations to

meet diverse requirements, including those

imposed by different governments, or to take

advantage of opportunities and inducements

offered to them by governments.

Finding 2:

Technology differences have decreased among

competing firms since the late 1960s. The absolute technology superiority of an IBM, AT&T, or

Boeing has been offset by the rise of capable

competitors worldwide. The traditional U.S. advantages of privileged access to broad, deep, and

liquid capital markets, as well as large economies

of scale and scope, have similarly leveled off. In

this context, the policies and actions of governments may be decisive in determining which

MNEs prosper in global competition. At a

minimum, they will influence both which competitors will succeed and where state-of-the-art

technology development and manufacturing take

place.

Finding 3:

The structure of the MNE system is changing rapidly. Excess capacity and increasing

competition are leading to consolidation and

shakeout in many global industries such as

consumer electronics, automobiles, pharmaceuticals, and steel. A coherent system of international

trade, investment, and monetary polices has not

emerged to meet the challenges of the global

economy.

Finding 4:

Instead, broad asymmetries in the policy

regimes of the major trading nations have

developed-especially market access, foreign

direct investment, financial, and industrial

policies related to the activities of MNEs. These

asymmetries, when combined with major shifts in

the global economy and protectionist responses to

them, contribute to increasing trade frictions and

tensions in international relations.

Finding 5:

Public policies and private sector initiatives

have combined to restrict foreign direct investment in some OECD nations to a level far

lower than that of others. (See figure 1-8.) In

Japan, for example, the ratio of outgoing to

incoming FDI in 1990 was 20 to 1 as reported by

Keidanren, Japan’s premier business association.l6 The Japanese Government has acted both

to assist domestic firms and to ensure that the

domestic economy remains self-sufficient in designated industries and technologies. Some analysts suggest that the climate for FDI in Japan is

improving, in part due to efforts by the Japanese

Government. But the increase in FDI into Japan

is moderate, and the evidence of real opportunities for foreign investors in Japan is inconclusive. 17

Finding 6:

Governments remain influential in dealing

with MNEs. The U.S. Government, however, has

opted to minimize its influence over many aspects

of MNE behavior in the United States. This

attitude, as reflected in government policies, is in

stark contrast to Japan and several EC member

states. Twenty-five years ago, the United States

was the center of gravity for world commerce and

technology development. Today that center is

slipping away, as foreign MNEs increase their

penetration of U.S. markets and U.S.-based MNEs

16 K~&~co~& OnkitHMtI“onal Industrial CooperatiorL ‘Y.rnprovernentof the Investment Climate and Promotion of Foreign Direct

Investment Into JaptQ” Oct. 27, 1992.

17s= C. Fred Bergstcnand Marcus Noland, Reconcilable Differences? UnitedStates-Japan Economic Conflict (Washington DC: Institute

for International Economics, June 1993), pp. 81-82.
14 I Multinationals and the National Interest: Playing by Different Rules

Figure 1-8-Ratio of Direct Investment Abroad to

inward Foreign Direct Investment

in Selected Countries, 1990

“~ 1

20-

15”

10”

5-

o–

20.5 I

2.5

1.3 1.2

r? \

Japan U s . U.K. Germany

NOTE: The ratios are derived by dividing outward by inward FDI.

SOURCE: MITf, “Measures for Promoting Foreign Direct Investment in

Japan,” Sept. - Dec. 1992, chart 3.

shift their attention and assets to expanding Asian

markets and Europe. The U.S. Government has

not developed sophisticated and flexible policy

instruments or the institutional capacity to address this shift.

Finding 7:

Many MNEs are increasingly “multi” and

less “national” than in the past; there appears

to be a growing divergence of national needs

and the needs of these MNE organizations.

This finding is less true of Japanese and some

European-based MNEs, where companies tend to

retain a stronger national identity. In the European case, some major MNEs are owned or

directly subsidized by the state. In Japan, formal

government policies and informal administrative

guidance-as well as the signals effectively

embedded in the structure of business networks—

have encouraged companies to consider and act in

the national interest.

Finding 8:

The interests of U.S.-based MNEs frequently

diverge from the U.S. national interest at least

in part because the U.S. Government has not

specified what that interest is. In the past, the

U.S. Government defined the national interest in

abstract and international terms, as the maintenance of free and open trade, with the understanding that an expanding global economy means a

rising standard of living for all major trading

nations. Several high-ranking corporate officers

told OTA that in order to survive, they are taking

actions they believe are not in the national

interest, including selling off key U.S. assets and

placing R&D facilities and advanced manufacturing plants abroad.

Finding 9:

U.S.-based firms no longer dominate the list

of the largest MNEs. This decline reflects in

part the relative decline of the U.S. economy

and the rise of Japan. Of the 500 largest NINEs

in the world today, 157 are based in the United

States, 168 in Europe, and 119 in Japan. In the late

1960s, 304 were U.S. companies, 139 were

European, and 37 were Japanese. Of the 147 new

foreign-based firms on the list, 82 are Japanese,

29 are European, and 36 are spread among 14

additional nations (see figures 1-6 and 1-7). The

steady rise in the number of foreign-based MNEs

is exerting pressure on U.S.-based companies and

on the viability of important industrial sectors in

the United States.

Finding 10:

The number and importance of international strategic alliances (ISAs) are increasing

rapidly, but their overall significance is not

well-understood. This trend is partly a result of

intensifying international competition in many

industries, and partly a result of dramatically

escalating costs associated with technology development and bringing new products to market.

There is concern that strategic alliances may

weaken U.S. technology leadership in some

industries by transferring technology to foreignbased firms. Conversely, some analysts cite the

beneficial transfer of process technologies to the

United States, particularly from Japanese-based

manufacturing fins. In industries and product
Chapter l—The Importance of Multinational Enterprises I 15

areas characterized by high barriers to entry and

oligopolist competition, ISAs may present the

potential for cartelization and even collusion

among alliance partners. Until such time as

egregious examples are brought to light, companies involved in strategic alliances will have to

exercise a discipline of self-restraint.

Finding 11:

For an increasing number of firms, multinationalization represents a strategic response to

a changing financial environment characterized by rising international capital flows, more

open capital markets, expanded financing options, and volatile exchange rates. Because they

have diversified operations in a number of national jurisdictions, many firms can take advantage of remaining regulatory and tax differences

to hedge some of the risks created by increased

financial uncertainty. Notwithstanding such strategies, productive new investments can still be

undercut by the complexity of risk management

in rapidly changing national and international

markets.

Finding 12:

Many U.S.-based MNEs have learned to

optimize their operations on a regional or

global basis. It is, therefore, likely that movement toward a more managed trading system

or a more highly regulated financial environment could force firms to adapt and reconfigure their operations.

Finding 13:

Japanese MNEs have used both domestic

government support and the support of the

keiretsu corporate ties to move aggressively

into U.S. markets in numerous key sectors

such as autos, semiconductors, and consumer

electronics. They have drawn effectively on the

technological resources of U.S. assets such as

innovative small firms and world-class university

research.

Figure 1-9-U.S.-European Community Direct

Investment Position, 1980-1992

250 ~ - -

200-

2

: 150- EC FDIUS

m

c.- \

.: 100-

a USDI in the EC

(Y

5 0

1980 81 82 83 84 85 86 87 88 89 90 91 92

NOTES: FDIUS Is foreign direct investment in the United States; USDI

is United States direct investment abroad. All data are determined on

a historical cost basis and are not adjusted for inflation. EC data after

1981 includes Greece and after 1986 includes Spain and Portugal.

SOURCE: U.S. Department of Commerce, Survey of Current Busimss,

August issues, 1982-92; U.S. Department of Commerce, Bureau of

Economic Analysis, “Net Investment Pmsition, 1992,” press release,

June 30, 1993.

POLICY DISCUSSION

Asymmetry in the national policies that influence MNE trade, investment, and market access

among Europe, Japan, and the United States is

stark. European governments, caught in the intersection of national sovereignty and the evolving

rules of the EC, often vacillate on trade and

investment issues between promoting policies

that tend toward closure and others that stress

bilateral reciprocity.

It is difficult to generalize about a European

position because countries vary in the policies

they promote. French and Italian initiatives often

place conditions or restrictions on trade and MNE

investment, while the British seek greater access,

at least in FDI. In the aggregate, however, the

European direct investment position in the United

States is comparable to the U.S. direct investment

position in the European Community (see figure

1-9). Even though German governments have

consistently advocated an open trade and invest-
16 I Multinationals and the National Interest: Playing by Different Rules

ment system, they nevertheless often acquiesce to

French and Italian demands for constraint of

imports, foreign investment, and the activities of

foreign-based MNEs. Many German firms have

enjoyed the best of both worlds, as exporters and

advocates of free trade on the one hand, and as

beneficiaries of European protectionism on the

other?

Japanese behavior bears little comparable ambivalence. Successive Japanese governments have

favored or tolerated market closure in both trade

and investment since 1945—to the increasing

detriment of many foreign-based MNEs. In recent

years, many formal legal barriers have come

down, but structural ones have increased, offsetting the legal gains. Although Japan has liberalized outward FDI, joint ventures remain the

principal avenue of market access for U.S.-based

MNEs. These often involve minority investment

positions for the U.S. partner, a significant

transfer of American-origin technology to Japanese concerns and, on occasion, apparently preset

limits on the market share the joint venture

company can attain in Japan.18 At the same time,

some Japanese affiliates in the United States have

transferred important management techniques

and process-related technologies to U.S. companies. Figure 1-10 shows the disparity in the

U.S.-Japan direct investment position over the

past decade.

Both the structural impediments that exist in

the private sector, and the reluctance of many

foreign-based MNEs to commit resources to

overcome de facto barriers to investment and

trade, contribute to the failure of many U.S.-based

MNEs to achieve a credible and commensurate

presence in Japan. There is, nevertheless, growing

Figure I-l O-U.S.-Japan Direct Investment

Position, 1980-1992

100 ———

90

80

~ 70

[ /

,-

; 60-

m

.s 50

b

s 40 .-(n Japanese FDIUS

: 30

\ /

. -

20 Y -- R

- -- -

\,

o

USDI in Japan I 1 I

198081 82 83 84 85 86 87 88 89 90 91 92

NOTES: FDIUS is foreign direct investment in the United States; USDI

is United States direct investment abroad. All data are determined on

a historical cost basis and are not adjusted for inflation.

SOURCE: U.S. Department of Commeree, Survey of CurrentBus/ms,

August issues, 1982-92; U.S. Department of Commerce, Bureau of

Economic Analysis, “Net Investment Position, 1992,” press release,

June 30, 1993.

evidence that many problems faced by foreign

firms in Japan could be alleviated by concerted

action on the part of the Japanese Government,

and there is increased interest in pursuing a more

activist approach that includes quantitative goals

for U.S. trade and investment with Japan, both in

the U.S. Government and the private sector.l9 In a

recent example, foreign-based firms achieved

20.2 percent penetration of the Japanese semiconductor market in the fourth quarter of 1992—in

large measure due to administrative guidance

promulgated by Japan’s Ministry of International

Trade and Industry (MITI).20

The relationship between translational investment and trade is the subject of much recent

113 Several ~mp~es told OW tit fheir Japanese joint venture operations have been limited to a Specific IIMUht h.

19 Cowfl on Comwtitivene55, Ro~map for ResuIts: Tr~e policy, Technology a& Ame~”can Compt?fitiw?rwm (Washington ~;: June

1993), pp. 1011.

m ~~uwntieco~lmion of~e [20pmcent semiconductor] agreement, the Japanese Government attempted fianti~ya ~ries Of ~~~io~

vis+-vis the Japanese end-user industries. ’ Yui Kimura, ‘Inward Foreign Direct Investment in the Semiconductor Industry in Japanj’ a paper

presented at the Conference on Foreign Direct Investment in Japan at the School of Organizxttionand Management, Yale University, May 14-15,

1993, p. 18. The uiticalrole of MI’TI’s administrative guidance in meeting the 20 percent goal by the end of 1992 was cmfiied in discussions

between OTA and staff of the U.S. Trade Representative.
Chapter l—The Importance of Multinational Enterprises I 17

analysis. Intrafirm trade may already exceed that

of international trade among unaffiliated firms.21

One authority calculates that, for both Japan and

the United States, intrafirm trade combined with

the exports of foreign-owned affiliates accounted

for about half of all trade in the mid-1980s.22

Using a more conservative measure, another

authority estimates that in 1988, intrafirm trade

accounted for approximately two-fifths of all

imports to the United States, and for about

one-third of all exports of U.S. firms.23

These figures indicate that, to an increasing

extent, trade is closely coupled to and follows

from investment by MNEs; that is, parent companies tend to supply their foreign subsidiaries and

vice versa. Accordingly, if a nation closely

controls or restricts the investments of foreignbased MNEs, then it also controls or restricts a

significant proportion of related international

trade. Conversely, a policy aimed at attracting

inward FDI, if successful, would also attract more

imported goods and services from foreign corporate investors. This helps to explain the simultaneous increase in Japanese direct investment in

the United States and the increase in the balance

of trade deficit with Japan, for example, in the

automobile sector in the late 1980s.

The evidence of asymmetry in national FDI

policies (documented extensively in chapter 3),

and the structural importance of translational

investment to the global pattern of trade, raises

the question of whether the United States might

reconsider its present policy of national treatment.24 Throughout the 1980s and into the 1990s

trade tensions remained high, and “industrial

countries resorted increasingly to non-tariff measures to protect trade-sensitive industries from

foreign competition. ”25 With a general propensity toward trade blocs and with the Uruguay

Round unresolved, the issue of translational

investment takes on increased importance. As the

foundation of intrafirm trade, such investments

provide a safety valve against global market

closure. The United States appears to be presented with three broad policy approaches.

Three Possible Approaches

Unilateral National Treatment and Open Markets

The first approach, the currently employed

policy of unilateral national treatment, is predicated on the principles of open markets, free

trade, and unimpeded investment. The United

States has tolerated defections from these principles by other nations that have employed overt

industrial policies or more subtle, structural

barriers to imports, trade, and investment. On the

positive side, investments of foreign MNEs have

helped compensate for the low savings rate in the

United States, added financial liquidity, and

instituted various organizational initiatives in

manufacturing production. These benefits cannot

be dismissed lightly.

In contrast, there is increasing evidence that a

partially open system, characterized by asymmetries in national policy frameworks, may have

21 JOhII M. Stopford and SUSan Smmge, Rival States, RiFal Firms: Competition for World Market Shares (Cambridge, w: Cmbridge

University Press, 1991), p. 17; and World Investment Report 199.?, op. cit., footnote 1.

22 De~ne Julius, GIo/M[ Companies and Public Policy: The Groti’in~ Challenge of Foreign Direct Investment Wew yOrk m: COU.IICfl

on Foreign Relations, 1990), p. 74.

23 Denfis J, Encamatio~Riva/S Beyond Trade. Anwrica I’ersu,s.lapan in Gfobal Competition (Ithi3C% NY: COrtN311 ufiverSi& PKXS, 1992),

p. 28.

~ me member States of tie OECD formally subscribe to the principle of national treatmen4 which means tit governments s~ not

discriminate against or in favor of any firm based on UK nationality of its owners.

25 ~temtional Mone~ Fund, I.rLTue.r and De\’clopment~ in international Trade polic>’. World Economic and Financial Smeys

(Washington DC: International Monetary Fund, August IW2). This report also noted that in the 1990s, “. . . protection persists in agriculture

and declining sectors and has spread to newer ‘high-tech’ areas (aerospace, electronics, biotechnology). . . .In this uncertain trade environment

countries are tending increasingly to address their concerns in tk context of bilateral and regional trade arrangements, ’ pp. 1-2.
18 I Multinationals and the National Interest: Playing by Different Rules

significant disadvantages for U.S.-based MNEs,

for technology development in the United States,

and for the overall vitality of the U.S. economy.

Over time, it may lead to the loss of many high

value-added jobs in the United States. A primary

question addressed in this report is whether the

United States can afford to sustain an open,

unilateral system of largely unregulated MNE

access—both in trade and investment-while

MNEs based in several OECD nations enjoy

barriers that preclude or reduce comparable imports and investments, for example, in the automobile and electronics industries. The issue is a

vital one if, as many now contend, trade and FDI

are so inextricably linked in the 1990s that FDI

has become ‘trade-creating, ’ rather than ‘tradedestroying.’

The competitive decline of many U.S. fins,

and the increasing evidence that the U.S. economy has not benefited fully from the influx of

trade and investment in the 1980s, suggests that

a reconsideration of a unilateral policy of national

treatment may be warranted. But the fear of

advocates is that attempts by the United States to

redress this imbalance could lead to a series of

undesirable outcomes—for example, increased

protectionism, prolonged global recession, or

trade wars. Any adjustment in policy must

address these legitimate concerns.

2. Enhanced Protection in the United States

The second possible approach would be to

restrict foreign-based MNE investment and selected imports in the United States severely, as

some appear to advocate. The introduction of

wholesale sanctions against foreign direct investment in the United States (FDIUS), or an increase

in protectionist trade practices, would likely

generate domestic’ problems for the United States,

as well as problems for the effective functioning

of an integrated capitalist system. Neoclassical

economists call for maintaining a free trade and

investment system because they fear any limitations will cause a spiraling descent into a 1930sstyle depression.

Movement toward trilateral trading zones in

Europe, Asia, and North America provides evidence of the allure of protectionist trade and

investment practices, despite claims that reduced

internal barriers are a sign of growing trade

liberalization. The United States has worked

diligently to avoid the growth of protectionist

barriers through the GATT, although the problems of the Uruguay Round persist.

3. Specific Reciprocity

An intermediate approach embodies, more

directly, 26 the notion of reciprocity in policy”

Reciprocity emphasizes equivalence and contingency. Equivalence suggests a balanced exchange of benefits among nations, while ccntingency emphasizes conditional action to attain that

balance. 27 Collectively, they might reasonably be

expected to contribute to a doctrine of fairness,

whose instruments are flexible and directed

toward a policy of openness, but also amenable to

greater closure in particular sectors if circumstances demand.

Some critics have equated reciprocity with

mercantilism and protectionism.28 Some even

suggest that responding in kind to unfair foreign

trade and investment practices would constitute a

first step toward a descent into worldwide market

closure and possibly global depression. In this

view, the United States should maintain its stance

as exemplar and defender of liberal trade, investment, and financial policies, even when significant damage is thereby inflicted on key sectors of

26 ~e ~Mclple of ~tio~ ~eatment encompu5es tie notionof‘‘fise’ r~ipr~i~, which rn~ that brc)acI, unihtterd action tO open

markets in one country should be reciprocated by other countries, although there is no direct requirement to do so.

27 Robert Keohane, “Reciprocity in International Relations,” International Organization, vol. 40, No. 1, winter 1986, pp. 5-8.

28 see, for exaple, Jagdish N. B@gwati and Douglas A. w “The Return of the Reeiprocitarians-U.S. Trade pofiw ‘1’bdaY)’” World

Economy, 10: 1, June 1987, pp. 109-130; and Edmund Dell, “OfFree Trade and Reciprocity,” WorldEconomy, vol. 9, June 1986, pp. 1:!5-1 39.
Chapter l–The Importance of Multinational Enterprises I 19

the U.S. economy and technology base. It is clear

that specific reciprocity represents a distinct

choice.

Specific reciprocity involves calculating a

‘‘careful equilibration of benefits’ and rules that

are “designed to achieve particular behavioral

outcomes. ’29 It may provide effective instruments for addressing the problem of asymmetry

in policy-by obtaining compliance with the

terms of bilateral or multilateral agreements

through the implicit threat of reciprocal action.

Because it can lead to the elimination of foreign

barriers, it can expand free trade and investment. 30

While reciprocity has sometimes been identified as protectionist, it may also serve as a

principle of equity whose strategic instruments

can promote greater free trade or comparable FDI

rules. In the past, the United States has generally

pursued unilateral principles in the realm of FDI

that ignored transgressions by its trading partners.

Specific reciprocity emphasizes the contingent

nature of the action of other countries with

advanced industrial economies. It has its own

advantages and disadvantages. Used prudently

and conservatively, it could provide leverage for

the U.S. Government to ensure access in other

OECD countries for trade and investment by

U.S.-based firms. Specific reciprocity has the

strategic advantage that it can be applied in the

context of bilateral negotiations or multilateral

forums, and can carry sanctions that are unilateral

in application. If used prudently, reciprocity

emphasizes the capacity of the United States for

flexibility, allowing appropriate policies tailored

to particular market sectors. It supports more, and

more varied, instruments of policy, while escaping the simplistic choice between free trade and

protectionism.

Countervailing potential problems, however,

could arise from implementation of a policy of

specific reciprocity. Foremost is the possibility of

a shift to closure rather than establishing reciprocity, if it is applied on a quid pro quo basis, or

not employed with a degree of reserve and

acumen. Threats of protectionism might, therefore, escalate in the absence of restraint and

diplomacy. Indeed, reciprocity may often call for

a less assertive tone, but more consultative forms

of coordinated management between the U.S.

Government and its major trading partners. Specific reciprocity requires competent management

and effective diplomacy, but may present the

basis for a constructive approach.

29 Stephen D. Krasner, ‘‘TradeConflicts and the Common Defense: The United States and Japan,” Political Science Quanerly, vol. 5,1986,

p. 788.

W SW, for e~ple, Beti v. Y~borOU@ and Robert M YarborouglL ‘Reciprocity, Bilateralkq and ‘Wonomic Hostages’: Self-MOK@J

Agreements in International Trade,’ lnternutionaf Studies Quurterly, (1986), 30, pp. 7-21, especially p. 19. Keohane, op. cit., footnote 27,

discusses this possibility in more general terms, on p. 27.
Multinational

Industry

and

National

Differences 2

T

his chapter examines the structure of multinational

industry and how differences in the policies of national

governments have affected that structure. It finds that

differences in government policy and corporate behavior

among nations may have broad implications for national

sovereignty, for standards of living in the United States and other

countries, and for international standards vis-a-vis wages, the

environment, and workplace conditions.

This chapter is also intended as a primer for readers who may

not have extensive experience with or knowledge of multinational enterprises (NINEs). Readers familiar with the complexities of MNEs and the policy environments in which they operate

may wish to proceed to later chapters.

The development of the multinational enterprise is a logical

extension of the rise of the modern industrial corporation in the

19th century. At first, businesses pursued scale and scope within

their domestic markets. However, competition at home, opportunities abroad, the need to reduce financial and other risks, and

foreign barriers to imports led increasing numbers of firms to

establish and then expand overseas operations. These facilities

have become important conduits for trade, investment, and

technology flows.

At the same time, this expansion of business activity has

brought companies and nations into ever more direct competition. As technology and management practices diffuse, workers

in the Organization for Economic Cooperation and Development

(OECD) countries increasingly find themselves in direct competition with one another, and with workers who are willing to

accept lower wages, benefits, and workplace health and safety

conditions. As they capitalize on these differences, multinationals can inadvertently become vehicles for declining standards.

21
22 I Multinationals and the National Interest: Playing by Different Rules

As the structure and behavior of the world’s

leading industrial firms has changed, so too have

the nations represented in their ranks. In the early

1960s, most MNEs were based in the United

States. In 1966, for example, 61 percent of the

world’s largest companies were based here. By

comparison, in 1991 firms based in the United

States accounted for only 31 percent of these

companies. Since the early 1970s, the number of

large MNEs based in Europe, Japan, and South

Korea has increased dramatically.

But the decline in dominance of U.S.-based

MNEs is not due solely to impersonal market

forces in other regions of the world. Many

national governments actively intervene through

such mechanisms as domestic content restrictions

and tariffs to ensure that high value-added activities are conducted within their national boundaries. Indeed, many foreign governments systematically favor national champions and actively

discriminate against foreign firms. Firms based in

protected markets can use profits they might

otherwise have been unable to achieve, along

with government support, to underwrite expansion abroad and/or to exclude firms based abroad

from their key domestic markets. Alternatively, if

uncompetitive in technology, cost, or other factors, they can use their privileged position to

forestall exit from the industry.

Taking into account such host government

pressures and the traditional reluctance of the

U.S. Government to intervene on their behalf,

some U.S.-based companies have transferred

operations and sourced abroad more than they

otherwise might have. In the absence of effective

government policies to the contrary, many U. S.-

based firms can be expected to continue to

respond to host government pressures in ways

that may not contribute to their long-term interests and the strength of the U.S. economy and

technology base.

The frost section of this chapter describes what

a multinational enterprise is and considers why a

fro’s managers might decide to locate distribution and production operations in foreign markets. Different corporate forms that function as de

facto MNEs, such as strategic alliances and

risk-sharing partnerships, are described. A typology of MNEs is offered, with attempts to explain

the implications for national policy and international business of each type of enterprise identified.

In the second section, national differences

among firms are analyzed, with the conclusion

that government policy regimes strongly influence the behavior of their own national firms as

well as foreign firms attempting to enter or

conduct business in their national markets. The

chapter finds that the dominance of U.S. firms

among the ranks of the world’s largest has

diminished markedly over the past 25 years, and

suggests that this is due in part to strategies that

other nations deploy to enhance their domestic

firm’ competitiveness.

In the fina1 section, some implications of MNE

behavior are discussed. The analysis suggests

ways in which MNEs can contribute to or reduce

trade conflicts among nations. It addresses the

influences that different kinds of MNEs exert on

labor, wage, and environmental standards globally.

THE STRUCTURE OF MULTINATIONAL

INDUSTRY

The development of the modern industrial

corporation in the 19th century led firm to pursue

economies of scale and scope.1 Scale means the

size (volume) of the production facilities. In

] See Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA: Bellmap Press of

Harvard University Press, 1977); Alfred D. Chandler, Jr., Scale And Scope: The Dynamics oflndustrial Capitalism (Cambridge, MA: Belknap

Press of Harvard University Press, 1990); Alfred D. Chandler, Jr., ‘‘The Enduring Imgic of Industrial Success,’ Harvard Bw”ness Review,

March-April 1990, pp. 130140.
Chapter 2–Multinational Industry and National Differences | 23

technologically advanced, capital-intensive industries, large facilities can usually manufacture

less expensively than small ones because fixed

costs can be shared among a greater number of

units. Scope refers to the ability of large facilities

to use similar raw, semifinished materials and

intermediate production processes to make a

range of different products.

Much of the cost advantage of large production

facilities depends on a high rate of capacity

utilization that enables investments and other

fixed costs to be spread over a large number of

units. To ensure a sufficient volume of sales,

firms invest in national and international marketing and distribution organizations. Firms also

invest in professional management to coordinate

and monitor their operations, and to allocate

resources. Modern management information systems and organizational design can drastically

reduce the resources devoted to coordination and

monitoring by the firm, providing potential advantages in response time and cost.

 Why Firms Establish Foreign Operations

Initially, most firms serve their overseas and

domestic customers from a single domestic production and research and development (R&D)

base. 2 In a nearly perfectly competitive world,

with no barriers to entry and very low transportation costs, it would be more attractive to expand

existing facilities rather than establish new plants

abroad. In the real world, however, transportation

costs are often substantial, currency values fluctuate, and governments actively intervene to influence market outcomes. In addition, competitors

seek to gain market power-for example, by

exploiting advantages of scale and scope, product

differentiation, political influence, government

financial support, strategic alliances among two

or more companies, and differential pricing.

A firm may establish overseas operations to

attract local capital, limit risk from currency

fluctuations, serve its foreign customers, or reduce the manufacturing costs of products intended for its domestic customers. Such an action

can take place in response to competitive pressures, as a means of reducing risk or enhancing

profitability, and as a direct result of government

policies intended to force firms to locate part of

their value-added chain within the host country.

Overseas production and R&D operations can

enhance a firm’s efficiency if they are located in

a region particularly strong in a desired capability. Locating facilities in areas with low-cost

labor, energy, or other inputs may significantly

reduce costs.3 In some cases, overseas manufacturing can significantly reduce transportation and

inventory costs of finished products. Local operations may help a firm adjust its products or

services to meet distinctive differences in consumer taste, as well as

requirements. 4

Overseas operations can

tion of markets controlled

They can also be used to

regulatory or other

facilitate the penetraby entrenched fins.

rapidly develop new

markets and preempt foreign or local competition.

Overseas operations may be used to deny opposing companies a protected domestic base from

which to subsidize an export drive into key

markets in the United States or elsewhere.

Host government policies often influence both

the decision to establish overseas facilities and

their nature. Governments and businesses engage

in dynamic and iterative relationships. GovernZ Cbristos N. Pitelis and Roger Sugdem The Narure of the Translational Finn (lmndon: Routledge, 1991).

3 For example, the assembly of automobile wiring harnesses and windshield wiper systems is very labor-intensive. U.S. taritls on completed

assemblies are low. Not surprisingly, such work has migrated to low-labor cost areas such as Mexico. U.S. Congress, OffIce Of Technology

Assessmen4 U.S.-Mexico Trade: Pulling Togefher or Pulling Apart?, ITE-545 (Washington DC: U.S. Government Printing Offke, October

1992), p. 147.

4 Michael Porter, “The Competitive Advantage of Nations,” Harvard Business Review, March-April 1990, pp. 73-93.
24 I Multinationals and the National Interest: Playing by Different Rules

ments often seek to induce firms to transfer into

the country more of the value-added chain than

the domestic market would otherwise support,

while firms seek to shape and respond to government policies in the most cost-effective manner.

Government-imposed barriers to entry, such as

tariffs and local content requirements, provide

firms the opportunity to participate in protected

markets. If the market is large enough, such

policies can lead firm to set up facilities, transfer

technologies to local suppliers and competitors,

and establish joint ventures that would otherwise

not have taken place.

As discussed in box 2-A, companies consider

a wide variety of issues when adding or rationalizing capacity. Some countries impose tradebalancing requirements as part of the price for

participating in a protected market. A firm may be

willing to build a product in a potentially lucrative

protected market, and export it to its home market

to meet trade-balancing laws---even if the cost of

supplying the product to the fro’s domestic

market is increased. For example, if transportation, inventory, and investment costs are taken

into account, U.S. automobile manufacturers

building for U.S. markets often find it more

expensive to manufacture in Mexico than in the

United States. However, to meet the requirements

of the Mexican Auto Decrees and thereby participate in Mexico’s profitable protected market, they

export vehicles from Mexico to the United States,

even when this is more costly.5

Previous expenditures can lock in a firm,

reducing its ability to respond to change. Industries with large capital investments and low profit

margins are more susceptible to lock-in than those

with high margins and low capital commitments.

Plant and equipment that become rapidly obsolete

can be abandoned more readily than those with a

long productive life. Accordingly, the automobile

industry is more locked in by its investments than

the semiconductor industry.

 Strategic Alliances and Risk-Sharing

Partnerships

Strategic alliances and risk-sharing partnerships often are attempts by firms to expand their

scale and scope. (For discussion of strategic

alliances, see chapter 5.) These alliances can

extend the financial, technical, and political reach

of the firm. They can enhance market access,

distribution networks, and manufacturing capabilities, or impose market discipline. They can

speed products to market, reduce financial and

technological risk, lower investment requirements, add or streamline capacity, and lower

costs. Such alliances can increase flexibility by

expanding the boundaries of the firm. In some

circumstances, they can facilitate the development of legal cartels or serve as vehicles for tacit

or explicit collusion to fix prices or allocate

markets.

The strategic alliance formed by IBM, Siemens, and Toshiba, for the design of dynamic random access memory semiconductors (DRAMS),

represents an alliance to reduce joint costs among

three large powerful MNEs in a highly competitive industry. The industry is characterized by

intense competition, short product lifecycles,

escalating R&D and manufacturing investments,

and prices that fall rapidly over time. Profitability

depends upon getting to market before price

erosion starts and then cutting costs faster than the

price erodes. At the same time, costly investments

are necessary to expand capacity fast enough to

capture sufficient market share to maintain the

cycle. Although demanding and expensive, the

technology is relatively well-understood, limiting

the useful life expectancy of proprietary knowledge. As a result, new firms with access to

5 U.S.-Mexico Trade, op. cit., footnote 3.
Chapter 2—Multinational Industry and National Differences I 25

Box 2-A–Rationalizing Production: Considerations Vary

Many observers mistakenly suggest that firms seek low labor costs to the exclusion of other consideration

when either adding capacity or restructuring their operations. Firms balance many factors in reaching such

decisions, including manufacturing philosophy, product quality, workforce quality and costs, transportation costs,

capital costs, competitive position, market characteristics, capacity utilization, labor relations, plant corporate

cultures, and the local supplier base. No single factor can be expected to dominate.

Legal and other requirements make it difficult and expensive to lay off workers in France and the Netherlands,

Britain’s lower wages and benefits not withstanding.1 Plants located in Europe, especially Britain, often have

restrictive work rules and union demarcation lines that hinder productivity. British workers are often less productive

because of their relatively low levels of education and training. Despite all this, Hoover recently chose to close a

plant in Dijon, France and transfer the work to its plant in Scotland where excess capacity existed, labor costs were

less, and the union made concessions to improve productivity in exchange for financial compensation to the

workers.2

GM intends to transfer automobile production from a joint venture with Valmet, a Finnish Government-owned

company, to its German operations. The move will increase capacity utilization in Germany and reduce

transportation costs for components.3 Hitachi has dosed television assembly facilities in the United States and

transferred some oft he work to Mexico and Malaysia.4 Hyundai has transferred its personal computer operations

to the United States to facilitate timely product development and delivery.5

As these examples show, labor costs do not always outweigh other considerations. Nevertheless, firms can

and do attempt to balance differences in labor and social costs, workplace practices, and the regulatory

environment. The greater the competition, the more interested the firm will be in reducing costs. In the absence

of translational standards, regulatory bodies and enforcement, such activities, in aggregate, are not unlikely to

exert downward pressure on wages, benefits, and workplace practices that are unrelated to plant efficiency.

1 mS dis~ssion iS based on: RotMtl Taylor, “Hoover Unveils Twgh Deal at Glasgow plant,” Fina~ckd rimes,

Jan. 26,1993, p. 6; Robert Tayfor, “Hoover Workers Get Lump Sum for Deal,” F/rraric/a/ 7Vnes, Feb. 3,1993, p. 9; David

Goodhart, “Social Dumping: Hardly an Open and Shut Case,” Finanda/ 77n?es, Feb. 4,1993, p. 2; David Buchan, “French

Promise to Make Hoover Pay Dear,” Financial 7irnes, Feb. 4, 1993, p, 2; and Robert Taylor, “Dijon Cleans Up Scottish

Jobs in Reversal of Hoover Move,” F7nanwal hws, Feb. 5, 1993, p. 12.

2 TO ensure efficient operation of the Glasgow plant, Hoover was forced to compensate itS wo~ers for the

abandonment of restrictive work rules, demarcation lines, and a reduction in the premium rate paid to third shift workers.

These payments ranged betwwn 2,650 and 3,150 pounds per worker, SW; Taylor, “Hoover Workers Get Lump Sum for

Deal,” op. cit., footnote 1,

3 Kevin Done, “GM Ends Finnish Production,” Financial 7%nes, Jan. ~, 1993, p. 14.

4 “Company News: Hitachi Closing California Pfant,” 77?e New York 7imes, Jan. 15, 1992, p. D4.

5 John Matioff, “Hyundai to Move Its PC Unit to U.S.,” T5e New York 77mes, Apr. 20, 1W2, p. D3.

substantial financial resources are still able to risk, lower individual firm R&D and investment

enter, even as unprofitable competitors depart.6

costs, a quicker development cycle, and enhanced

The IBM-Siemens-Toshiba alliance appears to profitability. The coalition may provide the possiprovide its members with important advantages, bility of at least tacit market discipline.

including reduced financial and technological

6 Many new and some existing semiconductor producers receive considerable financial support from their mtioml governments. Their

pursuit of market share at the expense of short-term profits has a depressing effect on prices, lowering the profitability of other participants.

Poor profitability can drive out participants dependent on the privale sector for capital.
26 I Multinationals and the National Interest: Playing by Different Rules

Operational control of development is vested

with IBM, probably the most capable player,

reducing technological risk for the participants.

Three firms pooling their investment and resources in an alliance with clear operational

control and lines of responsibility should be able

to develop the product more quickly than any

could alone. If the venture is well-managed, the

costs to each of the participants will be less than

if they had proceeded alone, even if total development costs are greater.

Reduced development times make it likely that

the individual member’s DRAMS will get to

market sooner, commariding a premium prior to

the entry of new competitors. Early production

should give important cost advantages over later

entrants, an advantage that could be accentuated

if at least two of the partners share manufacturing

experience, leading to faster joint cost reductions

than would otherwise have been possible.

Significant cost advantages on the part of the

three partners should support an aggressive campaign to add capacity. This should, therefore,

reduce the incentive for competitors to add

capacity ahead of demand and to initiate price

warfare to gain market share. Any resulting

increase in market discipline would further enhance the coalition’s profitability in the product.

MULTINATIONAL FIRMS TAKE DIFFERENT FORMS

The Office of Technology Assessment (OTA)

has identified six types of multinational firms. In

the case of large diversified MNEs, different

divisions or subsidiaries may fit into different

categories. As a result, the categories are not

intended to be rigid or mutually exclusive. Rather,

they capture the major differences that are relevant to the development of public policy. (See

also table l-l.) The six types of MNEs may be

described as:

● resource-b@,

● export-oriented,

● regional,

● translational,

● global, and

 distributed.

Resource-bused firms were the earliest widespread form of MNE. They are oriented to

agricultural products or the extraction and processing of natural resources, and their processing

for sale in the industrialized countries. Firms set

up operations where the natural resources are

found and/or can be produced cheaply. Minimal

processing is undertaken, generally to reduce

transportation costs or to ensure quality. Oil

companies, mining companies, and fires that

market products that include inputs based on

tropical agricultural commodities often take this

form.

Export-oriented firms have their principal production operations located in their domestic

market and export to other national markets,

although they may have final assembly, service,

support, sales, and marketing operations abroad.

R&D and design activities are usually concentrated in the domestic base. Firms pursue such a

strategy for four major reasons. First, sales abroad

may be too low to provide the economies of scale

for the establishment of efficient-sized overseas

units. Second, higher factor costs can discourage

the establishment of production operations abroad.

Third, government policies in the home base,7

coupled with relatively open target markets, make

it desirable to export rather than establish production facilities in additional countries. Fourth, the

firm may enjoy a monopoly that makes it unnecessary to respond to or preempt competitors.

Export-oriented firms that receive protection or

direct government support at home can pose a

severe threat to competitors located in more open

T This may include a protected national market and fwncial assistance (e.g. subsidies, R&D contracts, export f~”lug, and low-cost

capital).
Chapter 2–Multinational Industry and National Differences I 27

markets, and accordingly may contribute significantly to rising trade friction, If the position of

these firms depends on a technological monopoly

or economies of scale, they may find themselves

targeted by other governments eager to ensure

that domestic firms participate in the industry.

Regional MNEs are firms that have optimized

their operations, including production, around a

regional market, but have not yet achieved

significant sales and operations outside the region. Declining barriers to entry and intensifying

competition have made this an increasingly

tenuous strategy in industries such as mainframe

computers, minicomputers, central office digital

switch equipment, and automobiles. However,

firms can grow and prosper when: products have

high transportation costs; strong regional differences in product specifications and/or consumer

preferences exist; there are high regional barriers

to entry (perhaps associated with regional trading

blocs); and global competitors are evenly

matched, precluding expansion outside of traditional markets. Relatively weak companies may

find themselves confined to this role and under

attack from larger global competitors.

Traditionally, many European MNEs and U.S.

firms fit this description. Government ownership,

with its emphasis on employment, may severely

inhibit companies’ attempts to move beyond this

role. Regional companies often resort to international strategic alliances as a means of expanding

the resources available to them.

Transnational MNEs are firms that have begun

to locate production operations globally, but

depend heavily on their domestic market and

operations for their competitive position, key

production operations, and R&D. Such a firm

would be unable to sustain its competitiveness if

these operations were significantly reduced. Overseas operations usually do not include the most

technologically and organizationally difficult portions of the production process. R&D outside the

domestic base is limited at best, and primarily

intended to customize the product to local requirements and taste. Firms assume the transnational form for a variety of reasons. These

include:

●

●

●

●

Matching costs and revenues.

Transportation costs, factor inputs, manufacturing philosophy, or market growth that

make it more efficient to manufacture, or at

least assemble, in the regional market.

Barriers to entry, such as tariffs and established brand preferences.

Government restrictions intended to induce

the firm to establish operations or to exclude

imports.

Global MNEs have replicated the full value-

-added chain, including substantial product development and often research operations, in more

than one national or regional market. In theory,

such a firm might survive if it sustained the loss

of its operations in its domestic market. In many

cases, this form of organization reflects the

long-term consequences of host government policies intended to exclude or limit imports. As

international sales and assets increase, the firm

may no longer depend on its domestic national

market for scale and scope. This is most likely

to occur in firms whose domestic base is in small

but technologically advanced nations, such as

Canada and some European countries. Development of regional trading blocs in Europe and

North America could over time further reduce the

importance of the domestic base and increase the

importance of the regional base for such fins.

Distributed multinationals are firms that have

optimized their sourcing, production, and R&D
28 I Multinationals and the National Interest: Playing by Different Rules

base globally.8 In some circumstances, this can

provide the firm with advantages in factor costs,

economies of scale and scope, and experience

curve effects that outweigh government interventions to restrict or impose conditions on market

access and subsidize or support national champions. As a result they can be thought of as MNEs

that have limited the influence of both their

domestic base and host government’s policies on

their organizational structure. The actions of

distributed MNEs are driven by the global markets and global competition. In its purest form,

such a firm would have little allegiance to its

historic domestic base beyond advantages relating to the size and openness of the market, the

availability and cost of scarce factors, and government policies.

Distributed MNEs are particularly responsive

to the policies of host governments, although the

response can take the form of exit from a

particular market or geographic location. Countries with more restrictive FDI and trade policies

are likely to receive a greater proportion of work

and manufacturing facilities from distributed

MNEs than might otherwise have been the case.

This is emphasized when local markets are strong

or expanding.

In many cases, the decisions that influence the

nature of the firm are affected by economies of

scale and other advantages that can lead firms to

center specific activities, products, or processes in

either national or regional markets from which

they serve their regional and/or global markets.9

Where they exist, agglomeration economies of

scale reinforce such decisions on a firm or

IO Organizing the firm on a

industry-wide basis.

distributed basis is less attractive if barriers to

entry are high, governments effectively intervene

to shape business resource allocation decisions,

transportation costs are prohibitive, or there are

factors specific to the market.

 Factors That Influence Form

When economies of scale allow (and the

policies of the domestic base government do not

preclude), firms expanding overseas can be expected to locate an increasing proportion of their

assets in their major overseas markets. Determining an appropriate form for a firm is a complex

process with numerous factors. Table 2-1 seeks to

compare the relative importance of selected

criteria that determine the form of organization

that an MNE will gravitate toward over time.

Domestic government policies-especially protected national markets-are often relatively

more important to the export oriented MNE. Host

government policies-including protected markets-make an important contribution in the

regional, translational, global and distributed

forms of MNEs.

As competition intensifies, minimum efficient

economies of scale grow larger, customers become more demanding, and firms become more

sophisticated in their relationships with their

8 Nike is an example of such a company. Design and marketing expertise is centered in the United States. Manufacturing is provided by

subcontractors in the Far East. Working capital is provided by Nissho Iwai, a trading company. Subcontractors, with Nike’s assistance, are

constantly being relocated to take advantage of the best cost and quality available. Nike closed its manufacturing operations in the Philippines,

Malaysia, Brita@ and Ireland when these sites proved uncompetitive, and manufacturing is shifting from Taiwan and South Korea to lowercost sites in Ch@ Indonesia, and Thailand. See: Mark Clifford, “Spring in ~eir Step,” Far Eastern Economic Review, Nov. S, 1992,

pp. 56-57.

g For eqle, Philips has rmentiy decided to concentrate global production of cathodes at a single plant in Blackbum, mti”e ~ tie

United Kingdom. Ln 1993, 60 percent of its global production was located at this site and the balance at Sittard in the Netherlands. “UK to

Get All Philips Cathode Work,” Financial Times, Feb. 3, 1993, p. 9.

10 FOre~ple, tie SiZ of ~e~ket~dmpid technologicdchange provided by the Japanese, Korean, and Taiwanese Comumerelwtmtics

industry and the strength of the Japanese semiconductor manufacturing machinery sector provide additional incentives to locate semiconductor

manufacturing facilities in the region. Each such facility located in the region reinforces the advantages of locating facilities there.
Chapter 2—Multinational Industry and National Differences I 29

Table 2-l—Factors Influencing Type of Multinational Enterprise

Resource Export Regional Translational Global Distributed

Domestic base market size ... , ., .

Transport costs . . . . . . . . . . . . . , . . .

Low-cost inputs . . . . . . . . . . . . . . . . .

Economies of scale . . . . . . . . . . . . .

Technology . . . . . . . . . . . . . . . . . . . .

Government financial assistance . . .

Government ownership . . . . . . . . . .

Currency risk . . . . . . . . . . . . . . . . . . .

Domestic government policy . . . . . .

Protected national market , . . . . . . .

Protected regional market . . . . . . . .

Host government policy . . . . . . . . . .

Host country market size . . . . . . . . .

High Low Medium Medium Low Medium

High High Medium Medium Medium Low

High Low Medium Medium Medium High

Medium High Medium Medium Medium High

Low High Medium Medium Medium Medium

Low High Medium Medium Medium Medium

Low High Medium Low Low Low

Low Low Medium Medium Medium Medium

Low Medium Medium Low Low Medium

Low Medium High Medium Medium Low

Low Medium High Medium Medium Medium

Low Low High High High High

Low Low Medium High High High

SOURCE: Office of Technology Assessment, 1993.

domestic and host governments. In these conditions, the overall structure of international business may tend toward a more distributed mode.

For some products, generally those characterized

by low transportation costs and/or large economies of scale, firms may source from a single

location. For products where coordination, transportation costs, inventory costs, governmentinduced barriers to entry, and differences in taste

and standards prove prohibitive, a firm may

organize its operations on a regional basis.11

Diffusion of technology means that competitiveness will increasingly depend on the effectiveness

of the process of research, development, design,

production, distribution, and marketing rather

than on any single element of the process. This

heightens the importance of the firm correctly

identifying which configuration is the most appropriate for each of its operations. As chapter 5

suggests, international strategic alliances are one

available avenue to help meet these requirements.

NATIONAL DIFFERENCES

MNEs resist sudden changes in their structure

and organization. Previous investments in plant,

equipment, technology, people, corporate culture,

distribution channels, and organizational structure all tend to limit their freedom of action. In the

absence of dramatic differences in government

policies or rapid technological change, MNEs can

be expected to evolve gradually from one form of

organization to another.

However, each of the three regions—Europe,

North America, and East Asia—tend to produce

different characteristics in their MNEs. For example, firm based in Japan and South Korea are

more likely to be export-oriented MNEs. Firms

based in Europe are more likely to correspond to

the regional or translational form. Many MNEs

based in the United States are either global or

distributed. This section examines some of the

factors that account for strong regional tendencies

in the dominant types of MNEs.

11 ~uis T. Wells, Jr., conflict or Indifference: US Multinationals in a World of Regional Trading BIOCS, Tecbnkid papers No. 57 (p~:

Organization For Economic C-operation and Development 1992), pp. 26-27.
—

30 I Multinationals and the National Interest: Playing by Different Rules

Table 2-2 identities some historical factors that

may help to explain these regional variations.

There are important differences in several factors,

including the time at which industrialization took

place and the relative size of the domestic market.

Table 2-2 also suggests important differences in

government policies and the support provided to

domestically based firms. Asymmetries in government policies have had a profound influence

on the differences in firm organization by region.

 The Influence of Location

Traditionally, U.S. firms first established themselves in their domestic market before expanding

abroad. Capital markets have been very efficient

in the United States, encouraging a focus on

short-term results. Until recently, sufficient economies of scale were present in the domestic

market to ensure competitiveness without need of

scale and scope in foreign markets. When U.S.

firms ventured abroad, they faced numerous

restrictions on their operations, which encouraged them to produce in local markets. As a result

many U.S.-based MNEs historically viewed their

international facilities as an adjunct to their

domestic operations and chose to expand internationally in one of three ways: licensed production;

joint ventures and distribution arrangements; and

production in the host market.

More recently, U.S. firms have sought to

configure themselves around regional markets.

This can give them an advantage relative to

competitors whose primary market is a single

national market. It does not, however, automatically provide an advantage over export-oriented

and distributed MNEs that compete globally.

Firms based in more open markets may find it

uneconomical to remain horizontally and vertically integrated. They frequently respond to

competitive pressures by shedding less critical

operations, or exiting an industry segment. The

relative openness of the U.S. market ensures

U.S.-based companies will often face intense

competitive pressure in their core domestic market. Often, companies based abroad enjoy a

sanctuary home market. As a result, U.S.-based

MNEs tend to be relatively more speci alized than

their international competitors of comparable

size.

Firms that compete globally but lack a sanctuary home base often choose to source from direct

or potential competitors.12 As they gain economies of scale and scope, suppliers based in

protected markets may exploit such relationships

to compete directly with the purchaser in its core

markets. The long-term consequences of relationships with suppliers based in protected markets

must be weighed carefully if the firm based in the

more open market is to avoid undermining its own

competitiveness.

In some industries, such as automobiles, protectionist policies in various national or regional

markets forced U.S. firms to replicate virtually

the entire value-added chain, or to export products

to gain credits to import. European and some

Japanese firms also have been forced at times to

undertake similar operations. For example, both

Nissan and VW (as well as the U.S.-based MNEs

of GM, Ford, and Chrysler) manufacture and

export from Mexico. The threat of protectionism

was a major factor in the timing of the decision by

such firm as Honda, Toyota, and Nissan to

assemble vehicles in the United States.

Managers must weigh the costs and benefits of

responding to host government pressures. In their

calculations, U.S. business leaders are aware of

the traditional reluctance of the U.S. Government

to intervene with host governments to offset local

pressure on their foreign affiliates. They must also

consider the penetration of the U.S. market by

12 F~ bd h S=tiv markes may alSO be fomed to source from direct or potential competitors, For example, manufacturers of 486

PC clones based in Asia until recently have been forced to buy their microprocessors from Intel beeause there were no other suppliers available.
Chapter 2—Multinational Industry and National Differences | 31

Table 2-2—Historical Factors Influencing Firm Organization

Europe United States Japan

Present dominant form of MNE . . . . . . . . . . . . . . . . . . . . Regional/ Translational/ Export

translational distributed

Period of peak competitiveness . . . . . . . . . . . . . . . . . . . . Pre-1945 1945-80 1980+

Period of modern industrialization. . . . . . . . . . . . . . . . . . Early 1900 Early 1900 Post 1945

Domestic market

Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium Large Medium

Accessibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium High Low

Attractiveness of regional market

Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium smal l Medium

Accessibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low Low Medium

Government protection . . . . . . . . . . . . . . . . . . . . . . . . . . High Low High

Overall level of government support .......,., . . . . . . High Low High

Incentives to export . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medium Low High

National treatment of FD1. . . . . . . . . . . . . . . . . . . . . . . . . Medium High Low

Present efficiency of capital markets . . . . . . . . . . . . . . . Medium High Low

SOURCE: Office ofTechnology Assessmen~ 1993,

imports, U.S. national treatment of FDI, and the

relative lack of export incentives for U.S.-made

products. In such circumstances, management

could be expected to respond to host government

restrictions and inducements, when not unprofitable to do so, at the expense of their U.S.

operations. This in turn can lead to important

industrial capabilities being relocated faster or

to areas other than what a free market might

dictate.

With few exceptions, European-based MNEs

have received a greater degree of protection and

direct government support than have U.S. firms.

A major exception is the defense aerospace

sector, in which levels of support provided by

national governments are similar. However, even

here the commercial aircraft built by European

aerospace firms generally have received greater

levels of government support than have their U.S.

competitors. Japanese aerospace companies have

also benefited from high levels of government

support .

13 In certain countries, most notably

France and Italy, firms are often at least partly

owned by the government, or are explicitly

designated as national champions.14 Relatively

protected markets have encouraged firms to

engage in a wider range of activities than their

U.S. competitors, both horizontally and vertically. European MNEs tend to have a strong

regional focus, although where products are

transportable and distinctive competence is intact, worldwide export of finished goods is

common.

European firms are powerful competitors in

telecommunications, often due to their ability to

exploit domestic protected markets and other

government assistance. They are still powerful in

consumer electronics, although many find the

transition to the distributed MNE form from

regional, global, and translational forms to be

IS For adiwussion of government support of the commercial aircmft indwtry, 5W Chapter 8, ‘‘Government Support of the Large Commercial

Aircraft Industries of Jap~ Europe, and the United States” in U.S. Congress, Office of Technology Assessment Competing Economies:

America, Europe and the Paczjic Rim (Washingto~ DC: U.S. Government Printing 0fi3ce, October 1991), pp. 341-362.

14 h 1~ them Wme 10 Fmnc~ 3 ItaliaL and 3 spmish government-owned companies in the Fortune 500 htermtiontd fist. There were

no British, GermaQ or Japanese government-owned corporations in the group.
32 I Multinationals and the National Interest: Playing by Different Rules

traumatic. European companies remain important

competitors in machine tools and electrical systems, and are first-rank contenders in petrochemicals and pharmaceuticals. In most areas of

aerospace, European fins, often making heavy

use of government subsidies and components

sourced in the United States, remain contenders.

European firms are competitive in consumer

products and durables, although rationalizing

these industries on a regional basis is proving a

challenge, leading toward further consolidation in

the industry.

In industries characterized by rapid change,

state sponsorship has often led firms to fail to

expand globally in time to compete effectively

with U.S. and Japanese companies pursuing

global economies of scale and scope. European

semiconductor companies, for example, remain

relatively weak despite a 14-percent tariff on

semiconductors and billions of dollars in subsidies and support. As competition has intensified,

European computer firms, such as Bull and

Siemens-Nixdorf, have fared poorly against U.S.

and Japanese-based rivals.15 Financial support of

national champions can be massive. For example,

since the early 1980s, the French Government has

provided Bull, its national computer champion,

with financial support equal to 15 billion French

francs.lG Several national champions have been

acquired by U.S. or Japanese-based MNEs.17

Historically, European firms have followed

two major approaches to their international operations. The first was to organize as export-oriented

MNEs, that is, to manufacture domestically and

sell globally. The second was to set up a full

value-added chain, generally excluding corporate

R&D, in major national or regional markets.

European firms often purchase subsidiaries that

are then run as autonomous units. Historically,

European MNEs have been the largest source of

foreign direct investment (FDI) in the United

States,

In the post-World War II period, Japanese and

South Korean firms have enjoyed substantial

protection from imports and FDI.18 They have

benefited from government financial and regulatory assistance, infant industry policies, outright

protection, and government targeting of selected

industries. At the same time, their governments

have encouraged and directed domestic firms to

seek economies of scale from exports. Until

recently, the predominant form of organization

has been as export MNEs. Many fins, however,

are beginning to establish international operations and have begun to draw on the international

capital markets, reducing the influence of the

domestic government. Despite this, many of these

firms have shown a much greater reluctance to

transfer higher-value activities to their overseas

operations than have either U.S. or European

first. Some Japanese automakers grant their U.S.

operations less autonomy and source a higher

percentage of components from their domestic

operations than do U.S. automobile companies in

Europe .19

15 Bo~ NEC and IBM have @ty N*= ~ Bu~.

16 ~C~d L. Hudsoq ‘‘Bull Weighs Expanding Ties to Other Firms, ” The Wall Street Journal, May 28, 1993, p. A5D.

17 For exmple, ICL has bmn acquired by Fujitsu and Philtips computer operations by DEC.

18 See c~ptem 6 and 7 of Compering Economies, op. cit., footnote 13, pp. 237-337.

19 Hon& ~M me fm~t Japanese automobile company to begin assembly of automobiles in we United States. ~mestic Content fOr COrpOrate

average fuel economy (CAFE) standards exceeds 70 percent. However, on a component basis it maybe as low as 50 percent. (See box 4-A.)

The average European content of GM and Ford vehicles, according 10 the automakers, exceeds 95 percen~ in large measure because the vehicles

are engineered, designed, and sourced in Europe.
Chapter 2–Multinational Industry and National Differences | 33

ASYMMETRIES IN GOVERNMENT

POLICIES, OWNERSHIP, AND CONTROL

In 1971, the world of multinational enterprises

was dominated by U.S.-based firms.20 Today

competition from firms based in Europe and Asia,

most notably Japan, may threaten the survival of

key U.S.-based MNEs in a range of industries. As

discussed below and in chapters 3 and 6, important differences in government policies, capital

markets, and industry structure have influenced

the rise of large numbers of new competitors

based in Asia and Europe.

Asian fins, especially those in Japan and

South Korea, have increased their share of the

Fortune 500 International list the fastest, reflecting the advantages of both a rapidly growing

protected domestic market and government policies intended to encourage exports and target

selected global industry segments.21 In several

key industries-such as consumer electronics,

automobiles, and mainframe computers——

considerable excess capacity exists on a global

basis. As consolidation takes place, asymmetries

in government policies can influence the probability of survival and the distribution of potential

gains among otherwise evenly matched competitors or facilities.

The decline in relative importance of the U.S.

economy has been matched by a decline in the

relative importance of U.S.-based MNEs. International competitors are much more numerous

and their relative size has placed them on a much

more even footing. Japan now has the second

greatest number of large multinationals, comparable to the United States or the European Community (EC) as a whole. Asymmetries in government

policies among Europe, the United States, and

——.

Japan have led firms to configure themselves in

very different ways.

The United States has pursued a policy of

national treatment of foreign investors. With

some important exceptions, such as quotas on

textiles and agricultural products and the ‘ ‘voluntary restrictions” on imports of Japanese manufactured automobiles, the United States has been

relatively open to imports and FDI. Moreover, it

has not intervened to prevent firms from reconfiguring themselves in response to the policies of

other governments.

As noted above, many European governments

have protected national markets and limited

imports. 22 The extraordinary support they provide

their national champions can include direct cash

infusions, preferential access for government

procurement, the creation or tolerance of national

cartels, and other market allocation mechanisms.

In some industries, such as telecommunication

digital switches, the government may even own

the primary customer. This strengthens the linkage between public policy and domestically

based MNEs.

In Asia, governments have pursued three major

strategies toward industrialization. The frost is

import substitution. The second is to provide an

attractive location for MNE global export platforms. The third is to nurture domestically based,

export-oriented MNEs.

Countries that traditionally pursued import

substitution policies, such as India, sought to use

protected national markets and other government

assistance to supply the domestic market with

local production. Among policies to support this

strategy are the exclusion of international competitors, import licensing, domestic content require-

—

m ~wond Vmnoq ,~ovcreign~ a:Ba}: The Multinational Spreadof U.S. Enterprise mew’ Yo*, ~: B~ic Boob ~c, 1971). ~ ~lY ,

as 1902, concern was expressed in Europe regarding the invasion of American-based firms. Overseas investment of U.S.-based firms as a

Pereent of GNP was the same in 1966, at 7 percen~ as it was in 1914. See Alfred Chandler, Scale am-i Scope, op. cit., footnote 1, p. 369.

21 Competing Economies, op. cit., footnote 13, Pp. 7-13

22 ~lce of be us, Trade RepreScn~ltive, ~f)pz ~ational Trade E$hma(e Report On Foreign Trade Bam”ers (W@hkgto& DC: U.S.

Governrnent Printing (lffice, 1993).
34 I Multinationals and the National Interest: Playing by Different Rules

ments, government ownership of major domestic

firms, foreign exchange controls, and the granting

of monopolies to favored domestic or internationa1 fins. Because of inadequately sized national markets, isolation from the global economy, and a lack of leading edge technology,

import substitution has been unsuccessful on its

own, leading an increasing number of countries to

seek alternative solutions. However, as both

Japan and South Korea have demonstrated, it can

bean important component of government industrial policy.

Some countries, such as Malaysia, Singapore,

and Thailand, have concentrated on providing an

attractive environment from which MNEs can

serve both regional and global markets. Their

policies include facilitating access to existing

pools of low-cost and increasingly skilled labor,

targeting of specific industries for encouragement

and support, aggressively investing in education

and training, and providing financial and tax

incentives. They have also allowed relative freedom of operation for the MNEs and their supporting suppliers and subcontractors in movements of

goods, services, and capital. With some exceptions, most notably the automobile industry,

relatively little effort has been invested in developing domestic firms to compete abroad with

large MNEs. These countries contribute few firms

to the Fortune 500 International. However, the

lack of direct domestic competitors heightens the

attraction for foreign-based MNEs, in part because technology leakage to competitors is less

likely.

The governments of Japan and Korea have

pursued industrialization through promoting competition among domestic firms, protected domestic markets, direct government intervention and

assistance, the aggressive pursuit of exports to

achieve economies of scale and scope, and

acquisition of technology from abroad. Support

has included industrial targeting, provision of

low-cost capital to favored firms, restricted government procurement, restrictions on FDI, import

licensing, aggressive investments in education

and worker training, government-led research

consortia, and the encouragement of cartels and

other market sharing mechanisms.23 Box 2-B

discusses one of the most famous examples of a

U.S.-based firm, Texas Instruments, being forced

to trade proprietary technology for unequal market access.

In general, European firms’ sales have traditionally been more concentrated in domestic and

regional markets than their Asian counterparts.24

Large U.S. firms, by contrast, have a greater

percentage of their assets outside their national

and/or regional base. Japanese and Korean firms

are more likely to be substantial net exporters

from their domestic base of operations, and to

have a lower ratio of overseas assets to overseas

sales.

Ownership and control also varies by nationality of the firm.25 Different types of investors have

different objectives and financial performance

requirements, leading to differences in MNE cost

of capital, patience of capital, and planning

horizons. If the true cost of capital converges,

then differences in MNE behavior on the basis of

national origin should begin to close. Differences

in government policies will affect both the degree

and the rate of convergence.

In the United States, ownership is often concentrated in large institutional investors, such as

pension fund managers under pressure to maximize short-term profitability. U.S. capital marz S= ~tem 6 and 7 of Co~etin8 Econonu”es, op. cit., footnote 13, pp. 237-337.

U Ibger AmwanelandlXwid fimt, “Alliance and Acquisition Strategies for European National Champions,” AkKinsey Quarterly, 1992,

No. 2, pp. 44-62; and OTA m database.

2S ~ d,is~sion of m ~ue~e of ownemtip, control, and cost of capital that follows is W on Michael Porter, Capital Choices

(Whshingtom DC: Council on Competitiveness, June 1992).
Chapter 2—Multinational Industry and National Difference | 35

Box 2-B—Trading Technology for Unequal Market Access in Japan: Texas Instruments

One of the most famous examples in which a U.S.-based company struggled to gain even unequal access

to the Japanese market is provided by Texas Instruments (TI).1 TI held fundamental patents, was politically

influential, and was both a market and technological leader in its industry. Nevertheless, lengthy negotiations were

required with the Japanese Government before TI gained permission to establish wholly owned manufacturing

operations in Japan. TI agreed to license key technologies to Japanese firms and to consult with the Japanese

Ministry of International Trade and Industry (MITI) on a regular basis regarding its plans and future operations in

Japan.

Texas Instruments enjoyed important patent rights due to its ownership of Kilby’s patents, which made the

integrated circuit possible. Early efforts to establish first a wholly owned physical presence and then a

manufacturing facility in Japan were rebuffed. T|’s 1960 application for Japanese patents was delayed as a result

of industry pressure until 1969.2

In 1966, manufacture of integrated circuits began in Japan. Intervention by the U.S. Secretary of Commerce

proved fruitless. As production volumes and experience grew, the major domestic firms became more willing to

countenance limited competition in their home market. This, coupled with the threat of legal retaliation for patent

infringement on planned exports, Ied the major electronics firms, acting through their trade organization, to fashion

a new strategy to deal with TI.

Negotiations between MITI and TI continued. Official appeals on the part of the U.S. Government were

rebuffed. In late 1966, TI was able to force both Sony and Sharp to withdraw products from the U.S. market

In April of 1966, over 4 years after the process began, an agreement was reached. This required that TI

establish a 50/50 joint venture with Sony for 3 years. At the end of the 3 years TI could seek government permission

to buy out Sony, and TI received formal assurances from Sony, and informal assurances from the Japanese

Government, that it would be able to do so. TI was also forced to negotiate with and license as a group its major

Japanese competitors, substantially reducing its relative bargaining power and future royalties. Because it already

had a license for Fairchild’s patents, NEC was able to obtain a license fromTl at even more favorable rates, further

reducing TI’s royalty income. In addition, TI was required to” ‘consult’ with MITI about production levels from its

Japan-based venture.”3 Market access has remained limited and TI has been unable to achieve a market share

in Japan that corresponds to its position in the rest of the world.

1 mkdim~joncfrawsoil MatiMasm, Ametican Mu/t/naf/ona/sfidJa~n(CmM@e, fM:HarvmfUrhersity

Press, 1992); and Cwnpefing Economies: America, Europe and the Pacific Rim, (VVashlngton, DC: U.S. Government

Printing Office, October 1991), pp. 341-362.

2 The granting of the patents in 1989 seems to have strengthened TI in its subsequent ongoing nwotiat~m for

patent royalty income with Japanese semiconductor manufacturers. See: Andrew Poltack “A Chip Maker’s Profit on

Patents,” me New Yotk 77mes, Oct. 16, 1990, p. D1.

3 Mxon, op. cit., footnote 1, pt 186.

kets are extremely liquid, enabling investors to Except for certain favored defense contractors,

shift their holdings very rapidly in search of small there is relatively little government intervention

increases in the risk-adjusted rate of return. to allocate credit and subsidize the cost of capital.

Foreign participants enjoy national treatment in Neither antitrust nor national security consideraU.S. financial markets and face few restrictions tions have proven significant barriers to FDI.

on the import of capital or the repatriation of Capital markets in Europe are less liquid than

profits, making it relatively easy to acquire both they are in the United States, making the pursuit

successful and unsuccessful U.S.-based fins. by an investor of short-term advantage more
36 I Multinationals and the National Interest: Playing by Different Rules

difficult. Governments axe more willing to intervene to rescue unsuccessful competitors or to

prevent the foreign acquisition of domestically

based firms. The time horizons of large institutional investors are significantly longer than in

the United States, leading to more patient capital.26 Controlling interests are often concentrated

in a small number of shareholders, making the

firms very resistant to unfriendly takeovers.

| Eroding Dominance of U, S.-Based MNEs

Following World War II, U.S. firms achieved

commanding advantages in scale, scope, and

technology over the vast majority of their foreign

competitors. Foreign opportunities, coupled with

rising competitive pressures at home, led industrial firms to expand internationally .27 By the late

1960s, the success of U.S. MNEs led many

observers to conclude that they posed a direct

threat to the independence and prosperity of their

host countries.28 Many governments actively

sought to offset the competitive advantages of

U.S.-based multinationals. They responded with

policies intended to shield domestically based

competitors from foreign, mainly U.S.-based,

MNEs, and to force, or at least encourage, MNEs

to replicate their value-added chain and transfer

technology within the domestic economy. The

U.S. Government provided few countervailing

pressures and even encouraged U. S.-based MNEs

to cooperate with host governments.

Since the early 1970s, global diffusion of

technology has greatly reduced or eliminated an

important competitive advantage of many U.S.

firms. In many industries, the number of and

capabilities of competitors at both the supplier

and original equipment manufacturer level have

increased dramatically. As a result, product life

cycles have become shorter, the benefits of

vertical integration have been reduced, and it has

become more difficult to sustain advantages in

product differentiation and manufacturing technology. Increased competition has, in turn, often

reduced profitability and raised investment costs.

For these reasons, most large-scale firms now

seek access to all major markets on a timely basis,

to ensure profitability and to defray rising investment requirements.

Intensifying competition within the U.S. market—from new domestic entrants, transplants,

and foreign-based exporters—has forced an increasing number of U.S. companies to pursue

product and process development, sourcing options, and manufacturing strategies intended to

minimize short-term costs rather than build longterm competitive positions.29 This often means

relying on competitors to manufacture key components or final products.

In 1966, U.S. firms dominated the Fortune 500

International list, with European firms running a

distant second, and Asian firms a remote third

(see box 2-C). With the exception of certain raw

materials producers, relatively few of the Fortune

500 International firms depended on their international operations for a greater share of their

26 rbido At l-t gome of this difference in time horizon may be attributable to the less liquid capital *etS.

27 Vtinom op. cit., fOOtnOtC 200

28 JJ. s~m.sc~ei~ (translated by Ronald Steel), The American Challenge (New York NY: Atheneumj 1%0

29 Fw ~ple, for a dig~ssion Of how GE came to source microwave ovens from Samaung in Korea rather thilXl Continue to ~UfilChlIE

them, see Ira C. Magaziner and Mark Patinkin+ “Fast Heat: How Korea Won the Microwave War, “ HarvardBurincss Review, Jan./Feb. 1989,

pp. 83-92.
Chapter 2–Multinational Industry and National Differences | 37

Box 2-C-The International Fortune 500: Steady Erosion of U.S. Dominance

Since 1966 there has been a steady erosion in the percentage of the International Fortune 500 firms based

in the United States. As figure l-6 demonstrates, in 1966 the United States accounted for 61 percent (304) of these

firms. In 1991, only 31 percent (157) of the 500 largest manufacturing firms were based in the United States. In

comparison, firms based in Europe grew from 28 percent (139) in 1966 to 34 percent (168) In 1991. In the same

period, firms based in Japan grew rapidly from 7 percent (37) in 1966 to 24 percent (119) in 1991.

Figure 1-7 shows that in 1966,

U.S.-based firms in the Fortune 500 Figure 2-C-l—Employment by International

International had sales of $299 billion, Fortune 500 Firms by Region of Origin, 1966-1991

or roughly 67 percent of the $441 billion 14-

United States in total sales of the International For- —- -1 /

tune 500. Firms based in Japan ac- 12 .-’ “~

counted for less than 5 percent ($21 : 10 \

billion) and firms based in Europe ~

accounted for 25 percent ($111 billion). ~ a All Europe

In comparison, in 1991 total sales of ~

the International Fortune 500 were z

~G

$5,188 billion. U.S.-based firms ac- ~

Other

Japan Other North Asian

counted for 34 percent ($1,785 billion). ~ 4-

Other foreign

-1

American

Firms based in Japan accounted for 21 2 . . . . . . . . .

percent ($1 ,097 billion) and firms based

in Europe accounted for 36 percent ———

0 “ I 1 t

($1,901 billion), exceeding sales of 1966 1971 1976 1981 1986 1991

U.S.-based MNEs. SOURCE: OTA data base compiled from annual reports, Fortune 500

Overall employment of the interna- International, and Standard and Poofs Register.

tional Fortune 500 grew from 21 million

in 1966 to 26 million in 1991. Most of this growth took place in the period 1966-1971. Figure 2-C-1 shows that

U.S.-based firms increased their employment by 1.5 million workers between 1966 and 1971. Between 1971 and

1991, U.S.-based firms shed 3.2 million workers. In comparison, employment for firms based in Japan has grown

from 1.2 million to 3.5 million. Other Asian-based firms saw their employment grow from O to 581,000 during this

period. Between 1966 and 1971, employment for firms based in Europe grew from 8.1 million to 10.3 million. It

has remained relatively stable since. Firms based outside Asia, Europe, and North America saw employment grow

from 271,000 to 1.9 million.

revenues and profits than their domestic opera- but economically advanced countries, had the

tions. 30 However, in some cases non-U.S.-based bulk of their sales and production outside their

MNEs, most notably those headquartered in small domestic market.

w FO~e~ple, one s~dy WM able to profile the internatiorud SdeS of 93 U.S.-controlled ~s for 19@. O~Y 6 mport~ in~~tio~ ~es

greater than 50 percent of total sales; 36 reported international stales that we~ less than 20 percent of total sales. See: N.K. Bruclq and F.A,

Lees, “Foreign Content of U.S. Corporate Activities,” Financial Analysis Journal, Sept./0et. 1966, pp. 1-6, cited in table 4-1, “One Hundred

Forty U.S.-Controlled Multinational Enterprises Classified by Foreign Content of Operations, 1964, “ in Verne% op. cit., footnote 20, p. 122.
38 | Multinationals and the National Interest: Playing by Different Rules

From the 1950s to the 1970s, U. S.-based MNEs

tended to use their domestic production base to

supply products for a significant proportion of

their international sales. Overseas operations

were created for several reasons: to serve local

and regional markets; to seek low-cost factor

inputs, usually raw materials or unskilled assembly labor; and to improve the competitive position

in markets located in industrially advanced countries.

The typical U.S.-based MNE developed new

products for and introduced products in its

domestic market.31 Once the domestic market

was saturated, additional growth would be pursued abroad. The steady diffusion of technology

and the reduction of barriers to entry in many

major markets have rendered this “product life

cycle” strategy obsolete for an increasing range

of industies.32 Today MNEs tend to introduce

products globally to preempt competition from

local firms and other MNEs. This shortening of

the product life cycle requires that firms place

greater emphasis on speed and flexibility. It has

forced them to reconsider manufacturing, sourcing, and distribution strategies, and to forge new

relationships with both their domestic and host

governments. Strategic alliances, often with firms

based overseas, have become integral in this quest

for advantage (see chapter 5).

IMPLICATIONS FOR TRADE FRICTION AND

PUBLIC WELFARE

MNEs are the primary mechanism through

which international trade and investment are

conducted and, as a result, have become increasingly important building blocks of the international economy. They pursue advantage (market

power) through the quest for economies of scale

and scope. They export and import, invest and

acquire, manufacture and source, develop, license

and transfer technology around the globe. In the

mid-1980s, the sales of MNEs represented between 25 and 30 percent of the combined gross

domestic product of the market economies.33

MNEs account for about three-quarters of the

world’s commodity trade, and four-fifths of the

trade in technology and managerial skills of these

economies. MNEs may now account for one-third

of all global manufactured exports. A similar

proportion of global trade in goods and services

is intrafirm trade, that is, trade among parent

MNEs and their foreign subsidiaries.

In many sectors, international competition is

primarily organized around large oligopolist companies that compete globally, although not necessarily equally, in trade and investment. Leading

MNEs are believed, on average, to receive 30 to

40 percent of their total sales outside their home

country, although the 50 largest have 54 percent

of their revenues from outside their domestic

base.34 Overseas production by such firms often

exceeds their share of international trade.

This section briefly examines how the action of

MNEs can contribute to or alleviate trade friction

among nations. It shows how the different types

of MNEs described above can strengthen or

weaken their domestic base and the host country’s

31 Verne% op. cit., footnote 20, pp. 65-106; Also see Louis T. Wells, Jr. cd., The Product Lzfe Cycle andlnternational Trade (Boston, Mlk

Division of ResearcE Graduate School of Business Administration, Harvard University, 1972),

32 ~stop~r A. B@efi nd S-ntra Ghoshal, Managing Across Borders: The Translational Solution (BOW)% MA: WMd BUSkSS

School h3SS, 1991), p. 115.

33 JohLI H.z,Multinatio~l Enterprises and the Global Economy (New Yorlq NY: Addison-Wesley Publishing Company, 1993),

pp. 14, 386-387.

~ John Dunning, “Dunnm“ g on Porter: Reshaping the Diamond of Competitive Advantage,” University of Reading Discussion Papers in

Internationallnvestment andBw”ness Studies 152, 1991; as cited inhwraD’AndreaTy so~ Who’sBashing Whom (WashingtorL DC: Institute

For International Eeonornics, 1992), footnote 5, p. 4; and “The Non-Global FirnL” in “The Economist Survey: Multinationals, ” The

Economist, Mar. 27, 1993, p. 10,
Chapter 2–Multinational Industry and National Differences | 39

economy, technology base, labor markets, and

regulatory environment.

Many MNEs are able to seek capital and

government financial assistance on a global basis.

As a result they can make use of and are

influenced by both global and national capital

markets. This can reduce the influence of government policies in both home and host nations.

Firms may shift work from one facility to another

in pursuit of export financing. For example, the

failure of Britain’s Export Credit Guarantee

Department to provide export insurance, and the

willingness of the U.S. Eximbank to do so, led the

British-based MNE Trafalgar House to transfer a

200-million-pound contract to its U.S. subsidiary.

35 The British-based MNE John Brown transferred a large contract from its U.K. operations to

its French and Dutch subsidiaries for the same

reason.

The efficiency of MNEs, and their ability to

mobilize resources, including political support, is

matched by their ability to reconfigure their

operations to meet changing market conditions,

seek out low-cost alternatives, and respond to

government initiatives. Accordingly, their activities may place into contact and competition

different national labor forces, financial institutions, product markets, and systems of public

policy. 36 Firms may relocate high value-added

activities to take advantage of more permissive

regulatory regimes .37

Governments unwilling to rely on the impersonal working of the market may encourage or

foster the creation of economies of scale. Carefully orchestrated government policies, combined

with aggressive business practices, can create a

critical mass of technology, trained workers, and

production economies of scale within a specific

region and provide a protected sanctuary from

which favored firms operate. Such conditions

may create a self-reinforcing cycle that eliminates

facilities located in less favored locations. This

can lead to substantial trade friction.38

The resource-based MNE may pose considerable dangers for its host government because of

the economic and political influence it may be

able to mobilize. However, if such fins’ activities are confined to the exploitation of natural

resources for which alternative independent sup35 David ~we~ “Job,q md EXpOrtS ‘Imt Because of Credit Terms,’ “ Financial Times, Feb. 5, 1993, p. 6.

36 For C-le, BMW’S d~ision to establish ana.ssernbly plant in the United States may have bexmmotivated in part by the deske to improve

its bargaining position vis-a-vis its (traditional worldorce and supplier base. See: Barbara Harrisonj “High Hopes for New Plant” Financial

Times, Oct. 20, 1992, p. 34; John Templemen and David Woodruff, “The Beemer Spotlight Falls on Spartenburg, USA,’ Business Week, July

6, 1992, p. 38; Ferdinand Protzmaq “BMW Details Plan to Build Cars in South Carolina,” The New York Times, June 24, 1992, p. D4; Diana

T Kurylko, “BMW Poised to Build in U.S.,” Automotive News, Mar, 30, 1992, pp. 1, 38; James R. Crate, “Special Convefiible May Be 1st

ModeL” Automotive News, June 29, 1992, pp. 1, 38; Lindaay Chappell, “South Carolina Is a Surprising Fit for BMW,” Automotive News,

June 29,1992, pp. 1 and W, Diana Kurylko, ‘VonKunheim Drives BMW Beyond Contine@’ Automotive News, June 29,1992, p. 38; Diana

KuryIko, “Costs Drove Decision to Build in U.S.,” Automotive News, June 29, 1992, p. 39; and Lindsay Chappell, “Plant Quest Began in

‘70s,” Automotive News, June 29, 1992, p. 39. For an example of how MN’Es and governments can work in concert to defeat attempts to

organize a national electronics union in Malaysiq see Michael Vatilkiotis, “Credibility Gap: Union Issue Mars Image as Third World hader,’

Far Eastern Econonu”c Review, July 16, 1992, p. 18.

37 FoJ example, the German chemical company Bayer is relocating much of its biotechnology R&D ffom Germany to the United States to

take advantage of the more favorable regulatory environment.
40 I Multinationals and the National Interest: Playing by Different Rules

pliers are available, they pose relatively little risk

to the major industrialized nations.39

A variation of the resource-based MNE that

has the potential to create trade friction is the

MNE that exploits low-cost labor pools for

manufacturing and service operations.40 This

creates direct competition in wages and benefits

between workers in the industrialized countries

and their less fortunate counterparts. Such activities are precluded where poor infrastructure,

transportation, coordination, and communication

costs exceed productivity-adjusted differences in

worker compensation costs. Where they do not,

and where other barriers to entry are low or

nonexistent, work can be expected to migrate

rapidly to the lower labor cost areas .41 This in turn

can exert considerable downward pressures on

wages and benefits, raising social tensions in the

industrialized countries.

The export-oriented MNEs----coupled with domestic government policies that favor local production for export, provide a protected sanctuary,

and/or actively inhibit inward FDI-have the

greatest potential for provoking trade friction

among the industrialized nations. This is pronounced when a national system organized in

such a fashion runs large, visible trade surpluses.

Such surpluses, even when fairly earned, can

cause surviving competitors to seek relief from

their domestic and host governments. Unless

equivalent jobs are readily available, displaced

workers are likely to raise vocal protests against

declining wages and benefits or the closing of

their place of employment. Alternatively, large

trade surpluses can induce governments to seek to

establish new competitors to share in the rewards .42

Regional MNEs often arise and persist as a

result of barriers to entry and host government

policies. 43 They may also arise when: 1) MNEs

take advantage of low-cost labor to manufacture

products for sale in their domestic base, displacing the traditional workforce; 2) MNEs manufacture and source substantially less in the host

country than they sell, contributing visibly to a

balance of trade deficit; and 3) MNEs transfer

work from the established workforce to facilities

located in the host country, often in response to

protected foreign markets or trade balancing

requirements.

Translational and global NINEs generally

increase the proportion of their assets abroad as

their international sales expand relative to their

domestic sales. To minimize financial risk over

time, firms seek to match costs and revenues,

provided that doing so does not put them at a

competitive disadvantage. Where government

policies impose only small distortions in markets,

movements toward transnational and distributed

MNE forms are unlikely to worsen trade friction.

On the other hand, translational, global and

distributed MNEs can contribute substantially to

39 ~Some cMes, such as Copwr ~ng, ~vmtagm intransportation costs, technology, supporttig tias~cwe, ~d workfor@ capabilities

can offset seemingly insurmountable advantages in such factors as ore quality and wage rates. See: U.S. Congress, Offke of Technology

Assessmen4 Copper: Technology and Competitiveness, OTA-E-367 (Washington DC: U.S. Government Printing Office, September 1988).

Nevertheless, the import of significant quantities of low-cost mtural resource products from abroad may render uncompetitive domestic

facilities leading to their closure. Trade friction may result if those threatened with displacement seek protection or compensation.

@ s~de-~te co~, is ~ e~ple of a fii tit has moved rapidly in this direction. See: Joseph Pereira, ‘‘split personality: SOcW

Responsibility and Need for Low Cost Clash at Stride Rite, ’ The Wall Street Journal, May 28, 1993, pp. Al, A6.

41 A major comm~tis he availabifi~ of skilled managers ad technician in tie host co~~.

4Z me establis~ent of~e AJRBUS consortium represents such an example. See ~haPter 8! ‘‘Government Support of the Large Commercial

Aircraft Industries of Japau Europe, and the United States, “ in Competing Econow’es, op. cit., footnote 13, pp. 341-362.

43 B@em t. Cnv involv~g ~anspo~ation costs me ~ely [o provoke f~ction ~ess these COStS are made artificially high. For example,

transportation costs could be raised artificially by requiring that imports be shipped on favored carriers, or by delaying centiflcatioq inspect.iou

and customs clearance.
Chapter 2–Multinational Industry and National Differences | 41

trade fiction when government policies distort

markets or where economies of scale and limited

technology diffusion lead to large and visible

trade imbalances.

The development of distributed MNEs may in

part demonstrate that firms have become increasingly sophisticated at avoiding restrictions intended to force them to duplicate the complete

value-added chain within each national market. In

the absence of effective international oversight,

this form of organization, because it facilitates the

arbitraging of national differences, may create

additional downward pressure on labor markets

and regulatory regimes. Greater organizational

freedom may raise the importance of both production and agglomeration economies of scale,

possibly leading to greater concentration of certain types of work in specific countries or regions.
Foreign

Direct

Investment 3

0

nly in recent years has the U.S. Government become

concerned with the ways that foreign-based multinational enterprises (NINEs) affect the national interest.

The main stimulus for this new interest has been the

extraordinary economic achievements of large Japanese firms

and their pervasive penetration of U.S. markets, particularly in

industries such as automobiles, electronics, and banking. The

apparent inability of U.S.-based MNEs to invest on a comparable

scale in Japan has magnified this concern. Other, less dramatic

policy asymmetries exist between the United States and Europe.

Therefore, this chapter considers two issues: 1) the existing

government rules and private sector practices governing foreign

direct investment (FDI) in the United States, Europe, and Japan;

and 2) the role of major foreign multinational enterprises-from

Europe as well as Japan—in the U.S. economy.

The chapter examines the U.S. policy environment for FDI and

compares it to the policy regimes of other major trading nations.

Ideally, the United States wants FDI to provide well-paid, skilled

jobs, responsible corporate citizenship, and enhancement of the

Nation’s industrial and technology base. Clearly, it makes sense

to object to the presence of foreign firms in the U.S. economy

only to the degree to which they do undesirable things, If they

provide good jobs, add value to U.S. products, and contribute to

the U.S. technology base, they should be encouraged. There may,

however, be grounds to object if America’s leading trade partners

do not reciprocate in providing U.S.-based MNEs with similar

opportunities to invest overseas and derive the benefits from

those investments.

The chapter reviews the benefits and problems associated with

foreign direct investment in the United States (FDIUS). It

43
44 I Multinationals and the National Interest: Playing by Different Rules

elaborates on many themes initially examined in

OTA’s report, Competing Economies,1 and discusses the findings presented below. The analysis

suggests that rather than encouraging or discouraging FDIUS indiscriminately, it would be more

productive to develop an approach that benefits

foreign investors and maintains technological

development and high value-added jobs in the

American economy.

CHAPTER FINDINGS

1. The significant expansion of FDIUS in the

1980s brought a number of benefits to the

Nation. The first major benefit was macroeconomic: the influx of FDIUS helped compensate

for the low rate of domestic savings that had

adversely affected domestic investment rates.2

Foreign investors stimulated the U.S. economy, first by providing liquidity to the financial system through large purchases, and second by constructing greenfield wholesaling

operations and manufacturing plants. The second major benefit was microeconomic: foreign

investors, often Japanese-based MNEs in the

manufacturing sector, introduced innovative

managerial and organizational techniques to

their U.S. competitors, joint venture partners,

and suppliers. Consumers subsequently benefited from improved products and services.

2. The lack of more than minimal provisions

regarding the foreign acquisition of U.S. hightechnology fins-in contrast to the restrictive

rules and private sector practices governing

foreign acquisitions in some European Community (EC) countries and Japan—may have

major implications for the U.S. technology

base. Acquisition of U.S. high-technology

firms has helped improve the competitiveness

of the manufacturing affiliates of foreign producers in the United States and/or their parent

producers in Japan or Europe. At the same

time, it may have increased reliance on foreignowned sources of technologies critical to the

sustained success of many domestic manufacturing fins. In many industries, technological

diffusion has not been reciprocal.3

3. At present, U.S. Government policy cannot

distinguish between questionable FDI and that

which clearly benefits the national interest.

Current policy allows foreign-based MNEs to

implement strategies based on rational and

intelligent business practices, whether or not

they benefit the U.S. economy. Foreign-based

MNEs cannot be faulted for acting in their own

interests. Fault may lie instead in the lack of

clear national goals expressed through flexible

but explicit legislation.

4. FDI maybe becoming less important to MNEs

relative to strategic alliances. Statistical data

provide ample evidence that the rates of growth

in both global FDI and FDIUS have fallen

significantly since 1990, as demonstrated in

table 3-1 and figure 3-1.4 It is unclear whether

this tendency will reverse course in the near

term. While no thorough, accurate data exist to

estimate the amount invested by MNEs in

1 U.S. Congress, Offlce of Technology Assessmen~ Competing Economies: America, Europe, and the Pac@c Rim, OTA-lTE-498

(Washingto~ DC: U.S. Government printing Office, October 1991), See especially ch, 3.

2 Edward M. Graharnj “ForeignDirect Investment in the United States and U.S. Interests, ’ Science, vol. 254, Dec. 20,1992, pp. 1740-1745.

3 For data on technology trade among the United States, Japam and the EC see “Major Indices of Japanese R&D AXivity,”

JPRS-JSP-73-O03, Jan, 21, 1993, pp. 4053. See also General Accounting Of!lce, U.S. Business Access to Certain Foreign State-of-the-Art

Technology, September 1991.

4 John Rutter, “Recent Trends in Foreign Direct Investment in the United States: The Boom of the 80s Vanishes, ” Department of

Commerce, International Trade Administratio~ December 1992. However, it should be noted that more recent reports suggest, for example,

that there has been a net disinvestment during 1992. See “JaparI Keeps Cash at Home,” Financial Zlmes, June 15, 1993, p. 4; as taken from

Bank for International Settlements, 63rdAnnual Report (Basle, Switzerland: BIS, 1993); see also U.S. Department of Commerce, Bureau of

Economic Analysis, “Net International Investment PositioU 1992,” press release, June 30, 1993.
Table 3-1-inward Flows of Foreign Direct Investment, by Host Country per Annum, 1981-1992 (in billions of dollars)

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

United States . . . . . . . . . . 25.2 13.8 11.9 25.4 19.0 34.1 58.1 59.4 69.0 46.1 12.6 3.9

United Kingdom . . . . . . . . 5.9 5.3 5.1 -0.2 5.0 7.3 13.9 18.2 30.4 33.1 21.1 19.1

Netherlands . . . . . . . . . . . 1.5 1.0 0.8 0.6 0.6 1.9 2.3 4.1 6.4 8.7 5.1 5.2

(West Germany . . . . . . . . 0.3 0.8 1.8 0.6 0.6 1.2 1.9 1.2 7.0 2.3 2.9 3.0

Japan . . . . . . . . . . . . . . . . 0.2 0.4 0.4 0.0 0.6 0.2 1.2 -0.5 –1 .1 1.8 1.4 2.7

France . . . . . . . . . . . . . . . . 2.4 1.6 1.6 2.2 2.2 2.8 4.6 7.2 9.6 9.2 11.1 16.3

NOTE: All figures are dcdated on historical cost basis and are not ac@ted for inflation.

SOURCE: Organization for Economic -peration and Development (OECD), “lnwarcf Direct Investment Flowe,” Intematiod Direct Investment Pdkxs and Trends in the 198(X (Paris:

OECD, 1992), table 3; OECD, /%mrKY’a/Market & Tremis, June 1993, table 1.
46 I Multinationals and the National Interest: Playing by Different Rules

Figure 3-l—Foreign Direct Investment in the U.S., Annual Growth Rate and Position, 1962-1992

60?’0 450

\

-400

50%o -

I FDIUS position 3 5 0

40%o - \

Rate of growth i \

\

/ ‘i

300 !2?

\

/ \

=—,

\

/

-250 ~

30Yo - \

l \

\

-, ,,/ ]

/

v \

\ \/

-

200 ;

d

\ ‘ \/ 20Y0 - I \

\

150 $

\

‘, / \

1 0 0

lo?/o -

/

\ “50 \

0?!0 1 I I T I~- 0

196263 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92

NOTES: All data are calculated on historical cost basis and are not adjusted for inflation. Differences in data and calculation may account for

disparftles between Department of Commerce and organization for Economic Cooperation and Development (OECD) statistics.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis, Bushss Statistics, 1963-97 (Washington, DC: U.S. Government Printing

office, June 1992), p. A-120; U.S. Department of Commerce, Bureau of Economic Analysis, “Net Investment Position, 1992,” press release, June

30, 1993.

that MNEs increasingly prefer strategic alliances because they allow greater flexibility and

less commitment than strategies associated

with FDI.

5. A discrepancy exists between the comparatively open-door, national treatment policy

towards foreign multinational corporate investment adopted by the United States and the

United Kingdom and those policies adopted by

other major trading nations. Only the United

Kingdom (since the early 20th century) and the

United States (in the post-WWII period) have

applied free trade principles to the inward and

outward flow of investment capital. U.S. policy

has actively encouraged such practices.5 As

table 3-1 indicates, from 1986 to 1990, FDI into

the United States and the United Kingdom

increased to record levels. During the same

6.

period, FDI into Germany and Japan remained

low; for Japan, in 1988 and 1989 (the peak

years for FDI in the United States), net inward

investment was negative.

Since the 1970s, some Organization for Economic Cooperation and Development (OECD)

countries have liberalized their rules on the

outflow of investment capital; during the same

period, there has been an increased inflow of

FDI in some countries. But historically this

inflow has been regulated to provide limited

market access for foreign producers, sometimes in exchange for the transfer of proprietary

technology. It remains small relative to outflows. In some European states (e.g., France

and Italy) government policies on inward FDI

have been consistently restrictive. The constraints in Japan are more systematic; they are

s For a comparative historical analysis of FDI in Europe, Japan, and the United States, see Simon Reich The Fruits of Fascism: Postwar

Prosperity in HistoricuZPerspective (Mhaca, NY: Comel~ 1990). As an illustration of these policies in pmctice see, for example, Mira Wilkins

and Frank E. H.ilLAmerican Bm”nessAbroad: Ford On Sti Continents (Detroit, MI: Wayne State University Press, 1%4); for the case of policy

inJa~ see Mark Maso~ American Multinationals andJapan: The Political Economy ofJapanese Capital Controls, 1899-1980 (Cambridge,

MA: Council on East Asian Studies, Harvard University, 1992). For a European assessment of the constraints on FDI in the United States, see

Servicea of the Commis sion of the European Communities, Report on United States Trade and Investment Bam”ers: Problems of Doing

Business With the US, (Mussels, Belgium: Cornrnission Sewices, April 1993), pp. 82-90.
.

Chapter 3—Foreign Direct Investment | 47

also more often a product of private sector

initiatives. 6

7. MNEs based in countries with restrictive FDI

policies may enjoy strategic advantages over

their U.S. competitors. These advantages are

associated with the generation of artificial

profits in home markets7 and the capacity to

reach economies of scale. Senior officers of

major American companies told OTA that such

advantages threaten the degree of competitiveness and even the continued existence of some

large-scale U.S.-based MNEs.

8. Japanese and European policymakers have

concluded that they must maintain a domestic

presence in some sectors even when it seems

expensive in the short run. These governments

have reached an understanding with their

MNEs; business has agreed to sustain some

production that may be unprofitable in the short

term but that is essential to the productivity of

several crucial sectors. Furthermore, MNEs in

these countries have agreed to maintain as

much high value-added production in their

home base as possible. Some governments

among the OECD nations have instituted a

variety of subsidies and structural adjustment

policies to assist their own MNEs.8

FDI IN THE UNITED STATES

I What is Foreign Direct Investment?

There are two types of private overseas investment, portfolio investment and foreign direct

investment. Portfolio investment involves the

purchase of bonds of U.S. firms or the U.S.

Government, or holdings in U.S. banks. Portfolio

investment accounts for more than 60 percent of

transaction flows into and out of the United

States.

According to the International Monetary Fund:

Direct investment refers to investment that is

made to acquire a lasting interest in an enterprise

operating in an economy other than that of the

investor, the investor’s purpose being to have an

effective voice in the management of the enterprise. 9

Foreign direct investment in the United States,

however, has a more specific legal and statistical

definition. The International Investment and

Trade in Services Survey Act says it is the

ownership by a foreign person or corporation of

10 percent or more of the voting equity of a firm

located in the United States. Such an investment

is considered evidence of a long-term interest in,

and a reflection of influence over, a company’s

affairs. l0 This definition has advantages and

disadvantages, and is open to a variety of

exceptions. An individual or company owning

less than 10 percent might still be the largest and

most influential shareholder; one owning more

may remain a passive investor. Either way, the

behavior of the company or its strategic significance might remain unaffected by a change in

ownership of this type.

This report is less concerned with the formal

definition of FDI than the influence that foreign

6 See Office of the United States Trade Representative, 1993 National Trade Estimate Report on Foreign Trade Barriers (Washington DC:

1993), pp. 79-94, 143-170; for a Japanese perspective in support of this finding, see The Report of the Ad-Hoc Committee on Foreign Direct

Investment in Japau Keidanren Committee on International Industrial Cooperation, Committee on Foreign Affiliated Corporations,

Improvement of the lnvestmem Climate and Promotion of Foreign Direct Investment into Japan; see also House Wednesday Group, Beyond

Revisionism: Towards a New U. S,-Japan Policy for the Post-Cold War Era (Washington DC: Congress of the United States, March 1993).

7 House Wednesday Group, ibid., p. 18.

8 For related discussion, see Laura D’Andrea TysorL Who’s Bashing Whom? Trade Conflict in High Technology Industries (Washington

DC: International Institute for Economics, 1992).

9 IMF de fifitlon ~lted ~ De-e Jfius, Glo~l Companies ad Public policy: The Growing challenge of Foreign Direct Investment

(London: Royal Institute of Intermtional Affairs, 1990), p. 15.

10 see u,s, Dep~me~t of Comerce, B~~u of ~onomic ~ysis, ~o~eig~ Direct ]n}~est~ent in fhe united SfafeS, 1987 Benchmark

Survey, Final Results (Wasbingtom DC: U.S. Government Printing Office, August 1990).
48 I Multinationals and the National Interest: Playing by Different Rules

direct investors exert on the behavior of corporations. Such influence can alter a firm’s standard

practices relative to other companies in a particular industry. Moreover, foreign ownership can

have major strategic implications for the welfare

of the U.S. economy, in terms of technological

development, balance of trade flows, employment training and practices, and national security

requirements.11

Foreign direct investment includes the purchase of resources, such as knowledge, managerial expertise, plant facilities, or real estate, and

the building of greenfield plants. FDI is not

defined by the source of the capital used, but

rather by ownership, even if foreign persons or

corporations used domestic sources to finance

their transactions. Although FDI accounts for less

than 25 percent of all investment flows, it can be

of strategic importance to the U.S. economy

because of the types of jobs it generates, its

impact on domestic industry, and its effect on the

balance of trade, especially in industries like

autos and computers.

With some exceptions, the United States has

generally applied national treatment to foreign

investors. 12 National treatment articulates the

principle that foreign investors, whatever form

their investment takes, should be treated as if they

were domestic investors. This approach encourages the influx of FDI. The U.S. Government

approach to FDI comes much closer to the

position of the advocates of FDIUS than that of its

critics, as was clearly articulated in 1991 by the

Bush administration:

The Administration supports maintaining an

open foreign investment policy, with limited

exceptions related to national security. This

policy produces the greatest possible national

benefits from all investments made in the U.S.

economy. The United States has long recognized

that unhindered international investment is beneficial to all nations, that it is a “positive sum”

game.13

Prior to the mid- 1970s, the principle of national

treatment had little practical consequence in the

United States. The inflow of investment funds

was minimal, largely because other industrial

powers lacked the necessary capital. A second

important barrier to entry was the peculiarity of

U.S. markets, for example, until the first gas crisis

American consumers were uniquely unconcerned

with fuel economy and preferred large, comfortable automobiles. Most U.S.-based MNEs did not

face serious competition from foreign-based MNEs,

either through the import of finished products or

through foreign investment.

U.S.-based MNEs therefore prospered in relatively insulated consumer markets. This insularity lent itself to the development of historically

unparalleled wealth and strength. The surplus was

so large that U.S. citizens enjoyed the highest per

capita income in the world, while its corporations

benefited from technological leadership and economies of scale. Together, these factors afforded

many domestic firms the capacity to build or

acquire overseas facilities, and thus produced

many multinational enterprises.

14 The high value

of the dollar made U.S. real estate expensive, and

meant there were significant disincentives to

11 J~w, op. cit., footnote 9, p. 14.

12 See~wmd M. Graham and pad R. K.rugmaUForeign Directlnvestmenfin the UnitedStates (l%shingto% DC: hthk fOrkttXMtiOti

Economics, 1989), pp. 95-109. Critics contend that existing laws and the proposed NAFTA Agreement Annexes provide a legal framework

that could support a decision by the U.S. Government to implement policies that moved away from mtional treatment of FIX. For example,

see Edwaxd M. Graham and Christopher Wilkie, ‘‘Multinationals and the Investment Provision of the NAFIA, ” to appear in The Infernutional

Trude Journal, vol. 8, No. 3 (winter 1993-1994). However, there is no evidence to date that the U.S. Government intends to do so.

13 EconomicReport of the president, Transmitted to Congress, February 1991, together with t.he Annual Report of the Council of E~sono~”c

Advisors (Washington, DC: U.S. Government Printing Office, 1991), p. 262.

14 ~Pond Vemou * ‘~temtio~ hvestment and International Trade in the ~oduct ~cle, ’ The Quarterly Journal of Economics, May

1990, No. 2, pp. 190207.
Chapter 3–Foreign Direct Investment | 49

manufacturing, wholesaling, or real estate investments by foreign-based MNEs. This approximated the conditions for a sanctuary market;

accordingly, some people contend that U.S.

criticism of Japan for having a comparable

situation today is inappropriate. But, if the United

States did indeed enjoy a sanctuary market, it was

by force of circumstance, not by the design of the

public or private sector, as is the case in Japan. 15

The issue of national treatment started to

assume importance in the 1970s. The US. Government responded to the influx of FDI favorably,

with only nominal institutional constraints on

investment flows. At the Federal level, the

institution directly responsible for addressing

issues relating to FDIUS is the Committee on

Foreign Investment in the United States (CFIUS).

Created by President Gerald Ford in 1975 as an

oversight body, CFIUS monitors and regulates

FDIUS from the standpoint of protecting the

national security. It is an interagency body

composed of officials from the Departments of

State, Commerce, Defense, and Justice, the Office

of the United States Trade Representative, the

Office of Management and Budget, and the

Council of Economic Advisers; it is usually

chaired by a Treasury official.

Most CFIUS authority comes from the ExonFlorio provision in the Omnibus Trade and

Competitiveness Act of 1988, which empowers

the President to veto any takeover of a U.S. firm

on national security grounds. Agency officials see

the mandate of CFIUS as being consistent with a

broader U.S. policy “to welcome direct investment and to support free and open foreign direct

investment among all nations. l6 They have

stated that the Exon-Florio Provision is a statute

that protects national security without compromising an open investment policy, 17

The Treasury officials who have headed the

agency have adopted a narrow position in defining threats to national security. 18 One prominent

critic, for example, noted in a 1992 congressional

hearing that U.S. foreign direct investment policy

does not distinguish between purchases made by

foreign investors from the private sector and those

made by foreign governments, whose motives

might not be ‘market-driven. She recommended

that the U.S. Government routinely examine all

prospective purchases involving foreign governments. She also suggested that the definition of

national security be clarified to include a list of

critical military technologies that would not be

available for foreign purchase, while the definition of national security be expanded to include

elements of economic security. ’9

However, with very few notable exceptions,

CFIUS has adopted a passive role. Agency

officials have ‘‘received over 700 notices since

the inception of Exon-Florio in August 1988. Of

that total, 13 transactions have been subject to a

45-day extended review. Nine of those reached

the President desk for decision. In eight of those

nine transactions, he decided to take no action. "20

.— - — —

15 House Wdnesday Group, op. cit., f~tnote 6.

lb Statment by ,$tephen J. Canner, ‘IreaSury official Director for International Investment, before the Defense policy panel and

Investigations Subcommittee of the Armed Services Committee, [J.S. House of Representative.., May 14, 1992.

17 see smtement by 01~ we~~on, As~is~ant Saretw for Jnternatiol~l Aff~s, U.S. Dep~ment of tie TI-Msury, at I-Iw@ before the

Subcommittee on International Finance and Monetary Policy on June 4, Foreign Acquisition of U.S. Owned Companies (Washington DC: U.S.

Government Printing Office, 1992), pp. 5-6.

18 For ~xmple s= statement of peter ~lls, Former ~ef Adminis&ative officer of semat~b at Hting before the SUbCOmfnitt& On

International Finance and Monetary Policy on June 4, ibid., pp. 15-18. Some analysts argue that without change the Exon-Florio legislation

would support much more restrictive policies towards FDIUS. See Edward M. Graham and Michael E, Ebert, “Foreign Direct Investment and

U.S. National Security, ” The Worid Ecorromy, vol. 14, No, 3, September 1991, pp. 245-268.

19 statement by ~ua D’~&m ~SOn, at H~ing bcf(}rc d]e subc~rnlnil[ee on Int~r~ti~I~l FiWce and Monetary policy On June 4, Op.

cit., footnote 17, pp. 18-19.

zo Statacn[ by Stephen J. Canner, op cit., footnote 16.
50 I Multinationals and the National Interest: Playing by Different Rules

In the case of the attempted purchase of General

Ceramics Ltd. by the Tokuyama Soda Co., CFIUS

recommended that the acquisition be blocked

because the U.S. firm was a supplier of nuclear

defense technology. The sale went through after

the nuclear weapons component was sold to

another firm. The only recorded case of a sale

being blocked after CFIUS review was the

proposed purchase of Mamco Manufacturing of

Seattle by the China National Aero-Technology

Import and Export Corp. According to the director of CFIUS, the agency ‘‘is achieving its goal of

protecting the national security without discouraging foreign direct investment. ’ ’21

The limited use to date of the legislative

provisions under which CFIUS operates does not

appear to represent a significant barrier to foreign

direct investors. Moreover, many observers note

that informal limitations on foreign investors are

minimal or nonexistent in the United States.22

However, some contend that the very existence of

CFIUS has had a chilling effect on FDIUS.

The loss of both market insularity and U.S.

technological superiority has heightened competition from many European and Japanese firms

and their affiliates operating in the United States.

Formerly, the issue of mutual openness for trade

and investment was treated by U.S. policymakers

as relatively unimportant. In the context of U.S.

economic dominance, policymakers often considered America’s primary economic role to be that

of a locomotive for global prosperity. But the

successful regeneration of the economies of

Europe and the emergence of Japan as an economic superpower, coupled with a relative decline in U.S. economic strength and technological

advantage, has put new competitive pressures on

U.S.-based MNEs.23

During the 1980s, the United States was the

largest single recipient of FDI, accounting for

over 30 percent of global FDI that totalled about

$1 trillion, with Britain in second position at 15

percent. 24 This was a dramatic change for the

United States, whose MNEs have been the largest

overseas investors for most of the post-WWII

period.

In the early 1970s, U.S. scholars worried that

large overseas investment by America’s largest

and most powerful MNEs might contribute substantially to a decline in U.S. competitiveness,

and to the growth in the budget deficit, particularly if the profits were not repatriated. At the

same time, Europeans feared that Europe would

be dominated by the subsidiaries of U.S.-based

MNEs, and that European companies might not

develop sufficient scale and scope to compete on

a European or global basis.25

In the late 1980s, the focus of debate changed

dramatically, as the huge surplus of U.S. direct

investment abroad (USDIA) over FDIUS reversed course. Based on book value calculations,

FDIUS exceeded U.S. foreign investments for the

21 bid. For de~s of tie review proc~s itself undertaken by CFIUS, see statement of Frederick VOlca.IIS+ Ad@ fkistit SCCre~ for

Trade Developmen~ U.S. Department of Commerce, in Hearing before the Subcommittee on International Finance and Monetary Policy on

June 4, op. cit., footnote 17, pp. 10-11.

22 For an ~temtive view, SYX services of the Commission of the European Communities, Op. cit., foomote 5, pp. 82-90.

23 ~S issue WaS a centr~ one addressti in Competing Economies, op. cit., footnote 1.

~ III con~m~ the Federal Republic of Germany attracted investments totaling $19 billion in this period. See ‘Study: U.S. back, Germany

Trails, in Attractiveness to Direct Investors, ” This Week in Germany, Oct. 23, 1992, p. 5.

25 For a &smSSion of ~we issues ~c. Fr~ B~gs@~~omas Horst, ~d~~dore H. Mor~ American Mdtinationals and Amen”can

lnteresfs (Washington, DC: Brookings Institution, 1978); Robert Gilpi.r.L U.S. Power and the Multinational CoWorarion: The Political

Economy of Foreign Direct Investment (New York NY: Basic Books, 1975); Fred Block, The Origins of International Econom.c Di.~or&r:

A Study of the United States International Monetary Policyfiom World War II to the Present (Berkeley, CA: University of California Press,

1977); and Jean-Jacque Servan Schreiber, The American Challenge (New York NY: Athenium, 1%8).
Chapter 3–Foreign Direct Investment | 51

first time in 1989; foreign MNEs invested more in

the United States than did U.S. MNEs abroad.26

Although global FDI rose from $208 billion in

1973 to $1,403 billion in 1989, FDIUS increased

much faster, from $21 billion (10 percent of the

total) to $401 billion (29 percent of the total) in

the same period. The flow of direct investment

into Japan, however, remained low,27 Table 3-2

compares the shares of total global inward FDI of

several host countries and regions.

The United States thus became the world’s

largest importer of capital in the 1980s. The gross

total of FDIUS grew from $83 billion to $185

billion between 1981 and 1985, increasing at an

annual rate of 17 percent. The rate of FDIUS

growth accelerated between 1985 and 1989,

averaging 21 percent. In 1990 and 1991, however,

the rate of FDIUS slowed dramatically and may

even have become negative in 1992, although

OECD and U.S. Department of Commerce data

do not agree on this last point (see figure 1-2 in

chapter 1 and figure 3-1 in this chapter).

Some economists argue that a decline in new

FDI in 1990 and 1991 may have signaled a break

in new FDIUS; they postulate that the flow of net

lending from parents to affiliates declined and the

stock of retained earnings of U.S. affiliates fell

because affiliates paid dividends to their parents

despite negative earnings. 28 Figure 3-1 graphically illustrates the cumulative position and

growth rate of FDIUS. While there has been a

dramatic decline in the growth rate in the early

1990s, the total of FDIUS has grown, despite a

recession and slow recovery.

I Measuring Foreign Presence

Measuring the importance of foreign firms in

the domestic economy is complex.29 On the face

of it, foreign-controlled production does not loom

large in the landscape of the U.S. economy.

Despite the sometimes contentious public debate

surrounding FDIUS, foreign firm accounted in

1988 for a relatively small share of the U.S.

economy—no more than 4.1 percent of total

employment and 4.1 percent of total domestic

product. 30 As one Commerce Department analyst

observed, ‘‘the role of foreign-owned firms in the

U.S. economy—in terms of proportion of domestic sales, assets or employment—remains the

lowest, except for Japan, among industrial countries. ’31 In 1988, U.S. affiliates of foreign firms

did, however, account for a larger share of the

domestic manufacturing economy, with 14.7

percent of the assets, 12.2 percent of the sales, and

10.5 percent of the gross product. (See box 3-A.)32

These figures, however, underestimate the

importance of foreign multinationals in the U.S.

economy. To appreciate the full impact of foreignbased firms, all foreign-owned production-both

FDI and imports-should be considered together.

In specific industries-many of them related to

critical technologies-the foreign position is

much larger than the averages suggest. For

example, in the automotive industry, foreign

26 U.S. Dep@ent of Commerce, OffIce of the mef Economist, Foreign Direct Investment in the United States: Review andAnal@s of

Current Developments (Washington DC: U.S. Government Printing OffIce, August 1991), p. 4. It should be noted that the U.S. book value

of the net foreign direct investment position has been positive since 1990 (see figure 3-A-3 in box 3-A). U.S. Department of Commerce, ‘Net

International Investment Positiou 1992, ” op. cit., footnote 4.

27 U.S. Dep~ment of commerce, Foreign Direct Investment in the United States, ibid., p. 21.

28 Graham, op. cit., footnote 2, p. 1740.

29 For discu~slons on the issue of ~temtive memmes of ~1 see J~ius, op. cit., foo~ote 9, pp. 14-24; Robert Eisner and P~l J. pip,

“The World’s Greatest Debtor Nation?, ” North American Review of Econonu”cs and Finance, 1 (l), pp. 9-32; U.S. Department of Commerce

and Bureau of Economic Analysis, Survey of Current Business, May 1991, especially p. 41,

30 Gerald R. Moody, “Role of Foreign-Owned U.S. Affiiates in the U.S. Economy, 1977-88,” U.S. Department of Commerce, Forez”gn

Direct Investment in the United States, op. cit., footnote 26, p. 30.

31 Smlye okubo McGuire, 4 ‘Summary and Conclusions, ’ U.S. Department of Commerce, ibid., p. 84.

32 Mwdy, op. cit., fOotrlOtc 30, P. 30,
52 I Multinationals and the National Interest: Playing by Different Rules

Table 3-2—Host Country Share of Global Foreign Direct Investment, Selected Years (percent of world total)

1967 1973 1980 1989

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 9.9 16.5 28.6

EC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.5 32.7 37.0 34.5

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 0.8 0,7 0.7

LDCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.6 26.1 22.0 19.2

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.4 24.8 18.7 13.0

NOTES: All figures are Eel 2, regardless of year. LDCS denote lesser developed oountnes, as defined in the source.

SOURCE: U.S Department of Commerce, Bureau of Economic Analysis, Foreign Direct /nves&nent/n the United States: Redew mdAna/ys/s of

Current Developments (Washington, DO: U.S. Government printing Offioe, August 1991), table 4-2,

producers control about 31 percent of the U.S.

market. In the merchant semiconductor market,

the figure was about 30 percent in 1991,33 and in

the chemical industry, the foreign share was about

26 percent.34

Significant foreign production is conducted in

the United States. Foreign firms provide an

estimated 72,200 automotive industry jobs in the

United States,35 280,800 jobs in the chemical

~dus~,sG~d51,500 jobs in the steel industry .37

This accounts for a significant share of total

domestic employment in major industries, as

shown in figure 3-2.

The pattern of FDIUS that developed during

the 1980s was characterized by an increase in

Canadian, Japanese, and European investment.38

In the aggregate, Europe remained the leading

foreign investor,39 accounting for approximately

65 percent of all FDIUS in the 1980s, but the

Japanese position rapidly expanded. Figure 3-3

charts these investment positions. Japan’s rise

from the fourth to the largest single investor is

particularly striking.

Japan’s investments have received intense

scrutiny for a number of reasons. These include

the accelerated rate of growth of Japanese direct

investment (in the context of the competitive

challenge of the Japanese economy), the asymmetry in trade and investment access by U.S. firms

to Japan, and the burgeoning U.S. trade deficit. In

addition, there is a widespread perception--right

or wrong-that Japanese investors are better able

to maximize market share and absorb technology

than other foreign investors. Furthermore, Japan

is the most diversified of the major foreign direct

investors in the United States, and often all their

major producers in a sector—such as automobiles

or steel—invest in the United States, giving

critics a sense that Japanese investment is enveloping the U.S. economy.

The breadth of Japanese investment is reflected

in employment figures for manufacturing industries by sector. Table 3-3 profiles foreign affiliate

employment in the manufacturing and wholesale

trade sectors, covering the seven largest investors

in the United States during the early 1990s. While

Britain and Canada remain the largest two manufacturing employers, the table shows significant

employment levels for Japanese affiliates. The

table also illustrates the comparatively broad

33 S~~ConduCtor ~dusqAgwxktirm, Annual Data Book, 1991, P. 12.

34 U,S. ~p~ent Ofco-erce, Bur~~ of fiono~c ~ysis, Smey of Current B~iness, v~ou,q iggu~ 1992; U.S. Industrial Outlook

(Washington DC: U.S. Government Printing OffIce, January 1992 and January 1993).

35 AS of 1988; Ewnomic sh-ategy Institute, ‘‘The Case for Saving the Big mee, ‘‘ interim report (WasMngtoU DC: Economic Strategy

Institute, 1992), p. 56.

36 ~of 1988; U.S. Dep-nt of comme~e, Foreign Direct znve~fment in the Um’fe~Sfates, op. cit., footnote 26, p, 68,

37 Ibid., p. 62.

38 Ibid., p. 23.

39 KPMG peat Manvic~ “European Investment in the United States,’ report for The European Institute, 1991, p, 1.
Chapter 3—Foreign Direct Investment | 53

Box 3-A-Three Ways To Calculate Foreign Direct Investment

in the United States (FDIUS)

Figure 3-A-l—Alternative Valuations of U.S. Direct

Investment Position Abroad, 1982-1992

900

r

–- ‘---–- 1

800

700

g 600

: 500

g 400

.-

R 300

200

Market value P.,, /

/

/ ‘../

‘k //” ’

. .

7

 -—-

/ /

,/

Current cost ,’ /

.— —

– :+’/’”: ‘“

——-/ “

{ Historical cost

100

o~ 1 1 1

1982 83 84 85 86 87 88 89 90 91 92

SOURCE: J. Steven bndefeld and Ann M. Lawson, “Valuation of the Net U.S.

International Investment Position,” Survey occurrent Business, May 1991, p. 40,

table 1; Russell B. Scholl, Raymond L. Mataloni, and Steve D. Bezirganian, ‘The

International Investment Position of the United States in 1991 ,“ Survey of Current

Business, June 1992, p. 53, table 4; U.S. Department of Commerce, Bureau of

Economic Analysis, “Net International Investment Position, 1992,” press release,

June 30, 1993.

Measuring global foreign direct

investment (FDI) is a contentious issue.

Depending on how FDI is calculated,

very different outcomes can be

reached in identifying the ratio of U.S.

direct investment abroad (USDIA) to

FDIUS, and second, the relative significance of foreign investment in the

United States. The most widely used

method is the “book value” or “historical cost” approach. This approach

calculates the value of FDI from the

initial cost of the investment ignoring

subsequent changes in the value of t he

investments. There are two major problems with the book value approach: it

usually understates substantially the

current value of investments; and it can

be distorted by currency fluctuations.

One alternative to calculating by

book value is to calculate by stock or

current cost. This approach calculates the current value of an investment, not its original value. This method also

has problems, principality because it is very laborious to update repeatedly the values of numerous investments.

A third method is the “replacement cost adjustment” or “market value” method. This is similar to the stock

value met hod, but focuses on investment goods prices rather than on share prices. This approach has two major

deficiencies. First, the current value of many investments has little to do with the replacement cost of the original

capital goods, much of which maybe outdated; second, the value of an investment may have less to do with the

market value of physical capital assets than with the value of intangible assets such as skills, knowledge, or

goodwill.1

There are two practical implications of the distinctions among the book (historical cost), stock (current cost),

and replacement (market value) methods. The first concerns the ratio between the out flow of FDI from the United

States (USDIA) and the inflow of capital (FDIUS). According to Department of Commerce estimates, based on

book value, FDIUS exceeded USDIA for the first time in 1989. 2 This method prompted some economists to contend

that the United States had become the “world’s greatest debtor nation,” based on its net international investment

position. Others, relying on stock estimates that recalculate old investment at present values, have reached a

different conclusion, especially when other resources such as gold are added to equity ownership.3

1 Forageneral discussion of the merits of allthreeapproaches see Robsrt Eisnerand Paul J. piefXW, ‘~ewd’s

Greatest Debtor Nation?,” North American Review of Economkx and%me, vol. 1, No. 1, pp. 9-32. The rnmket vaiue

figures are available in BEA, “Valuation of the U.S. Net International Investment Position of the United States,” Survey

of Current Business, June 1992, p. 53, tabfe 4.

z U,S, Department of commerce, Office of the Chief Eoonomist, Rm#gn Wed /IWeSt7Wf In tk un/teds@t*:

F?etiew and Ana/ysls of Current Developments (Washington, DC: US. Government Printing Offke, August 1991 ), p. 4.

3 Eisner and PiePer, op. cit., footnote 1, p. 11.

(continuedon netipaga)
54 I Multinationals and the National Interest: Playing by Different Rules

Box 3-A-Continued

Flgure~A-2—Alternative Valuations of the Foreign Direct

Investment Position in the U.S., 1982-1992

700

‘r

Market value

\ 7

!$ 5oo-

= \

~ 4oo -

Z Current cost

2 3oo-

.-0

=

m ~.

Historical cost

1oo0! r I 1 r 1 I 1 1 1 !

1982 83 84 85 86 87 88 89 90 91 92

SOURCE: Landefaldand Lawson, p. 40, table 1; Scholl, Matatonl, and Sazirganian,

p. 53, tabla 4; U.S. Dapartmant of Commarca, Bureau of Economic Analysis, “FM

International Invaatment Poeition, 1992,” preas release, June 30, 1993.

Using Bureau of EconomicAnaiySs (BEA) data and ail three methods

of caculating USDIA, FDIUS, and the

net position, Department of commerce

economists in 1991 concluded that

only the book method showed the

United States as a net debtor in 1989.

Both the stock and the replacement

methods yielded a net direct investment surplus. (Figures 3-A-1, 3-A-2,

and 3-A-3 show the results of the

different measurements of USDIA,

FDIUS, and the net direct investment

positions.)

Using assigned stock or replacement value as an indicator suggests

that USDIA is still greater than FDIUS

by a large margin. Even the book

method shows the net investment position of the United States in surplus after

1989. However, the replacement value figures are affected by the high value of the U.S. dollar in the 1950s and

1960s relative to its value between 1985 and 1990. In addition, the figures are potentially distorted by stock market

Figure 3-A-3-Alternative Valuations of the Net U.S.

International Direct Investment Position, 1982-1992

300 ——

250- Market value

200- \

\ \

\

150-

1ooCurrent cost d

50-

0- /

Historical cost

-50 1 I I 1 1 1 1 t 1

1982 83 84 85 86 87 88 89 90 91 92

SOURCE: Landefeldanctbwson , p. 40, tabie 1; Scholl, Mataioni, and Bezirganian,

p. 53, tabio 4; U.S. Department of Commarce, Bureau of Economic Analyds, Wet

International Investment Position, 1992,” preaa releaaa, Juno 30, 1993.

4-JIJIiW GIOW &mptwthM and Futiic PO/icy: 7he C3rvw#)g Challenge of Fmign Dbot lnvedmeni

(London: Royal irtstituteot irtternatiortsi Affdrs, 1990), p. 38.

5 sss ~m ~, op. m, footnote 1, p, 17, table 5B.
Chapter 3-Foreign Direct Investment | 55

Figure 3-2—Percent of U.S. Workforce Employed

by Foreign-Owned Affiliates in Selected

Manufacturing Sectors, 1990

Semiconductors

Electronic

computers

Auto parts

Autos

Chemicals

Pharmaceuticals

14.9

29.9

I

I

I I I I I

O 5 10 15 20 25 30 35

Percentage

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, “Employment and Wages in Foreign Owned Businesses in the United

States, Fourth Quarter 1990,” press release, October 20, 1992, table 2.

distribution of Japanese affiliates, as well as the

relatively high levels of Japanese affiliate employment in wholesale trade. In comparison,

Canadian affiliates, which have approximately

the same number of workers in aggregate, employ

only 13.5 percent as many workers in the wholesale trades. British investors employ nearly a

quarter-million more people, yet they employ

some 90,000 fewer in wholesaling. Given that

wholesale trade is directly related to the import of

goods, rather than their domestic manufacture,

this statistic suggests that Japanese investors

employ a large percentage of workers among

affiliates that are primarily devoted to importing.

This issue is returned to later in this chapter.

Japanese manufacturing investment in the

United States also differs from traditional investment patterns because of its strategic nature.

Japanese firms have invested heavily, for example, in steel, rubber, and autos as one complex, or

triangle, of investment (consumer electronics,

semiconductors, and computers are another).

These horizontally and vertically integrated

Figure 3-3-Foreign Direct Investment Position in

the U.S. by Selected Country, 1980-1992

100

United Kingdom

u)

z 8 0

=

%

3 60-

(n

c

.-

: 40

/ ----- ’

20-

/

/

.— Ca’nada

o-r I 1 1 1 1 1 1 1 I

198081 82 83 84 85 86 87 88 89 90 91 92

NOTE: All data are calculated on a historical cost basis and are not

adjusted for Inflation.

SOURCE: U.S. Department of Commeree, Bureau of Economic

Analysis, Foreign Direct Investment in the United States: Review and

Current Developments, August 1991, table 2-4; U.S. Department of

Commerce, Bureau of Economic Analysis, Foreign Dkect Investment

in the United States.’ An Update (Washington, DC: U.S. Government

Printing Office, June 1993); U.S. Department of Commerce, Bureau of

Economic Analysis, “Net Investment Position, 1992,” press release,

June 30, 1993, table 3.

groups appear to be more coherent, comprehensive, and strategic than European patterns of

FDIUS, such as heavy British investments in

chemicals, medical instruments, and publishing,

and have thus tended to generate more concern

among critics. Figure 3-4 shows Japanese affiliates’ assets in several manufacturing sectors.

Overall, Japan’s FDIUS rose from $4.7 billion

in 1980 to $69.7 billion in 1989, increasing at an

average annual rate of 32.5 percent between 1980

and 1985, and accelerating to 37.8 percent between 1985 and 1989. The rate of Japanese

FDIUS declined between 1990 and 1992,@ because of a recession in Japan and an increase in

the cost of capital in Japan.

Putting these figures in perspective, the EC

countries’ expansion of FDIUS, although notable,

was much slower than Japan ’s. European FDIUS

rose from $47.3 billion in 1980 to $234.8 billion

w i -Japan Keeps Cash at Home, ‘‘ op. cit., footnote 4, p. 4.
56 I Multinationals and the National Interest: Playing by Different Rules

Table 3-3-Employment of Affiliates by Industry of Affiliate and by Country of Ultimate

Beneficial Owner, 1990 (In thousands of employees)

Industries Canada France Germany Netherlands Switzerland Britain Japan

Total manufacturing . . . . . . . . . . . . . . . . .

Food and kindred products . . . . . . . . . . . .

Beverages . . . . . . . . . . . . . . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chemicals and allied products . . . . . . . . .

Industrial chemicals . . . . . . . . . . . . . . .

Dregs . . . . . . . . . . . . . . . . . . . . . . . . . . .

Soap, cleaners, and toiletries., . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Primary and fabricated metals . . . . . . . . .

Primary metal Industries. . . . . . . . . . . .

Ferrous . . . . . . . . . . . . . . . . . . . . . . . .

Nonferrous . . . . . . . . . . . . . . . . . . . .

Fabricated metal products . . . . . . . . . .

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . .

Machinery, except electrical . . . . . . . . .

Computer and office equipment. . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . .

Electric and electronic equipment . . . .

Audio, video, and commercial . . . . .

Electronic components. . . . . . . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . .

Other manufacturing . . . . . . . . . . . . . . . . .

Textile products and apparel . . . . . . . .

Lumber and furniture . . . . . . . . . . . . . . .

Paper and allied products.. . . . . . . . . .

Printing and publishing . . . . . . . . . . . . .

Rubber products . . . . . . . . . . . . . . . . . .

Misc. plastics products . . . . . . . . . . . . .

Stone, day, and glass products . . . . . .

Transportation equipment.. . . . . . . . . .

Motor vehicles and equipment . . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . .

Instruments and related products. . . . .

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total wholesale trade . . . . . . . . . . . . . . . .

Motor vehicles . . . . . . . . . . . . . . . . . . . .

Professional/commercial equipment . .

Metals and minerals . . . . . . . . . . . . . . .

Electrical goods . . . . . . . . . . . . . . . . . . .

Machinery and equipment. . . . . . . . . . .

Other durable goods . . . . . . . . . . . . . . .

(Groceries and related products . . . . . .

Farm product raw materials . . . . . . . . .

Other nondurable goods.. . . . . . . . . . .

305.5

NA

NA

21.0

NA

NA

●

1.5

0.4

32.2

24.2

9.3

14.9

8.0

41.3

6.1

0.7

5.4

35.2

NA

2.1

NA

90.2

10.7

2.4

5.9

51.1

NA

3.5

NA

NA

7.6

NA

1.1

1.3

20.7

1.4

0.2

NA

0.9

3.1

0.7

NA

0.1

7.4

181.1

12.5

5.5

7.0

22.8

NA

NA

0.5

0.9

35.3

NA

3.1

NA

NA

34.5

15.1

NA

NA

19.4

NA

NA

5.5

76.0

1.9

0.7

0.5

NA

NA

4.8

29.9

10.9

NA

NA

6.6

3.0

43.4

NA

0.4

2.4

0.8

0.7

2.4

NA

11.9

11.4

249.7

2.9

0.5

2.4

94.4

70.1

4.2

18.0

2.2

21.8

6.0

2.0

4.1

15.8

59.9

20.9

2.7

18.2

39.0

NA

12.6

NA

70.8

7.7

5.5

1.6

NA

NA

3.4

10.1

6.1

4.5

1.6

9.4

0.7

65.6

18.4

4.0

6.8

NA

4.6

1.5

NA

0.1

4.2

127.7

17.4

0.0

17.4

41.5

NA

●

NA

NA

10.5

0.0

0.0

0.0

10.5

NA

1.6

0.7

1.0

NA

NA

2.7

0.5

NA

0.4

0.0

NA

NA

NA

NA

NA

0.7

0.0

0.7

0.3

●

16.2

0.1

2.2

0.7

0.1

2,8

2.5

1.4

0.6

5.8

178.6

NA

●

NA

60.4

1.1

53.6

NA

NA

8.2

5.7

0.3

5.4

2.5

49.3

NA

NA

18.3

NA

NA

0.4

NA

NA

1.5

0.4

NA

NA

●

0.5

5.3

0.5

0.5

0.0

7.1

2.4

14.9

0.0

5.7

0.1

0.4

3.0

1.2

0.2

NA

NA

538.7

105.0

2.4

102.8

129.2

80.3

32.0

NA

NA

39.5

10.4

0.5

9.9

29.1

92.1

44.7

10.3

34.4

47.4

7.5

11.1

28.8

172.7

20.0

6.2

5.9

33.7

NA

10.8

30.7

22.4

4.0

18.4

30.9

NA

59.9

5.0

6.1

3.6

2.1

4.3

19.5

7.6

0,3

11.5

291.7

15.1

4.3

10.7

23.7

11.2

7.2

2.7

2.6

61.8

54.0

50.0

4.0

7.8

89.6

54.7

25.2

29.5

34.9

3.4

24.1

7.4

101.6

8.6

1.0

4.2

NA

NA

3.5

11.2

26.2

26.2

0.0

5.6

3.8

152.9

38.1

18.7

7.1

68.3

9.2

5.7

1.2

1.5

3.1

NOTES: Ultimate Benefldal Owneristhatfirm, moving upa U. S.affiliate’s ownershlpchain, and beginning with andindudingtheforeign parent, that

Is not owned more than 50 percent by another firm. An aeterix indicates fewer than 50 employees, NA indicates data is not avdlable.

SOURCE: U.S. Department of(krnmerce, Bureau of Economk Analysis, Foreign Direct/nvestmentin the UnksdStates, Qx+rathns of U.S. Atf///ates

of Fore@ CornptIn/es, Pre/im/nary 1990 Estimates (Washington, DC: U.S. Government Printing Office, August 1992), table F-3.
Chapter 3—Foreign Direct Investment | 57

in 1989,41 at an

percent between

average annual increase of 17.8

1980 and 1985, and 21.6 percent

between 1985 and 1989. In other words, the

growth rate of Japanese FDIUS was much higher

than the European growth rate of FDIUS, although cumulative EC FDIUS is still much higher

than that of Japan. Japanese FDIUS is also much

higher than U.S. investment in Japan. (See figure

1-10 in chapter 1, which compares Japanese

investment in the United States to U.S. direct

investment in Japan through the 1980s. See also

figure 1-9, which compares U.S. investment in the

European Community to EC investment in the

United States.42)

I Reasons for Reversal

What explains the shift in flows toward FDIUS?

Traditional economic theory postulates that foreign investors make decisions based on two sets

of considerations. Classical macroeconomic investment theory points to the significance that

investors attach to the marginal returns on capital

relative to its cost, motivated by the desire to

maximize returns while hedging against interest

and exchange rate fluctuations .43 The alternative,

macroeconomic or industrial organization approach, focuses on the strategic behavior of the

multinational enterprise. It claims that MNEs set

up foreign subsidiaries because of their desire to

sustain profits in the face of stiffer competition; to

gain access to a market or expand share; to sustain

or create a comparative advantage enjoyed by the

firm; to service the particular needs of a customer

or its market; or for political reasons.44

Dating from the late 1970s, foreign firms—

most particularly Japanese firms-began to follow the pattern traditionally associated with U.S.

firms as they became MNEs. Besides the large

and persistent U.S. balance of trade deficits,

which itself is caused in part by barriers to trade

and investment in certain key markets, analysts

have identified at least six possible reasons for the

growth of FDIUS in the United States. These

reasons are not mutually exclusive and varied in

importance for MNEs from different countries.

The first reason was changes in the cost of

capital. U.S. debt and equity markets had traditionally been a source of relatively cheap capital,

and American firms benefited from this system.

However, during the late 1970s and 1980s, the

pattern changed. The traditional U.S. advantage

of access to liquid capital markets of unrivaled

scope disappeared. Exacerbated by the rising

budget deficit, high inflation 1evels raised domestic interest rates. These factors, when combined

with the globalization of some financial markets,

meant that foreign producers could benefit from

comparable and often lower interest rates than

their U.S. counterparts. 45 This development i s

reflected in figures 3-5 and 3-6, which show the

nominal corporate and prime interest rates in the

United States and Japan between 1970 and 1991.

As the figures indicate, the beginning of the

boom in Japanese FDIUS in the early 1980s

coincided with the period of greatest disparity

between U.S. and Japanese interest rates, whether

corporate or prime. How are these interest rate

differentials and the growth of Japanese FDIUS

41 Ibid.

42 ~m ~ese ~vestment levek are considered in real terms, despite slight discrepancies the same patterns emerges k boti ws.

43 SW, for example, Gary Hufbauer, ‘‘The Multinational Corporation and Direct Investment,‘‘ in Peter B. Kenen, cd., International Trade

and Finance: Frontiers for Research (Cambridge: Cambridge University Press, 1975).

~ me most not~ proWnat of ~ view is Stephen H. Hymer. See his two books: The International Operations of National Firms:A S@Y

of Direct Foreign Investment (Cambridge,+: MIT Press, 1976) and The Multinational Corporation:A Radical Approach (Cambridge, MA

MIT Press, 1979). More recent versions of this argument have evolved into the theory of internationalization. For example, see John Cantwel~

“A Survey of Theories of International Production,‘‘ in Christos N. Pitelis and Roger Sugde& The Nature of the Translational Firm (New

York NY: Routledge, 1991), pp. 16-63 and especially pp. 23-26. Dunnin g makes similar arguments in his eeketic paradigm. For a recent

version see John H. Dunning, Multinational Enterprises and the Global Economy (New York NY: Addison Wesley Publishing Co., 1993).

45 For a discussion of this point see, for example, “Capital punishmen~” The Econon”st, May 23, 1992, p. 1.
58 | Multinationals and the National Interest: Playing by Different Rules

Figure 3-4-Assets of Japanese Manufacturing Affiliates in the U.S.

by Selected Industry, 1990

Food products ]2.4

Industrial chemicals ]4.4

Drugs 72. 0

Computer and office equipment~54

Non<omputer electrical equipment~63 ‘ex’i’esr5”’ Electric & electronic equipment

Paper products

Stone, clay and glass products ~37

Motor vehicle and equipment 16.0

Primary metals 111.6

Fabricated metal products 2.1

I 1 [ t [

o 2 4 6 8 10 12 14

Billions of dollars

NOTE: Data are calculated in 1990 ckdlars.

SOURCE: U.S. Department of Commerce, Bursau of Economk Analysis, Fore&n Direct hwestment in the Unhd

States, @mrations of U.S. Affiliates of Fore@ Companies, Preliminary 19sUI Estimates, August 1992, table B5.

related? As the cost of money falls (adjusted for

inflation and currency fluctuations), the incentive

to invest grows. Thus, as long as inflation remains

low and currency exchange rates remain favorable, interest rate disparities encourage Japanese

investors to pursue opportunities abroad. This is

what they did.

Correspondingly, as the difference between

interest rates in the United States and Japan

shrank and all but disappeared in the early 1990s,

so too did the propensity towards Japanese

FDIUS.46 Indeed, it has been suggested that Japan

has suffered from a capital cost disadvantage

since 1992.47 These figures support the proposition that the cost of capital affected the propensity

toward foreign investment; as it becomes cheaper

in the investing country, the prospect of FDI

becomes more attractive.%

The expansion of Japan’s equity market during

the 1980s caused new sources of cheap capital to

develop, as Japanese firms benefited from leveraged loans. However, the subsequent decline of

the Japanese stock market in the early 1990s did

much to offset this advantage.49 In the early

1990s, therefore, while the growth rate in foreign

investment in the United States has declined,

Japanese as well as European investment has

levelled off after the fast growth of the previous

46 For dwh fic dW~ in ~jor investments in the United States, see ‘Fewer Deals, I&ss Investrmnt,’ Forbes, July 20, 1992.

47 ~c~d p. ~ttione, ‘Ctipjti Cost Disadvantage for Japan?” @@o: Mor~ @aranty Trust Co., Apr. 6, 1992).

4S ~~ow.dow ~ @ ~~ of ~=e of J~~~~WS w~ pm of a g~~ d~elmation or possible decline of FDIUS SXTMng OECD

countries (see footnote 50), which suggests one of three possibilities: fnsti that the cost capital differential shrank among the United States and

all major investors in the United States at about the same time; secon~ that the cost of capital issue only appertained as an incentive to Japanese

investors because the differential was so grea~ or Wr& that the cost of capital differential is only a partial explanation of the changes in rates

of Japanese FDIUS, Finally, there is also an argument, and appropriate supporting evidence, contradicting the claim that them is a rel@.ionship

between the cost of capital and patterns of FDI. For a summary discussion of this debate, see ch. 6.

49 James Stemgold, “Japan’s Cash Fountain Has All But Dried Up,” New York Times, Dec. 6, 1991, p. D1.
Chapter 3-Foreign Direct Investment | 59

Figure 3-5—Nominal Prime Interest Rates in the U.S. and Japan, 1970-1991

4 Japan =. —— -

1

2

o~ 1 1 1 1 1 ) 1 1 1 1 1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

SOURCE: Adapted from Richard P. Mattaone, “A Capital Cost Disadvantage for Japan?” Morgan Guaranty Trust, Tokyo, April 1992, p. 3,

decade. 50 The decline can be attributed largely to

the U.S. recession of the late 1980s, but problems

in the Japanese economy during the early 1990s

also contributed. As the Japanese stock market

bubble deflated, industrial firms that engaged in

heavy financial engineering suffered heavy losses,

as did many Japanese banks that might have

provided loans to replace equity financing.51

The 1970s and 1980s also saw the impact of

three distinct systems of capital among leading

OECD countries. While the American and British

economic systems continued to rely on equity

markets, some countries (like Germany) developed a credit-based system run by national banks,

and others (like France) had a state-run system.52

Both the national bank-led and state-run systems

were characterized by greater patience and a

willingness to make long-term capital available at

lower interest and on a more liquid basis to

domestic firms than to foreign-owned firms.53

In Germany, for example, national banks

usually serve on the boards of the companies to

which they provided loans, ensuring a measure of

fiscal prudence as well as coordinating company

behavior through interlocking directorates. In

Japan, a similar function is performed by banks

associated with specific keiretsu or groups of

companies .54 In France, state-owned banks facilitated investment by providing capital at lower

interest rates. France reversed its net FDI position

50 James Sterngold, “Japan’s ‘Recycling’ of Its Trade Surplus Declines,” New York Times, Feb. 22, 1993, p. Al. Due to the preliminary

nature of the 1992 da@ Department of Commerce, OJ3CD, and Bank for Intermtional Settlements estimates of FDI inflows show either a slight

increase or decrease in FDIUS. This small discrepancy, when compared to aggregate FDIUS and the lower direct investment outflows from

Japan and Europe, still supports the general evidence of a slowdown in FD1l-JS in the early 1990’s. See “Japan Keeps Cash at Home,’ op. cit.,

footnote 4; U.S. Department of Commerce, “Net International Investment Positiom 1992,” op. cit., footnote 4; and OECD, FinanciaZMarket

Trenak, June 1993, table 1, p. 44.

‘1 Anthony Rowley, ‘‘Ebbing Streams; Japanese Firms Curtail Their Overseas Forays,‘‘ Far Eastern Econom”cReview, June 18, 1992; also

see Sheridan Tatsuno, ‘‘Japanese Redirect Electronics Investments to Asia, ’ New Technology Week, Nov. 16, 1992, p. 6.

52 For a fill discussion of this issue see John Zysmw Governments, Markets, and Growth: Financial Systems and the Politics ofIndustn”al

Change (fthaca, NY: Cornell, 1983).

53 For ~ a~ysis of t.his issue see Michael E. Porter, Capital Choices: Changing the Way America ]nvesrs in I~us~ (w~@tOU ~:

Council on Competitiveness, 1992).

~ For a &scussion see Robert J. Ballon and Iwao Tomit~ The Financia/Behavior ofJapanese Corporations (TokYo: Kodasharntemational,

1988), especially pp. 58-63.
60 I Multinationals and the National Interest: Playing by Different Rules

Figure 3-6-Nominal Corporate Bond Rates in the U.S. and Japan, 1970-1991

16

14-

12“ U s .

E

~ lo5

\

8-\~ /

/-— —

\ /

7

— =

\ /

\

\ /’

6

1

4

2

1

/

Japan

I

1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

SOURCE: Adaptact from Richard P. Mattsone, “A Capital Coat Disadvantage for Japan?” Morgan Guaranty Trust, Tokyo, April 1992, p. 3.

and became a net FDI exporter for 8 of the 9 years

between 1983 and 1992.55

These institutional arrangements encouraged

foreigners to invest in the United States. The

influence of capital shortages, one of the traditional impediments to investment on the scale

required to compete in the United States, had been

alleviated, creating incentives for a variety of

foreign firms to expand their manufacturing or

resource base to the United States.

The second reason for the shift in FDI flows is

the liberalization of rules governing the outward

flow of capital in some OECD countries in the

1970s and 1980s. The most prominent examples

included countries that had previously restricted

outbound FDI, such as France, Italy, and Japan.

Of these, Japan was initially perhaps the slowest

to respond.56 Yet when capital liberalization in

1972 finally replaced the Foreign Exchange

Control Law of 1949, Japanese overseas investment grew quickly. Reflecting its importance,

Japanese officials often refer to liberalization as

the “gannen’ of overseas FDI, a term usually

reserved for the first year of the reign of a

Japanese emperor.57 Overseas investment by

Japanese firms almost doubled in the early 1970s,

to a total of $345 million,58 and continued to

increase dramatically. By the end of the 1980s,

Japanese global external direct investment totaled

$201 billion, with $69.7 billion invested during

1989 in the United States alone.

The third major reason was the shift in exchange rates between the dollar and the yen. The

dramatic fall in the value of the dollar against the

yen between 1985 and 1988, under the terms of

the Plaza Agreement in 1985, encouraged the

influx of FDIUS. During this period the yen rose

against the dollar by about 90 percent. This rapid

strengthening of the yen brought about a sharp,

widespread decline in the cost of production in

host countries relative to the cost in Japan,

including the initial costs of investment. Thus the

SS JuI.@ op. cit., footnote 9, p. 24.

56 Jap~’S ~es ~gsrding both Mx)ti~ OUtbOd FDI src ChOdCkd ill Dd Encarnstioq Rivals Beyond Trade: America Versus

Japan in Global Competition (IthactL NY: Cornell University Press, 1S92), pp. 36146.

57 Rw~ Ko~y4 The Japnese Ecotwnty: Tr4e, Industry and Government flO~O: Udvemity of ~bo fi~s, 1~), P. 118,

SE Ibid., p, 112,
Chapter 3-Foreign Direct Investment | 61

strong yen is an important factor behind the sharp

increase in FDIUS. Further, the yen’s appreciation gave Japanese firms a strong incentive to

develop labor-intensive manufacturing facilities

offshore .59

The fourth major reason for the shift was the

institution of a series of formal and informal

protectionist barriers. During the 1980s, the

United States extended its protectionist measures

to limit direct competition in manufacturing

sectors for the first time since 1945, a pattern

characteristic of the EC as a whole and many of

its member states, Increased U.S. protectionism

was accomplished through a variety of formally

negotiated agreements or informally negotiated,

self-imposed restraints, such as voluntary export

restraints and orderly marketing agreements in

such areas as the automobile, machine tool,

textiles, and steel industries.60 As a result, many

firms transferred some part of their manufacturing

or sales to the United States. They did so either to

ensure continued access to what was, in many

sectors, the world’s largest market, or to maintain

price competitiveness in the face of possible

tariffs.

A fifth factor affecting the growth in FDIUS

was pressure from the Japanese Government

designed to encourage some of their largest

domestic corporations to invest in the United

States. Often these firms were initially reluctant

to do so, being concerned about the political,

cultural, and economic implications of transplanted investments. Officials of Japan’s Ministry of International Trade and Industry (MITI)

were often vocal proponents of FDIUS and

believed that it would mitigate the fiction between the United States and Japan generated by

the burgeoning trade deficit. This was most

evident in the case of the automobile industry,

where Toyota and Nissan initially resisted MITI’s

prompting and were subsequently disciplined by

having their market share of exports to the United

States reduced under the terms of the Voluntary

Export Restraint Agreement of 1981.61 (See

chapter 4.)

A final factor was the tendency to follow the

leader for fear of the opportunity cost of not doing

so. Companies, as risk-averse actors, fear that

their competitors will gain a significant advantage. This is particularly true among Japanese

fins, who compete so aggressively with each

other in their domestic market. Thus, once one

major foreign competitor is persuaded to invest in

production or other facilities abroad, MNEs from

the same country tend to follow to prevent the

competitor from developing a comparative advantage.62 That tendency was evident in many

cases involving Japanese FDIUS in the 1980s, as

every major Japanese auto producer, for example,

followed Honda’s lead, albeit with some initial

reluctance and at MITI’s prompting.

The influx of FDIUS was due to many factors,

some exogenous and others the result of U.S.

Government policy.63 The collective result was

59 For ~ diScu55ion, for e~ple, of how this c~ge in exchange rates affected Japanese FDI in the auto industrys~ ‘‘Asian c~~ers:

The Sun Also Sets,” The Economist, May 24, 1986, pp. 66-67.

60 For dews of ~ese memures see Tyson, op. cit., footnote 8; and Ellis S. Krauss and Simon Reich ‘‘IdeoloW, Interests, and the bticm

Executive: Toward a Theory of Foreign Competition and Manufacturing Trade Policy, ” International Organization, 46, 4, autumn+ 1992.

61 For ~de~~ di5cuSS~on of ~~’s relations~p~~~eauto firms and illustrationof ~s pointreg~ding~e distibutionof market ShflZ(Y3,

see Paul A. Summerville, “The Politics of Self-Restraint: The Japanese State, and the Voluntmy Export Restraint of Japanese Passenger Car

Exports to the United States in 1981” (Ph.D. Doctoral Thesis, University of ‘Ibkyo, 1988).

62 ~~efickT. ~ckerbWker, O!lgopollstic Reaction and Mu[ti~tio~l EnteVrise @osto~ MA: H~md University, Graduate School Of

Business AdministratiorL 1973); and Theodore MoraL “Foreign Expansion as an ‘Institutional Necessity’ for U.S. Corporate Capitalism: The

Search for a Radical Model,” World Politics, 25, No. 2 (April 1973). For a discussion of this point in application to Japanese investment in

the United States, see Tom Roehl, “FirrIL Industry and Country Level Influences on Japanese Foreign Investment in the United States, ” in

Vladirniz Puck cd., The lnternationtdization of Japanese Firms (forthcoming).

63 For a &sWssion of a variety of these influences on Japanese investors see RoehI, ibid.
62 I Multinationals and the National Interest: Playing by Different Rules

that there were three major changes in the nature

of Japanese investment. The frost was in the

aggregate amount of Japanese FDIUS, which

grew rapidly, as outlined above. The second was

in the thrust of this investment, as it shifted from

mining, natural resources, and manufacturing to

include tertiary industries like finance, insurance,

and real estate. The third change was in the

distribution and location of Japanese FDI, as the

North American fraction of all Japanese FDI

increased from about a quarter (an average of 26.8

percent between 1951 and 1980) to nearly a half

by the middle of the 1980s (46.8 percent in 1986).

The increase in Japan’s manufacturing investment was more dramatic, rising from an average

19.3 percent of Japanese investment in the United

States between 1951 and 1980 to 57.8 percent by

the middle of the 1980s.64

Changes in the cost of capital and exchange

rates in the early 1990s have slowed the growth of

FDIUS, particularly from Japan.65 But it is also

possible that increased protectionism may either

sustain FDIUS or generate new forms of strategic

agreements or alliances among fins, which

could affect the structure and competitiveness of

the U.S. economy.

| Benefits and Disadvantages of

Increased FDIUS

Many analysts believe that the increase in

foreign investment during the 1980s was influenced both by U.S. presidential policy and

congressional politics. The Reagan administration vigorously pursued policies to increase the

influx of FDIUS, in order to offset the decline in

U.S. competitiveness and the loss of domestic

jobs. These efforts by the Reagan and Bush

administrations were buttressed by arguments

suggesting that the impact of investment by

foreign-based MNEs did not differ from that of

their domestic counterparts.66 Congressional proponents of action on behalf of beleaguered

domestic industries may also have played a part

in promoting the growth of FDIUS, through their

advocacy of domestic content legislation.67 Although the administration disagreed with the

domestic content ideas, the congressional efforts

often provided the President with a credible basis

to suggest that either foreign governments negotiate an informal agreement or face a less sympathetic Congress likely to introduce policy through

formal legislation.

The success of this policy, however, has

generated policy issues of its own. There have

been two responses to the significant expansion of

64 K~m@, op. cit., footnote 57, PP. 122-123.

65 For a disc~sion of new limits on and pattern of Japanese overseas direct investment in general, w “Japanese Spoken Here,” The

Economist, Sept. 14, 1991, pp. 67-68. For evidence regarding its reduction in the United States, see “FewerDeals, Less Investment” Forbes,

July 20, 1992, p. 290; or the more comprehensive data in Steve D. Bezirgania~ “U.S. Hlliates of Foreign Companies: Operations in 1990,”

in Survey of Current Business, May 1992, pp. 45-68; and in Rutter, op. cit., footnote 4.

66 No~ble proponents of the view that foreign and domestic investment is largely undifferentiated in effect include~and Kruop. cit., footnote 12.

67 For Cmplm reg~~g tie auto industry, see Hearing before the Subcommittee on Trade, Committee on Ways ~d Mxms,FuirPractices

in Automotive Products Act of 1983, HR 1234, Section 2, later resubmitted as the Fair Practices in Automotive Products Act of 1983, HR 5133

(Washingto~ DC: U.S. Government Printing OffIce, 1984); Subcommittee on Trade, Committee on Ways and Means, Domestic Content

Legislation and the U.S. Auto Industry: Analyses of HR 5133, Committee Print, p, 10 and seep. 3~ Hearing before the Senate Subcommittee

on Economic Stabilization Committee on Banking, Housing, and Urban Affairs, The Eflecf of Expand”ng Japanese Automobile Zmports on

the Domestic Economy (Washington DC: U.S. Government Printing OfllW, April 1980). For a discussion of the dynamics of protection in

the case of steel see Michael Borrus, “The Politics of Competitive Erosion in the U.S. Steel Indus~,” John Zysman and Laum Tyson (da.),

American Industty in Internutionai Competition (Ithaca, NY: Cornell University Press, 1983); Krauss et al., op. cit., footnote 6Q Robert S.

Walters, “U.S. Negotiation of Voluntary Restraint Agreements in Steel, 1984: Domestic Sources of International Economic Diplomacy”

(PittsburgiL PA: Pew Charitable Trusts/University of Pittsburm Graduate School of Public and International Affairs, Pew Case Studies in

International Negotiation no. 107, 1988); Robert W. Crandall, The U.S. Steel Industry in Recurrent Crisis (Washington DC: Brookings

Institute, 1981).
FDI in the U.S. economy, one stressing the

advantages and the other the disadvantages.

These responses are summarized below.

| Benefits of FDIUS

Advocates of direct investment by foreign

MNEs emphasize four advantages created by

FDIUS. 68 The first is the subsidy to levels of

investment in the presence of low U.S. savings.

This argument cites the stimulating macroeconomic effects of financial infusions to the U.S.

economy, regardless of the source, and emphasizes that Americans save less than people in

other advanced industrial states. Indeed, U.S.

savings and investment growth rates began to

diverge in 1983, when the United States began a

5-year period of economic expansion, with the

gap between gross saving and investment peaking

at $155 billion in 1987.69

A second commonly cited advantage is managerial and organizational innovation, especially

to manufacturing.70 Examples are the just-in-time

inventory system, the more general system of lean

production, and the decentralization of decisionmaking now being tried by some of America’s

multinational firms.71 Consistent with these changes

is a shift toward less hierarchical bureaucratic

structures, team personnel organization, and a

Chapter 3-Foreign Direct Investment | 63

renewed attention to quality that has accompanied foreign manufacturing investment. These,

collectively, enhance manufacturing productivity

in the United States.72

Third, proponents of FDIUS who distinguish

between domestic and foreign firm argue that

foreign producers in the United States sharpen the

competitiveness of U.S. business. They assume

that increased competition will encourage domestic firms to enhance their productivity, particularly where they operate under monopolistic or

oligopolistic conditions.73 In this view, FDI is a

symptom of a lack of competitiveness, not its

cause.

74 Benefits accrue to consumers in the form

of lower prices and a wider selection of products.

The fourth benefit of FDIUS is job creation,

There are, for example, 10 transplant automakers

with plants in the United States, with BMW a

proposed eleventh and Daimler-Benz a twelfth.

These collectively account for 50,000 jobs in

assembly and parts making operations and 16

percent of the 14.8 million vehicle capacity .75 On

a broader scale, as of 1990, British-owned affiliates accounted for over 1 million jobs in the

United States, Japan for 617,000, Germany for

513,000, and the Netherlands for 290,000.76 (See

table 3-4.)

68 For e~ples of work that tend to emphasize the benedlts of FDIUS, see Earl H. Fry, The Polifi”cs ofhternationalh vestment (New York

NY: McGraw-Hill, 1983) and more recently his “Foreign Direct Investment in the United States: Public Policy Options,” a paper prepared

for the International Studies Association Conference, April 199Q see also Robert Kudrle, “ Good for the Gander,” International Organization,

vol. 45, No. 3, summer 1991, pp. 397-424.

@ See U.S. Dep~at of Commerce, Op. cit., fOOtIK3te 10, p. 13.

70 C&m, for ~~ple,-K-q ~~c~ ~~~ “How Jap~ese ~us&y is Reb~@ & Rust Belt, ’ Technology ReVI”CW, VO1.

94, No. 2, Februmy-March 1991, pp. 25-33.

71 See, for example, Michael CUS~O, “Manufacturing Innovatioru hssons from the Japanese Auto Industry,” SZoun Management

Review 30 (fall 1988) pp. 29-39.

72 For a ~cussion of ~s ~~t see Robefi R. fihd~, “-t~~~~d Jq~ese wge~ Are harning frOm 13tich Other, ” Business

Horizons, 24 (March/April) 1981, pp. 63-7Q Kazuluk‘ o Nagato, “TIM Japan-United States Savings Rate Gap,” Daniel Okimoto and Thomas

Rohleu eds., Inside the Japanese System (Stanford, CA: Stanford University Press, 1988), pp. 64-70.

73 For ~ ewple of such a ch@ S* Graham and KrugmarL op. ci~, footnote 12, pp. 57-59.

M _ Op. cit., footnote 2, p. 1742.

75 ~~ ‘T~p~nt’ Auto Facto~eS Have R~e~ & ~dus~,” NW York Times, July 23, 1992, p. C5.

76 U.S. Dep~ent of co-ace, Bwau of ~onomic ~ysis, Foreign Direct Inveflment in the United States: Operations of U.S.

Afiliates of Forez”gn Companies, Preli?ninaq 1990 Estimates, Augus4 1992, table A-2.
64 I Multinationals and the National Interest: Playing by Different Rules

Table 3-4-Selected Financial Data for U.S. Affiliates of Foreign Companies, 1990

Japan United Kingdom Netherlands Germany

Number of affiliates . . . . . . . . . . . . . . . . . . . . . . .

Total assets (in $ bil) . . . . . . . . . . . . . . . . . . . . . .

Safes (In $ roil) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income (in $ roil) . . . . . . . . . . . . . . . . . . . . . . .

Number of employees (in thousands) . . . . . . . . .

Average compensation (in $, per employee) . . .

Exports by affiliates (in $ roil) . . . . . . . . . . . . . . . .

Imports to affiliates (in $ roil) . . . . . . . . . . . . . . . .

Ratio of imports to sales . . . . . . . . . . . . . . . . . . .

Ratio of exports to imports. . . . . . . . . . . . . . . . . .

2,142

370

313,138

-2,191

616.7

37,203

39,155

87,712

0.28

0.45

1,161

262

188,852

2,406

1,039.2

32,036

7,926

13,225

0.07

0.60

346

91

72,819

32

290.2

34,290

2,829

6,588

0.09

0.43

1,144

101

107,521

219

513.3

34,307

7,041

17,858

0.17

0.39

SOURCE: U.S. Department of Commerce, Bureau of Economie Analysis, For@QnDir~t/nv~tientin the UnhdStates: @eratbns otU.S. Affi/htes

of Foreign Compan/es, Preliminary 19$M Estimakas, August 1992, table A-2; U.S. Department of Commerce, Bureau of Economic Analysis, Foreign

Direct Investment in the United States: An Update, Jurie 1993.

Proponents of FDIUS who emphasize job

creation often blur the distinction between foreign

and domestic firms and, at the extreme, reject the

notion of national firms. Some have argued that a

foreign-based MNE with manufacturing facilities

in the United States contributes more to the U.S.

economy than a U.S.-based MNE that transfers

the bulk of its manufacturing to offshore facilities.77 In this view, U.S. prosperity lies in the

skills of the labor force, not necessarily in the

success of U.S.-owned firms. The implication is

clearly that incentives or regulations should be

used to encourage forms of FDIUS that use, and

help develop, a skilled labor force for high

value-added jobs. Such a theoretical dichotomy

between a foreign firm that invests in the United

States and a U.S. firm that invests abroad

excludes discussion of what many argue is the

preferred option-a U.S.-owned firm that invests

in plant and labor in America.

| Disadvantages of FDIUS

Critics of the national treatment approach to

FDIUS emphasize four major complications:

harm to competitiveness, unfair employment and

hiring practices, financia1 subsidies, and economic and military security issues relating to

technology transfer. All four link multinational

corporate responsibility to aspects of U.S. economic and social development.

First, critics stress competitiveness-namely,

the potentially adverse economic consequences

of unregulated FDI for U.S. manufacturing firms

and for the U.S. technology base.78 In contrast to

the argument that direct competition will improve

the productivity of U.S. firms, these analysts

stress that foreign competitors can destroy domestically based firms because they can compete

in an unrestricted U.S. economy from the basis of

highly restricted international competition in

their own market. As a result, unrestricted competition may benefit consumers in the short term,

but both consumers and the national economy

will eventually lose.

Along these lines, recent work contrasts the

‘‘trade-creating’ nature of Japanese direct investment abroad (DIA) with the ‘‘trade-destroying”

77 see, for ~mple, Ro&~ B. Reich “who is Us?,” Harvard lkrz”ness Review, January-February 1990 PP. 53-64.

78 See, for ex~ple, hfartinl’blchin~d SUSWI Tolchin,Buying into America: HowForeign MoneyIs Changing the Face of OurNation (NCW

York NY: Times Books, 1988); Pat Choate, “Political Advantage: Japan’s Campaign for Ameri~” HarvardBum”ness Review, 1990: 87-103;

Norman Glickrnan and Douglas Woodward, The New Competitors: How Foreign Investors Are Changing the U.S. Economy (New Yorlq NY:

Basic Books, 1989); Daniel Bursteiq Yen!: Japan’s New Financial Empire andlts Threat to America (New York NY: Simon and Schuster,

1988); Thomas Ornestad, “Selling Off America,” Foreign Policy, No. 76 (fall 1989), 119-140,
Chapter 3-Foreign Direct Investment | 65

DIA of the United States.79 For example, the

formation of affiliates of Japanese auto assemblers has been accompanied by the formation of

affiliates of some of their supplier keiretsu

members. As advocates of the trade-creating view

would expect, the U.S. trade deficit with Japan in

autoparts has grown as the Japanese assemblers

have increased production in the United States.80

Table 3-4 examines the import, export, and

sales patterns of U.S. affiliates of the four major

foreign direct investors. These data seem to

support the proposition that Japanese investment

is more trade-creating than trade-destroying, with

a ratio of imports to sales of .28 (over three times

that of Dutch investment, and four times that of

British investment). This table also indicates that

Japanese-based MNEs tend to use their U.S.

affiliates as a conduit for the sale of products

made in Japan, rather than as facilities to replace

Japanese-made goods with U. S-made goods. A

higher proportion of goods sold by Japanese firms

seem to be assembled in the United States from

components built in Japan, relative to U.S.

affiliates of other foreign firm.

What accounts for this pattern, and will it be

sustained over time? Proponents of FDI claim that

a life cycle pattern exists for FDI, whereby

foreign investors initially rely more on imports

from their parent organization but increasingly

shift to a higher domestic content as they mature.

Because Japanese firms have invested in the

United States so recently, they would naturally

have higher import propensities, but this will

change with time.81

Critics of this suggestion present two arguments. First, although importing is common

among new investors, Japanese-based MNEs tend

to transplant suppliers along with production

facilities more often than other foreign-based

fins. While domestic content might indeed rise,

it will not do so because of a heavier reliance on

domestic producers. Second, critics stress that

vis-a-vis domestic content and use of nontraditional suppliers, the behavior of Japanese firms in

the EC differs significantly from that of the same

firms in the United States, even when the

investment dates from the same period.

What might explain a greater Japanese commitment to domestic content in the EC? One

possible answer is the differing rules and regulations that Japanese investors face in Europe and

the United States.82 If this is correct, then

responsibility for the decision of Japanese firms

to import more or to use their traditional suppliers

more in the United States lies partly with the U.S.

Government, which has articulated few rules to

encourage alternative forms of MNE behavior.

Many analysts believe that the U.S. Government

cannot fault Japanese firms for playing by the

rules as they exist.

The second concern of critics of FDIUS relates

to the economic and social effect of FDIUS on

domestic employment. This concern has two

components. One is about the types and number

79 Rob- Gfipin reflWts ~s sentiment in ci@ the work of Kiyoshi Koj~ a distinguished Japanese f2COnOIUkt. Gilpin s~t~ tit

“[c]ontrastingJ apan’s foreign direct investment with that of the United States, Kojirna argues that Japanese foreign direct investment attempts

to be ‘trade-creating’, whereas American foreign direct investment has been ‘trade-destroying’. Japanese foreign dinxt investment has sought

to increase, or at least maintairL Japanese exports; U.S. foreign direct investment on the other Imr@ has tended to replace U.S. exports by

establishing production facilities abroad to serve the U.S. or world markets. Mhough Kojima was referring specifically to direct investment

by Japanese corporations, his characterization is applicable to afmost all Japanese foreign investment.” The argument offera an explanation

why the U.S. trade deficit with Japan ballooned while Japanese FDIUS grew. Xn Robert Gilp@ ‘‘Where Does Japan Fit In?” Millennium:

Journal of Internatioml Studies, vol. 18, No. 3, 1989, p. 337.

so SW, for example, Richard G. Ne~ ‘‘The Second Wave Arrives: Japanese Strategy in the Auto Parts Marke4° Business Horizons,

vol. 23, No. 4, July/August 1990, pp. 24-3~ and Andrew Pollac~ ‘‘Trade in Auto Parts Favom Japan Despite Gains by U.S., ’ The New York

Times, July 1, 1993, pp. D] and D18.

81 GrahanL op. cit., footnote 2, p. 1743.

62s= Robin @t~, “Prot~tionism Witi Purpose: Guiding Foreign Investmen~” Foreign Po@, f~ 1992, No. 8*, pp. %-l~; “me

Enemy With@” The Econo?ru”sf, June 12, 1993, pp. 67-68; Ofilce of Technology Assessment op. cit., footnote 1, p. 207.
66 I Multinationals and the National Interest: Playing by Different Rules

of jobs created by FDIUS, particularly in manufacturing. Critics assert that some transplanted

manufacturing facilities are little more than screwdriver plants that assemble high value-added

components produced abroad.83 This practice

results in relatively few, and possibly inferior,

jobs.

The quality-of-jobs issue is far from clear-cut.

Leading analysts assert, for example, that “for

manufacturing as a whole, and for individual

industries within manufacturing, there is no

systematic difference between the foreign and the

domestic firms in compensation and value added

per employee,” and provide aggregate data to

support that contention.84 Yet data drawn from

individual industries, such as the auto industry,

suggest that this claim is more complex than these

analysts assert.85

The employment issue is further complicated

by assertions that some foreign investors discourage unionization and may employ discriminatory

employment Practices.86 This view, critics claim,

is buttressed by lawsuits filed against several

major Japanese firms. The suits have claimed

discrimination against women and against nonJapanese employees in promotion decisions; several companies, including Sumitomo and Honda

of America, have settled.87 Nevertheless, while

one position is that the “increased rate of

foreign-based multinational investment in the

United States raises the specter that discriminatory motives will become substantially more

prevalent in plant relocation, site selection, and

subcontracting decisions,” the same is potentially true of U.S. firms that develop greenfield

sites. 88

The third form of criticism of FDIUS focuses

on tax subsidies, infrastructure development, and

other incentives that foreign direct investors often

receive from State and municipal authorities. The

States have repeatedly competed with each other

to secure investment by foreign-based MNEs,

particularly in the manufacturing sector. Individual States have, in effect, pursued their own

industrial policies, offering lucrative tax, infrastructural, and loan incentives to foreign MNEs to

as Rob~ B. ~ich ~d WC D. wnk@ “Joint Ventures With Japan Give Away Our Future,” Harvard Business Review, vol.~, No. 2,

March-A@ 1986.

~ Graham and Krugrmq op. cit., footnote 12, p. 70.

M M a diswsion of hw ~mion Pkns in transplant faciliti~ are systematically inferior to those at domestic plants, sec Candace Howes,

“The Benefits of Youti ~ Role of Japanese Fringe Benefits Policies in the Restructuring of the U.S. Motor Vehicle Industry,’ International

Contribution to LubourSti”es, 1,1991, pp. 113-132; Teresa Ghilarducci “PensionCosts and Changing Pension Norms: The Case of Japanese

Auto Transplants and the U.S. Auto Firms,” unpublished paper, University of Notre Dame.

86 For a v~e~ of ~~entstit Euppofl this point ~‘hwIIy J. B- “Busineas Location Deeisions k thi? Utikd SM3S:~hiitCS

of the Effects of Unionizatio~ Taxes and Other Characteristics of States,” JournaJofBusiness andEconon”c Statistics, Jan. 3, 1985, pp. 14-22;

John S. McCknaheq “Who Owns U.S. Industry?,” Business Week, Jan, 7, 1985; and Stewm R Reed, “Japanese in the American Sou@”

in Kozo Yamamw cd., Japanese Investment in the United States: Shotdd We Be Concerned? (Seattle, WA: Society for Japanese Studies,

1989), p. 219; Robert E. Cole and Donald Deskins, Jr., “Racial Factors in Site Location and Employment Patterns of Japanese Auto Firms

in Americq” CaIfornia ManagementRevi”ew, fall 1988, pp. 15-18; and Douglas Woodward, ‘Ucational Dete rminants of Japanese Plants, ”

Southern Journal of Economics, vol. 58, January 1992, pp. 690-708.

87 f&R~@ op. cit., footno~ 72, p. 92. AISO scx BmplOym@ d HOUSiDg i%hCOfIIIId@X, HOW Committ= on @ve~ent@~tionst

“Employment Discrimination by Japanese-Owned Companies in the United States: Hearings’ (Washington DC: U.S. Governme nt Printing

tilce, 1992). ACCordingto Japanese SOIKCCS, the followingfhns have been sued ondis~“on charges: Tbyow Nissaq Hen@ Mitsubishi

Motors, Suzuki, Sony, Matsushita Electric Industrial Co., Hitachi, NEC, FujiQ Ricoh Canoq Tbshi@ Kyocew Dai-Ichi IQmgyo 13anlL

Sanwa B@ Mitsubishi B@ C, Itoh & Co., Shiseido, Japan Air Lines, Sanyo Securities, Dentsu Inc., Hakuhodo Inc., and Recruit Corp. See

‘‘Companies in U.S. Accused of Discriminatiom” Chuo Koron magazine (lNagami Kiti September 1992, in FBIS, Sept. 11, 1992), p. 1.

However, consistmt with the principles of U.S. law, none of these firma should be considered to have hansgressed any law until they have been

found guilty. For a generaI discussion of the behavior of Japanese f- see Douglas Woodwar& ‘T..matiomd Determinants of Japanese

Plants,” Southern JOWMI of Ecomnu”cs, vol. 58, January 1992, pp. 690708.

88 For this Wo@tion and a discussion Of the iSSue Of diSC* tion in hiring practices see Marley S. Weiss, ‘Risky Business: Age and Race

Discrimination in Capital Redeployment Decisions,’ Maryhmdf.uw Review, vol. 48, pp. 901-1017, especially pp. 917-921.
induce them to locate in their States.89 Indeed,

some critics note that more States maintain

economic development offices in Tokyo than in

Washington.

The financial incentives offered by competing

States have grown dramatically since the mid1970s. In practice, the incentive package that won

the last Japanese factory becomes the opening bid

for the next plant. The State of Ohio, for example,

paid $16 million in direct incentives to Honda to

secure the Marysville plant in 1982; by 1988,

Kentucky spent $125 million in incentives convincing Toyota to locate its plant there.90 Critics

question whether State competition for FDIUS is

in the nation’s interest and whether this competition has reached a stage where the costs of

incentives outweigh the benefits even at the local

level. Figure 3-7, listing the cost of subsidy per

job created, shows how State rivalries have

escalated the costs of attracting jobs. Officials of

one company that had benefited from such an

incentive package told OTA that they would not

push as hard for an incentive package if they were

to open further facilities in the United States,

suggesting that some of these packages may have

been too generous, or possibly even unnecessary.

Critics also argue that domestic firms rarely

benefit from state incentive packages, even

though these packages in principle are equally

available to domestic and foreign fins. According to these critics, domestic firms lack the

—

Chapter 3–Foreign Direct Investment | 67

flexibility to shift plant locations because of the

costs of moving production and the potential

political conflict in replacing urban, unionized

plants with nonunionized, rural manufacturing

facilities-often in other regions of the country .91

Officials of domestic firms repeatedly told OTA

that they would like to move production to

greenfield sites, but were unable to do so for a

variety of reasons. Nondiscriminatory state policies have therefore discriminated against domestically owned firms, assisting foreign MNEs more

than indigenous ones.

Finally, recent developments have raised the

concern that foreign investments in the United

States, particularly those made by Japanese multinational fins, may not be permanent. This fear

has already been realized. During 1993, the

Japanese economy stumbled, and numerous Japanese firms announced plant closings, cutbacks in

investment plans, and layoffs in the United States.

These firms include Fujitsu, Seiko, Hitachi,

Fanuc, Komatsu, Nissan, Daihatsu, Isuzu, and

many others in both manufacturing and nonmanufacturing sectors.92 For example, Fujitsu recently

announced plans to close a semiconductor manufacturing facility in California and transfer the

production to a plant in Southeast Asia because of

currency fluctuations.93 Consistent with this concern, aggregate data indicates that foreign direct

investors in general organized the net transfer of

dividends from affiliates to parents in 1990 and

89 Dmpite he failure of the Volkswagen venture and the cost to Pennsylvania’s taxpayers, State officials SubsWuentlyOffered ~-Y

lucrative deal to Sony to use Volkswagen’s plant for the production of televisions.

90 T. David won and ~~ M. Howe~, ‘‘Japanme ~ves~ent in he united Statm: A s~dy of Trends and Site selection Behavior, ” a

paper presented at the Annual Meeting of the International Studies Association Mar. 30-Apr. 4, 1992, Atlanta, GA, pp. 4-5.

91 Japm~w auto pr~uwrs Ofte% ~fiou@ not ~ways, Iocate plants in IIUd se(~gs. MarysvMe, OH, home of Hond~ had a population of

7,500 prior to theplant’s arrival, while Nissan, Diamond Star (jointly owned by Mitsubishi and Chrysler), and Subaru-Isuzu all located in towns

of less than 50,000 people. When looking at domestic fiis, the most appropriate comparison to draw is between the transplant geenfield sites

and that of General Motors’ Saturn Plant in Spring Hill, TN, which is unionized. After experimenting with new contractual relations comparable

to those found in transplant facilities, Saturn employees chose to return to a more traditionally structured contract. See ‘‘ReaLity Comes to

G.M.’s Saturn PtanL” New York Times, Nov. 14, 1991, p. C5.

~ “From the Expansion Route toan Emphasis on Profitability” (’ ‘Kakuchorosenkara saisansei jushi e’ ‘), Japun EconomicJour~) (Nihon

Keizai Shimbun), Aug. 26, 1992, p. 3. This raises the question of whether foreign investors have scaled back their operations disproportionately

to domestic fums. A critical response would be that the closure of capacity in the United States by NINEs, whether domestic or foreign-owned,

is undesirable.

93 Larry Holyoke, ‘ ‘Who’s Afraid of the Big, Bad Yen? Not Japanese Exporters, “ Business Week, Oct. 12, 1992, p. 49.
—

68 I Multinationals and the National Interest: Playing by Different Rules

Figure 3-7—Escalating American State Subsidization to Auto Manufacturers

1982: Honda – Marysville, OH

1983: Nissan – Smyrna, TN

1987: Mazda – Flat Rock, Ml

1988: Diamond-Star – Normal, IL

1988:Toyota – Georgetown, KY

1989: Subaru-lsuzu (SIA) – Lafayette, IN

1- —

2,500

6,470

1

14,263

28,724

42,771

98,059

! 1 I I 1 —

0 20,000 40,000 60,000 80,000 100,000 120,000

Dollars per employee

SOURCE: Adapted from Martin Kenney and Richatd FlorMa, “HowJapanese Industry Is Rebuilding the Rust Belt,” 7bchno10gyRetiew, Feb.-March

1991, p. 30.

1991, even though many of those companies

generated negative earnings.94

ASYMMETRIES IN NATIONAL POLICY

REGIMES

To understand the current state of FDI, it is

necessary to review its history. Their have been

three distinct periods. The frost, from the 1890s to

the 1930s, was marked by protectionist trade

policies in Europe, Japan, and the United States,

complemented by open investment policies. Americans heavily substituted direct investment for

portfolio investment in Europe and Japan, particularly in manufacturing production facilities.

This preference was reflected in the outward

expansion of firms like Singer and Ford.95

Japan and France, although later resistant to

foreign investment, were at this time receptive to

U.S.-based MNE investment.96 In discussing

cultural and structural impediments that confront

U.S. firms in Japan, many analysts overlook the

rich history of U.S. trade and investment in Japan

in the early twentieth century, and their early

successes producing and selling in Japan. This

raises the question of why U.S.-based MNEs that

were successful at providing and selling in Japan

in the past should be less able to do so today.

In the second period, from the 1930s to the

1970s, the FDI policies of advanced industrial

states diverged systematically. The United States

and United Kingdom sustained largely unregulated, enthusiastic national treatment investment

policies. Britain became a major recipient of U.S.

MNE investment, largely involving the construction of fully integrated manufacturing facilities.

In contrast, in the 1930s, 1940s, and in some

cases through the 1970s, Germany, Italy, Japan,

and France either completely blocked foreign

investment-and sometimes threw U.S. firms

out-or took steps to ensure that foreign firms did

~ Gmham, op. cit., footnote 2, p. 1740. This tendency was sustained in 1992 according to “Japan Keeps Cash at Home,” op. cit., footnote

4, p. 4, with Japanese investors sustaining net losses of $2 billion.

w See, for ~amp]e, wilkins et a.I., op. cit., footnote 5; and MSSO% op. cit., footnote 5.

96 For a discussion of Japan in this pcriod, w MChlld CWXUIMXI o, The Japanese Autonwbile Industry (Cambn“dge, MA: Council on East

Asian Studies, Harvard University Press, 1985); for France see Pariick Fxidenson, “French Automobile Marketing, 18901970,’ Akio Okochi

and Koichi Shimokawa (eds.), The Development of Mass Marketing (’Rdcyo: University of ‘lMryo Press, 1981).
Chapter 3-Foreign Direct Investment | 69

not thrive. Of these countries, Japan provides the

most consistent example of discriminatory behavior by both the public and private sectors in this

period. While the public sector was responsible

for Japanese restriction of FDI until the 1970s,

analysts have suggested that the private sector

introduced effective informal impediments to

investment during the 1970s and into the 1980s.97

During this period, France and Italy discouraged U.S. FDI altogether. The West German

policy was more open and more complex, encouraging FDI while often using subtle impediments

to protect domestic fwins-thus benefiting from

capital inflows and the jobs FDI created, helping

to secure an economic base from which to

compete effectively in the post-WWII period.98

In addition to limiting FDI, these four governments organized the emergence of a series of

firms that subsequently became the post-WWII

national champions, and ultimately MNEs. Auto

industry examples include Nissan and Toyota in

Japan, Renault in France, Volkswagen and DaimlerBenz in Germany, and Fiat in Italy. While

U.S.-based MNEs penetrated parts of Europe,

their success varied greatly by country and sector.

In the United Kingdom, they proved to be highly

successful, while elsewhere they were less so.

Throughout the third period-the 1970s and

1980s—the United States sustained its policy of

national treatment which, as intended, increased

the flow of FDIUS. However, this policy, despite

attempts by the Organization for Economic Cooperation and Development (OECD) to advance the

principal of national treatment, rarely led to

reciprocal treatment for U.S.-based MNEs seeking to invest abroad. (See box 3-B.)

The EC’s long debate on regulating inward FDI

is largely unresolved. Evidence of a convergence

in European FDI rules is limited. Agreements on

domestic content laws regarding foreign MNEs

often appear to be settled in principle, only to be

disputed in practice. As one report noted about the

provisions of the EC-Japan agreement on Japanese auto imports:

The agreement may fall apart because it leaves

a number of matters open to interpretation-such

as whether Japanese cars made in the U.S. will be

counted [as imports from Japan]. Even the

meaning of the 1999 ceiling on the total Japanese

market share of 16.09 percent is not clear. The

French and Italians argue that if this ceiling is

attained, imports from Japan will have to be cut.

Otherwise, they say, what is the point of setting

the overall market share to the exactitude of a

second decimal point? Not so, says Britain, home

to a Nissan factory and soon to a Toyota and

Honda one as well. Britain reckons transplant

production will not be limited in any way—and

that exports should not have to be cut back either

. . . Given such different interpretations, the

chances of the agreement reaching 1999 intact are

remote. . . there is [also] a distinct possibility that

the keenest Japan-bashers among EC car makers,

like Jacques Calvet of Peugeot (or his successor),

will ask for another transition period, delaying

real liberalization even longer.99

97 semmJ~~~ MfTza~the ~apam$e~iracle: The Growth Of~&~’a~POl@, ]P2J-]PTJ (stitior~ CA: Stanford University

Press, 1982); Marie Anchordoguy, “Mastering the Market: Japanese Oovernment Thrgeting of the Computer Indus~,” Znternationcd

Organization, 42 (summer 1988); TJ. Pempel, “Japanese Foreign Economic Policy: The Domestic Bases for Economic Behavior,” in Peter

J. KatzensteixL cd., Between Power and PZenry (Madhcq WI: University of Wisconain Press, 1978); Hideicbiro Nakarmq “Japaq

Incorporated and Postwar EconomicGrow@’’Jap anese Econon”c Stu&”es 10:3 (spring 1982) pp. 68-109; Isamu Miyazaki, “TheRealReasons

forlapan’s Success in Economic Grow@” Japanese Economic Sides 10:3 (spring 1982). For a focus on the shift in investment iqedhmnts

to the private sector in that decade see Dennis J. Encarnationand Mark Maso~ “Neither MITT nor America: The Political Economy of Capital

Liberalma “ tion in Japaq” lnternationaf Organizarion, winter 1990, pp. 25-54; and Encarna tiom op. cit., foomote 56.

w Reich ~. cit., foomote 5, pp. 303-328.

~ “Stalling Japan’s Car Makers,”The Econcmu”st, Aug. 3, 1991, pp. 232.
70 I Multinationals and the National Interest: Playing by Different Rules

Box 3-B—The OECD Declaration and Decisions on International Investment

and Multinational Enterprises

National governments have found it difficult to regulate MNEs. Multilateral regulation maybe even more

challenging, as demonstrated by the Organization for Econcmic Cooperation and Development (OECD) efforts

to establish rules for MNEs and international investment

In its 1976 Declaration and Decisions on International Investment and Multinational Enterprises, the OECD

established two sets of rules, one governing the practices of MNEs and the other governing FDL1 To govern MNEs,

the OECD established a voluntary code of corporate conduct that encourages MNEs to give their subsidiaries the

autonomy to abide by national laws and to cooperate with local business and labor. The code of conduct advises

MNEs to permit labor representation, contribute to technology transfer, and not obstruct competition or harm the

environment. To govern FDI, the OECD recommended that all member countries extend national treatment to

foreign MNEs. The influence of both sets of rules has been limited primarily because they rely on the good faith

of MNEs and member nations.

For example, the code of conduct for MNEs has no quantitative means of measuring effectiveness and

commitment. Instead, it promotes good corporate citizenship among MNEs, measured primarily by membership

In national business federations that affiliate and consult with the OECD through the Business and Industry

Advisory Committee (BIAC).2 Individual firms have been reluctant to endorse the OECD’s rules because of the

political and legal implications of explicit commitment, especially in Iabor and environmental disputes. Moreover,

many MNEs reportedly feel that stronger, obligatory rules would be too intrusive.3 The business community sees

asymmetries in policies as the major impediments to foreign investment, and the BIAC has been pressing the

OECD to enhance the International Investment and National Treatment portion of the Declaration.4

1 or~nization for Economio Co-operatbn and Development, IWlafatlon on htwI?atkMd /fWtWm6W and

hfu/thatlona/Ent@p~ (Paris: OECD, 1976),

2 ~ BUSinSSS and industry A4visory Committee to the OECD is based in pafk.

3 ~f~iai b@ne~ f~ratbn inte~~+

4 ~~n= ad i~~ry A@&~y ~mmitt~. B~c Statement On a Potential OECD Bfoi?dw Inw$ftnent

hwtfumen~ Paris, Dee. 3,1992.

Examples of successful U.S. investments in tations on investment practices by U.S. firms still

Japan are still the exception.l00 OTA interviews exist. l0l The success of a few U.S. firms in Japan

with managers of U.S.-based MNEs suggest that does not indicate widespread application of free

the Structural Impediments Initiative has had trade and open investment practices.l02 U. S.-

only limited success in making the Japanese based MNEs like IBM, Texas Instruments, and

domestic market more receptive to foreign prod- Motorola have made commercial inroads often

ucts. Structural, cultural, and governmental limi- only after exhaustive efforts, and some have been

Im Forde~s conce~~effo~ of individual companies inJapan, see Mason+ op. cit., foornote 5, pp. 32-%. Fora summary of the present

situation see ~lce of the United States Trade Representative, Second Annual Report of the U.S.-Japan Working Group on the Structural

Impediments Im”tiative,” July 30, 1992, hereafter referred to as 2nd SKI report.

101 ~ysistimpwti of MS view COmeS fiomanumberof sources. See Keidanrenrepq op. cit., foomote 6; The House W*esday Gfoup,

op. cit., foomote 6; ~lce of the United States Trade Representative, op. cit., footnote 6, pp. 79-94.

lm For a li.q of tie limits to free trade and open investment practices in Japaq see Keidanren report Op. Cit., footnote 6.
Chapter 3-Foreign Direct Investment | 71

forced to trade proprietary technology for market Japan as a Special Case

access. 103 Many U.S. firms have turned to their In some cases, U.S. firms may not have made

government for help in an effort to gain trade or a realistic effort to gain market access in Japan;

investment access to Japan’s marketl04 or have accordingly, their claims that the Japanese system

simply given up, frustrated by the high costs of is unfair maybe inappropriate. On the other hand,

market entry. charges of Japanese limitations on trade and

investment should not be dismissed merely as

Im For a dis~ssion of tie e~rienc~ of these fm in Japan see ficarnationet d., Op. d.. fOO@lOk 97, pp. 25-54; -~ Op. cit., foo~ote

5; and Tyscq op. cit., footnote 8, pp. 53-75.

IM pe~r y, K~nstein and Yutaka Tsujinaka, ‘‘Bullying vs. Buying: U.S.-Japanese ‘rransnational Relations and Domestic Structures,”

paper delivered at the 1992 Annual Meeting of the American Political Science Association, Chicago, Sept. 3-6, 1992. me U.S. Government

has initiated several export-promotion measures such as the ‘Japan Corporate Program.” For details, seethe Americim Chamber of Corrunenx,

The Wu’fedStates-Japan White Paper J993 (Tokyo: American Chamber of Commerce in Japam 1993), p. 2.
72 I Multinationals and the National Interest: Playing by Different Rules

complaints by U.S. firms that could not learn to

compete effectively.105 Firms such as Dow Chemical, Motorola, Ford, and Coca Cola have either

failed to penetrate the Japanese market or have

succeeded only after exhaustive efforts; they have

not had comparable difficulties penetrating other

foreign markets. Difficulties gaining access to

Japan by world-class competitive firms suggest

that impediments in Japan are real.l06

The Trade Expansion Committee of the American Chamber of Commerce in Japan (ACCJ) has

identified 34 areas of particular concern for

market and investment access, including product

and service sector limitations, as well as broader

problems relating to distribution, government

procurement, investment, and taxation.

107 In a

1993 article, the chairman of the Sony Corp.

confirmed the continued discrimination against

foreign products in Japan: “It is clear,” he wrote,

“that many foreign products still have trouble

with entry into and distribution in the Japanese

market." 108 And even if the cause of failure in

many or most cases is lack of effort by individual

foreign firms, reports of discrimination from

groups such as the ACCJ and prominent Japanese

business leaders cannot be dismissed.

There is currently a debate in both the United

States and Japan over whether the Japanese

Government or Japan’s private sector is the

primary source for deterrents to U.S. FDI. One

view says that the government provides the major

roadblocks, while another says that the major

constraints on foreign investment have shifted

during the last decade from the public to the

private sector. The latter view contends that

Japan’s major firms originally acted as aggressive

intermediaries between the Japanese Government

and U.S. fins, but have now taken charge of

Japan’s “strategic investment policy.”l09

During the first three decades of the post-WWII

period, the major limitations to U.S. FDI in Japan

came from laws initiated and administered by a

government intent on protecting its domestic

market and encouraging inward technology transfer. The period up to 1950 has been described by

one leading analyst as the “closed door” period,

and that between 1950 and 1970 as the ‘‘screen

door” period, when the government carefully

faltered foreign investment to maximize technology transfer. 110 A classic example of this pattern

was the case of IBM. The Ministry of International Trade and Industry (MITI) made the firm’s

access to Japan conditional on the licensing of

IBM patents to Japanese firms and charging them

no more than a 5-percent royalty. lll

Japanese Government officials gave assurances of liberalization as early as 1969. Nevertheless, the Japanese market is still highly resistant

to FDI. Many analysts and managers of U. S.-

based MNEs argue that official governmen t

restrictions have been supplanted by ‘‘private

sector impediments” emanating from an “interior layer of business practices. ’ ’ 112 One report

recently suggested that access is still limited by

ingrained structural factors that ‘‘stem from

particular features of the Japanese economic

IW For such a critic~ view of Americ~ m~gemeng see James Abegglen and George St- Jr., Kaisha, The Japanese Coqmration (New

York NY: Basic Books, 1985).

IW It sho~d b not~ tit SOIM critics contend that the Japanese Government attempts to coopt a few leading U.S. f~sfor Strategicpoliticd

reasons; for example, see ‘‘Chiprnakers Call For Easing Burden on Japan, ’ Wall Street Journal, June 7, 1993, p. A3.

lm Three me diSCUSW systematically in ACCJ, op. cit., foomote 104, but see, for summarY, pp. 2-6,

10S MO Mori~ ‘‘Toward a New World Economic Order, ” The Atlantic Monthly, June 1993, pp. 90 and 96.

109 ~carnation, op. cit., footnote 56, p. 41.

1]0 M=o~ op. cit., footnote 5, pp. 209-218.

111 Sm Cement ~s-hi Sigem, former depu~ director of ~~’s Heavy ~dus~es BURW, ~oted h Johnson, Op. cit., fOOhlote 97, p.

245.

112 Ibid., p. 200.
Chapter 3-Foreign Direct Investment | 73

structure, business organizations, and relations

between the Japanese private sector and the

government. "113

What factors produce these constraints, and are

they amenable to reform? The claim that some are

the product of immutable cultural factors and that

others stem from an arcane and complex distribution system may have some foundation.114 Yet

some analysts suggest that the constraints created

by institutional factors and private and public

sector policies are indeed amenable to reform.

In contrast to most countries, new FDI in Japan

occurs primarily through greenfield establishments and/or joint ventures.l15 This unusual

pattern may be explained by Japanese attitudes

toward mergers and acquisitions. Many companies in Japan are hostile to unsolicited takeovers,

and the term takeover bid is often used to describe

foreign attempts to acquire Japanese companies,

Some analysts argue that the private sector in

Japan instituted a system of stable shareholders as

part of the liberalization of investment rules by

the Japanese Government. According to this

view, MITI encouraged companies to exchange

shares and thus make acquisition by foreign

investors more difficult, a practice that began

with GM’s attempt to purchase shares of Isuzu in

1969:

MITI finally announced that it would accept up

to 35 percent foreign capital participation, on the

condition that a substantial portion of the shares

be held by stable shareholders. The term was used

to indicate shareholders of Japanese nationality

who could be counted on to retain their shares,

even if the stock declined in market value and

favorable prices were offered by foreign interests

. . . A feasible means of finding stable shareholders would be for companies in a group or industry

to hold each other’s shares.116

Since then, companies have sought stable

shareholders who are not interested in participating in the management of the company and who

must obtain approval from the issuing company

before selling their stock. The maximum share

holding for financial institutions was reduced to

5 percent in 1987, apparently encouraging the

wider distribution of company shares. But, in

practice, members of the same keiretsu commonly exchange shares, binding their business

relationships together more tightly and correspondingly making foreign acquisition of their

respective companies more difficult.

It has been suggested that firms such as Toyota,

as well as broader business groups such as

Mitsubishi, Mitsui, and Sumitomo, consciously

pursued stable shareholding acquisitions designed

to achieve the “keiretsu-ization” (keiretsuka) of

their firms.117 Keiretsu members and their related

companies account for approximately 34 percent

of all corporate assets in Japan. 118 In practice,

hostile takeovers are rare, and foreign takeovers

usually occur only after all domestic possibilities

have been exhausted.119 This view appears consistent with the details concerning a series of

1 IS Office of tie Utited Smtes Tmde Representative, op. cit., footnote 6, p. 143. These constraints are systernNiCWy olltied in dew ti tie

2nd SII report, op. cit., footnote 100.

114 ~e=e Me dlScuSsed ~ibid,, p. la;~te~Memorand~, Dep~~tof tie Tre~~, SW-Vey ojG-7Luws andl?egulations on~orefg?l

Direct Investment (Washington DC: Department of the Treasury, Dec. 7, 1988), p. 2; The House Wednesday Group, op. cit., foomote 6, p.

6. See also United Nations Conference on Trade and Development (UNCTAD), Programme on Translational Corporations, WorZdlnvestment

Report 1993: Translational Corporations and Integrated international Production (New York NY: United Nations, 1993), pp. 42-43.

115 Robert Z. Lawrence, “Japan’s LowLevels of Inward Investment: The RoleofInhibitions on Acquisitions, Transnationtd Corporations,

vol. 1, No. 3, December 1992, p. 47.

116 B~on et al., op. cit., footnote 54, pp. 50-51.

117 ~.o% Op, ~it, foo~ote 5, pp. 205.206; se ~so N~~a Shum, Kabushiki no mochiai tO kigyo ho, p. 46, as cited b h&lSOQ ~. 2W

no, 16.

118 Baflon et al., op. cit., foomote 54, p. 42.

119 ~ter~ memorand~, Department of the Treasury, Op. cit., footiote 114, p. 2.
74 | Multinationals and the National Interest: Playing by Different Rules

acquisitions of Japanese firms by foreign companies in the early 1990s. Many Japanese companies recently acquired by foreign MNEs were

generally described as distressed or unprofitable.l20 The rise in the value of the yen against the

dollar in 1993 suggests that even this limited

trend towards foreign purchases may be difficult

to sustain.

Determined foreign investors may turn to

greenfield site construction or licensing. But the

high cost of land renders the greenfield option

available to only a few companies. This may

encourage U.S. firms to settle for licensing

agreements, which save them the costs of manufacturing and market entry.121 Indeed, despite the

liberalization of formal Japanese rules regarding

inward FDI, in 1990 the $1.2 billion earned by

U.S. companies from royalties and licensing fees

from Japan accounted for 35 percent of worldwide U.S. receipts from unaffiliated foreigners.122

This figure of $1.2 billion was 61 percent of the

figure for U.S. FDI in Japan in the same year. This

proportion of fees to U.S. FDI has grown over the

prior 10 years when liberalization of the rules for

FDI in Japan suggests that it should have decreased. With liberalization, U.S. firms would

expect to invest more and license less. Moreover,

this percentage is out of line with the ratio

between U.S. licenses and FDI in other countries,

and with the ratio between Japanese licenses and

FDI in the United States.123

These figures suggest that the constraints on

mergers and acquisitions, which many believe are

caused by keiretsu behavior, push U.S. firms into

business arrangements that effectively limit their

market access. But more importantly, it limits

their capacity to compete in Japan. In joint

ventures, U.S. firms often take a minority share.

As compared to Europe, U.S. shareholders in

Japan are more likely to be the minority partner.

l24 At the same time, licensing ensures that

Japanese firms gain access to U.S. technology,

leading to wide-scale, nonreciprocated technology transfer from the United States to Japan.

As one advocate of this position states,

. . . the continued dependence on licensing, the

heavy reliance on minority-interest ventures and

the relatively large investments in majorityowned wholesale trade ventures support the

argument that the marketing and distribution of

foreign products in Japan is unusually difficult, or

that current inflows have been too small to offset

the impact of earlier policies.l25

In contrast to the limited amount of merger and

acquisition activity by foreign investors in Japan,

such activity among domestic Japanese firms is

vibrant and unhindered. Figures provided by

Japan’s Fair Trade Commission (FTC) for 1990

note that 1,532 mergers and 969 acquisitions

occurred. 126 Another source indicates that of 584

mergers and acquisitions involving Japanese

firms in 1992, 387 involved Japanese firms

acquiring other Japanese fins, and 165 were

1~ Jo~~n Friedlan4 “The Urge to Merge, “ Far Eastern Econom”c Review, Jan. 28, 1993.

121 ~w=e, op. cit., footnote 115, pp. 47, 51-52, 63.

122 rbid. ~wwe notes tit Jq~e~ f-~ned o~y $185 ~oniII my~ti~ ~d Manse fms from UtikXJ SWCS f~, p. 50.

IU Ibid., pp. 52-53.

124 ~L~ lgf)(), ~jon~.ow~ compafie5 ac~~~ for about 78 per cent of ti FDI tMsd.s of Ufdtd StitCS *.By con@~4 o~Y 34 Pm

cent of the FDI assets in Japan and only 26 per cent of the assets in manufacturing were in majority-owned axnpanies, Indeed, there is a

relationship between countries that have generally discriminated against FDI and the share of majority-owned fms in FDI assets. While in

developed countries that ratio averaged 76 per cen~ the conspicuous outliers are the Republic of Korea (18 per cent), India (14 per cent) and

Japan (34 per cent).” ibid., p. 53.

1~ ~~~e, op. cit., footnote 115, p. 55.

lx Jqan Fair Trade com.ds sio~ Annual Report to the Committee on Competition Luw and Policy, OECD, on Developments in Japan

(’_lMqJo: January-December 1990), p. 32.
Chapter 3-Foreign Direct Investment | 75

Japanese firms acquiring foreign firms. In only 32

cases did foreign firms acquire Japanese firms.127

Evidence suggests that the keiretsu system

impedes FDI in Japan as well as the capacity of

Japanese affiliates of U.S. firms to trade in

Japan. 128 The Structural Impediments Initiative

stressed the inhibiting role of the keiretsu on

market access for U.S. investors in Japan. Consistent with this claim, a recent ACCJ report

emphasized the exclusionary business relationships that continually hinder the capacity of its

members to trade in Japan. The report noted that

the keiretsu arrangements “have affected the

ability of certain American industries, such as the

automotive, flat glass, insurance, and semiconductor industries, to take full advantage of market

opportunities in Japan, even when the product is

highly competitive. ’ ’129

According to some analysts, a final impediment to FDI instituted by the private sector in

Japan is the adoption of articles in company

charters that preclude any form of foreign participation in the running of the companies, such as

excluding non-Japanese citizens from their

boards. Toyota wrote this provision into its

charter in the 1960s.130

Limitations on new U.S. FDI in Japan are such

that during the 1980s the sum of inward FDI in

Japan grew primarily through the reinvested

earnings of existing firms. 131 The conclusion of

many analyses is that the major impediment to

investment is the structure of Japan’s private

sector. The private sector may also create similar

obstacles to trade.

Foreign firms able to establish a presence in

Japan often face supply and distribution problems

when a few firms control the supply of essential

products in Japan. For example, efforts by Toys

“R” Us to establish itself in Japan as a low-cost

toy retailer have been undermined by a few supplier firms trying to ensure that other retailers are

not damaged by the entry of a new competitor. *32

The automobile industry provides another example of how the keiretsu system can restrict

market access. European auto firms complain

about the collusion and exclusivity of the distribution system in Japan. 133

Automobile companies in Japan have much

greater control of their dealership network than do

their counterparts in the United States, through

both direct ownership and individually negotiated

contracts between the independent dealerships

and the automobile manufacturers. In the absence

of the active encouragement of the auto company

that controls the dealership, penetration of the

market through dual dealerships is exceptionally

difficult. This makes the creation of an effective

dealership network in Japan extremely timeconsuming and expensive compared to establishing a network in the United States. For example,

127 (I. Fr~ BergStcn and ~cus Nol~d, Reconci/ab/e Differences ? uniredsfates.Japan &-ono~’c conflict (washirlgton, DC: Instlmte fO1

Intermtional Economics, 1993),p.81. The large discrepancy in the total number of mergers and acquisitions between this source and the Japan

FTC (cited above) may result from different counting rules. Bergston and Nolan give the following statistics for 1990: total mergers and

acquisitions, 801; Japanese firms acquiring Japanese fins, 341; Japanese firms acquiring foreign firms, 450; foreign firms acquiring Japanese

fins, 10.

IM see ~c~el L Gerlac~ A{liOnce Capltalixm: The Social Organization of Japanese Business (Berkeley, CA: University o

f Ca]tiortia

Press, 1992), pp. 36-37 and 262-268.

129 The details of these limits are offered in ACCJ, op. cit., footnote 104, pp. 30-34, 49-50, 64-68, 9@92.

130 MmO& op. cit., foomote 5, p. 207.

131 ~~~ence, op. cit., fOOmOte 115, P. 70.

132 For details Sm ~k ~SOn, ‘‘Unitd states Direct Investment in Japan: Trends ~d ~ospects, ’ Cal@rnia Management Review, vol.

35, No. 1, fall 1992, p. 108.

133 See ‘f EuroWmAuto~dus~ Proposes ‘Joint Sectoral Initiative’ With Jap~t ‘‘International Trade Reporter, May 19,1993, pp. 830831.

The European Auto Industry also noted the discrirninatory effects of unfair taxation, administrative guidance, inadequate protection of

intellectual property rights, and the cost of land.
— —

76 I Multinationals and the National Interest: Playing by Different Rules

establishing a distribution network in Japan from

scratch, with sales outlets equal in number to

Mazda or Honda (about 2,500) could be expected

to cost more than $1 billion, assuming acceptable

locations were available.134 Training the staff of

such a large number of outlets would be timeconsuming and expensive, further increasing the

costs of creating a competitive dealer network.

Some analysts argue that the Japanese Government has liberalized FDI in order to defuse

tension with the United States over its trade

surplus. 135 Others contend that, despite the emphasis on capital liberalization, the government

pursues policies that effectively constrain FDI.

As a 1992 Keidanren report stated:

Japan has considerably more regulations on

business than most other countries, and this

undoubtedly obstructs the entry of new firms,

both domestic and foreign, into the market. Many

foreign firms, which are able to enter other

markets, face greater difficulties in entering the

Japanese market due to such regulations and

administrative guidance.136

The solution, according to this report, is a shift

towards transparency in government administration. U.S. companies in Japan have made similar

claims, suggesting that transparency in the decisionmaking process remains inadequate in Japanese agencies that have denied U.S. firms access

to information concerning rules and regulations. 137

This criticism appears consistent with U.S.

claims that Japan’s Anti-Monopoly Law is administered “with inadequate penalties, less than

vigorous enforcement, and numerous exceptions.’ ’138

Furthermore, the law allows for ‘‘exemption

cartels” that meet specified legal conditions.

These exemption cartels numbered 256 at the end

of 1990, and were defined as either ‘‘depression

cartels’ or “rationalization cartels” under The

Anti-Monopoly Act.139 One ACCJ report contends that monopolistic practices still exist in

Japan as a result of selective application of the

anticompetitive laws by the Japan FTC.140 Due to

these measures, U.S.-based MNEs investing in

Japan are often unable to compete directly with

their Japanese counterparts in areas where the

Japanese firms are least competitive.

Furthermore, Japanese Government proscriptions of investments that threaten national security or public order, affect existing producers, or

disrupt the national economy are vague enough to

justify government intervention under many different circumstances.141 The Japanese Government’s concern about the effects of disruptive

practices may result in a variety of problems for

foreign products and fins:

Foreign air transport companies face difficult

and time-consuming obstacles to acquiring airport landing rights and brokerage licenses. Medical equipment companies have experienced both

slowing of approvals of new medical technology

in which the U.S. has a leadership position, and

134 ~s es~teis based on a lo-percent share of Auto- which cost Ford $10 million in 1992. Autorama had 328 sales outiets. Ho*

and Mazda each had approximately 2,500 sal= outlets in 1990. Indirect invatments by Mazda (currently 25 percent owned by Ford) to support

Auto~ in which it currently has a 41 pe~ent stake, probably exceed $100 million. Source: Ford Motor Co. and Japan Automobile

Manufactur~ Association, Inc., Automotive Dism”bution in Japan (JAMA: Washington, DC: June 1990) p. 3,

135 See, for e~ple, Julius, op. cit., footnote 9, P. 33.

IM Keid~n repo~ op. cit., footnote 6, p. 5.

137 Examples of the adv~se effects of such problems are evident in the case of construction projects, the setting of re@atiOtIS for solid wood

products use, and the procedures for date labeling of certain food products. ACCJ, op. cit., footnote 104, p. 5.

13s ~lce of United States Trade Representative, op. cit., footnote 6, p. la.

139 For de~ls s= J~~ Fair Trade Cornmissio~ op. cit., fOOtI@e 126, pp. 30-31.

la ACCJ, op. cit., footnote 104, p. 3.

141 htti~ memomndu~ Department of the Treasury, op. cit., footnote 114, table, p. 5. For a list see 2nd SII report, Op, cit., footnote 100,

pp. 1-63.
Chapter 3-Foreign Direct Investment | 77

funding of Japanese products directly competing

with U.S. products, Imported food products face

rigid barriers such as unrealistic short delivery

deadlines and onerous date-labeling requirements,

in addition to being required to meet food safety

standards different from those sued in other

countries. Restrictions on premium pricing and

sales promotions handicap foreign and new-tomarket companies, such as travel and tourism

agencies and processed food importers.142

The definition of a legitimate basis for government intervention to deny foreign investment is

therefore far broader in Japan than in the United

States.

According to a recent report of the United

States Trade Representative (USTR), government

measures that are transparent often remain discriminatory. The USTR reported that the Japanese Government retains the authority to restrict

investment in specified sectors, including aircraft,

space development, agriculture, fishing and forestry, oil and gas, mining, leather and leather

product manufacturing, nuclear power, weapons

and ordnance manufacturing, and tobacco.143

U.S. firms often raise five additional issues.

These are:

1.

2.

3.

4.

5.

intellectual property and patent rights;

Japanese Government and private sector

procurement practices;

inadequate funding of programs intended to

encourage FDI in Japan;

the high withholding rate on dividends

repatriated to overseas parents;

continuing regulation intended to support

prices in the property and financial sectors.

The issue of intellectual property rights in Japan

is complex, extending both to advanced hightechnology sectors such as biotechnology and to

more established sectors such as automobiles and

textiles. U.S.-based MNEs are concerned that

Japanese patent protection rules and the longer

duration of patent registration (compared to other

nations) has a deleterious effect on the competitiveness of foreign firms.l44 This claim is not new,

dating to initial U.S. efforts to re-enter the

Japanese market. It has become more acute,

however, because of the heightened competitiveness of Japanese firms, the access of Japanese

firms to America’s best technology, and the

importance attached to patent issues at the continuing Uruguay Round of the General Agreement

on Tariffs and Trade (GATT). Attempts to

address U.S. concerns have not been effective.145

The procurement issue focuses on the claim

that pervasive “ ‘Buy Japanese’ attitudes and

practices persist in such sectors as construction

and engineering, radio communications (wireless

telecommunications equipment), and semiconductors, for which major ‘market-opening’ or

purchasing agreements exist."146 The same claim

has been advanced about U.S. supercomputers.

Despite the clear superiority of U.S.-made supercomputers, the Japanese Government procured

only five machines from U.S. companies in the

1980s, preferring to source an additional 46

machines from Japanese firms. This led to agreements between the United States and Japan over

supercomputer procurement in 1987 and 1990.147

In some cases, specifications for Japanese

Government procurement are not made public.

But even when they are, critics suggest, they often

effectively deny foreign vendors the right to

142 ACCJ, op. cit., footnote 104.

143 ~fice of ne United States Trade Representative, op. cit. foobote 6, p. 161.

144 ~id,, pp. 18.20. Recent reforms cut the patent emation period from 37 months in 1988 to 30 months in 1991. 2nd SII report+ op. cit.,

footnote 100, p. 50.

Ids ~is po~t is ~de in ibid,, especially pp. 49-50.

lfi ~id., p, 4, For a Usting of procurement limitations iII Japa~ s= pp. 13-17.

147 For a de~~ di~cu~sion of ~sisme, see Offlw of T~~ology Assessmen~ op. cit., footnote 1, pp. 273-78.
.- .

78 | Multinationals and the National Interest: Playing by Different Rules

participate. The U.S. firms remain unable to

penetrate the Japanese market despite transparent,

nondis criminatory procurement standards adopted

under a 1990 agreement revised in 1992.148 MITI

officials agree that only limited progress has been

made and that ‘‘there is a need to do more to

improve transparency and avoid discrimination in

procurement practices. ’’149 Progress in reaching

an agreement has been made in a number of areas,

including software and a variety of chemical

treatments. 150

In addition to restrictions authorized under the

Foreign Exchange Control Law, Japan sources

cite specific restrictive industry laws in sectors

such as air and marine transport, communications, and broadcasting. A 1992 Keidanren report

indicated that these individual industry regulations “are actually more responsible for restricting foreign investment than the Foreign Exchange

Control Law. ” Thus ‘‘opaque restriction of entry

by policies and administrative guidance based on

specific industry laws virtually discriminate [against]

foreign capital and limit the competition. ’’151

These laws often complement the industry-,

group- or firm-specific private impediments that

originated in the 1970s.

U.S. sources support these generalizations with

specific examples. An ACCJ report concluded

that:

While deregulation has proceeded to some

extent in recent years, many archaic and arbitrary

regulations and guidelines remain in effect, serving as impediments to trade. Many building codes

preclude the use of certain wood products, Radio

communications and telecommunication services

and equipment continue to be highly regulated

sectors. These regulations keep prices high and

delay access for competitive and high-quality

American goods and services. ., . Air transport

services suffer from regulations which control the

prices they charge and the services they offer. In

some cases all that is required is simplification

and clarification of regulations (cosmetics), or

modification of guidelines for existing “liberalizing laws (telecommunications services

carriers), 152

Institutions with programs designed to encourage

FDI in Japan, such as the Export-Import Bank of

Japan’s Product Import Promotion Financing

Program, lack adequate funding and are consequently limited in effectiveness.

The Japanese Government has also established

artificially low ceilings for the financing of

projects by foreign corporations through the

Japan Development Bank.153

Tax policies also discourage FDI. The government has sustained an artificially high withholding tax rate of 10 percent on dividends paid from

subsidiaries in Japan, in contravention of the 5

percent OECD model convention. Some analysts

suggest that this constitutes discrimination; a

Keidenran report separately advocates that the

Japanese Government lower its rate to 5 percent,

consistent with the multilateral tax convention.l54

A recent congressional report argues that

pervasive government measures continue to regulate land and financial markets, in effect sustaining extremely high prices despite the bursting of

the speculative bubble in Japan. 155 Artificially

high land prices discourage the establishment of

new facilities and the expansion of existing

la For de~~ see 2nd SII repo~ op. Cit., fOOtflOte IW.

l@ Ibid., p. 28.

150 ACCJ, op. cit., footnote 104, pp. 13-17, 71.

151 Keid~en repo~ op. cit., footnote 6, p. 8.

152 ACCJ, op. cit., footnote 104, p. 4.

153 Ibid., pp. 8-9.

154 Ibid., p. 10.

155 Houw wefi~~y Group, op. cit., footnote 6, p. iii.
Chapter 3—Foreign Direct Investment | 79

operations. Inflated financial markets hinder entry

and expansion through acquisitions,

The sources cited above appear to disagree on

whether impediments to investors originate in the

private or public sector. The Japanese Government claims it is trying to impose liberalization on

a recalcitrant private sector, while representatives

of the private sector suggest the converse is true.

Regardless, both seem to impede FDI in Japan.

This conclusion stems from the evidence that

Japanese public and private sector officials have

often resorted to minor concessions to accommodate foreign pressures for change, while avoiding

major changes. Amaya Naohiro, a high-level

MITI official, suggested as early as 1969 that this

was the thrust of MITI policy,156

In interviews conducted by OTA, both U.S.

Government officials and business executives

echoed these observations. In view of the history

of concerted Japanese barriers to inward FDI,

several said that those who believe that Japan is

liberalizing its FDI policy should provide evidence in the form of concrete results, for many

data indicate that this is not the case. In 1990,

Japan’s level of inward FDI per capita was much

lower than other OECD countries such as Germany and the United Kingdom. The U.S. level in

1990 was more than 20 times that of Japan (see

figure 1-8 in chapter 1,) Figure 1-4 shows only

moderate growth in the overall FDI position in

Japan for 1991 and 1992, especially when compared to the growth in Japan’s FDI position

abroad for the same years.

Japanese figures demonstrate an asymmetry in

the comparable position of foreign fires in the

United States and foreign firms in Japan. According to MITI, foreign-owned firms employed 0.5

percent of the work force in Japan in 1991,

compared to 3.8 percent in the United States.

Products of foreign companies came to 1.2

percent of total sales in Japan, compared to 16.5

percent in the United States. Moreover, foreign

affiliates controlled only 0.9 percent of total

assets in Japan, compared to 20.4 percent in the

United States (see figure 1-1 in chapter 1).157 By

the end of the 1980s, US. FDI in Japan totaled

nearly $20 billion, doubling between 1985 and

1989, and accounting for 9 percent of all U.S.

Direct Investment Abroad (USDIA), although

that figure remained well behind the leading

recipients, Canada (18 percent) and the Britain

(16 percent).158 In 1992, Japanese direct investment abroad reached approximately $250 billion,

more that 10 times the amount of FDI in Japan

(see figure 1-4 in chapter 1).

The United States and Japan share what many

have described as the most important bilateral

relationship in the world, a relationship that is

critical to the growth of global free trade. At the

same time, Japan’s export surpluses are a leading

cause of the U.S. trade deficit. These two factors

help to explain why so many analysts and

policymakers focus on policy asymmetries between the United States and Japan and on the

structural conditions that shape Japan’s private

sector.159

Ifi AS cited in Masoq op. cit., footnote 5, p. 201.

157 From G~s~.Kei IG~OU Koudou aousa, Houjin Kigyou Toukei, MITI 1991, as cited in House Wednesday Group, 0p. Cit., foo~ote 6,

p. 4: Lawrence, op. cit., footnote 115, p. 48, suggests that all FDI in Japan totals 1 percent.

158 Enc~Mtion, op. cit., footnote 56, pp. 95-96.

159 House Wednes&y Group, op. cit., footnote 6, p. 26.
Japanese

Multinational

Enterprises

in the

United States 4

T

his chapter examines some of the major issues regarding

the activities of large Japanese-based multinational

enterprises (NINEs) in the United States. As the most

conspicuous competitors with leading U.S.-based MNEs

during the 1980s, Japanese fins’ activities here, and the effects

of U.S. Government policy on those activities, offer an opportunity to assess how the national policy on foreign-based firms

affects our interests.

Throughout the business and academic literature on foreign

direct investment (FDI) and U.S. international competitiveness,

one theme is constant: the competitive challenge of Japanese

corporations. Major manufacturing corporations such as Toyota,

NEC, and Mitsubishi have been central to Japan’s remarkable

postwar economic resurgence. They have also been among the

principal players in Japan’s late 1980s overseas investment

boom.

U.S. firms were among the first to expand production

significantly to foreign locations; European firms have made

significant international investments, particularly within other

European countries. But it is clear at any level of analysis that

Japanese firms have greatly expanded their presence in the world

economic system and especially within the United States during

the last decade. (See figures 1-4 and 3-3.)

Between 1981 and 1991, the number of Japanese firms in the

Fortune 500 rose from 78 to 119, with 20 in the top 100 in 1991,

twice the number as at the beginning of the decade. As can be

seen in table 4-1, Japanese companies increased FDI faster than

those from any other nation during the 1980s, accounting for 11

81
82 I Multinationals and the National Interest: Playing by Different Rules

Table 4-l—Foreign Direct Investment Position

in the U. S., Selected Years

(in billions of dollars)

Country 1980 1985 1991

All . . . . . . . . . . . . . . . . . 83.0 184.6 407,8

Developed . . . . . . . . . . 72.0 161.2 381.5

EC-12 . . . . . . . . . . . . . 47.3 107.4 232.0

Japan . . . . . . . . . . . . . 4.7 19.3 86,7

Canada . . . . . . . . . . . . 12.2 17.1 30.5

NOTE: Data are based on historical cost and are not adjusted for

inflation.

SOURCE: John Rutter, “Recent Trends in Foreign Direot Investment in

the United States: The Boom of the 80’s Vanishes,” U.S. Department

of Commeree, International Trade Administration, December 1992,

appendix table 2.

percent of FDI by major developed countries and

21.3 percent of cumulative direct investment in

the United States by the end of the decade.2

Japanese direct investment in the United States

increased at an average annual rate of 32.5 percent

from 1980 to 1985, and continued at a rate of 28.4

percent for the second half of the decade, far

outdistancing similar rates for other developed

countries. 3

Although investment leveled off significantly

after the 1980s, in 1990 Japanese firms had stakes

of 50 percent or more in 1,088 U.S. manufacturing and assembly operations, and smaller stakes

in 136 more enterprises. The majority-owned

enterprises together operated more than 1,500

factories and employed 284,000 Americans, with

another 86,000 jobs at minority Japanese-owned

establishments. 4 Despite the decline in Japanese

investment in the first 2 years of the 1990s, many

analysts suggest that this is only a temporary lull.

Indeed, one analyst estimates that by the end of

the century, Japan may invest another $700

billion overseas, 40 percent of which can be

expected to take the form of direct investment.

This would amount to a shift of 15 percent of

Japanese production abroad.5

By the end of the 1980s, the Japanese presence

in the United States was well-established. Japanese direct investment in manufacturing in the

United States focused on electric and electronic

equipment, primary and fabricated metals, and

transportation equipment.6 Counting both imports into the U.S. and domestic production,

Japanese firms accounted for significant market

shares in many key industries, reaching 20

percent of the semiconductor market,7 29.9 percent of the automobile market,8 and significant

holdings in the steel market.9

These changes have stimulated public debate

over the competitive challenge from Japanese

1 John M. Stopford and Susan Strange, Rival States, Rival Firms: Competitiortfor World Market Shares (Cambridge, England: Cambridge

University Press, 1991), p. 17.

2 B~~ on book value. John W. Rutter, Department of COmmemP-, ‘‘Recent Trends in Foreign Direct Investment in the United States: The

Boom of the ’80s Vanishes,” December 1992, appendix table 1.

3 Ibid.

4 Japan Economic Institute, “Japan’s Expanding US Manufacturing Presence, 1990 Update,” JEXReport, June 1992, pp. 34. (The U.S.

Government defines a foreign-controlled fm as one with at least 10 pereent of its equity held by one foreign owner.)

f’ Kemeth Courtis, Tokyo economist for Deutsche Banlq cited in Robert L. Cutts, “Capitalism in Japan: Cartels and Keiretsu,” Harvard

Business Review, JulylAugust 1992, p. 54,

6 John W. Rutter, U.S. Department of Commerce, ‘‘Trends and Patterns in Foreign Direet Investment in the United States,’ Foreign Direct

Investment in the United States: Review and Analysis of Current Developments, August 1991, p. 25.

7 Semiconductor Ir,dustry Assoeiatiou Obtaining Access to the Japanese Market: Inten’m Report on the 1991 US-Japan Semiconductor

Agreement (Washington DC: May 1993), p. 7.

8 In 1992; U.S. Department of Commerce, “Motor Vehicles and Parts,” US lndustriui Outlook 1993 (Washington, DC: US Government

Printing Office, January 1993), p, 35-7.

s The Department of Commerce reported that foreign steel makers held substantial positions in almost 25 percent of domestic integmted

mills by the late 1980s, with Japanese fms the dominant foreign investors. Ibid., p. 13-3.
Chapter 4-Japanese Multinational Enterprises in the United States | 83

corporations and the Japanese economy. Some

analysts suggest that the impressive performance

of Japanese firms is due primarily to efficient

industrial organization and production techniques.

Others stress business relationships among Japanese industrial companies along with banks that

allow them to obtain capital more cheaply,

compete for market share rather than short-term

profits, and weather hard economic times. Some

argue that government protection and aid to

developing industries, and restrictions on foreign

sales and investment, are the keys to Japanese

success.

Japanese firms have lagged behind their U.S.

and European counterparts in the globalization

process. This is at least partly due to their

latecomer status; the industrial infrastructure of

the nation suffered greater destruction during

World War II than that of most European nations.

But while the physical damage was substantial,

much of the structure and operating style of

Japanese firms survived from the prewar era.

Some aspects of the Japanese system go back to

the establishment of the first zaibatsu, or familybased commercial empires, in the 19th century

(although parts of the system emerged as early as

the 17th century).

Thus, some of the powerful organization evident in modern-day Japanese corporations has

developed over time-with influence from governmental planners-as the firms have developed. This may explain the companies’ conservatism, their strong identification with Japan, and

their reluctance, in many cases, to adapt to what

many in the United States consider appropriate

forms of corporate behavior and community

participation.

Japanese managers tend to view relationships

with foreign firms, customers, and governments

as opportunities to absorb knowledge and technology. Just as the aristocrats who steered the new

Japanese state after the Meiji Restoration of 1868

modeled social and governmental institutions on

what they saw as the best of the West, so Japanese

corporations have absorbed Western institutions—

such as Fordist mass production and the global

corporation—and adapted them to Japanese sensibilities and goals. In this view, it may be useful

to think of the Japanese firms that loom large in

many technology-intensive, high value-added

industries as possessing a national ideology of

technology absorption.l0

This chapter addresses factors that have aided

the expansion of Japanese firms in the United

States, both through exports and direct investment. It discusses the competitive challenge to

U.S. industries posed by these firms, and the

assistance provided by Japanese Government

policies and keiretsu business groupings to the

activities of large Japanese enterprises in the

United States. The chapter concludes by examining an area of particular concern to Congress:

Japan’s significant investments in both small and

start-up companies in high-technology industries,

and in domestic university research. Critics have

suggested that such practices result in Japanese

firms profiting disproportionately from U.S.

strengths in basic sciences and technology research and development (R&D).

CHAPTER FINDINGS

1. The Japanese Government has supported and

preserved the competitive position of Japanese

firms doing business in the United States, using

‘‘administrative guidance’ of domestic enterprises and government-to-government activism.

2. Japanese corporate ties, particularly as represented by the keiretsu industrial groupings,

10 For ~ &~ption of J~p~’s i&olo@C~ predisposition tow~d tec~o]ogy absoqtioq S= David B, Friedman ~d WChl!ld J. s~llek,

“How To Succeed Without Really Flying: The Japanese Aircraft Indusq and Japan’s Ideology,” paper presented for National Bureau of

Economic Research Conference, San Diego, CA, Apr. 1-3, 1992.
- -.

84 I Multinationals and the National Interest: Playing by Different Rules

have helped Japanese firms establish global

sales, distribution, and production networks. In

the United States, keiretsu-type organization

has accompanied the establishment of some

Japanese-owned production facilities.

3. Many Japanese producers in the United States

are gradually increasing the U.S. content of

their domestic production-although they have

not reached the levels of domestic content of

either their U.S. rivals or other foreign investorsas local suppliers become more qualified and

more competitive. This process is in conflict,

however, with maintenance of the Japanese

producers’ keiretsu ties. The issue is further

complicated by inconsistent U.S. Government

definitions and methods of determining domestic content.

4. Japanese firms look to both U.S. university

research in basic and applied sciences, and

small, innovative U.S. firms in hightechnology areas, as valuable technology resources. They have made extensive efforts to

draw on these resources through strategic

investments, alliances, and other ties.

Japanese Government Activism

One factor often cited to explain Japan’s

international commercial success is the skillful

intervention of government bureaucrats, particularly the Ministry of International Trade and

Industry (MITI). According to numerous examinations of the Japanese system,l1 government

officials work closely with industry leaders,

strongly influencing firms under the guise of

“administrative guidance” in order to foster the

development of specific domestic industries and

prevent what is often described as “excessive

competition. Among the tools at their disposal

are government subsidies, loan guarantees, and

technology consortia, as well as various measures

aimed at restricting the entrance of foreign firms

into the domestic market.

Recognizing the difficulties that confront foreign firms, the Japan Export and Trade Organization (JETRO), an agency of MITI, in recent years

has encouraged imports to Japan, offering information and introduction services to foreign firms

interested in cracking the Japanese market. Similarly, in a program called the “Business Global

Partnership Initiative, ” MITI announced its intention to encourage large domestic firms to

increase imports, expand local procurement for

overseas production activities, and help foreign

firms make direct investments in Japan.12 Although such plans may invite skeptical responses

from foreign observers, they indicate the Japanese

Government’s sensitivity to outside pressure.

Although financial and economic developments, such as capital liberalization and the rise

in value of the yen, were major impetuses during

the 1980s for increased Japanese investment in

the United States (see ch. 3), the influence of the

Japanese Government-in tandem with U.S.

actions-was also significant. In the auto industry, for example, the Japanese Government explicitly encouraged firms to invest in the United

States and other nations to avoid protectionist

measures and threats of further action by the U.S.

Government. The intergovernmental relations

that led to the bilateral Voluntary Export Restraints of 1981 are a good example of this

phenomenon.

The Japanese Government has a history of

discruminating against not only foreign firms but

11 Chalmers A. JohnsoxL MITX and the Japanese Miracle: the Growth of Industrial Policy, 1925-1975 (Stanford, CA: Stanford University

Press, 1982). Alternative intupretations that stress the role of big business and the interplay of different interest groups are provided by Richard

Samuels, The Busz”ness of the Japanese State (Ithacq NY: Cornell University Press, 1987); and Karel van Wolferen, The Enigma of Japanese

Power: People and Politics in a Stateless Nation (New York NY: Vintage Booka, 1990),

12 -qof ~~mtio~~~e and rIldUStIY, _@@S* Mbhc Aff* ~lce, ‘‘Business Global Partnership Initiative, Fact Shee~

November 1991, p. 3.
Chapter 4-Japanese Multinational Enterprises in the United States | 85

also certain domestic firms.13 Those firms that

traditionally had been the biggest beneficiaries of

government policy in the auto industry were the

least enthusiastic about investing in the United

States, and were uncharacteristically vocal in

articulating their views. They feared that moving

production to the United States would reduce

their productivity, subject them to unfavorable

U.S. regulations over issues such as hiring

practices, and affect their ability to maintain close

control over the activities of subsidiaries.

Conversely, those firms that previously received fewer benefits from government policies

were more receptive to the idea of change; when

MITI officials approached all the auto manufacturers in late 1979 with the idea of building U.S.

facilities, Honda alone announced that the company would build a U.S. plant in Ohio in January

of 1980. Honda apparently implemented an overseas investment strategy that won favor with

Japanese Government officials while reducing

their influence on the company.

Both Nissan and Toyota in contrast, announced

that they would not build U.S. plants.14 Their

continued resistance provoked strong and public

criticism from MITI.15 The two firms subsequently

responded rather differently: Nissan capitulated,

announcing that it would build a U.S. plant, while

Toyota balked.

In the United States, the United Auto Workers

(UAW and Ford filed petitions with the U.S.

International Trade Commission (ITC) under

Section 301 of the Trade Act, requesting protection on the grounds that imports were the primary

cause of the auto industry’s distress. MITI officials met with U.S. Trade Representative (USTR)

officials in June 1980, promising them that

Japanese firms would exercise restraint in imports, and MITI’s head publicly criticized the

companies for their lack of cooperation, particularly Toyota,

What had hitherto only been hints that U.S.

protection was a possibility then became more

explicitly stated, if not formalized, in September

1980, with a request for a Voluntary Export

Restraint (VER) order transmitted by the U.S.

ambassador in Tokyo. Tokyo agreed, but the

major Japanese auto producers reneged. MITI

officials encouraged U.S. officials to demand

Japanese responsiveness. l6

The U.S. Justice Department declared that a

VER would not violate U.S. antitrust law if it was

administered by the Japanese state. Further negotiations between U.S. and Japanese Government

officials then settled on a VER of between 1.5 and

1.8 million automobiles per year. MITI thus

reasserted its authority to supervise the allocation

process and thereby exercise significant leverage

over the domestic firms. Within a week, MITI and

USTR officials agreed on a figure of 1.68 million

units for 3 years.

By limiting exports, the two governments

created an incentive for direct investment by the

Japanese firms to sustain market share. Toyota

and Nissan both resisted moving production to

the United States but their loss of market share to

Honda 17 motivated them to invest in the United

States.

13 For ~ di~Cu~~lOn of ~s ~in~ sm Simon Reich, The Fmits of Fascism: posfwarprosperiV in Historical perspective ~t.blCq NY: Comefl

University Press, 1990).

14 pad A. S ummemille, ‘‘The Politics of Self-Restraint: The Japanese State, and the Voluntary Export Restraint of Japanese Passenger Car

Exports to the United States in 1981” (unpublished doctoral dissertation% University of ‘Rdcyo, 1988), p. 322.

15 No~m Fujii: 1‘me Road t. he u,S.-J*p~Auto crash’ u.s,.Japan Relations: Ncw Am”fu&s for a New Era, Annual Review 1983-1984

(Cambridge, MA: The Program on U.S.-Japan Relations, Center for Lntemational Affaiss, Harvard University, 1984), p. 41.

16 Smmemille, op. cit., footnote 14, pp. 326, 356.

17 Hon& ~crem~ it5 she of J~p~eS~ compafi~’ automobile s~es ~ be unit~ s~tes from 21 to 26 percent between 1981 ~d 1985.

Ibid., p. 395.
86 I Multinationals and the National Interest: Playing by Different Rules

Foreign direct investment in the United States

(FDIUS) did have advantages for Japanese fins.

It allowed them to insulate themselves from

further export cutbacks and the effects of currency

variations, to compete with U.S. firms directly in

their home market, and to reduce the influence of

both the Japanese and U.S. Governments. The

Japanese Government lost influence over these

firms by encouraging the globalization of production, while the U.S. Government lost influence

because it could no longer threaten protectionist

restraints. The United States instead had to deal

with transplants that were able to develop domestic political strength by signing agreements with

State governments regarding job, investment, and

production levels.

The new transplants were able to compete

effectively against their domestic counterparts by

locating plants with cheaper labor costs, and by

transplanting their efficient production systems.

They did this in part by encouraging or coercing

Japanese subcontractors and suppliers to move

production capacity to the United States, thus to

a large extent reproducing the domestic system of

industrial groupings, or ‘‘keiretsu, ’ in this country, as the following section describes.

KEIRETSU

There is increasing evidence that the structure

of the Japanese business groups known as keiretsu

gives them an advantage against U.S. fins. The

keiretsu, a general term for horizontally or

vertically organized networks of companies, provide member firms with preferential procurement

by group members, low-cost capital, stable shareholding, and support in hard economic times.

There has been extensive academic and media

examination of the keiretsu, as well as government attention, both in bilateral trade negotiations

and in domestic antitrust actions. This section

examines the relevance of the keiretsu to the

activities of large Japanese firms in the United

States, and whether there are grounds for congressional concern.

Many keiretsu relationships have been transplanted to this country as part of the highly

efficient production systems of the large Japanese

manufacturing firms. Examination of the geographical dispersion of Japanese manufacturing

facilities demonstrates quite clearly that supplier

firms have established production facilities in the

United States to service their important customers.

18 This transplantation is based at least partly

on cultural preferences for doing business with

other Japanese companies, but it can also be seen

as a rational economic decision to maintain

established, reliable supplier relationships. As

Japanese producers form relationships with domestic suppliers and customers, however, the

keiretsu relationships may weaken. U.S. Government demands and media attention appear to

speed this process.

Many Japanese firms producing in the United

States apparently prefer to do business with

Japanese suppliers that have established their

own U.S. manufacturing affiliates, thus denying

business to U.S. companies. When such practices

have been challenged, Japanese manufacturers

typically respond that they have been unable to

find U.S. suppliers capable of meeting their high

quality standards at acceptable prices.l9 Toyota

for example, claimed in 1990 that the average

defect rate of parts it bought from U.S. suppliers

113 ~c~el L. ~r~cb ‘ ‘relight of the Keiretsu? A Critical ASS~Sment, ” Journal of Japanese Studies, 18:1, winter 1992, pp. 112-115.

19 _Ke~ey and Richard Florida, ‘‘How Japanese Industry is Rebuilding the Rust Be14° Technology Review, February/March 1991,

p. 28.

ZO L~dsay ~ppell, ‘Double-wged Sword, ’ Automotive News, Mar, 4, 1991, p. 1.At the ‘ibyotaplant hbrgetom KY, JapaM,*made

parts are reportedly kept on hand as emergency inventory in case the U. S,-made parts that are delivered are unacceptable. Alex Taylor, ‘ ‘Japan’s

New U.S. Car Strategy, ” Fortune, Sept. 10, 1990, p. 68.
Chapter 4-Japanese Multinational Enterprises in the United States | 87

was 100 times that of parts from Japanese

suppliers.20

There is some evidence that more business is

now going to U.S. parts suppliers: total sales of

U.S.-made parts and accessories to Japanese

automakers (for their operations in both Japan and

the United States) increased from $1.7 billion in

1985 to $10.5 billion in 1990.21 This could,

however, be due to political considerations. A

Nissan representative was quoted as saying that

his company bought U.S.-made parts for its U.S.

production even when they were 20 percent more

expensive than Japanese products, and that Nissan was willing to push that margin up to 50

percent. 22

Japanese keiretsu have been the focus of

significant U.S. Government interest in two

important areas. The first was the 1989 U. S.-

Japan Structural Impediments Initiative, which

identified the Japanese business groups as a

barrier to U.S. firms’ access to Japanese markets,

and as an unfair advantage for Japanese firms in

international competition. Although various Japanese Government officials and commissions, as

well as private-sector groups, have agreed that the

keiretsu do give member firms an unfair advantage, 23 little change appears to have occured.24

The U.S. Government has also attempted to

moderate the potency of the keiretsu through new

policies encouraging Justice Department enforcement of antitrust provisions against Japanese

firms or their U.S. subsidiaries, on the grounds

that the Japanese keiretsu structure amounts to

monopolistic or anticompetitive activity. A 1992

change in the Justice Department’s policy on

prosecution of antitrust violations by foreign

enterprises indicated a new dedication, by at least

some parts of the U.S. Government, to protecting

domestic firms against bigger and richer foreign

competitors, particularly Japanese firms.25 The

new policies abandoned a prior interpretation of

U.S. antitrust law that required proof that corporate collusion harmed U.S. consumers. Rather,

the Justice Department argued in 1992, antitrust

laws could also be used to aid U.S. firms seeking

access to foreign markets.26 Although the Justice

Department emphasized that the new policy was

not aimed at specific foreign markets, the implication was clear that there were special grounds

for complaint against Japanese

structures .27

WHAT ARE THE KEIRETSU?

The Japanese word “keiretsu”

organizational

means system,

lineage, or linkage. The vagueness of that definition is appropriate, because the term is used to

cover a broad variety of relationships among

companies. In its most fundamental definition,

the word describes the cooperative arrangements

formed by Japanese companies to reduce the risks

of commercial activity.

There are two major types of keiretsu: horizontal, or ‘bank-centered, ’ and vertical, or producercentered, which include chains of suppliers extending upstream from a principal manufacturing

company and chains of distributors downstream.

21 U.S. Department Of Commerce, ‘‘Motor Vehicles and Parts,’ U.S. lndusm”al Outlook 1993 (WashingtoXL DC: U.S. Government Printing

Ofllce, January 1992), p. 35-21. This figure does not distinguish between U.S.-owned fms and U.S. afftiates or subsidiaries of Japanese auto

parts makers.

22 Nobuyuki Oishi, “Auto Parts Makers Fear Fallout from ‘Buy Americau’ “ Nikkei Weekly, Mar. 7, 1992, p. 19.

~ Kei@n (F~mation of finomic Organimtions), Ad-Hoc Committee on Foreign Direct Investment in Japam ‘ ‘kqXOv=ent of the

Investment Climate and Promotion of Foreign Direct Investment into Japam” Oct. 27, 1992, p. 13.

x tiersJo~ou “Japan’s ~wn: s~ wi~ A Pl~” The New York Times, Jan. 12, l$@2, s~tion 4, P. 19.

M Janicc E. Rubin and Dick Nanto, “Japan’s Keiretsu and U.S. Antitrust Laws, ” CR.S Review, SePt. 1992, p. 31.

26 “US Moving to Strengthen Its Antitrust Powers in Trade,” The New York Times, Apr. 4, 1992, p. 43.

27 Job s. -q, ~Cu$S, Extends Rach of Antimst Enformmen4° ]nter~tional Financial bW Review, June 1992, p. 18.
88 I Multinationals and the National Interest: Playing by Different Rules

The two types of keiretsu function differently in

helping Japanese MNEs compete in hightechnology areas.

Although the term keiretsu has become fashionable in U.S. business journalism, the practice

of companies cooperating to provide capital and

spread out risk has its roots in the prewar zaibatsu,

the great industrial combines run by aristocratic

families. In fact, the oldest of the zaibatsu, the

Mitsui group, was founded in 1616 by Sokubei

Takatoshi, a samurai who abandoned his class’

traditional contempt for the world of business

with the proclamation, “No more shall we have

to live by the sword. I have seen that great profit

can be made honorably. I shall brew sake and soy

sauce, and we shall prosper. ’

The zaibatsu, organized around holding companies controlled by the founding families, expanded into many different areas of commerce,

although they tended to specialize in certain

segments.29 Because their manufacturing ability

was crucial to the Japanese war effort during

World War II, they were identified as a major

target of the Allied program to demilitarize Japan

during the Occupation. The holding companies

and practices such as cross-shareholding were

outlawed, and the zaibatsu were broken up.30

However, as part of the 1949 Allied Occupation

policy change known as the “reverse course,”

when Japan was recognized as a vital ally of the

West against Communist expansion, zaibatsu

dissolution was ended. After regaining autonomy

in 1951, the Japanese Government amended the

Anti-Monopoly Law imposed by the Allies to

allow cross-stockholding and interlocking directorates. Those two practices, along with regular

private meetings of executives known as “presidents’ clubs, ” are the three most conspicuous

structural elements of modern horizontal keiretsu

affiliation.

| The Horizontal Keiretsu

The structure of horizontal keiretsu is roughly

similar to that of the zaibatsu, except that the

coordinating role of the holding company is split

among the main bank, the general trading company, and the presidents’ council of the group. In

fact, three of the current eight major horizontal

groups-Mitsui, Mitsubishi, and Sumitomo-are

continuations of traditional zaibatsu.31 Most analyst classify three more “new” groups-Fuyo,

DKB (Dai-Ichi Kangyo Bank), and Sanwa––with

the frost three as major horizontal keiretsu. There

are two more “medium-sized” keiretsu, the

Tokai Group and the group based on the Industrial

Bank of Japan.

Horizontal keiretsu usually include a major

bank, a trust bank, a major insurance company,

and a trading company, with members in most if

not all major areas of industrial production:

electronic equipment, autos, construction, metals,

mining, chemicals, textiles, heavy equipment,

financial services, real estate, and transportation.

The government encouraged this diversity to

stimulate competition and to concentrate resources in critical industries.32 The practice is

known as ‘‘one-set-ism,’ (wan setto-shugi) since

each group has a complete “set’ of companies

spanning the spectrum of major industries.33

28 Temtomo o~w~ “Japan’s Industrial Groups” IUSU Business Topics, autumn 1980, p. 34.

29 Ibid., p. 34.

w Ibid., p. 35.

31 Dodwe~ M~keting Consultants, Industrial Groupings in Japan 1988-89 (Tokyo: Dodwell Marketing Consultants, 1988), P. 3. This is

the most commonly cited reference for statistical information on the keiretsu. The cited edition identifies 8 horizontal keiretsu and 39 vertical

ones. However, these numbers vary not only with time-since companies leave and join keiretsu increasingly frequently--but among sources.

32 me Anchordoguy, ‘‘A Brief History of Japan’s Keiretsu, ” Harvard Business Review, July-August 1990, p. 58.

33 ()=wa, op. cit., footnote 28, p. W.
Chapter 4-Japanese Multinational Enterprises in the United States | 89

All together, these eight groups accounted for

more than a fifth of the total paid-in capital of

Japanese firms and nearly 13 percent of total

corporate profits in the nation in 1987.34 The six

major horizontal groups are estimated to have

accounted for about a quarter of Japanese gross

national product (GNP) since World War 11.35

Furthermore, over two-thirds of Japan’s imports

pass through the hands of the large trading

companies affiliated with the major keiretsu.36

The practice of stable mutual shareholding

protects companies against U.S.-style pressures

for short-term profits or high dividends, as well

as outside takeover attempts.37 Typically, the

‘‘main bank’ at the center of a keiretsu will

hold 5 to 10 percent of member companies’ stock,

while other keiretsu members may hold 2 to 5

percent of the stock each;38 this often amounts to

as much of a quarter of the company’s stock held

within the keiretsu. 39 In addition to creating

symbolic bonds among companies, keiretsu members implicitly agree not to trade the stock they

hold.40 Financial ties among companies are further strengthened by intragroup loans, usually but

not exclusively from the central bank; atone point

in 1989, for example, more than 46 percent of

Mitsubishi Corp.’s outstanding loans were held

by Mitsubishi group banks.41 Companies within a group reportedly tend to give business to each

other, as well as financial support; although

a Japanese Government commission estimated

that mutual transactions within keiretsu accounted

for 30 percent of members’ total business, academic estimates describe that figure as extremely

low.42

The above characteristics vary among and

within groups. Companies may leave, or join, a

keiretsu; there are various affiliations across

keiretsu; and there are suggestions that keiretsu

dynamics are changing. Some observers see the

system dissolving as the importance of banks as

a source of capital declines,43 while others see

some keiretsu strengthening their group identity

by increased leadership from the central corpora34 D~well, op. Cit., footnote 31, pp. 36* 38”

M ~~ ~W~ ‘‘my Jap~ Keeps On Winning, ” Fortune, July 1S, 1991, P. *O.

36 ~c~els. ~~c~ A//i~nCe Capifa/lsm: The social Organization of Japanese Business @erkeleY, CA: university of C~ifOfi ~s~

1992), p. xviii.

37 Kozo Yamamuw “Will Japan’s Economic Structure Change? Confessions of a Former Optimis4° K. Yamamw cd., Japan’s Economic Structure: ShouMZt Change? (Seattle, WA: Society for Japanese Studies, 1990), p. 30.

38 Anchordo@y, op. cit., foo~ote 32, p. 59.

39 yo~timy- “me Big six Horizon~Keire~”Ja~n Quarterly, Apti-JwM 1992, p. 192.

40 me Practim gWs back to tie pOStSVaI period when Japanese COmptUdes felt VUhl*le to Umver attemPts throu@ e@ty P~~s ~

foreign fins. Ozaw& op. cit., footnote 28, p. 37.

41 -Y-, op. cit., fOOtnOte 39. P. 193.

42 Ibid., p. 194.

43 AS G~Saxcmhou.se observes, ‘‘with the growh of Wtity fmancing and with the equalizing of the terms of access to capital between

keiretsu and non-keiretsu fm, one of the main props of the keiretsu system is coming undone. An acceleration of keiretsu hopping and

disaftlliation can be expected in the future.’ (Comment m Robert Z. Lawren@, ‘‘Efflckw or Exclusionist?: the Import Behavior of Japanese

Corporate Groups,” Brookings Papers on Economic Activity, No, 1, 1991, p, 334); also Hughtivinsoxq ‘

6 Keiretsu relations changhg, ” Japan

Times Weekly Intl. Edition, Aug. 10-16, 1992, p, 18, and W. Carl Kester, Japanese Tdeovers: The Global Contest for Corporate Control,

(BostoG MA: HBS Press, 1991), p. 206.
90 I Multinationals and the National Interest: Playing by Different Rules

tion and mergers of key entities.44 The appreciation of the yen and increasing global competition

have forced companies to tie up with “the most

powerful partners”—not necessarily those in the

company’s keiretsu-in particularly expensive

and/or risky business areas such as telecommunications, shipbuilding and ocean transportation,

and chemicals.45 This would include ventures

such as the developing cooperation of Mitsubishi

with Germany’s Daimler-Benz.46

During the first 2 years of the 1990s, the

economic contraction that severely affected the

activities of many Japanese corporations brought

to media attention the capacity of keiretsu networks to aid struggling members. There have

been several spectacular rescues of overextended

Japanese companies by their keiretsu partners.

Although such events can demonstrate the costs

of keiretsu membership, they may ultimately

result in even closer relationships, as the beneficiaries of such help are obligated both financially

and psychologically to their main banks and other

principal keiretsu members. Itoman Corp., for

example, was acquired by another member of the

Sumitomo keiretsu after it could not repay

extensive debts to Sumitomo Bank.47

To the extent that keiretsu relationships are

undermined, Japanese firms could be expected to

source in a manner more like that of their U.S. and

European counterparts, while suppliers could

expect prices that include an independent equity

profit. One convincing analysis of the state of the

keiretsu in the early 1990s suggests that if

anything, the keiretsu are restructuring rather than

collapsing. 48 Given their historical role in the

Japanese industrial system, it seems reasonable to

place the burden of proof on those who argue that

the keiretsu are breaking down.

| Vertical Keiretsu

The other major type of keiretsu, the vertical

group, may have more relevance to the activities

of Japanese companies in this country. The

vertical keiretsu is essentially a supplier chain

leading to a major manufacturer of automobiles,

electronics, or other complex products. There are

probably 30 to 40 vertical keiretsu of significant

size. 49 The multiple levels of suppliers descending from the apex of a Toyota or a Matsushita can

extend into extraordinary numbers: Toyota reportedly contracts with 175 primary suppliers and

4,000 secondary ones.5o One researcher cites an

automaker with not only 168 primary subcontractors and 4,700 secondary ones, but 31,600 tertiary

suppliers. 51 The relationships in the supplier

pyramid are intended to be long term, but are not

guaranteed sales for the supplier. The manufacturer will often maintain relationships with sev44 s= ~~c& op. cit., footnote 18; J~=R ~04 ‘%8Y ~“, and Michael L. Gerlac@ ‘‘Keiretsu Networks in the Japanese

Economy: a Dyad Analysis of Intercorporate Ties,” Amen-can Sociological Review, October 1992, pp. 561-585, Lincok ‘hkahashi, and

Gerlach state that because banks have increased their provision of capital to affiliated companies via the ~hase of stocks and bonds (rather

than loans), and because supplier relationships are even more important in technology-intensive industries, ‘it is premature to assume that the

keiretsu is an obsolete organizational form’

45 ~Well, op. cit., footnote 31, p. 21.

e tiles sm~ “NO’S cmqxmy,” Far Eastern Econom”c Review, MitY 24, 1990, p. 67.

47 Jom~pn_ ‘$sys~tic Solution: 1toman’s Problema Will Be Spirited Away,” Far Eastern Economic Review, @t. 1, 1%% PP.

86-7; Robert Neff, “For Bankrupt Companies, Happiness is a Warm Keiretsu,” Bw”ness Week, Oct. 26, 1992, pp. 48-9.

4s ~lach ‘‘-t of the Keiretsu?,” op. cit., footnote 18.

49 yamamura, op. cit., foofnote 37, p. 30.

50 ~WWfi op. cit., fOOtnOte 35$ P. 77”

51 Helou A@- “T’he Nature and Competitiveness of Japan’s Keiretsu, ’ Journul of World Trude, June 1991, p. 103, footnote 18.
Chapter 4-Japanese Multinational Enterprises in the United States | 91

eral suppliers for each component, to ensure

competition as well as steady supplies.52

The vertical keiretsu is an efficient means of

sharing information, contributing to efficiency

and vertical integration. It is also an efficient

mechanism for exploiting lower tiers, enabling

the top tier firm to extract prices that take

advantage of lower wage rates and do not include

an arms-length equity profit for the supplier. This

aspect of the keiretsu system helps explain why

Japanese firms operating abroad may be less

likely to source from domestic suppliers.

The term vertical keiretsu also describes the

chain extending from major manufacturers

through levels of distributors down to the retail

level, particularly in consumer goods; this is far

less a matter of cooperation among firms than of

coercion by powerful suppliers to prevent price

reductions and competition from other (especially

foreign) brands in the same shop.53 The manufacturer controls distributors by providing capital

and offering rebates. Many Japanese retailers of

electronics goods, for example, sell only one

brand; Matsushita Electric Industrial Co. has

24,000 exclusive retailers, Toshiba has 11,000,

Hitachi has 9,000, and so on. 54 Even where

allowed by law, this type of distribution system

requires large investments in retail outlets.

In the agreement resulting from the bilateral

Structural Impediments Initiative negotiations of

1989-90, the United States noted that “economic

rationality of keiretsu relationships notwithstanding, there is a view that certain aspects of keiretsu

relationships also promote preferential group

trade, negatively affect foreign direct investment

in Japan, and may give rise to anticompetitive

business practices.”55 This ambivalence affects

much of the debate on keiretsu, since it appears

that many characteristics of the groupings help

Japanese firms at the same time that they hurt

foreign ones. Highly efficient Japanese MNEs

derive much of their advantage from superior

management and process technology rather than

product technology. Much management skill is

embedded in their traditional service, component,

and equipment supplier base. Introducing new

suppliers to replace existing ones could be highly

disadvantageous. 56 In a similar vein, some defenders of keiretsu suggest that the keiretsu

structure is simply a natural result of Japanese

cultural values. As one journalist notes, ‘‘an

attack on [the keiretsu system] runs the risk of

being construed as an attack on Japanese culture. ’57

| Keiretsu: Influence on Market Access

and Competition

In an analysis of the effect of keiretsu on

Japanese imports and exports, one authority

concluded that vertical keiretsu are more defensible from the Japanese perspective than horizontal

keiretsu, since they appear to improve efficiency

in exports while the horizontal groupings do

not.58 When appraising their effect on activities of

Japanese firms in the United States, the vertical

keiretsu are of more immediate concern. The

apparent preservation of keiretsu ties among

major Japanese auto producers and component

52 ~hordo~y, ‘ ‘Brief History, ” op. cit., footnote 32, p. 59. Alan S. Blinder notes that the companies can vary the ‘market share’ of each

supplier for reward and punishment. “A Japanese Buddy System That Could Benefit U.S. Business,” Business Week, Oct. 14, 1991, p, 32.

53 -f.rsA+ Jo~ou“IQr@m: An Outsider’s View, “ Economic Insights, September/October 1990, p. 16.

54 D1~k N~to, ‘{J~~’s ~dus~ Groups: me Keiretsu,” cm Report, NOV. 5, 1990, p. 14.

55 ~ot~ in ~vvrence, op. cit., footnote 43, p. 311.

56 See G.qlach op. cit., foomote 18, especially PP. 92-93.

57 ~les sfi~, ‘‘IQirefiu: Reform Runs into Resistance, ’ Far Eastern Economic Review, June 21, 1990, pp. 5&54.

58 ~=nce, op. cit., fw~ote 43, p. 322. He notes, however, tit~~~s of ketietsu appw to stifle imports Sl@fhIlfly.
92 Multinationals and the National Interest: Playing by Different Rules

suppliers with production facilities here could

exclude and harm U.S. parts suppliers.

The horizontal keiretsu in theory benefits all

member companies by guaranteeing stable shareholding, information-sharing, access to financing, and cooperation in areas where the costs of

development of a technology, for example, can be

spread out among several members of a group.

The keiretsu may provide some security in hard

economic times. Members of the Sumitomo

keiretsu, for example, helped bail out Mazda, its

automaker, in the early 1970s: “The Sumitomo

bank extended loans to Mazda; other keiretsu

members agreed to employ Mazda employees

temporarily until the company was out of trouble;

and all members of the keiretsu purchased only

Mazda cars.”59 In addition, Sumitomo bank

helped arrange for Ford to purchase a 25 percent

share in Mazda.60 Some analysts have also

suggested that horizontal keiretsu ties tend to

reduce imports in relevant industries;61 

one reason for this might be collusion among the major

players in an oligopolistic market, which would

result in exclusion of all newcomers, whether

domestic or foreign.

The vertical groupings, however, principally

benefit the central manufacturer, and often work

against the interests of suppliers in the chain who

depend on keiretsu business, but suffer from

demands for continuous rationalization and/or

price reductions. Distributors’ freedom to sell

other companies’ products or compete on price

with local rivals is also constrained, but they

benefit through guaranteed high profit margins.

Despite the disadvantages of the keiretsu

voiced by some suppliers, the flexibility of the

Japanese system is impressive, especially in the

production of automobiles, which combines thousands of components that can be produced by

outside suppliers. The two extremes of almost

total in-house production of components and

almost total market procurement both appear

inefficient, observes one U.S. analyst: “The

American approach has been either to do it

in-house (GM) or to buy a large fraction of parts

in the marketplace (Chrysler). Neither approach

seems to work as well as the group system of

Japanese competitors such as Toyota. ”62 As a

result GM, Ford, and Chrysler have begun to

mod@ their sourcing and procurement strategies.

U.S. automakers are criticized for creating a

system in which ‘‘costs have been shifted from

higher to lower levels of the production systern. ’ ’63 Ironically, this is one of the major factors

in the Japanese producers’ ability to weather the

significant increases in the value of the yen since

1985. The system allows the manufacturers to

employ highly skilled workers who perform very

high value-added work, pushing the lower value

work down to subcontractors, who are forced to

cut prices to ease the pain of economic adjustment

for the parent company.64

Nippondenso, the world’s largest auto-parts

manufacturer, with 11 plants in North America, 4

in Europe, and 12 in Asia,65 is an example of the

growing complexity of the supplier relationship,

especially as supplier companies grow into large

corporations capable of exploiting scale econo59 “me M@~ ICe&~” XndUStry Week, J~. 20, 1992, p. 53.

@ ~k mow Amen-can Multi~tionals and fapan: The Political Economy of Japanese Capital Controls, 1899-1980 (Ctitidge,u:

Harvard University Press, 1992), pp. 239-40.

61 ~Wnce, op. cit., footnote 43, p. 328.

62 Jmes p. WCXD.WQ smtem~t before the Joint Economic Committee, DCC. 10, 1991, P. 3.

63 Ibid., p. 3.

64yamamur% op. cit., footnote 37, p. 32.

65 ~~e Do RosM@ “Riding tie SlipS-” Far Eastern Econonu”c Review, Dee. 26, 1991, pp. 72-73.
Chapter 4-Japanese Multinational Enterprises in the United States | 93

mies themselves. Although Nippondenso is a

member of the Toyota keiretsu, with the manufacturer holding nearly a quarter of its stock, it also

produces components for Honda, Mazda, and

Mitsubishi, 66 and has begun supplying parts to

U.S. manufacturers. Yet it retains close ties with

Toyota.

Keiretsu can aid companies in R&D and

advanced manufacturing by coordinating “precompetitive research in new technologies, and

by easing access to capital for high-tech ventures

that are extremely expensive to startup and have

short production-life spans. An example of the

latter is a semiconductor fabrication facility that

may cost $500 million and be at the leading edge

of technology for only 4 years or less,67

Supplier relationships are the most obvious

manifestation of keiretsu activity in the United

States. Along with 11 Japanese auto manufacturing facilities in North America have come 66

steelworks, 20 rubber/tire facilities, and more

than 270 auto parts suppliers.68 Japanese firms

initially defended this practice on the grounds that

local producers were not immediately capable of

meeting the demanding standards of Japanese

production techniques. 69 There may also be

elements of cultural preference in the choice: as

one anonymous Japanese auto executive told a

U.S. reporter, in selection of suppliers for his

company’s transplants, ‘‘First choice is a keiretsu

company, second is a Japanese supplier, third is

a local company. ”70 This pattern prompted the

Federal Trade Commission to investigate Japanese transplant sourcing practices.71

Japanese keiretsu, whether horizontal or vertical, are probably more likely to offer U.S. firms

limited amounts of business in contested areas

than to welcome them as full members of the

group. Nissan allowed 2 U.S. companies into its

network of 192 primary suppliers,72 and Toyota

has formed an organization of local suppliers

called the ‘Bluegrass Automotive Manufacturers

Association. ’ ’73 But there are numerous examples

of how Japanese firms favor familiar suppliers.

For example, in 1988 less than 30 percent of the

electronics content and 1 percent of the semiconductors of Japanese-branded televisions assembled in the United States came from U.S. suppliers. Similarly, less than 3 percent of the electronics content of VCRs assembled in the United

States by Japanese firms came from U.S. suppliers.

74 Of products assembled in this country by

Sony Corp., for example, only about 20 percent of

the company’s $8 billion worth of U.S. sales were

manufactured domestically.75

Rather than retaliation or protection, various

analysts have urged a U.S. attempt to emulate the

system in some way. Such emulation could take

two forms: entry by U.S. firms into Japanese

keiretsu, or the formation of U.S. keiretsu-like

organizations. Other analysts suggest that U.S.

companies can and should try to adopt certain

ti Ibid., p. 72.

67 ~les H. Ftiguso~ “Computers and the Coming of the U.S. Keiretsu,” Harvard Business Review, July-August 1990, p. 57.

68 Ke~ey ~d FIori&, op. cit., footnote 19, p. 25.

69 Ibid,, p. 28.

70 ~Ppo~ op, cit., fOOmOte 35, P. 80”

71 BilJ powell, “J~p~: Au ~ he F~y, ” ~ew~ee~, June 10, 1991, p, 38.

12 Ibid,

73 K~ey and Florida, op. cit., foomote 19, p. 32.

74 John E&house, “How U.S. Could Learn from Europe,” San Francisco Chronicle, Oct. 1, 1990, p. Cl,

75 Sheldon Wefig, vice c~~~Sony ~n@e~g ~d~ufac~g~f America, ‘ ‘Globalization’s Impact on Corporate Technological

Competitiveness, ” paper presented to the American Association for the Advancement of Science, AAAS 93, Boston, MA, Feb. 14, 1993,

p. 4.
94 | Multinationals and the National Interest: Playing by Different Rules

keiretsu practices. One, for example, calls for a

network of U.S.-European linkups for development, production, and marketing-a straightforward bulwark against further Japanese expansion.76

According to media reports, many U.S. firms

have attempted to mimic Japanese-style corporate

ties, ‘recasting their investment practices to form

cooperative links both vertically, down their

supply lines, and horizontally, with universities,

research labs, and their peers. ’ ’77 Less stringent

enforcement of antitrust regulation by the Bush

administration may have encouraged intraindustry collaboration, both bilateral and in consortia.78 The Big Three automakers are collaborating on electric car technology, and IBM has

begun tie-ups of varying levels of formality with

Apple, Siemens, and other electronics firms.79

It is important to make the distinction, though,

between productive government-sponsored consortia and policy actions that stifle the positive

aspects of vigorous competition. As one analyst

observes: “The strength of Japanese industry in

world competition involves the combination of

extremely intense competition between firms in

the same sector coupled with long-term shared

destiny with financial organizations and firms in

other sectors. ’ ’80

DOMESTIC CONTENT OF JAPANESEOWNED U.S. PRODUCTION

A major issue of contention in the debate over

foreign, and particularly Japanese, investment is

the question of how much value a foreign-owned

production facility adds to the local and national

economy. One way of determining this is to

evaluate how much of the product of such a

facility is “domestic content,” and how much is

imported. A foreign-owned assembly facility

located in the United States might use local

workers to do little more than assemble kits of

components designed, engineered, and produced

in the firm’s home country, thus avoiding political pressures associated with the trade deficit,

while contributing little to the host nation. Alternatively, such a facility might be a stand-alone

plant containing the entire production chain, from

research and development to marketing staff.

Determining the level of domestic content,

however, can be tricky. One reason is that

different parts of the U.S. Government define a

North American product differently. For the

purposes of levying import duties under the

Canadian Free Trade Agreement (CFTA) or the

North American Free Trade Agreement (NAFTA),

the U.S. Customs Service (USCS) defines a

domestic product differently than the Environmental Protection Agency (EPA) does when it

evaluates gasoline mileage of automakers’ domestic and imported fleets under the Corporate

Average Fuel Economy (CAFE) standards.81

Actual domestic content, on a components basis,

could be less than 50 percent, even when for EPA

purposes it reaches a 75 percent level.82

There are problems associated with domestic

content requirements, on both technical and

76 Ferwom op. Cit., footnOte 67, P. ‘8.

77 Km~ Keuy and Otis po~1‘~figfrom Jap~,” B~iness W,,ek, Jan. 27, 1992, P. 52,

la Ibid., p. 52.

79 Ibid., p. 55.

so womc~ op. cit., footnote 62.

81 Under tie ~A, USCS does not allow the pmCtiCe of ‘‘ro~-up’ of domestic content when evaluating assemblies of numerous

components. (Samuel Banks, Assistant Commissioner for Commercial Operations, U.S. Customs Service, press briefing, Mar. 2, 1992).

82 For ~ de~l~ &C~Ssion of how rou.up Cm wow very -l ac~~ levels of domestic components ~d msembly tO q- mUCh kger

imported content as domestic content see U.S. International Trade Commission, “Rules of Origin Issues Related to NAFTA and the North

American Automotive Industry,’ USITC Publication 2460, November 1991.
Chapter 4-Japanese Multinational Enterprises in the United States | 95

political grounds. On the technical side, it can be

difficult to assess the actual amount of value

added to a given industrial product, since this

requires looking at each step of the industrial

process, assessing whether the producer is correctly justifying each material and labor component and accurately representing its source.

In some formulations, such as the CFTA rules,

elements such as depreciation on capital equipment or debt interest can account for significant

amounts of the ‘‘domestic content’ a producer

calculates. For example, the largest domesticcontent item claimed by Honda in 1990 for

engines produced at its Anna, Ohio, plant was

depreciation on machinery, much of which was

imported from Japan.83 One U.S. official associated with a 1989-90 Customs Service audit of

Honda estimated that the real value added domestically to the cars assembled by Honda in North

America was probably no more than 25 to 30

percent of the total value of the final product.84

(See box 4-A.) An analysis conducted by the

University of Michigan, however, found a 1989

Honda automobile produced in Marysville, Ohio,

to have 62 percent North American content, and

38 percent import content, including parts of

foreign (Japanese) origin purchased from suppliers located in North America.85 A General Accounting Office (GAO) analysis, meanwhile,

found Japanese auto transplants had 50.5 percent

domestic content on average in 1989, compared

to 38 percent in 1988. A significant part of this

increase was accounted for by increased purchases of parts from domestic suppliers.86

Evaluation of domestic content is further muddied by the presence of foreign-owned suppliers.

In the Honda audit, the USCS evaluated parts

purchased from the U.S. subsidiary of a Japanese

firm as U.S. products.87 Critics claim that this

may be misleading; according to one U.S. official: “It is easy to set up a sham ‘domestic

supplier’ who is actually the subsidiay of a

Japanese company doing minimal assembly on a

Japanese-designed component.”88

An additional problem in determiningg domestic content is the practice of ‘roll-up,’ in which,

for example, a part that is made of 51 percent

domestic inputs (including labor) and 49 percent

foreign inputs is counted as 100 percent domestic

product at the next stage of assembly. By

skillfully manipulating this process, according to

a U.S. Customs Service official, it would be

possible to qualify a product with a very high

percentage of foreign content as North-American

made. 89 (See box 4-A.)

On the political side, domestic content requirements can have complex ramifications. Most

obviously, they are a barrier that conflicts with the

free trade approach the United States has traditionally espoused. While many exceptions to the

principle of free trade can be found in practice,

domestic content requirements are one of the

clearest examples of a government-imposed market distortion.

83 pad ~muswn and James B. Treece, “Honda: Is It an American Car?” Business Week, Nov. 18, 1991, p. 106.

84 OTA interview, Oct. 21, 1992.

85 u~verSi~ of ~c~gan ~mP~tion fi~ch ~ti~te, The us.Japan Automotive Bi/atera/ 1994 Trade D@if (ktII &bOr, ~:

~, h&y 1991), p. 67.

86 us, Con9eSs, Gen~~ ~ou~g ~lce, Foreign Inve$t~nt:Japane5e&/iatedAuto~er5’1$?89 Us Production’ sImpact on Jobs,

GAO/NSIAD-91-52 (Wa.shingto~ DC: October 1990), p. 3.

87 Keith Bradsher, “Honda’s Nationality Proves Troublesome for Free-Trade Pact,” The New York Times, Oct. 9, 1992, p. Al.

88 J. Mic~el Fmeq Under secre~ of Co-eme for ~termtio~ Aff~s, Wotd in David E. Singer, ‘ ‘1s ‘h)c+d COntent’ the SIIMX16t

Way to Judge Imports?” The New York Times, Mar. 8, 1992, section 4, p. 3,

89 Ba&, op. ~it., fm~ote *I.B-indica~~ that this practice of roll-up accotmting of domestic Content korderforproducts to bec~sfl~

as North American would not be allowed, p. 15.
ltinationals and the National Interest: Playing by Different Rules

Box 4-A-Honda: The Sourcing Behavior of a Leading Japanese Transplant

Honda was the first Japanese automobile company to produce vehicles in the United States. Claiming that

Honda’s U.S. affiliate should be treated like a U.S. automaker, one executive argued, “Whether a company is

beneficial to the United States is not a function of the capital that created the Company.” 1 The company should

be judged on the basis of the contribution it makes to the U.S. economy. On that basis, the time when Honda’s

contribution to the U.S. economy and technology base is fully equal to that of the leading U.S. firms remains on

the horizon.

The Big Three-GM, Ford, and Chrysler-conduct the bulk of their R&D in the United States, where they also

design and engineer most of the vehicles they manufacture and sell in the United States, Mexico, and Canada

Most of their supplier base is located within the United States, and much of the rest within the NAFTA region.They

report their average domestic content on a component basis for vehicles sold in the United States at 88 percent.

U.S. automakers who compete with Honda estimate that the average local content of all Japanese transplant

assemblers would be about 50 percent.2

Honda like other Japanese transplant assemblers, retains its key competencies in its Japanese operations.

Research, development engineering, design, and the bulk of their assembly capacity and supplier base remain

centered in Japan. Typically, high value-added activities are the last to be moved abroad.

The vehicles that Honda assembles here have an excellent reputation. its assembly facility is judged to be

productive and its workforce well-trained and well-compensated. Although wages and benefits in Honda’s

assembly operations are comparable to the Big 3, actual costs are lower due to the much younger average age

of the workforce. By locating in Ohio, Honda and its keiretsu-related suppliers located in the U.S. avoid many of

the social costs associated with workers being displaced from the Big 3 and their traditional supplier base.3

Most experts believe that Honda has made more progress in domestic sourcing for its U.S. operations than

the other transplant assembly operations. Honda has an estimated EPA domestic content (which allows roll-up)

for vehicles assembled in the United States of about 70 percent. One published study estimated that its actual

domestic content, including assembly, was 62 percent.4

1 Chafiw M.~, “Honda Considers ttsetf American Despite Heritage” Aufonwtlw hkwq Jan. 18, 1993,

p. 33.

a Satenwnt of Ron~d R. BOItZ, vice Preside@ Product Strategy and Regulatory Affaks, Chrysler gt~,

Before the Joint Economic committee, Dec. 10,1991, chart 13; Personal communication, Dean Hariow, General Motors

CO@, June 1,1993.

a For a dm- of the worker-age advantages the transplants enjoy, see: Candace HOWS, t@hOny bfon

the Joint Economic Committee hearing on The Future Of US. Manufacturing: Auto Assemblers and Suppiiera k 10,

1991 p. 12.; and Candace Howes, “The Benefits of Youth: The Role of Japanese Frfnge Benefit Polides in the

Restructuring of the U.S. Motor Vehicle industry,” /ntwnatloM/tinttiM/onsti hbourStudhM vol. 1,1991, pp. 113-132.

4 ~an p. McAiin&n, Davtd J. Andrea, Michaei S. Flynn and Brett C. Smith, W U.S. J8/MnA@omothBBkW

lfW Tmck DefkYL Report Number UM~l 91-20 (Ann Arbor, Mi: Transportation Research institute, May 1991). Honda

disputes these figures. Also se6, Paui Magnusson, James B. Treece, and Wiiliam C, Symonds, “Honda: is itAn Amertcan

Car?” Business We/q Nov. 18,1991, pp. 105-112.
—

Chapter 4-Japanese Multinational Enterprises in the United States | 97

In a U.S. Customs Service audit of Honda cars produced in Canada in 1989-90, conducted under the terms

of the Canadian Free Trade Agreement, the use of domestic components to roll up imported components was not

allowed.5 The Customs Service concluded that domestic content was 38 to 48 percent, not the 50 percent being

claimed.6 They also found that the single largest item of local content for the Anna Ohio, engine plant as defined

for customs purposes, and counted as domestic content, consisted of depreciation on facilities and equipment

sourced from Japanese suppliers.7 This would suggest that Honda’s investments have had a relatively small

positive effect on the local manufacturing equipment supplier and tool and die industries.

Qualifying new suppliers is both time consuming and expensive,8 and economies of scale and capacity

utilization are critical to profitability in auto production. These factors have led Honda and its suppliers to source

less of their vehicles’ content from the U.S. manufacturing sector than do the Big Three. One would expect

technology transfer to the U.S. supplier base to be gradual, and this appears to have been the case, although there

is considerable anecdotal evidence that certain facilities have benefited greatly. Honda now produces more than

half the cars it sells here in this country, which gives it the incentive to continue to shift technical and design

functions to the United States as long as production volumes warrant such a shift.9 Currently, however, just over

20 percent of the company’s production is done in this country,10 indicating that its key competencies are still,

logically, in its home base. For the foreseeable future, Honda and its keiretsu suppliers11 can be expected to

conduct less research and development and source fewer components in the United States or North America than

the Big Three.

5 n~ discussion is based on a briefing provided by the U.S. Customs SeM”Ce to OTA in oCtOber 1892. ff mti-uP

had been allowed under the terms of the CfTA, the Honda cars probabfy woutd have qualified as North Arnedcan products

Afao see John Daiy, “A Coiiision Course,” A&clean’s, Juiy 1,1991, pp. 84-5.; and William C. Symonds, Paul Magnuason,

and John Pearson, “GunfigM at the Customs Corrai,” Business Wek Mar. 2, 1992, p. 54

6 ~n~ North America inc., Comments on OTA draft JUIY 2, 1983, p. g.

7 @nUS~n, Tragce, and Symonds, Op. dt., fmtnote ‘$, P. 106”

S A r~nt qudy Conducted by a U.S. consulting firm for the Japan Auto Manufacturers Asaodatlon deacrlbesthe

difficulties that an auto parts suppiierwould face in being quaiified by anymajorautomaker, U.S. or Japanese. The study

suggests that resistance on the part of the Japanese transplants to purctme parts from domestic suppiks, while

significant during the earfy 1980s, has decreased “substantiality.” Boston Consulting Group, “Context of U.S.-Japan

Automotive Issues and Competitiveness of Automobile-Parts Suppiiers” (Tokyo: 6oston Consulting Group, March 1993),

p. 19.

9 I+Mda North America inc., op. cit., footnote 6, P. 11.

10 HOMW U.S. prduction in 1992 was 475,718 (Dean Harfow, op. cit., footnote 2). Total 91*I prOduCtkn Of the

company in 1991 was 1,975,000 vehicies. (Automotive News, “Top 12 Global Vehicle Producers4 Years,” 1992 Market

Data - May 27,1992, p. 3.)

11 Honda Motor, Japan’ sthidiargWtado~er, heads averticaikeiretsu estimated at over300subsidiarfes and

affiliates. Dodweii Marketing Consultants, /ndu@dal Gmu@ngslnJapan, 1988+9 (Tokyo: Dodwelf Marketing Consultants,

1988), p. 259.
98 I Multinationals and the National Interest: Playing by Different Rules

In addition, domestic content requirements

may affect the competitiveness of U.S.-based

MNEs. Corporations with manufacturing and

sourcing operations in several countries take

advantage of shifting supply and demand and

resource availability to minimize production and

shipping costs. Although many U.S. producers in

major industries tend to have higher average

levels of domestic content than foreign-based

competitors, OTA interviews suggest that they

might still resent government-imposed restrictions that could limit their freedom to source

globally.

In response to criticism that they are not adding

significant value to the production process in the

United States, many U.S. affiliates of foreignbased MNEs contend that it is unfair to compare

a new investment with a complete industrial

operation producing in its home country. Transferring production abroad can be a gradual

process, with the value added increasing as

overseas employees gain in skills and sophistication, and establish a local supplier base.

All the major Japanese automakers and many

of their Japanese suppliers have established

styling, engineering, and design facilities in this

country, some as integral parts of manufacturing

affiliates and some as separate operations.90 Most

of the automakers claim that significant portions

of recent models of automobiles built here (e.g.,

the 1992 Nissan Stanza and the 1992 Toyota

Camry), 92 were styled, designed and/or engineered here, although basic research may have

been conducted in Japan. At Honda’s Marysville,

Ohio, plant, the frost Japanese transplant in this

country, the design and engineering not only of

cars but of robots, machine tools, and other

production equipment was reportedly being performed domestically in 1988, the sixth year of the

plant’s operation.93

The subject of domestic content—which typically includes labor costs and other related

expenses of car production-has become a legal

issue between the U.S. Government and Japanese

automakers in two contexts. The first case concerns Honda Civics manufactured in Canada and

imported to the United States duty-free under the

terms of the U.S.-Canada Free Trade Agreement.

The USCS has determined that about 90,0001989

and 1990 model year Civics do not qualify as

North American-produced vehicles, and has imposed an additional $17 million duty on Honda.94

The USCS and Honda differ over the amount of

value added in the machining of the engine block

of the cars in question; Honda claims the USCS

decision stems from political motivations. One

Honda executive stated that the Honda case ‘‘has

been aimed at hitting Japanese enterprises” in the

United States.95

The NAFTA currently requires 50 percent

North American content to qualify for preferential treatment under the agreement; that threshold

is to rise gradually to 62.5 percent by 2002.% A

customs official knowledgeable about the audit

suggested that Honda, after’ revising its producW K~ey and FloridiL op. Cit., footnote 19, p. 46-47.

91 Richard Reseigno, “Yen for the Fast Lane: Japanese Auto Makers Step on the Gas,” Burron’s, Feb. 12, 1990, p. 16.

w ~S. vuil~ ~4CwP~g Witi the World From Kentucky,” Production, December 1991, P. 61.

93 ~~R. Re~~~,$’Jap==T~p~ts: a New Model for Detroi$” ll~”ne~~ Horizons, January-February 1988, p. 53,

~ “Japanese Automakers Respond to Imeal Content Issue-Ripples Caused by Civic Case,”Asahi Shimbun, Apr. 20, 1992 (morning

edition), p. 7, from FBIS.

95 No~@ Ow “Managed Trade Gaining Favor with~,” Nikkei Weekly, Mar. 3, 1992, p. 1.

% Kei~B-a, “Nationality of Autos Big Trade Issue,” The New York ZVnes, (Id. 9, 1992, p. D2.

97 o~interview, @t. 21, 1992.
Chapter 4-Japanese Multinational Enterprises in the United States | 9 9

tion and sourcing procedures, may qualify under

the NAFTA standard.97 (See box 4-A.)

In relation to cars produced by Japanese

affiliates in the United States, another domestic

content issue has to do with the CAFE level of

some Japanese automakers’ products. The EPA

sets minimum CAFE levels for automakers’

foreign and domestically made cars. Since the

EPA sets the minimum domestic content of a U.S.

car at 75 percent, an automaker can determine

which cars to produce in the U.S. and which to

import, in order to keep its domestic CAFE level

down .

98 This can be as simple a matter as

changing the sourcing of a few high value-added

components, an issue relevant to U.S. automakers

as well. In one case, for example, Ford reportedly

switched from a domestic to a foreign supplier for

certain components of one particular low-mileage

car model in order to transfer it from its domestic

fleet to its imported fleet.99

JAPANESE INVESTMENT IN SMALL U.S.

HIGH-TECH FIRMS

Since the late 1980s, there has been widespread

speculation in Congress and the media that

Japanese firms were investing in small, innovative U.S. high-tech companies in order to obtain

technology at relatively low cost. Some analysts

have described a Japanese strategy to gain the

edge in an area where the United States still

clearly dominates: state-of-the-art technology in

R&D-intensive industries such as computers,

semiconductors, and biotechnology. The computer industry trade press, in particular, has taken

the position that the Japanese are even funding

U.S. innovation.l00 It is often argued that difficulty in obtaining start-up capital forces companies to trade their cutting-edge technology for

Japanese money or both.

Although data are inconsistent on the subject,

OTA research suggests that of all U.S. high-tech

start-ups, perhaps as few as 5 percent have

received Japanese financing. For example, in

1989, a peak year for Japanese investment in the

United States,l0l there were 1,500 high-tech

start-ups in this country. 102 Yet in that year the

most comprehensive source of data on Japanese

mergers and acquisitions in the United States

reported only 46 Japanese investments in or

acquisitions of U.S. firms in the areas of computer

equipment, telecommunications, and electric and

electric components. 103 Although not conclusive,

these figures indicate the relative scale of these

phenomena. The Japanese were not financing the

development of advanced technology in Silicon

Valley.

However, within more specific industry segments, even small numbers of acquisitions could

afford Japanese firms significant control of key

technologies. A telling example is in the photomask industry, in which there are effectively no

U.S. merchant mask makers without Japanese

98 ~ppell, op. cit., footnote 20.

w Alex Taylor, “Do You Know Where Your Car Was Made?,” Forrune, June 17, 1991, p. 52.

ICO v~ene Ww, ~ I~~@ tie H@.T~h ~~” ~n~ow~r~~, Sept. 23, 1991, p. 40. Otim represen~tive headlines in IlatiOXlld Xllilgtlzhles d

newspapers included: ‘‘American Technology at Fire-Sale Prices, ’ Forbes, Jan. 22, 1990, pp. 6(M4; “A Shopping Spree in the US: Japan

Still Has a Voracious Appetite for Technology Invented Overseas,” Business Week, June 15, 1990, pp. 86-87; and “Is the U.S. Selling Its

High-Tech Soul to Japan?” Business Week, June 26, 1989, pp. 117-118.

101 E~y ~omtom CtHCIW Japan Got Burned in the USA, ’ Fortune, June 15, 1992, p. 115; 1989 ~~tie ~t@@ of the downtuq

according to the Japan Economic Institute, JEI Reporz No. 46A Dec. 13, 1991, p. 3.

102 C. Gordon Bell, f-figh-l’’eCh VenmreS; The Guide for En~epreneurial success (New Yo&, NY: Addison-Wesley, 1991), p. 4.

103 Japan ~~Repo~e~,~erBro~ersR~~ch@ti~te, Jan. 1990, p. 7. Ano~~ widely cited &tabase reported Japarme illvtMmentS

in 399 of the 608 foreign investment deals found in U.S. high-tech industries in 1988-92. (’‘High Technology Acquisitions, ’ compiled by Linda

M. Spencer, Economic Strategy Institute, Washington DC.) OTA used the ESI database as one of its initial sources to identify Japanese

acquisitions.
. . . — - - . . . .

100 I Multinationals and the National Interest: Playing by Different Rules

affiliations. Figure 4-1 shows that, according to a

widely cited source, of 141 deals reported from

1987 to 1991 the highest percentage of Japanese

acquisitions in computer-related industries (42

percent) were in the semiconductor and semiconductor manufacturing areas.

Since 1992, equity investments by Japanese

firms have declined along with Japanese investment in the United States in general,l04 but

industry observers suggest that the formation of

nonequity strategic alliances between Japanese

and U.S. firms remains steady.l05 This could

indicate a number of things, including a thriftier

approach to technology acquisition, a stage of

equilibrium as major firms pause to evaluate their

acquisitions and how best to use them,l06 or a shift

toward technology partnerships with larger U.S.

firms, as in recently announced alliances among

Intel and Sharp, Toshiba and IBM, and Fujitsu

and AMD.l07

Another form of Japanese investment into

small high-tech fins, difficult to measure but

potentially significant, is the funding of start-ups

and young firms through local or Japanesedirected venture capital funds. Industry sources

estimate that Japanese investors have provided

roughly half of foreign investment in U.S.-based

venture capital funds. International investors may

have provided as much as 23 percent of the capital

raised by the U.S. venture capital industry in

certain years. 108 Some Venture

. funding relationships, especially within the context of funds

specializing in a particular technology area, allow

Figure 4-l-Japanese Acquisitions in the U.S.

Computer-Related Industries, 1987-1991

Computers Sales/accessories

13% 7%

Semiconductors

42%

22%0

SOURCE: “Japanese Acquisitions in the U.S. Computer and Related

Industries, 1987-1 Q 1991 ,“ Ulmer Bros. Research Institute, July 1991,

p. 1, table A.

investors access to the fro’s products and

researchers, which could amount to an inexpensive and discreet window on developing technology. Several industry sources described Japanese

corporate investments as typically aimed at obtaining access to emerging technology.

Although industry sources suggest to OTA that

Japanese companies have been a significant

source of venture capital to young firms in various

technology areas, without more authoritative data

it is impossible to evaluate this trend. Such an

approach, however, would be consistent with the

direct equity investments examined in OTA’s

Silicon Valley interviews and other research.

1~ “Jap~~e~uisitio~Keq Slowing, ’’~apanM&AReporter, UhnerBros., Ine., July/August 1992, pp. 1-3; Michael R. Sesit+ “Japanese

Are Shying Away From Investments in U.S.,” Asian Wall Street Journa(, Feb. 1, 1993, p. 26. Some analysts put the end of the Japanese

investment boom even earlier; see Susan MacKnight “Japan’s Expanding U.S, Manufacturing Presence: 1990 Update, ’’L!?IReport, No. 46A

Japan Economic Institute, Dec. 13, 1991, pp. 1-5.

105 Jur&o lvla~bw, ‘‘Company _@,’ Dataquest Perspective, May 25, 1992, p. 17.

]06 J~an fionomic Institute, JEI Report, No. 46A, P. 3.

IW “Cost Explosion Fuels Continued Rush by Chip Companies ‘Ib Find Partners,” Asian Wall Street Journal Weetiy, July 20,1992, p. 8.

10S me average -~foreiw ~e of to~ c~i~ commit~d f~m 1980 to 1991 WM sl@Uy OV~ 12 percat. venture ~onomics, fig. ‘2.(),

“Capital Commitments by Limited Partners to Institutionally-Funded Independent Private Venture Capital Funds,” 199J Yearbook (New

York NY: Venture Economics, Inc., 1991), p. 7A.
Chapter 4-Japanese Multinational Enterprises in the United States I 101

The recent decline of Japanese investments

also demonstrates another salient point about

Japanese corporate behavior: there is a strong

follow-the-leader tendency. Many of the executives interviewed by OTA believed the investment in their companies was at least partly

motivated by a perceived need by the Japanese

firm to match the investments of its Japanese

rivals.

Interviews with companiesl09 and other research suggests that the basic reason small

high-tech U.S. firms obtain Japanese (or other

foreign) funding is because the money is not

available from domestic sources. Although virtually all the industry sources interviewed agreed

that technology acquisition was a principal goal

of most of the investments by Japanese firms in

small U.S. high-tech start-ups, the relationships

tended to include more aspects than a simple cash

infusion in exchange for technology. Although

the total number of high-tech start-ups that have

received Japanese funding is relatively small, the

phenomenon should be viewed as a significant

means of technology absorption, consistent with

support of U.S. university research and other

technology-absorbing activities described in this

report.110

| Sources of Investment

Seed money and initial venture funding in the

computer industry comes primarily from venture

capital firms, or, less frequently, from larger firms

in the industry. These investors are concerned

with making a profit on their investment. Industry

interviews indicate that large Japanese companies

that invest in small U.S. high-tech firms typically

do not primarily seek a risk-adjusted financial

return on their investment, but are more interested

either in obtaining technology, marketing rights,

or access to the U.S. market. If this is the case,

then the question of whether a given high-tech

start-up can succeed with a certain product may

be irrelevant; what matters most to the (Japanese)

investor is whether it can obtain what it seeks.

Industry representatives clearly indicated to

OTA that there is a lack of incentive for U.S.

venture capital investors to develop a long-term

perspective and to provide resources beyond a

limited time scale. Indeed, many of the interviewees described a similar scenario: high-technology

firms generally run out of financial resources at a

stage when they are on the verge of making

technological and commercial breakthroughs. It

is then, when U.S. start-ups are most vulnerable,

that Japanese corporations may prove to be the

only viable source of capital--often, although not

always, making contractual demands that involve

IW OTA ~temiew~ 18 f~s in 5 techrlology areas: computers and computer equipment, semiconductors, semiconductor rnfinUfactig

@pmentt @~ced mated, and bio~~ology. ~ese five =-were cho~n as kd~ties that meet generally agreed-on characteristics

of “high technology”: a high proportion of costs goes into research and development; the technology is generally regarded as critical to an

industrialized nation’s technology base; and the technology is constantly developing.

The fw were chosen from lists of Japanese investments in U.S. high-tech fm compiled by the Department of Commerce, the Japan

Economic Institute (a private research organization funded by the Japanese Government), and the Economic Strategy Institute, a private policy

research organization, as well as from articles in general interest business, and trade periodicals. Firms were selected from the lists based on

their locatio% their principal area of business, and their size (less than 500 employees, the threshold used by the Small Business Innovation

Research (SBIR) program).

The fact that all the f- interviewed are in Californ@ is indicative of the geographic distribution of high-tech start-ups in the United States.

Commerce Department studies, as well as interviews with indus~ sources in Silicon Valley, Boston’s Route 128, and North Carolina’s

Research Triangle Park-three areas commonly cited as high-tech centers in the United States-indicate that a sign.ifhnt majority of small

start-ups that have received Japanese funding are in California, mostly in the Silicon Valley area, which extends from San Francisco to San

Jose.

110 Be@~e of ism~ ~que to tie industry, technology transfer in the biotechnology industry is quite different from other hi@-tmh ~W

and presents somewhat different policy concerns. It is discussed below.
102 I Multinationals and the National Interest: Playing by Different Rules

the transfer of technology patent rights, and often

production, to Japan.

The firms interviewed frequently complained

that U.S. venture capitalists’ horizons are too

short, and that they need more patient capital than

is available from U.S. investors. Venture capitalists, according to industry sources, typically seek

a return on their investment within 3 years. This

does not mean, of course, that the venture

capitalists are short-sighted. Having experience

with the market and the Silicon Valley environment, such investors are in fact likely to judge a

company’s prospects more accurately than its

founders. Even if a company has good technology, the business climate or other factors such as

poor management can cause it to fail. The market

is extremely competitive and moves very quickly.

Timing of financing is key to what a Japanese

investor can obtain from a business relationship.

One company executive observed that it is often

more difficult for a company to get “bridge

financing” after several rounds of venture capital

than to attract the initial seed money. The late

entrant Japanese investor may thus be able to get

significant technology/marketing rights if the

target firm is in sufficiently dire straits.

Many company officials suggested that large

U.S. firms’ reluctance to invest in small domestic

start-ups has important consequences for the

nation’s technology base, and claimed that they

would prefer to deal with U.S. firms rather than

with foreign investors. But in many cases, these

large corporations either demonstrate little interest in the development capacity of start-ups, or are

“too interested” and want to acquire them. The

large firms are therefore generally not inclined to

make equity investments, and when they do, tend

to adopt a more “adversarial’ posture than their

Japanese counterparts. This further encourages

small U.S. firms to seek Japanese investment

partners.

Representatives of several large U.S.-based

technology firms told OTA that their firms were

interested in obtaining technology from U.S.

start-ups, but that they received many more

queries from such firms than they could fired.

Clearly, this issue is a matter of point of view; the

question of whether large U.S. companies are

taking full advantage of the technology resources

of the start-up community cannot be answered

without more empirical research.

Virtually all the industry sources OTA interviewed agreed that technology acquisition was a

principal goal of most of the Japanese investments in small U.S. high-tech start-ups. In only a

few of the firms interviewed did the U.S. executives believe that the Japanese investor was

interested even partially in return on their investment. Most assumed that the firm considered the

investment the price of the technology/market

access. Other industry sources confirmed this

view.

When the U.S. firms had a unique technology,

they often appeared to have a much greater

control over the terms of Japanese investment.

Executives of several companies believed they

had successfully limited their investors’ access to

technology, control over the location of manufacturing process, or sales rights. Nevertheless, this

might change should additional investment capital be required.

Marketing rights, as opposed to simply a

presence in or access to the U.S. market, appear

to be a close second to technology acquisition as

a motive for investment by large Japanese fins.

High technology, and in particular information

technology, has become a global market; a firm

can no longer be successful if it sells only in its

own domestic market. Further, in industries such

as semiconductor equipment, both R&D and

marketing (including service) are so expensive

that a firm must be present in all significant

markets in order to compete. With such noncommodity products, manufacturing economies of

scale are small, so while a small company can
Chapter 4-Japanese Multinational Enterprises in the United States I 103

compete in terms of manufacturing, it must still

market its products.

Industry sources also noted that the status’ of

being associated with a high-tech company or

with a glamorous Silicon Valley name was often

an attraction for Japanese investors: Canon’s

$100 million investment in Steve Jobs’ Next

Computer Corp. may bean example of this. In the

same vein, several companies described examples

of equity purchased at a very generous valuation,

with little apparent financial return as of yet.

Japanese companies’ ideology of technology

acquisition resonates with the history of Japanese

industrial development since the Meiji Restoration (1868), which has included a strong strand of

government-encouraged technology absorption

from the West. Since World War II in particular,

government agencies such as MITI have structured policies to stimulate the influx of technology, such as requirements that foreign companies

investing in Japan make technology licenses

available to domestic firms.111 (See ch. 3.)

| Types of Relationships

In addition to straightforward cash for equity

exchanges between Japanese investors and U.S.

firms, relationships often include marketing agreements, joint ventures, funding for R&D, codevelopment projects, supplier relationships, and personnel exchange. These aspects of the relationship are not always clearly in the Japanese

investor’s favor; although technology transfer

from Japan to the United States is generally

minimal, Japanese investors can sometimes extend certain kinds of technical support to the U.S.

fins. More importantly, several companies reported that their Japanese investors had introduced them to Japanese customers, or provided

access to low-cost capital from Japanese banks. In

one case, a Japanese bank made capital available

to the U.S. firm at 1 1/2 percent below the U.S.

prime rate.112

Cases where the U.S. company supplies a

component to its Japanese investor appear to have

the most immediate chance for productive interaction, since any benefits to the U.S. firm’s

technology result in a direct benefit to the

investor. This does not mean that the U.S.

supplier, however, is protected against losing its

customer later if the Japanese firm gains enough

know-how to produce the components itself.

Similarly, the extent to which the connection with

a Japanese investor opens markets in Japan could

vary. In the case of one semiconductor manufacturer, for example, there seemed to be little

market-opening until the 1986 Semiconductor

Trade Agreement (STA) forced Japanese firms to

make an effort to source in the United States.

Ironically, one executive suggested, its Japanese

investor could conceivably count purchases of

chips from its own fabrication facility as U.S.

imports for purposes of fulfilling the STAquota.113

Amicable relationships do not automatically

preclude the Japanese firms from obtaining technology that they could potentially use to compete

with their U.S. partners. In the case of several

companies, the terms of the deals-often evolving through repeated requests from the U.S.

partner for money—allow the Japanese firm at

some point to use the U.S. fro’s own technology

to compete with it. One company president

admitted that this was a strategic error that could

have significant negative consequences for his

firm.

111 SeeJo~oq op. cit., footnote 11; and Marie Anchordoguy, Computers Inc.: Japan’s Challenge to IBM (Cambridge, w: HwmdE@

Asian Monographs, 1989).

112 OTA ktel-view, July 1992.

113 He sugge~t~ tit ~s ~@t tie plac.e by sb,ipp~g tie c~ps to tie Ufited Shtes and hen mimporting them, or even by conducting a

paper transfer without moving the product at all. (OTA interview, July 1992.)
104 I Multinationals and the National Interest: Playing by Different Rules

It would be inaccurate to conclude, of course,

that Japanese firms are always astute, strategic

investors. OTA interviews-including some with

representatives of the Japanese investors themselves-revealed instances of inept Japanese

investment decisions and unsuccessful attempts

at integration of U.S. affiliates, as well as of

mutual exchange of information. The benefits to

a Japanese investor in terms of technology

transfer and generation of profits depend on the

circumstances.

Predatory investment behavior is most apparent in cases where Japanese corporations invest in

U.S. firms with related technologies. In many

cases, however, a firm from a sunset industry such

as steel is looking to diversity, to give itself a

“high-tech” image, or simply to make a profitable equity investment. Or the investment might be

from a trading company whose only interest is in

marketing a finished product in Japanese or

third-country markets. In such investment relationships, the effect on the development of the

independent U.S. firm is believed to be generally

neutral at worst, at best highly beneficial.

With the exception of the biotechnology industry, OTA teams found that the Japanese sunset

industry firm accounted for the majority of

investments in U.S. start-ups from 1988-1992,

and often seemed as interested in learning about

a new technology area on a relatively basic level

as in obtaining state-of-the-art technology. As

one scholar put it, “the chances of Kubota

exploiting an area of U.S. technology area lot less

than of NEC doing it.’ ’114

In contrast, predatory investment strategies are

designed eventually to own the U.S. firm outright,

or simply to absorb the technology and/or manufacturing rights of the start-up’s product, or more

likely to be associated with investors from the

same sector with closely allied products. Such

investors can benefit through directly integrating

the technology that the U.S. firm is developing

into their own production process. Respondents

in interviews repeatedly voiced their support for

legislative measures designed to limit technology

transfer in these cases, citing European and

Japanese practices that constrain the free flow of

technology.

I Japanese Investment in Biotechnology

Because of country-specific regulatory regimes, technology transfer in the biotechnology

pharmaceutical industry is fundamentally different from other high-tech areas, and presents

somewhat different policy concerns. Since the

costs of getting a drug or medical product

approved in a particular country can be astronomical, involving extensive clinical testing and

documentation, and knowledge of the specific

national regulatory system is essential, it is

standard practice for companies to license products across borders. In the case of small start-ups,

which not only need large amounts of cash to keep

their research and approval applications going but

also generally lack sales forces abroad, the logic

of licensing products to pharmaceutical companies in other countries prior to regulatory approval is even more obvious.

For this reason, the relationships between

Japanese and other foreign investors and U.S.

biotechnology start-ups seem to follow a simpler

pattern, presenting unique challenges and threats

to the U.S. technology base. Although further

study would be valuable, there was little indication from the OTA interviews that Japanese

pharmaceutical companies behaved much differently than other foreign or U.S. fins. The unique

phenomenon, rather, is the existence of the U.S.

biotechnology start-up environment, which draws

on the availability of venture capital and the

strength of U.S. research institutions, as well as

114 I@c~cI Boms, ufive~i~ of Californi& Berkeley, personal Communication Sept. 9, 19W.
Chapter 4-Japanese Multinational Enterprises in the United States | 105

extensive government funding, primarily through

the National Institutes of Health (NIH).

Efforts to nurture biotechnology in Japan have

not had the impressive success that many other

targeting ventures have, although the Japanese

Government has declared biotechnology a ‘ ‘strategic’ industry. 115 Japanese companies are improving at biotechnology, but are still clearly

behind U.S. (and some European) companies’

technology in most aspects of the business. A

major possible explanation for this is in the

activities of NIH, which has conducted or sponsored a broad variety of research initiatives in

biotechnology. The bulk of the outside research

NIH has sponsored has been at U.S. universities.

OTA was told in nearly every interview that the

Japanese university system has not produced the

quality or quantity of biotechnology research or

researchers that the U.S. university system has.

This suggests that one reason for the scientific

success of U.S. biotechnology companies is

publicly funded research from which foreign

companies are now beginning to profit.

OTA found no instance in which a U.S.

biotechnology company received substantial technica1 assistance from either their Japanese investors or their Japanese contacts. Most of the

Japanese investors are far larger than the U.S.

firms, and when they seek a U.S. firm to assist

with clinical trials and FDA approvals, they

typically choose more established U.S. firms that

are better equipped to perform those duties.

The biotechnology industry is young, with its

oldest firms little more than a decade old. It fits

the model of high-technology industry in that it

requires advanced scientific and technological

knowledge, and it has lofty barriers to entry. The

success of a firm depends heavily on its human

capital, and there is a great deal of personnel

movement among firms. R&D costs are extremely high, with the added burden of clinical

trials and FDA approvals. The industry is made

up of many small firms working in radically new

areas of technology, all competing for funding.

They offer payoff as much as 5 to 10 years down

the road, with the strong possibility that returns on

investment might disappear at any step in the

process.

The youth of the industry also means that the

stock market, an important source of capital, turns

on small events. Not many products invented or

produced with biotechnology have been proposed

for FDA approval; the regulatory fate of the few

that have been submitted has significantly influenced the stock prices of biotech fins. Approval

of one experimental drug, for example, caused a

boom in biotechnology stocks, while another

drug’s failure to obtain approval caused a sharp

decline in the market.ll6 This volatility, in turn,

affects the ability of new firms to issue initial

public offerings.

OTA interviews gleaned little quantitative

evidence on the extent of foreign investment in

the industry, but it appears to be common. There

are several reasons for foreign, especially Japanese, interest in the industry. First, alliances with

foreign companies are standard practice in the

pharmaceutical and medical-devices business because of the difficulties of dealing with the heavy

regulation of these products in the various nations

that account for the biggest markets-the United

States, Japan, and the member states of the

European Community (EC). Even big companies

typically form partnerships with foreign companies to get their drugs through clinical trials and

regulatory processes overseas. For many small

115 Kev~w. o~~omor, 6 ‘B1~t~~o]ogy:~~te~tio~s~~y,’‘Biotechnolo~D~elop~nt:.&panding the Capacity toProduceFood,

United Nations Department of Economic and Social Development Advanced Teebnology Assessment System Issue 9, winter 1992,

p. 133.

116 OTA interview, August 1992; GiM Kolata, ‘‘Halted at the Market’s Door: How A $1 Billion Drug Failed, ” The New York Times, Feb.

12, 1993, p. Al,
. ..—

106 I Multinationals and the National Interest: Playing by Different Rules

companies, investment from a Japanese company

represents the best opportunity to expand the

market for their products to Japan or other East

Asian nations. The necessity of having a Japanese

investor to sell in Japan is especially great since

Japan’s regulatory process is particularly stringent and requires that clinical trials be done on

Japanese nationals.

The primary reason the biotechnology companies interviewed wanted Japanese investment,

however, was not only to expand their eventual

markets (most of them had only one or two

products on the market, some had none), but to

obtain funding for further research and clinical

development in the United States. Corporate

investors were deemed preferable to venture

capitalists, being more likely to be patient and

provide capital on better terms. Venture capitalists’ only hope of getting a return on investment

lies in the company succeeding financially; if the

company fails, they get nothing. The other,

strategic type of investor would seek different

types of benefits, such as learning about technology, getting marketing rights or licenses, and

establishing relationships with firms for possible

future benefits. In short, strategic investors have

many more ways of obtaining a good return on

investment than appreciation of their stake in the

company. As a consequence, they are reportedly

willing to accept a smaller equity stake for a given

investment than are venture capitalists.

It appears likely that without foreign capital,

fewer small biotech start-ups would make it to

market with an approved product. At the same

time, venture capital, although valuable, is not a

substitute for strategic investment. This implies

not that there is a failure in the venture capital

market, but that venture capital cannot provide

the amount of capital that many technologyintensive start-ups need. Strategic investors, then,

can play a vital role in nurturing companies and

technologies.

The strategic investors are clearly getting

technology. Japanese companies that have invested in small biotech firms all have been trying

to learn about biotechnology. Although there

have been few instances of Japanese firms sending their scientists to do long-term research at the

U.S. firms, Japanese investors all have been

expected to do clinical trials in Japan, which

could provide a thorough grounding in many of

the technologies. The licenses that many of these

investors are getting through or in addition to

their investments also transfer technology, since

in many instances the licenses are for process as

well as product patents.

Japanese investment in U.S. biotechnology

firms may present a greater threat to the U.S.

industry than similar investment in information

technology, since the Japanese firms have more to

learn in the biotechnology area. The question to

be answered here regards the linearity of the

development of biotechnology products; that is,

would one key technology acquisition then provide a step for a Japanese company on which to

base future product development? A successful

drug can make a small company’s fortune, but the

major international pharmaceutical companies

tend to produce products in many different

therapeutic and diagnostic areas. Typically, the

companies OTA visited did have a base technology on which a product family was produced, but

a deeper examination of the biotechnology industry might produce further insights as to how this

would position a company for future growth.

JAPANESE MNEs AND U.S. UNIVERSITY

RESEARCH

During the late 1980s, Congress and the media

gave increased attention to the transfer of U.S.

technology to foreign MNEs that might have

resulted from their relationships with U.S. universities and research institutions. As the number of

such relationships-particularly those involving

Japanese firms-grew, congressional and media
— —

Chapter 4-Japanese Multinational Enterprises in the United States I 107

attention correspondingly focused on the fear that

we were ‘‘selling our science. ‘’117 Some analysts

argued that foreign corporations had achieved

excessive access to advanced research that had

been funded by U.S. taxpayers.

In recent years inquiries by members of Congress have resulted in several studies by GAO, in

congressional hearings, and in investigations by

the NIH.118 Although reliable figures are not

available, OTA estimates that the share of all U.S.

university research funded by Japanese or other

foreign-based firms remains small. It is, nevertheless, possible that a foreign company could

strategically sponsor research or license universitydeveloped technology to obtain significant returns. If that technology was originally funded

with government support, there might be reason

for U.S. taxpayers to be concerned. Furthermore,

since the Government is a significant consumer of

health care through Medicare, Medicaid, and

military/veterans’ insurance programs, it has an

interest in how government-sponsored medical

research ultimately benefits consumers.119 Concern about the issue, then, is not unreasonable,

and the U.S. Government would do well to expect

universities to cooperate fully in keeping the

American public informed about these concerns.

120

Major research institutions maintain consistent

standards for such corporate funding to retain

academic freedom to publish, and to safeguard the

institutions’ financial interests. As standard practice, all the top-tier research institutions that OTA

interviewed retain patents and other ownership

rights to any research performed by university

investigators. Universities report that the law

regulating such relationships, the Bayh-Dole

amendment (see below), is effective and relatively easy to comply with, and that corporate

sponsors of research or firms that seek to license

university-developed technology are unlikely to

request exceptions to these standards. 121

The discussion of corporate-university relationships that follows is primarily intended to

respond to congressional concerns. The relationships, especially those involving Japanese fins,

117 M-UIiII and SUSaKI J. ToIch@ Selling Our Secun”ty: The Erosion of Amen”ca’s Assets (New York, NY: Alfred A. Knopf, 1992), p. 217.

118 Three smdi~ include: U.S. COngreSS, House Committee on Government Operations, Subcommittee on Human Resources and

intergovernmental Relations, Is Science For Sale? Conflicts offttterest vs. the Public Interest, June 13, 1989; U.S. Congress, House Committee

on Science, Space and Technology, Subcommittee on International Scientific Cooperation International Technology Transfer: Who is Minding

the Store? July 19, 1989; U.S. Congress General Accounting Off3ce, Engineen”ng Reseorch Centers: NSF Progrom Management andlndu.q

Sponsorship, GAO/RCED-88-177 (Gaithersburg, MD: 1988); U.S. Congress General Accounting Office, R&D Funding :Foreign Sponsorship

of US University Research GAO/RCED-88-89BR (Gaithersburg, MD: U.S. Congress Government Printing Office, 1988); U.S. Congress

General Accounting Office, University Research: ControllingInoppropnateAccess to Federally FundedResearch Results, GAO/RCED-92-104

(Gaithersburg, MD: 1992).

In February 1993, an amendment to NIH’s funding bill was introduced to limit advance access to U.S. government-funded research by foreign

corporations. The amendment was withdrawn, but further hearings on the subject are reportedly planned. (Congresm”onolRecord, Feb. 17, 1993,

S1701.) In the spring of 1993, the National Institutes of Health were conducting a smey of more than 100 major U.S. research institutions,

all of which receive federal funding, to examine their relationships with foreign corporations. The NIH has not yet announced when it will

release findings of its survey.

119 See U.S. Conwess, ~lce of T~hnology Asws~en~ PharmoceuticolR&D: Costs, Risks, andRewards, OTA-H-522 (Washingtor4 DC:

U.S. Government Printing Office, February 1993).

lm me primary vehicle for technology transfer remains, as it has bee~ students who take their knowledge and research skills to a private

company. While the number of foreign graduate students in U.S. science and engineering programs is significant, rising from 20 percent of

all science, engineering, and health-field graduate students in 1983 to 31 percent in 1991 (National Science Foundation, Foreign Participation

in U.S. Academ”c and Engineering: 1991 (’NSF 93-302), cited in ‘In PrinL” Science ond Government Report (Washington DC: Science and

Government Repor’L Inc., July 1, 1993, p. 8), that mode of technology transfer is not the focus of this study.

121 Susa Winy, ufivmi~ of Florida, ~ch at Natio~ ~ti~t~ of H~~-~utic~ ~n~acw~ of America TWhIIOIOgy TEUMCX

Conference, Washington DC, May 5, 1993.
. - . —- --

108 I Multinationals and the National Interest: Playing by Different Rules

are of interest as an example of how foreign firms

may tap into the U.S. technology base, and how

Japanese firms in particular have been able to take

advantage of such resources.

It is important to note that in general, reciprocity would be difficult to obtain in regard to

these issues. Observers agree that advanced

research in the sciences is far more likely to be

done within company laboratories in Japan than

in university facilities. Research conducted in

Japanese universities does not compare in quality

or scope with the work done at academic institutions in the United States; thus neither U.S. firms

nor U.S. graduate students are lining up for access

to Japanese university research laboratories.

| Extent of Corporate Funding of U.S.

Academic Research

Academic research comprises a large component of the total U.S. research effort. Academic

institutions conducted about $17.2 billion in basic

and applied research in 1991,122 increasing from

a 12-percent share of total U.S. research spending

in 1985 to a 15-percent share in 1991. During the

1980s, academic R&D expenditures rose at an

even faster pace than total U.S. spending, increasing more than 180 percent from 1980 to 1991,

while total national spending increased about 140

percent. 123 The top 100 educational institutions

accounted for about 70 percent, or nearly $12

billion. From 1980 to 1990, industry’s share of

total funding of academic R&D rose from 4 to 7

percent, or about $1.16 billion.l24

Estimates of how much money foreign corporations spend at U.S. universities vary widely.

Many analysts believe that foreign and especially

Japanese funding of U.S. universities escalated

rapidly in the late 1980s, but this was an increase

on a very low base, and remains low in comparison with total funding from domestic fins. In

1986, the National Science Foundation (NSF)

polled 1,270 Japanese enterprises, and found that

a total of 56 firms had funded a total of about $3.6

million in U.S. academic research in 1983, that 71

had funded a total of $5 million worth in 1984,

and that 98 had funded a total of $9 million worth

in 1985. In a more complete study, conducted in

1988, GAO put total foreign corporate funding of

academic R&D at $27.6 million for fiscal year

1986, or about one-third of 1 percent of the total

R&D expenditures of the 107 universities reporting foreign funds (27 reported no foreign funds).l25

This represented about 5 percent of total industry

funding of academic R&D.126

Meanwhile, foreign governments and other

nonbusiness sources spent another $46.8 million

at U.S. universities, with one-third of that total

going to an international ocean-drilling program

— — —

IE Natio~ Science F~~datioq op. cit., foo~ote 120, p. 306, table 4-2. This did not include about $5 billiom Or$3.5 billion ~ conshnt 1982

dollars, at federally funded research and development centers (FFRDCS), which conduct R&D ahnost exclusively for use by the Federal

Government. One problem in estimating these numbers is def~ a “university” or “academic institution. ” The NSF prefers a broad

defiitiou including university-affiliated research centers, experimental stations, and medical centers as well as traditional departments.

National Science Foundation Division of Science Resources Studies, The Science and Technology Resources of Japan: A Compan”son with

rhe United States, NSF 88-318 (Washington DC: 1988), p. 23.

In Ibid.

la Natio~ Scien~Fo~&tioW Division of ScienceResources Studies, Academic ScienceandEngineen’ng :RdkDExpenditures, Fiscal Year

1990, NSF 92-321, detailed statistical tables (Washington DC: 1992), table B-1, p. 19.

125 ~ese numbers tend to minimize the extent of foreign funding, however, as they ignore industrial liaison program (ILP) membership fees

and endowments and gifts for research programs, GAO did not attempt to estimate how much money university ILPs received from foreign

sources, although it stated that the amount of support was ‘‘not extensive’ (GAO, R&D Funding, op. cit., footnote 118, p. 18). Foreign sources

(not just corporations) accounted for $27.3 million in gifts and endowments for research programs in FY 1986 (Ibid., p. 21).

IU Ibid,, p. 8.

In Ibid., p. 8.
Chapter 4-Japanese Multinational Enterprises in the United States I 109

at Texas A&M University.127 MIT received $5.3

million, or 2 percent, of its research budget from

ties with foreign corporations; Japan accounted

for roughly half of that. The GAO found 13

foreign corporation-university agreements worth

$500,000 or more.128 These arrangements, which

varied in length from 3 to 20 years, provided $127

million to the universities over time. 129 Finally,

GAO found that most foreign corporate funding

was not in areas identified by the Department of

Commerce as critical technologies for future U.S.

economic growth.130

OTA’s research suggests that a conservative

estimate of Japanese corporate funding of U.S.

university research (including endowments to

research programs) would be about $50 million

per year, with total foreign corporate funding at

about $75 million. That would make the foreign

corporate contribution to university research about

two-thirds of 1 percent of the top 100 universities’

research spending, with Japanese corporations by

far the main foreign corporate funders of U.S.

university research.

| Legislative Grounding of CorporateUniversity Relationships

America’s universities have long served as the

country’s primary centers of basic research activity. U.S. universities’ role in promoting national

economic competitiveness has been largely ‘‘precompetitive"— building the country’s human capital and knowledge base, rather than producing

marketable products. The Federal Government

has thus funded research at U.S. universities

primarily as part of a national commitment to

basic science, rather than as an attempt to achieve

specific goals. With the major exception o f

defense-related research, the United States has

not conditioned its research funding of universities on the generation of concrete results or a

certain return on investment. It has generally

supported the peer review process for Federal

grants to ensure standards of scientific merit as

defined by the research community.

However, in the 1970s, amid deepening concerns about the trajectory of the U.S. economy,

Congress began to examine ways to encourage a

more active university role in promoting the

country’s well-being. One of the outcomes of this

debate, which continues vigorously, was a focus

on Federal patent policy. Congress was concerned

that U.S. patent rules had allowed foreign firms to

gain ground on domestic ones in global markets.

At the time, the Federal Government claimed title

to all wholly or partially federally funded patents

developed by universities. Since the government

did not actively promote licensing of those

patents to the private sector, and since it did not

grant exclusive licenses, Congress feared that

much commercializable research was not reaching the U.S. private sector. The result was PL

96-517, the University and Small Business Patent

Policy Act (also known as the Bayh-Dole Act).

Under the Bayh-Dole Act, the universities and

other research performers could receive title to

patents resulting from federally funded research.

Thus they could now profit from granting exclusive or nonexclusive licenses to federally funded

innovations.

For U.S. universities, a majority of whose

research funding came from the Federal Government, the act promised to be a major financial

windfall. Not only would they collect licensing

fees on their innovations, but they would also be

able to use the licensing “carrot” to convince

corporations to fund projects already partially

underwritten by the Federal Government. For

US. corporations, it promised to be an innovation

12g ibid., p. 5,

‘~y [bid., p, 36.

‘w Ibid., pp. 10-11
110 | Multinationals and the National Interest: Playing by Different Rules

windfall, giving them a clear advantage over

competitors from foreign countries, whose university research could not compare with America’s in quantity or quality.

From both these points of view, Bayh-Dole

appears to have been a qualified success thus far.

Universities are always pleased to receive corporate funding, especially as Federal research funds

decrease or fail to keep pace with rising costs.

University officials and researchers have told

OTA that they prefer on the whole to work with

domestic firms, both for reasons of patriotism and

practicality. Indeed, because of linguistic and

cultural understanding, they found U.S. firms

more convenient than foreign sponsors, and

wished U.S. corporations were more aggressive

in sponsoring research and licensing universitydeveloped technologies.

Representatives of corporations, on the other

hand, expressed more skepticism about the value

of such research. They typically felt that immediate returns on such investments are unlikely, and

that any technology coming out of a university lab

is likely to be far from commercialization. Corporate interviewees often said that’ the cost of

licensing a technology from a university was

likely to amount to only a fraction of the cost of

commercializing such research. Rather, they suggested, their biggest benefits from relationships

with universities are likely to be in recruitment

opportunities and in keeping in touch with the

advanced work conducted in university research

facilities. 131

| Types of Corporate-University

Relationships

Foreign corporate tie-ups with U.S. universities take many different forms, none of them

unique to foreign companies. The most

cant

●

●

●

●

●

signifiinclude:

sponsored research at universities,

licensing university-controlled patents,

membership in university industrial liaison

programs (ILPs),

corporate philanthropy, and

location of facilities in university-related

research parks.

This discussion will focus on the first three of

these, which have been the subject of most

congressional concern and media scrutiny.

| Sponsored Research and Technology

Licensing

Sponsored research involves the most intimate

interaction and therefore the largest amount of

potential knowledge transfer between universities

and foreign firms. This is especially true when, as

is typical, research tie-ups offer the possibility of

a technology licensing arrangement at the end of

the project. Corporations cannot dictate the specific nature of a project or direct the progress of

research; they can only opt to support a research

project that an investigator proposes. Major

research universities, such as MIT, Harvard, and

Princeton, will not negotiate conditions of sponsored research relating to ownership of intellectual property or restrictions on what results of the

research may be published, although some may

agree to give sponsoring corporations access to

results and article manuscripts a certain number

of days, typically 30, before publication.

Some university officials suggested that smaller

or less well-established universities may be

willing to accept more direction on the nature of

research, or even to perform what one university

scientist described as ‘‘product-testing,” but no

131 o~~tcwiew~officm of~vemi~ ~~lo~h~m~ offi~s, off&s of spo~or~researc~ and industrial liaison programs, as well

as marchers from mPrincetou Harvard (including Massachusetts General Hospital, a teaching hospital of the Harvard Medical School),

the Univcxsity of California at I.Ivine, and the Scripps Research Institute.
Chapter 4-Japanese Multinational Enterprises in the United States I 111

interviewee would cite specific institutions where

these compromises might take place. It is likely,

however, that the larger and more prestigious

research institutions have less incentive to accede

to corporate pressures to withhold publication or

to cater to specific corporate research purposes.

Contract research is usually limited to a precise

objective, and the firm often has the right to an

exclusive license to research results. In this

category, the firm may or may not participate in

the performance of the research, but it usually has

rights to observe the research in progress, which

may be partially based on proprietary information

provided by the company. Sponsored research

and contract research can culminate in a license,

either exclusive or nonexclusive, for a universityheld patent. If the original sponsor chooses not to

license a particular invention or technology, the

research institution may also license third parties

not originally involved.

Industry-university research centers and consortia involve firms paying an annual fee to

observe and help direct the center or consortium’s

research projects, which are generally at a precompetitive stage. They may also pay an additional fee for projects in which they are actively

involved. Patentable research results are often

licensed on a nonexclusive basis to any and all

members of the consortium. One unique facet of

industry-university consortia is that they can span

several disciplines, bringing together not only

employees from different firms but also university researchers from different departments. The

MIT Media Lab, which has been cited as receiving a large amount of support from Japanese

corporations, is perhaps the premier example of

the university-industry research consortium.132

While some European companies are active in the

Media Lab, the much larger Japanese presence

often amounts to a fifth of the Lab’s funding.133

The director of the Media Lab, noting the

sensitivity of such disclosures, has suggested that

the Lab should reduce its fundraising efforts from

Japanese corporate sources to avoid unfavorable

domestic opinion.134

| Industrial Liaison Programs

Foreign corporate membership in universitysponsored ILPs has drawn considerable media

and congressional attention in recent years, but

typically offers companies a less intimate relationship with university researchers than sponsored research projects. These programs, which

blossomed in the 1980s and are now quite

common at major research universities, generally

charge a fee (rarely more than $100,000) in

exchange for providing “facilitated access’ to

research in fields of interest to the corporate

member. In practice, facilitated access usually

means invitations to conferences and subscriptions to publications summarizing the activities of

university researchers, the possibility of reviewing papers and research results before official

publication dates, and special incentives to faculty to cooperate with ILP members.

Liaison programs take two basic forms: generalpurpose (university-wide) liaison programs and

focused liaison programs that specialize in a

particular technology area or academic field.

Liaison programs offer more limited access to

university research than research consortia or

research centers. A 1992 GAO survey of 35

important research universities found that of the

30 offering ILPs, 24 had foreign members, with

132 k 1992, tie kib performed ccmtractresearch with such Japanese corporations as NHK, Nintendo, lbshih Yanu@ NEC, Hen@ s-,

Sony, Sony Industrial Products, Hitachi, Mitsubishi Electric, Seiko EpsorL and l’bshiba in different specialized consort@ and had received

major building gifts and endowments from Asahi Broadcasting CorporatioIL Asahi Shimbun Publishing Company, Fukutake Publishing,

Hitachi, Matsushita, MCA, NEC, Nintendo, Sony, and Tbshiba.

133 MT Me~ ~b, Press relMse, 1992; stw~ B~d, The Media ~b: ~nvenfing the Future at~(_Nw York NY: Vikhg, 1987).

1~ Brad, ibid., p. 167.
112 Multinationals and the National Interest: Playing by Different Rules

499 foreign companies paticipating.135 At MIT’s

program, by far the largest of these, Japanese

firms accounted for more than a fifth of the

corporate membership.136

MIT officials suggested, however, and U.S.

corporate members of MIT’s ILP confirmed, that

while membership in a liaison program may be

more beneficial to a foreign firm than to a

domestic one, it may not afford the foreign firm

privileged access. The reason for this apparent

anomaly is that liaison programs provide entree

into networks of scientists and researchers with

which U.S. firms are already likely to be familiar.

It may well be of more benefit for a Japanese firm

to be updated on current research activities at MIT

than a domestic firm whose scientists may have

come from that university and have more opportunity to obtain information informally.

| Corporate Philanthropy

Not surprisingly, corporate gifts are the preferred form of sponsorship from the universities’

point of view, since they typically have the fewest

strings attached. If a corporation wishes to learn

about research activities at a university, philanthropy is not the most cost-effective means of

achieving its goal, compared to sponsorship of

research or even membership in an ILP. Overall,

corporations gave $2.17 billion to higher education in the academic year 1989-90, up 11.5

percent from the previous year.137 Although the

total amount of foreign corporate giving is

unclear, of the approximately $260 million listed

as “large corporate gifts” for 1990, about $46

million (18 percent) came from foreign corporations. Japanese gifts accounted for about $18

million, or about 7 percent of the total.138

The benefits corporate donors receive for their

gifts vary, ranging from “mix and mingle opportunities” with faculty (and other corporate donors) to low-cost executive training programs that

business schools tailor to the corporation’s needs,

among other modest benefits. Endowing a chair

for a researcher at a university of the rank of MIT

or Harvard typically costs about $1.5 million, for

which a corporation may receive research reports

or copies of papers published by the holder of the

chair, but rarely any closer access to university

research. Japanese firms may view philanthropy

as a gesture of goodwill that could indirectly

induce the university to view the firm in a positive

light if opportunities to expand the relationship

were to arise.

| University-Related Research Parks

The popularity of university-related research

parks has increased rapidly since 1983. As of

1992, there were 128 such parks in the United

States, 80 percent of which had been established

since 1983. In addition, a large number of new

parks were planned.139 Research parks are real

estate development projects undertaken by a

university, usually in cooperation with a private

developer. They also often include “business

incubators” for start-up companies; these startups may closely involve university faculty in their

operations. The key difference between universityrelated and private industrial parks is that companies can draw on the resources of facilities,

researchers, and libraries available at the participating universities. The university gets revenue

135 GAO, Iw, op. cit., footnote 118, p. 17.

136 ~~chu~tts Institute of Technology, “The International Relationships of MIT in a Technologically Competitive WorlG Report by the

Faculty Study Group on the International Relations of MIT” (Cambridge, MA: Massachusetts Institute of Technology, 1991), p. 5.

137 -cTrust for ~n~py, “Giving USA 1991 (TVt@@tO@ DC: -C, 1991), p. 111.

1~ Ibid,, pp. 97-99.

139 ~eficm ~sW~tion of University-Related Research Pinks, “Research Park Statistics” (lkmpe, AZ: A4URRP, 1991), p. 3.
Chapter 4-Japanese Multinational Enterprises in the United States | 113

and the possibility of performing joint research

with industry. Industry gets access to university

libraries and other resources (which often include

an office for technology transfer to research park

occupants), plus the Unquantifiable advantage of

being situated in a highly intellectual, cuttingedge environment.

Foreign firms have usually been welcome in

research parks. Although figures are not available

on the percentage of foreign corporate occupancy

at research parks, there is certainly a sizable

presence. A spokesman for the Association of

University-Related Research Parks noted that

there are:

. . . no nationalistic policies at research parks.

They probably like international companies to

locate there. If you’re the type of company doing

the activities parks allow, it doesn’t matter where

you’re from.140

Foreign investment in university-related research parks is welcomed by municipal and State

governments, because it provides them with

high-skill, high-wage, high-tech employment,

together with potential spillover effects from

research, Although companies may see various

advantages in locating close to universities, the

real benefit may lie more in image and atmosphere than in direct technology transfer.

la~sB~tcher, presiden~ ~eric~ Association of University-Related Research Parks, personal Conlmtication, Jl@ 1992.
International

Strategic u

Alliances 5

L

arge numbers of international strategic alliances (ISAs)

among multinational enterprises (NINEs) emerged during the 1980s in response to the pressures of rapid

technological change and the increased internationalizaion of capital, production, and knowledge. ISAs constitute a

significant tool for MNEs to meet the challenges of increased

competition and globalization. They enable MNEs to spread the

costs and risks of research and new product development, while

providing greater flexibility and speed for commercialization.

ISAs are introducing a range of new factors into the

relationships among nations and multinational enterprises.

Because they have increased dramatically in number and scale in

recent years, they are likely to further obscure the nationality of

MNEs. In the future, international competitiveness may be

defined less in terms of competing firms based in different

nations, and more in terms of shifting, competing coalitions of

MNEs engaged in international strategic alliances. At the same

time, ISAs are causing profound shifts in the long-term

competitiveness of U.S. industry; their full impact has yet to be

understood.

International strategic alliances have created both competition

and interdependence between rival states and multinational

fins, rendering corporate planning and U.S. policymaking more

difficult and uncertain. National economic sovereignty may

become increasingly illusive as the United States grapples with

increased dependence on key economic and technological assets

controlled by MNEs involved in ISAs. International strategic

alliances are also blurring the national identity of U.S.-based

MNEs, further weakening the link between their activities and

the competitiveness of the U.S. economy as a whole.

115
116 I Multinationals and the National Interest: Playing by Different Rules

This chapter analyzes the recent growth of

international strategic alliances. It discusses the

complex motivations, patterns, and varying impact of ISAs across U.S. manufacturing industries. The chapter also assesses the policy implications stemming from the involvement of U.S.

companies in such international alliances.

CHAPTER FINDINGS

1. The causes underlying the recent growth and

extensive development of strategic alliances

between MNEs are primarily economic and

technological. The rise of ISAs can be attributed to various factors, including increased

foreign competition in key manufacturing industries, rapidly escalating costs of R&D, and

growing technological convergence among some

industries. Nevertheless, governments play a

critical role in influencing the formation, structure, and content of ISAs.

2. Asymmetries between different foreign governments’ trade, investment, industrial, and

technology policies, particularly those that

affect market access, may impede the ability of

U.S.-based MNEs to use strategic alliances

competitively. For instance, some foreign governments will restrict market access unless

U.S.-based MNEs supply critical technologies,

manufacturing capabilities, and distribution

rights to their foreign alliance partners. At issue

for U.S. policymakers is how to address such

asymmetries in foreign governments’ policies.

Should the U.S. Government provide support

for its domestically based MNEs via industrial

technology and other policies? Should the

United States pressure multilateral institutions

to secure the harmonization of policies across

borders?

3. The impact of ISAs has distinct and perhaps

conflicting implications for U.S. firms and for

policymakers. On the one hand, international

strategic alliances are a response by MNEs to

the competitive pressures associated with the

transition to a more global economy. On the

other hand, ISAs raise tough new issues for

U.S. policymakers concerned about preserving

the competitiveness of U.S. manufacturing

industry, and its high-wage, highly skilled

employment base.

4. On the domestic front, ISAs challenge directly

the presumption that the competitiveness of

U.S.-owned MNEs is the same as U.S. competitiveness. Since ISAs involve coalitions of U.S.

and foreign MNEs, defining an American

company and devising national treatment policies becomes extraordinarily complex. At the

international level, U.S. policymakers must

anticipate the antitrust implications in industries where ISAs are likely to lead to further

global concentration. While U.S. antitrust concerns have remained largely a domestic affair,

pressure may build for the United States to

collaborate with foreign authorities and to

impose conditions on ISAs that are likely to

harm consumers.

5. These concerns arise because ISAs may present

the potential for cartelization and even collusion among alliance partners, particularly in

industries characterized by high barriers to

entry and oligopolistic competition. There is

concern that combining technology, manufacturing, marketing networks, and other assets of

competing firms into ISAs may concentrate too

much market power in the hands of too few

firms.

6. In a number of industries, ISAs have enhanced

the international competitiveness and productivity of U.S. fins, workers, and the economy

as a whole. ISAs have pressured U.S. firms to

change and to learn by requiring them to

develop, adopt, and disseminate new technologies, while encouraging them to become more

open and flexible to new managerial and

manufacturing methods. International strategic

alliances have also increased U.S. companies’

awareness of and access to new international
markets. In effect, U.S.-based MNEs are becoming better at learning from and thus mastering ISAs.

WHAT ARE INTERNATIONAL STRATEGIC

ALLlANCES?

No single definition exists for international

strategic alliances. In general, strategic alliances

involve long-term arrangements that focus on

several issues of mutual concern to different

corporations. This chapter focuses on ISAs that

involve the collaborative development and sharing of R&D, manufacturing, marketing, and

distribution.

Strategic alliances move beyond simple armslength transactions. Rather, they seek to improve

the competitive position of the partners and

reflect the long-term objectives of each corporate

partner. They usually involve substantial commitments of capital, technology, and/or other assets. 1

Alliances designed to pursue short-term market

opportunities are called ‘‘tactical, ’ and do not

necessarily reflect the broader strategies of the

firms involved. ISAs have become so important

that some firms consider them to be intrinsically

desirable; as a position statement issued by one

large corporation suggested, “the alliance itself is

a goal. ’

The institutional forms that international strategic alliances take are both numerous and

complex. They include precompetitive R&D

consortia, a variety of technological cooperation

and production agreements, and exchanges of

marketing and distribution networks.3 In fact,

Chapter 5-international Strategic Alliances I 117

international strategic alliances usually encompass several of these interrelated activities. ISAs

may involve equity sharing, or the formation of a

new company managed jointly by participating

fins, or they may be based on looser, less

institutionalized forms of cooperation.

Compared to internal development, mergers, or

acquisitions, strategic alliances enable MNEs to

reconfigure rapidly to meet new market conditions and technological challenges. As one authority notes, “the time required to build expertise or gain market share internally is likely to

exceed the time required with a coalition. ’

Additionally, ISAs offer greater flexibility because they are easier to dissolve than either

mergers or acquisitions; their sunk costs are lower

and commitments less irreversible.5

RECENT TRENDS IN INTERNATIONAL

STRATEGIC ALLlANCES

In the 1980s, internationalization brought on

by advances in telecommunications and transportation, coupled with increasingly open markets,

effectively heightened competition among multinational fins. Companies must now view their

markets from a regional and/or global, rather than

national perspective. For these reasons, among

others, corporate managers have recognized the

benefits of ISAs, and as a consequence, the

number of such alliances has increased dramatically.

This section provides an overview of the recent

trends in international strategic alliances. Based

on a number of statistical studies conducted in the

1 David C. Mowery (cd.), International Collaborative Ventures in U.S. Manufacturing (Cambridge, MA: Ballinger Press, 1988); and Lynn

K. MyteIka (ed.), Strategic Partnerships and the WoridEconomy (bndon: l%irleighDickinson University Press for Frances Pinter Ltd., 1991)

provide extensive treatment on the definitional aspects of international strategic alliances.

z Toyota White Paper presented to the Off3ce of Technology Assessment, Feb. 24, 1993.

3 Licensing agreements are not considered to be strategic alliancns for the purposes of this report.

4 Michael E. Porter and Mark B. Fuller, “Coalitions and Global Strategy,”Michael E. Porter (cd.), Competition in Global Industries

(Bostou MA: Harvard BuSi13eSS School PIESS, 1986), p. 328.

5 Claudio Ciborra makes this important point. See his chapter, ‘‘Alliances as Learning Experiments: Competition and Change in High-Tech

Industries,‘‘ in Mytelka (cd,), op. cit., footnote 1.
118 I Multinationals and the National Interest: Playing by Different Rules

Figure 5-l—Trends in International Strategic

Alliances by Regional Partnerships, 1979-1985

200 -

I

——

/ 7

/

/ECg 120-

b) U.S.-EC

Cu

~ 80

3

z 4 0

/

U.S.-Japan

o ’

1979 1980 1981 1982 1983 1984 1985

SOURCE: Adapted from Michael Hergert and Deigan Morris, “Trends

in International Collaboration Agreements,” Farok J. Contractor and

Peter lmrange (ads.), Cooperative Strategies in International Business

(Imxington, MA: Lexington Books, 1988), p. 101.

United States, Europe, and Japan, it assesses the

rate of growth in ISAs in the 1980s and 1990s, and

analyzes the patterns as well as the modes of

international collaboration by country, industry,

and motivation.6

l The Increase in ISAs

Various studies demonstrate that the number of

ISAs has increased significantly since 1980.7

Figure 5-1 indicates a steady increase in the

number of ISAs from 1979 to 1985, particularly

between U.S. and European firms. Examination

of international strategic alliances from 1980 to

1989 in three major core technologies—

biotechnology, information technology, and new

materials-confirms the sharp, upward trend in

ISA formation throughout the decade. As shown

in figure 5-2, in all three core technologies about

90 percent of the agreements were established

during the 1980s: “In new materials over 62

percent of the alliances were made since 1985; in

biotechnology and information technologies these

shares reach about 60 percent and 54.5 percent

respectively.

According to Pharmaceutical Strategic Alliances, a database directory that tracks alliances in

the pharmaceutical and biotechnology industries,

there has been a tremendous surge in strategic

alliances, especially between U.S. firms and

European corporations. During the first half of

1992,90 strategic alliances involving biotechnology were signed, up sharply from 58 in the same

period of 1991.9 According to a U.S. medical

industry publication, “there are more alliances

going on now than there have ever been. It’s the

hottest period of deal-making in biotech that has

ever been seen."10

| Distribution of International Strategic

Alliances

The critical role that strategic alliances play in

the global strategies of companies is reflected in

the distribution of ISAs over the past decade. Due

6 For empirical studies of international strategic alliances see John Hagedoom and Jos Schakenra@ ‘‘Inter-fro Partnerships and

Co-operative Strategies in Core Technologies,” C. Reeman & L. Soete (eds.), New Explorations in the Economies of Technical C’hange

(bndon: Pinterpublishers, 1990); and their more recent study, ‘‘Strategic Technology Partnering and International Corporate Strategies,’ K.

Hughes (cd.), European Competitiveness (Cambridge, MA: Cambridge University Press, (forthcoming)). Refer also to a chapter by Michael

Hergert and Deigan Morris, “Trends in International Collaborative Agreements,’ Farok J, Conhactor and Peter Lorange (eds.) Cooperative

Strategies in International Business (lxxingtoq MA: Lexington Books, 1988); P, Mariti and R. H. Smiley, “Co-operation Agreements and

the Organization of Industry,” The Journal of Industrial Ecorwnu”cs vol. 31, No. 4, 1983, pp. 437-451; KJ. Hlati International Joint

Ventures: An Econom”c Analysis of U.S. Foreign Bu.tiness Partnerships (Lexington+ MA: Lexington Books, 1985).

T Hergert et al., Ibid.

g Hagedoorn et al., ‘‘Inter-fro Partnerships and Cooperative Strategies in Core Technologies, ” op. cit., footnote 6, p. 5,

g ~s info~tion WaS atibutd to Roger Longma% editor of In Vivo, cited in S~&a Sugawti% “Biotech Firms Forming More Strategic

Links, ” The Washington Post, Oct. 19, 1992, pp. HI, H14. Pharmaceutical Strategic Alliances is published by Windhover Information Inc.

10 Ibid.
Chapter 5-international Strategic Alliances I 119

Figure 5-2—Trends in International Strategic

Alliances by Selected Industries, 1970-1989

3wr — ‘

-

7\ -–1

250

200

150

100

50

Information

technologies

New material s

I o +f I I

1970-79 81 83 85 87 89

SOURCE:John Hagedoorn and Jos .Schrakenraad, “inter-firm Partnerships and Cooperative Strategies in Core Technologies,” C. Freeman

and L. Poete (eds.), New Explorations in the Economics of T&nica/

Change (Lcmdon: Pinter Publishers, 1990), p. 5.

to differences in research methodologies, a lack of

uniform definitions, and inconsistent data collection methods, various studies reach differing

conclusions as to the predominant international

pattern of strategic alliance partnerships. Nevertheless, all studies emphasize the dominance of

the so-called Triad—Europe, Japan, and the

United States.

For example, one study published in 1988

found that the majority of strategic alliances are

formed between companies within the European

Community (EC) (31 percent) or between U.S.

and EC firms (26 percent), followed at some

distance by EC-Japan (10 percent), and U. S.-

Japan (8 percent). 11 However, a more recent study

indicates that during the same time period (1980s),

intra-U.S. cooperation consisted of the largest

share of strategic alliance partnering (25 percent),

followed closely by U.S.-EC alliances (22 percent), intra-EC (20 percent), and U.S.-Japan (14

percent) .12 Technology alliances between Europe

and Japan, intra-Japanese cooperation, and nonTriad partnering take an average share of between

5 and 10 percent.13

Most studies conclude that over 90 percent of

all agreements are made between companies from

the United States, Western Europe, and Japan.

Intrabloc partnering, e.g., intra-U.S., intraEuropean Community, intra-Japanese alliances,

has continued to increase its portion of alliance

formation since the second half of the 1980s.14

I ISA Formation by Industry and Industry/

Country

Although international strategic alliances have

been employed with increasing frequency, they

are concentrated in relatively few industries.l5 As

figure 5-3 illustrates, international strategic alliances involving U.S. firms occur in a range of

manufacturing industries-from mature industries such as automobiles, to embryonic ones such

as biotechnology, and include technologyintensive sectors in aerospace, information technology, and new materials.

A number of other trends can be deciphered

from this figure. First, in terms of absolute

numbers and percentages, international strategic

alliance formation leads by a vast margin in the

information technology field (41 percent of ISAs),

followed by biotechnology (19 percent), chemi11 H~gefi et al., op. cit., footnote 6, p. IW.

12 Hagedoom et al., “Strategic Technology Partnering and International Corporate Strategies,” op. cit., footnote 6, p. 13.

13 Ibid.

14 ~g~~m and sch~em~ in their chapter ‘bter-firm partnerships, op. cit., footnote 6, p. 9, find that in all three core technologies,

intra-U.S. collaboration takes the largest share of agreements, in particular in biotechnology, where over 35 percent of the agreements refer

to intra-u.s. alliances.

15 H~gefl et ~, op. cit., foo~ote 6, p, 105; and ~~w po~ac~ “T~~o]ogy Tm~~nds Borders Rtisbg lbugh Questions,” The NCW

York Times, Jan. 1, 1992, pp. 1, 20-21; as taken from the Maasrncht Economic Research Institute on Innovation and Technology.
120 I Multinationals and the National Interest: Playing by Different Rules

Figure 5-3-New International strategic Alliances Among U.S., European, and Japanese Firms

by Selected Industries (1980-1989)

Biotechnology Automotive

1985-89: 198 1980-84: 26 1985-89: 79

New materials Aviation/military

1980-84: 63 1985-89: 115

/ 15 I \ /’ 23 I \

1980-84: 32 1985-89: 103

0(“’”m

Information technology Chemicals

1980~4: 348 1985-89: 445 1985-89: 103 1980-84: 80

O U.S.-Europe _ U.S.-Japan ~ Europe-Japan

NOTE: The total number of new allianms in an industry within the specific period is listed after the range of years,

SOURCE: Adapted from Andrew Poliack, “Technology Transcends Borders Raising Tough Ouestions in the U.S.,” The New York Times, Jan. 1,

1992, pp. Al, A20-21; as taken from the Maastricht Economic Research institute on innovation and Technology.
Chapter 5-International Strategic Alliances | 121

cals (11 percent), new materials (11 percent),

automotive (6 percent), and military aerospace (4

percent). Second, with respect to U.S.-European

multinational corporate technology alliances, the

areas of growing collaboration are in the biotechnology, information technology, and chemical

sectors. U.S.-Japan strategic alliances have expanded rapidly in recent years in the information

technology, automotive, and new materials industries. Far fewer are the number of alliances

formed between European and Japanese multinationals. They are concentrated largely in the

information technology industries, followed at

some distance in new materials, chemicals, and

biotechnology.

TYPE OF COLLABORATION BY REGION

Table 5-1 indicates by region the most frequently cited reasons firms give for entering into

strategic alliances. As can be seen, the purposes

for international collaboration vary across international trading blocs.

Clearly an important determinant in both U.S.

and European international strategic alliances is

access to Japanese manufacturing technology,

rather than straightforward market access. In

terms of EC-U.S. international collaborative agreements, shared research and product development

are notable reasons for alliance behavior.

WHY INTERNATIONAL STRATEGIC

ALLlANCES ARE ON THE RISE

A number of overlapping economic and technological developments are shaping the environment of MNEs, encouraging and conditioning the

formation of international strategic alliances.

These developments include: technological leveling across countries; converging product markets;

slow economic growth; excess capacity; shorter

product life cycles; escalating R&D costs; and

increasingly complex product and production

process technologies.

U.S.-based MNEs dominated the international

economy of the 1950s and 1960s. Since then, their

market share in many industries has declined as

foreign MNEs have achieved technological parity. The ability of foreign MNEs to absorb,

exploit, and develop advanced technologies makes

them attractive partners in ISAs. In some industries, such as automobiles, foreign MNEs “are

either the technological equals of U.S. firms, and

therefore able to contribute managerial or technological expertise . . . or are more advanced. "l6

Demand for many products is becoming more

homogeneous throughout the global market. Firms

that can exploit this convergence may achieve

economies of scale and scope, which frequently

enhance profitability. As a consequence, securing

access to the United States as well as to foreign

markets has become crucial to MNEs’ development, production, and marketing strategies. While

in many manufacturing industries market access

is becoming increasingly open, in a number of

defense and other high-technology industies,

market access still remains restricted by U.S. and

foreign government nontariff trade barriers and

industrial policies.

A final economic factor is the combined impact

of slow growth associated with the recession in

the late 1980s and global surplus capacity in

many manufacturing industries. Key strategic

industries, such as automobiles, semiconductors,

and aerospace, face enormous pressures for consolidation and rationalization. International strategic alliances enable companies to achieve and

exploit greater product specialization with the

necessary economies of scale. In mature and

16 David C. Mowery, ‘‘Collaborative Ventures Between U.S. and Foreign Manufacturing Firms,’ Research Policy, vol. 18, No. 1, February

1989, p. 24.
—

122 I Multinationals and the National Interest: Playing by Different Rules

Table 5-l-Reasons Firms Give for Establishing international Strategic Alliances, by Regional Partnership

Development Marketing Production Number of

Region (percent) (percent) (percent) agreements

ECJapan . . . . . . . . . . . . . . . . . . . . . . . 40 26 72 50

EC-U. S. . . . . . . . . . . . . . . . . . . . . . . . . . 57 12 31 117

U. S. Japan . . . . . . . . . . . . . . . . . . . . . . 24 30 46 33

SOURCE: Adapted from Michael Hergert and Deigan Morris, ’Trends in International Collaboration Agreements,” Farok J. Contractor and Peter

Lorange (eds.), Cooperative Strategies In /nternationa/Bushss (Lexington, MA: Lexington Books, 1988), p. 108.

consolidating industries, ISAs can reduce excess

capacity, and thus enhance market discipline.17

Across a wide array of technology-intensive

manufacturing industries, product life cycles

have shortened considerably; indeed, in some

cases they barely exceed the length of time

required to secure U.S. patent protection. Shrinking product cycles have made it more difficult for

companies to just@ the high freed capital costs

required for each new product generation. In the

telecommunications sector, for example, industry

analysts report:

The pace of technical change in microelectronics and computer technology has shortened life

cycles of switching products while increasing

their costs of development. Electronic switches

for public carrier central offices can cost from

$500 million to $1 billion to develop and become

obsolete within five years of introduction.l8

Skyrocketing freed development costs, together

with reduced recoupment cycles, have increased

the pressure on firms to market on a global scale

and to achieve product development and market

access at lower costs.

Second, as product cycles shorten, many companies must increase R&D spending to remain at

the frontier of technology. Referring again to the

telecommunications industry, one industry expert

cites that in 1986 the top 10 firms spent $753

million (7.5 percent of turnover) on R&D, which

represented an increase of 9.3 percent over the

previous year.l9 With margins under pressure

from excess capacity and slow economic growth,

firms are under pressure to deploy R&D spending

more effectively, reduce capital expenditures and

operating costs, and seek additional cost savings

through economies of scale and scope. As the

president of Texas Instrument’s Japanese subsidiary acknowledged, ‘technology advances require

a huge cost, both in human resources and equipment to develop semiconductors, so it is becoming necessary to share as much as possible. ”20

While soaring R&D costs have motivated

MNEs to form international strategic alliances,

other technological factors play an equally influential role. Many broad-based manufacturing

sectors, such as the aerospace and automotive

industries, must rely on a diverse array of

emerging technologies-new materials, optoelectronics, robotics-that are outside their core

competencies. For example, microprocessors are

now a key component in automobiles, household

durables, and computers; manufacturing and designing them requires advanced manufacturing

capabilities and access to the latest developments

17 me s~epoint IXM bmnm~e witiregwd to joint ventures. See Kathryn Rudie Harrigaq A4anagingforJoint Venture Success @X-@tOU

MA: Lexington Books, 1986), p. 19.

16 G- p. Pimno, Mictiel V. Russo, and David J. Teece, ‘‘Joint Ventures and Collaborative Arrangements in the Telecommunications

Bquipment Industry,‘‘ in Mowery (cd,), op. cit., footnote 1, p. 38.

19 Da~ provid~ by Myte~ (Cd.), “crisis, Teclmologic~ Change and the Strategic ~hmce, ” op. cit., f~tnote 1, P. 19.

m me Cement was made by Sachiaki Nagae, cited by Jacob Schlesinger, ‘‘Texas Instruments and Hitachi: Enter Pact to Expand Alliance

in Chip Making,” The Wall Street Journul, Nov. 21, 1991, p. B3.
Chapter 5-International Strategic Alliances | 123

in a variety of scientific disciplines.21 To many

firms, ISAs represent a cost-effective way to

acquire these competencies.

In addition, industries such as telecommunications, computers, pharmaceuticals, and biotechnology are being transformed by the convergence

of overlapping and underlying technologies. Computer and telecommunications firms, for example,

often form strategic alliances to ensure compatibility between various network systems, such as

private branch exchanges (PBXs) and local area

networks (LANs). The merging of technologies

from these two industries has also spurred innovation in the telecommunications equipment, software, and integrated circuits industries.22

The impact of this technological revolution,

particularly at the component level, has made it

more difficult and inefficient for many companies

to track all the relevant technological fronts

themselves. Unable to develop new technologies

on their own, many NINEs seek ISAs to augment

and complement their existing technological portfolios. In essence, MNEs are harnessing ISAs to

reduce the gap between the corporations’ technological competence and the technological complexity of their environment caused by continuous and rapid technological change. ISAs enable

firms to reduce costs, risks, and uncertainty in

their environment, and enhance simultaneously

their internal technological and manufacturing

capabilities.

WHY MNEs ENTER INTO STRATEGIC

ALLlANCES

The previous section outlined the broad economic and technological developments that condition the formation of international strategic

alliances. This section analyzes specific, firmlevel factors that motivate MNEs to pursue

international strategic alliances. MNEs seek strategic

1.

2.

3.

4.

5.

6.

alliances for at least six principal reasons:

cost and risk sharing,

generation of economies of scale and scope,

asset pooling,

market access,

speed, and

competitive positioning.

I Cost and Risk Sharing

One frequently offered motivation behind ISAs

is the ability of firms to spread the costs and risks

associated with R&D activities as well as new

product development and commercialization. As

discussed earlier, technology-related factors have

exerted a broad, compelling influence on the

external environment of MNEs. In the aerospace

industry, for example, the costs of developing a

new commercial passenger aircraft are estimated

to be well over $4 billion. Such costs, in

conjunction with the risks of an uncertain market,

are difficult, if not impossible, for one corporation

to finance alone. International strategic alliances,

such as Airbus and the one recently contemplated

by McDonnell-Douglas and Taiwan Aerospace,

are notable examples. In the fall of 1991, McDonnellDouglas sought $2 billion from Taiwan Aerospace in return for a 40-percent equity stake for

the development and commercialization of the

MD-12 passenger aircraft-a key product if

McDonnell-Douglas is to survive against Boeing

and Airbus. The company chairman asserted

that “without this alliance and international

risk-sharing partners, we will be unable to grow

as a commercial aircraft company. ’ ’23

21 Mictiel De~pierre and J~n-Benoit Zimmerman develop this tUgUIIICXM in their CbptCr, “Towards a New Europeanism: French Firms

and Strategic Partnerships, ” Mytelka (cd.), op. cit., footnote 1, p. 102.

22 pimo et al., op. cit., footnote 18.

23 Citti ~ MCH W, Stevensom “Gain for McDonnell-Douglas Raises Fears of U.S. ~ss, ’ The New York Times, Nov. 20, 1991, pp. DI

and D4.
124 I Multinationals and the National Interest: Playing by Different Rules

The U.S. computer industry has been similarly

motivated to enter into strategic alliances because

of the need to reduce and spread costs and risks

associated with a company’s strategy of product

diversfication. Apple has formed strategic alliances with two Japanese MNEs. It has teamed

with Toshiba to manufacture a CD-ROM player,

and with Sharp to manufacture personal digital

assistants (PDAs). According to Apple’s CEO,

“We cannot afford to fund these projects by

ourselves. These alliances give us a chance to be

players in an important growth area. ”24 Apparently Apple is contributing software know-how

and product design in exchange for Japanese

manufacturing expertise and key components

such as flat panel displays.

I Economies of Scale and Scope

Steadily increasing minimum economies of

scale and scope often raise investment costs and

limit the number of firms that can independently

underwrite the costs of efficient-sized facilities.

Many MNEs are negotiating alliances to mobilize

additional financial resources. For example, in

July 1992, U.S.-based Advanced Micro Devices

(AMD) and Japan’s Fujitsu began collaborating

on flash memory chip development. To generate

the economies of scale necessary to price the

chips competitively, a plant costing an estimated

$700 million would be required. AMD had annual

sales of $1 billion at the time. As AMD’s chief

financial officer admitted, “ . . . it was an

enormous nut for us to swallow alone. ’25 International strategic alliances have long occurred in the

aircraft industry, where enormous costs of new

product development, combined with low volumes, require a company to sell anywhere from

350 to 400 commercial aircraft within the frost 10

years and at least 600 overall in order to achieve

profitability. Approximately 30 basic types of

aircraft have been introduced during the jet age;

about 8 have sold at least 600 units, although

several more may yet do s0.

26 To date, the

industry as a whole has lost significant amounts

of money, which has further intensified interest in

strategic alliances to share costs, control risk, and

enhance market access.

| Asset Pooling

International strategic alliances are a means of

pooling other, nonfinancial, firm-specific assets

that are not easily licensed, such as proprietary

technology, manufacturing know-how, marketing, and distribution charnels. For instance,

several alliances in the pharmaceutical and biotechnology industries have been formed in order

to pool the complimentary technologies of

the partners. In April 1992, 15 U.S. and European multinational pharmaceutical companies

announced collaboration in AIDS drug research .27

The emphasis on asset complementarily and

pooling is also evident in the telecommunications

industry. In the AT&T-Philips alliance, AT&T

provided most of the underlying technology and

technical know-how used in developing the next

generation of digital switching equipment. Philips contributed its superior production technology, European identity, and familiarity with the

tightly controlled and regulated European telecommunications markets.28

24 ~wmd W. r)~~nd, “Byting Japaq” Time, Oct. S, 1992, p. 69.

M John Burgess, “Ventures Share Cutting Edge with Japu” The Washington Post, Sept. 6, 1992, p. F1.

26 See U.S. CoW5s, ~lce of Technology Assessrnen~ Competing Econom”es: America, Europe, and the Pa@c Rim, OTA-I.TE498

(Washington DC: U.S. Government Printing Office, October 1991). Personal communication with Wolfgang Dernisc& Managing Director,

UBS Securities, July 26, 1993.

27 Peter Coy, “’llvo Cheers for Corporate CollaboratiorL” Business Week, May 3, 1993, p. 34.

28 hen J. wdik, “R&I) and International Joint VentWeS,’ Contractor et al., (eds.), op. cit., footnote 6, pp. 190-191,
Chapter 5-International Strategic Alliances | 125

| Market Access

As indicated, market access is a critical motivation for firms to establish ISAs, Access to some

markets, most notably Japan, remains restricted

by government trade and industrial policies as

well as informal barriers to entry and FDI (see

Chapter 3). Strategic partnerships with foreign

companies are central to overcoming this key

barrier to entry. Coalitions based on international

market access can “achieve access to local

know-how, local legitimacy, government blessing, and strong local market positions gained

through first-mover effects. ’ ’29

| Speed

As competition in international markets has

intensfied, product life cycles have been reduced.

If profitability is to be maintained, MNEs must

reduce the time necessary for R&D, product

development, commercialization, production, and

marketing. ISAs can offer MNEs opportunities to

accelerate all these activities. This is especially

important, for example, in the biotechnology

industry, where the recent wave of U.S. strategic

alliances with foreign companies is aimed at

shortening the time required for commercialization. Indeed, pressure on biotechnology firms to

get their products into global markets faster is one

reason why small U.S. biotechnology firms are

forming strategic alliances with both domestic

and foreign pharmaceutical giants.

| Competitive Positioning

As indicated earlier, MNEs may establish

international strategic alliances to strengthen

their current and future competitive positions.

There are three important competitive uses of

ISAs for multinational enterprises.30

First, ISAs enable companies to monitor (and

in some cases acquire) the technological developments of competitors and potential future rivals.

This strategic rationale is especially apparent in a

number of automotive industry ISAs involving

U.S. and Japanese MNEs-example, NUMMI

(General Motors and Toyota) and Ford-Mazda.

Second, ISAs can influence the evolution and

the structure of an industry by creating new entry

barriers, such as affecting the industry’s cost

structure or ensuring that competitors employ a

certain technology. In this respect, ISAs are

frequently initiated at the precompetitive R&D

stages, when enterprises can develop common

technical standards. While forming a barrier to

entry, technological standardization can also

ensure a greater degree of product line compatibility.

The role of ISAs to secure common technical

standards is critical to the computer and telecommunications industries. For example, one of the

motivating factors for the now dissolved AT&TOlivetti alliance was to sell AT&T’s UNIX

operating system in Europe. The adoption of

UNIX in 1986 by five of Europe’s major computer producers, including Philips and Siemens,

was perceived as a successful move and a

challenge to IBM’s position in Europe.31 More

recently, Sun, DEC, and Hewlett-Packard have

formed alliances to increase the likelihood that

their particular RISC-chip standard will dominate

that segment of the semiconductor market.

Third, international strategic alliances can

shape the competition in an industry by attempting to deter and/or preempt rival firms. In the

Z9 poflcx et al., op, cit., footnote 4, p. 334.

so On tie competitive uses of intermtioti strate~c alliances, see porter et al. (eds.), op. cit., footnote 4; Mgq OP. cit., foomote 17; GUY

Harnel, Yves L. Doz, and C.K. Pra.halad, “Collaborate with Your Competito~and W@” Harvard Bm”ness Review, January-February

1989, pp. 133-139. For a critique of this approach refer to Claudio Ciborra, “Alliances as Learning Experiments,” Mytelka (cd.), op. cit.,

foomote 1.

31 piWo et al., op. cit., footnote 18, p. 48.
126 I Multinationals and the National Interest: Playing by Different Rules

computer industry, ISAs are often used by an

aggressive partner to fight proxy battles against a

dominant competitor, “as in the use of Amdhal,

ICL, Bull, and Siemens as frontline troops by

Fujitsu and NEC in their assault on IBM.’ ’32 ISAs

can also serve as defensive or preemptive measures. Boeing, for instance, has formed deeper

alliances with its Japanese suppliers in part

because it hopes to prevent these firms from

developing links with its European rival, Airbus. 33

As ISAs solidify into long-term partnerships,

they may be used by allied MNEs in anticompetitive ways. New oligopolies could be formed by

MNE alliances through the very process of

sharing technology and controlling market distribution. For example, the recently proposed alliance between Boeing and members of the Airbus

consortium to develop jointly a super jumbo

aircraft could preclude meaningful competition in

this market segment. If fully realized, the alliance

could also lead to greater market discipline in

other market segments.34

HOW GOVERNMENTS SHAPE THE

FORMATION AND CONTENT OF ISAs

Previous sections have delineated the firmlevel, internal, and competitive motivating factors for MNE strategic partnering. However, the

government plays a critical role in constructing

policy environments and in influencing the market forces that inform MNEs’ decisions and

choices regarding ISA activity. In. particular,

trade, industrial, and regulatory policies help

shape the formation, structure, and content of

international strategic alliances.

| Trade and Investment Policies

Government control over market access, via

trade and investment policies, has tremendously

encouraged international strategic alliances among

multinational enterprises.

First, governmental moves to nontariff barriers

have created strong incentives for international

corporate alliances. One scholar argues that tariffs

tend to encourage foreign direct investment and

joint production arrangements as a means of

market penetration, ‘‘nontariff barriers favor the

use of collaborative ventures that incorporate

product research, development and marketing as

well as manufacture. ’35 Nontariff import and

export restrictions, such as those permeating the

automotive and semiconductor industries, have

led to increased collaboration between U.S. and

foreign firms for reciprocal market access. One

prominent analyst links the escalation in strategic

alliances in the 1980s between U.S. and Japanese

automakers to Japanese concern over future U.S.

trade barriers.36

Second, continued Japanese and, to a lesser

extent, European government restrictions on foreign direct investment— especially in high technology and defense-related industries-have encouraged firms to enter into ISAs. (As discussed

in chapter 3, U.S. restrictions on FDI primarily

apply to defense-related activities.) I.J.S.-

European and U.S.-Japanese alliance activity in

32 cibom~ ‘‘Alliances as Learning Experiments,” op. cit., footnote 5, p. 53,

33 tibu has ex~~sed interest in including Japanese companies ailied with Boeing (like Mitsubishi Havy hdustries, Fuji HmVY

Industries, and Kawasaki Heavy Industries) in a proposed consotium to develop and produce a 600-seat passenger aircraft. See Jacob M.

Schlesinger, “Airbus Industries Said to be Seeking Japanese Alliance, ” The Wall Streer Yournal, Nov. 19, 1991, p. A16; and John Holusha,

“’Ihe Global Lab: Aerospace; International Flights, Indeed,” The New York Times, Jan. 1, 1992, p. A49.

~ ,,BW@ ~d ~~ Work on SuPr Jumbo,” Financial Times, June 11, 1993, P, 3,

35 Mowev, op. cit., footnote 16* P. 24.

36 Rob@B, Reich and Eric D.- ‘ ‘Joint v~~es tith Japan Give Away 0~ Future, ’ Harvard Business Review, vol. 86, No. 2,

Mi3rch-+d 1986, p. 83.
Chapter 5-international Strategic Alliances | 127

key strategic sectors, such as aircraft and telecommunications, are obvious cases.

Finally, because government procurement practices often restrict domestic market access, they

encourage ISAs. In Europe and Japan, especially,

the prominent and continued role of government

ministries as both purchasers and regulators of

their telecommunications industries means that

U.S. firms must establish alliances with foreign

partners, who can then provide them with a

national ‘‘cloak’ in order to gain market access.

| Industrial Policies

Though intended to stimulate the international

competitiveness of national industry, European

and Japanese governments’ provisions of R&D

funding, risk capital, and state purchasing have

spurred U.S. MNE alliance activity abroad.

In Japan, for example, the government through

its various ministries-Ministry of International

Trade and Industry, Ministry of Finance, and the

Ministry of Post and Telecommunications-has

played a central role in the successful development of the country’s computer-related industries. Through measures such as the promotion of

interfirm collaboration, R&D funding, procurement, and leasing programs, Japanese computer

and semiconductor MNEs have challenged IBM

global position. 37 In Europe as well, various

governments have pursued national champion

strategies in high-technology industries to combat the growing competition and market penetration by U.S. and Japanese MNEs. However, rising

R&D costs, shorter product cycles, and economies of scale are making national champion

strategies anachronistic. Accordingly, some Triad

governments have begun to support ISA formation. For example, the EC has established a

number of strategic alliance programs in the

information technology-related industries. These

include the European Strategic Program for R&D

in Information Technologies (ESPRIT), and the

Joint European Submicron Silicon Initiative (JESSI).

The U.S. semiconductor industry, in conjunction

with the U.S. Government, has formed the

pre-competitive R&D consortia, SEMATECH.

For U.S.-based MNEs, the combination of

industrial policies (particularly those that provide

access to risk capital) with the high cost of new

product development has enhanced the appeal of

strategic alliances with European and Japanese

fins. For example, IBM and NEC both have

equity stakes in Bull, and IBM has participated in

EC-sponsored programs such as JESSI.38

| Regulatory Policies

The regulatory policies of governments have

an underlying though pronounced effect on international strategic alliance formation. Three areas

for review include antitrust policies, deregulation,

and technical standards.

With regard to antitrust issues, many analysts

argue that because U.S. antitrust laws are far

tougher than those in Europe or Japan, U.S.

MNEs are at a comparative disadvantage domestically, and are thus more likely to form strategic

alliances with foreign companies. The debate

ST For ~ exw~ent &wWsion of the role of the Japanese Government in promoting its computer industry see Ketmet.h Fhunm TargeO”ng the

Compurer (Washington, DC: The Brookings Institution% 1987); Competing Economies, op. cit., footnote 26, chapter 7, pp. 237-291; and Jonah

D. Lay and Richard J. Samuels, “Institutions and Innovation: Research Collaboration as Technology Strategy in Japam” in Mytelka (cd.),

op. cit., footnote 1. For Japanese policies towards high-technology industries in general, refer to Daniel Okimoto, Between MITIand the Market:

Japanese Industrial Policy for High Technology (Stanford, CA: Stanford University Press, 1990).

38 competing Economies, op. cit., foo~ote2?6, p. ZXZ; and Richard L. Hudso~ ‘‘BuLI Weighs Exp~ding Ties to Otier Firms, ” ‘he ‘U1l

Street Journul, May 28, 1993, p. AS.
128 I Multinationals and the National Interest: Playing by Different Rules

surrounding the impact of U.S. antitrust laws on

ISAs, however, is especially contentious.39

In 1984, in response to pressures from the U.S.

semiconductor industry, the U.S. Congress

passed the National Cooperative Research Act

(NCRA) on the basis that domestic alliances in

precompetitive research would improve U.S.

international competitiveness in high-technology

industries. The Japanese, by contrast, tend to view

R&D and commercialization as less distinct, and

thus have long permitted domestic strategic

alliances involving joint product development

and manufacturing.

Despite the NCRA’s passage, various U.S.

corporations have maintained that the threat of

U.S. antitrust action still poses a chilling effect on

domestic alliance formation. Citing the antitrust

suit filed against Microsoft, Intel, and Open

Software Foundation, many U.S. computer firm

managers say it is simpler and less risky to team

with foreign partners.40

One area where U.S. antitrust and regulatory

policies have played an indisputable role in ISA

formation is the dramatic restructuring of the U.S.

telecommunications industry during the late 1970s

and early 1980s. Deregulation of the U.S. telecommunications equipment and services markets—

the world’s largest-and the 1984 divestiture of

AT&T, arising from U.S. antitrust litigation,

stimulated numerous international strategic alliances.

Another consequence of U.S. regulatory changes

in the telecommunications industry was that

AT&T was freed to compete in new domestic

markets, such as computers, and in previously

prohibited foreign equipment and services markets.41 This regulatory change led to the proliferation of strategic alliances initiated by AT&T to

diversify and expand its product lines (AT&TOlivetti) and to gain market access, especially in

Europe (AT&T-Philips).

A third area where government regulatory

policies influence international corporate alliance

formation is in the setting and adoption of

technical standards. Standards can both open and

close domestic markets to foreign firms. On the

one hand, by adopting a different standard for its

domestic market, a government can create a

barrier to entry for foreign competitors. On the

other hand, as in the case of Europe, where

national markets are too small and fragmented,

the lack of a common standard hurts domestic

companies because they cannot develop sufficient economies of scale. Recognizing the importance of EC-wide standards for global competitiveness in high-technology industries, intra-EC

alliances have emerged, such as RACE (Research

for Advanced Communications in Europe), which

was established to define standards for integrated

broadband communication (voice, text, data, and

visual).

Another example of the importance of standard

setting for ISAs is the international race to

develop and commercialize high-definition television technology (HDTV). The U.S. Federal

Communications Commission’s 1991 decision to

adopt a digital standard shifted various member39 ~o~ M. Jorde and David J, T-e, ‘‘Innovation and Cooperation: Implications for Competition and Antitrust,’ Jour?lul of Economic

Perspectives, vol. 4, No. 3, summer 1990, pp. 75-96; Joseph Brodley, “Antitrust Law & Innovation Cooperation, ” Journal of Econom”c

Perspectives, vol. 4, No. 3, summer 1990, pp. 97-1 12; Carl Shapiro and Robert D, Willig, “On the Antitrust Treatment of Production Joint

Ventures,” Journal ofEcortomic Perspectives, vol. 4, No. 3, summer 1990, pp. 113-30; and Gene M. Grossman and Carl Shapiro, “Rewmh

Joint Ventures: An Antitrust Analysis,” Journal of Law, Econom”cs and Organization, vol. 2, fall 1986, pp. 315-337.

40 ~ew pol~ck, ‘cTwhIIoIov; Antitrust Actions on the Rise Again, ” The New York Times, Nov. 10, 1991, section 3, p. 12.

41 For e~pl~ of strategic alliances between U.S. and overseas service providers, see Martin Dicksoq ‘‘MCI Gti MOE Firepower in

Telecoms War, ” Financial Times, June 17, 1993, p. 13; Bart Ziegler, Mark IAwyn, and Paula Dwyer, “Who’s Afraid of AT&T7,” Bwiness

Week, June 14, 1993, pp. 32-33; and “Company News: AT&T in International Services Alliance, ” The New York Times, May 26, 1993,

p. D3.
Chapter -International Strategic Alliances I 129

ships in rival strategic alliances.

42 initially involved in European-supported, analog-based 95

HDTV project, both Philips and Thompson have

now joined with NBC, the Sarnoff Research

Center, and Comparison Labs, Inc. to win the U.S.

digital competition.43 Advances in digital technology provide U.S. partners with an important

competitive advantage, while France Thompson

and the Netherlands’ Philips contribute their

expertise in analog and camera development. In

May 1993, all three consortia agreed to develop a

single digital standard for HDTV.

To summarize, governments shape international strategic alliances in a number of ways.

First, differences in trade, industrial, and regulatory policies have created a market for the

exchange of strategic assets among multinational

fins. To compete internationally, U. S., European, and Japanese MNEs are using international

strategic alliances to transform and alter their

portfolios of strategic competencies and assets.

Second, governments can also alter the parameters of ISAs by influencing firms’ partnering

decisions. For example, one consequence of the

pervasive involvement by governments in various

EC collaborative programs-RACE, ESPRIT,

JESSI-has been to transform European firms

from competitors to attractive alliance partners. In

interviews with European high-technology MNEs

involved in ISAs, one analyst reports that European company executives “repeatedly stressed

that they could not hope for balanced corporate

alliances unless they were perceived as technologically and industrially attractive partners.”44

Indeed, European MNEs point to IBM’s participation in JESSI as a noteworthy demonstration of

their argument.

In general, such asymmetries between government policies, particularly in terms of market

access, can significantly influence the ability of

U.S.-based firms to initiate and control the terms

of ISAs.

HOW SUCCESSFUL ARE INTERNATIONAL

STRATEGIC ALLlANCES?

The conditions that motivate the creation of

these ISAs often contribute to their termination.

Indeed, despite the frequency with which they are

employed by MNEs, many ISAs are very shortlived, averaging perhaps only 5 or 6 years.45 All

MNEs have experienced various difficulties in

forming as well as continuing their strategic

alliances. In many cases, problems arise because

firm fail to realize and/or anticipate the many

cultural, managerial and other obstacles they are

likely to confront. Furthermore, simultaneous

competition and cooperation between companies

engaged in an international strategic alliance

requires a balancing act that some MNEs are

unable to manage. Some analysts are concerned

that ISAs pose considerable risk to U.S.-based

MNEs, because U.S. firm appear less able to

absorb new technologies and skills rather than

many of their strategic partners.%

This section examines some of the common

obstacles confronting ISAs, drawing on case

42 By 1991, he ~~ Competition ~vo]v~bee s.IJtitis: General Instrument CO~, and ~;~~ and AT&T; ~d philiPs EIcx~nics~

Thomson Consumer Electronics, NBC, and the David Sarnoff Research Cater.

AS H~~~ MIy, “me HDTV Alliance: U.S. and EuropeaiI Industrial Policy Approaches, ” Masters research paper submitted for a class

in “International Strategic Alliances, ’ the School of Foreign Service, @rgetown University, Washington DC, May 1993.

44 wawc s~~ol~, ~~~h.T~~h E~~O~~: The p~l~~ic$ of ]nter~tional Cooperation (Berkeley, CA: university Of ~OMia ReSS, 1992),

p. 314.

45 B~ce Kogu~ 1‘Joint Ventures: Theoretical and hnperid i%SpeCtiveS, “ Strategic Management Journal, vol. 9, 1988, pp. 319-332; and

‘‘A Study of the Life Cycle of Joint Ventures,’ Contractor et al., op. cit., footnote 6.

M David hi and John W. Slocum, Jr., “Global Strategy, CompetencbBuiMing andStrategic Alliances,” California ManagementReview,

Fall 1992, pp. 81-82.
130 I Multinationals and the National Interest: Playing by Different Rules

studies primarily from the experiences of U. S.-

based companies. In some of the cases, MNEs

failed either to establish the strategic alliance in

the first place, or intercorporate differences led to

the eventual termination of the alliance. In other

examples, U.S.-based MNEs successfully resolved differences with their foreign partners.

| Overeagerness

As AT&T learned, overeagerness is a mistake

when seeking foreign partners. With the break-up

of AT&T in the mid- 1980s and the lifting of

restrictions on international equipment sales,

AT&T needed to rapidly establish itself overseas.

Within a 5-year period AT&T had secured 28

international strategic alliances, primaril y with

European partners. AT&T’s strategic alliances

with Olivetti and Philips proved especially disappointing for each company. The European MNEs

were reluctant to inject capital and research effort

into the alliances as rapidly as AT&T expected.

At the same time, AT&T was overconfident,

taking for granted that its technology would sell

its products in Europe.47 AT&T did not recognize

the need to establish a European identity first.

| Underfinancing

ISAs have failed due to underfinancing of

projects. In some cases, MNEs have been reluctant to supply the necessary capital, as demonstrated by the cases of Philips and Olivetti

mentioned above. In other instances, firms may

be overextended financially and may also have

underestimated the costs entailed in achieving the

goals of the alliance. For example, both McDowellDouglas’ alliances with Europe’s Fokker for the

manufacture of the MDF 100 and with Aerospatiale/

Dassault-Breuget for the Mercure 2000 during the

late 1970s and early 1980s were terminated.

Neither plane was commercialized, in large part

because McDonnell-Douglas was unwilling to

commit the necessary funds.48

| Management Differences

Among the several managerial-related problems that can afflict the formation and longevity

of ISAs is the desire by one or both partners to

dominate the direction of the alliance as it

evolves. While successful ISAs require firms to

reach decisions jointly, the tensions inherent in

sharing authority can lead to managerial disputes,

and eventually to the termination of the alliance.

This factor is especially important in cases where

there are broad differences in size and corporate

culture.

One study of ISAs involving U.S. companies

found that ‘‘American NINEs believe that power,

not parity should govern international collaborative ventures.”49 In contrast, the study found that

European and Japanese firms often consider

partners as equals and subscribe to management

by consensus. One U.S. company involved in

highly acclaimed alliances with various Asian

partners is Coming. In its partnership with

Korea’s Samsung, Corning has not insisted on top

name billing. As one Coming executive explained, ‘ ‘There’s no need for dominance if it’s a

successful, growing enterprise. ’ ’50

Differences in management cultures, poor interfirm communication and cooperation, unclear

or competing lines of authority, and slow decisionmaking can impair ISAs.51 For example,

47 S=LAS ~,CtYomMva,ls Can Be Your Allies,” Forrune, Mar. 27, 1989, p. 76.

4S For ~cxccllatovefiewofISA in tic ~~t indus@y, se Kei~~ywmd, ~nter~~OnaJCo~zabOrariOn in CivilAeros~ce @ew Yor~

NY: St. Martin’s Press, 1986); Mowery (cd.), “Joint Ventures in the U.S. Commercial Aircraft Industry, ” op. cit., foomote 1.

49 How~v. ~r~utta~D~vi(j A. H&~ ‘Ccmpmte to CornPete GIo~y,” Ha~UrdBUsinessR#iew, Nbrch-April 1986, p. 146.

m ~, op. cit., fOOtnOte 47, P, 76.

SIs= ~g~ op. cit., footnote 17.
Chapter 5-International Strategic Alliances I 131

when Motorola tried to transfer semiconductor

technology to Texas from its joint venture plant in

Sendai, Japan, the transfer was at best a partial

success. According to a Motorola executive, ‘‘In

Texas, we just could not convince our managers

to step aside and let people named Seki or

Nishihara run their operations for a year. ”52

Another illustrative example is the failed

alliance between TRW and Japan’s Fujitsu because of the creation of a ‘‘double management

system. ‘53 This system, which required dual

managerial approval, so encumbered operational

decisionmaking that both companies terminated

the alliance in frustration.

| Alliance Goals Change

Differing goals between MNEs have caused

major conflicts regarding the future direction of

an international strategic alliance. Demand changes,

competitive pressures, or other factors may necessitate a shift in the alliance’s original objectives,

which can change the relevance of the alliance to

its members. This may create dissatisfaction and

conflict among the partners, undermining the

viability of the original arrangements. According

to one observer:

As an owner’s dependence on its venture’s

activity rises or declines, the balance of relative

bargaining power between partners shifts, especially if resources one partner contributes to the

joint venture become more or less valuable than

the resources contributed by other partners.54

A recent Japanese survey found, for example, that

one of the reasons for the slowdown in alliance

formation as well as increased rates of termination between Japanese and foreign MNEs was

that the foreign partners had gained sufficient

knowledge of the Japanese market to go it alone.55

| Erosion of Competitive Position

Pooling strategic assets is a driving motivation

of ISAs. However, such exchanges may have

unintended, detrimental consequences on a partner’s long-term competitiveness.56 Cooperation

between MNEs involved in pre-competitive R&D

alliances tends to be both simpler and more

frequent because the gains from eventual sales are

distant. However, when collaborative ventures

near the marketing stage, ‘‘the incentive to cheat

on a partner or to benefit at each other’s expense

may become strong. ‘’57 Lack of trust and fear that

the continued participation in an alliance will lead

to the erosion of an MNE’s global competitive

position is a critical reason for the short lifespan

of some ISAs.

In some cases, while the partners’ overall

strategic goals converge, their competitive positions in an industry do not. In its broad strategic

alliance with Japan’s Mitsubishi Kasei, the U. S.-

based Monsanto found that the joint venture

company had diversified into a number of product

lines that were in direct competition with those of

its U.S. parent.58 Another example where product

collisions may produce an untenable balance

between cooperation and competition is AT&T’s

52 David E. Sanger, ‘‘Costs May Be Too High for All-American Chips,’ The New York Times, Jan. 1, 1992, sec. 1, p. 48.

53 per~utt~ et al., op. cit., footnote 49, p. 150.

54 Hfigu op. cit., footnote 17! p. ‘i55 For C-pie, he Gemn p-ceutic~ ~qany, Bay~, r~nfly t~k over ~ dis~~tion C?M.IIIEk tit ‘hkc& (knlid kd~hi~

had previously provided. See Gregory H. Feldberg, “Joint Ventures in Japan Suffering Wedding Blues,’ The Japan Economic Journul, Aug.

25, 1990, pp. 1 and 7.

56 For e~ple, see David Lei and JOIUI W. SIOCWXI, Jr., “Global Strategic Alliances: Payoffs and Pitfalls,” Orgam”zationul Dyna”cs,

Winter 1991, pp. 44-62.

57 Hmgert et al., op. cit., footnote 6, p. 106.

58 Feld~~, op. cit., fOOmOte 55, p. 7.
132 I Multinationals and the National Interest: Playing by Different Rules

alliance with Philips to market AT&T’s digital

telephone switching system in Europe. Philip’s

commitment to the alliance was clearly strained

when AT&T teamed up with Italy’s Olivetti, a

major Philips competitor in the office machinery

sector.

One example of an international strategic

alliance that recognized early on the need to

develop trust and to limit opportunistic behavior

while strengthening the competitive position of

both partners is Motorola’s partnership with

Toshiba. At the center of the alliance is an

agreement that calls for Motorola to release its

microprocessor tecchnology incrementally as Toshiba

increases Motorola’s penetration in the Japanese

semiconductor market.

Thus far, this chapter has examined the trends

in and motivations for the growth in the number

and scope of ISAs. It has also delineated how

trade, investment, industrial, and regulatory policies of governments shape and condition both the

formation and the content of these MNE alliances. Nevertheless, the discussion above highlights the inherent fragility of ISAs due to the

various problems associated with underfinancing,

managerial failures, and shifting and competing

goals, among others. The final section addresses

the implications that international strategic alliances may have for U.S.-based MNEs as well as

for U.S. Government policy.

| Implications of ISAs for U.S. Firms and

Government Policy

International strategic alliances are a relatively

new and multifaceted phenomenon. The rapid

expansion of ISAs since the early 1980s, as well

as their high failure rate, makes any assessment of

their implications for U.S.-based MNEs and

policymaking difficult and tentative. To date,

studies of ISAs have concentrated on the motivational factors influencing alliance formation.

There are few detailed, comparative industry case

studies that focus on the vital question of how

ISAs affect the competitiveness of U.S. firms in

particular and the economy in general. In the final

report of this assessment, OTA will address this

question.

The following discussion raises some important issues. While there are no clear answers or

prescriptions, ISAs have different and perhaps

competing implications for U.S. firms and policymaking. On the one hand, ISAs are part of the

transformation to a global economy. For MNEs,

international strategic alliances have led to the

further integration of the world economy and to

the growing interdependence of nations. The

consequences, as one MNE manager observed,

are that ‘national borders and corporate nationality are less significant in the increasingly globalized economy. ’59

On the other hand, ISAs raise many tough

issues for U.S. policymakers intent on preserving

high-wage jobs for Americans and keeping the

nation competitive in many high-technology industries. This tension between the interests and

needs of MNEs and national governments is

inevitable, but ought not to be irreconcilable.

In some cases ISAs enable formerly U.S.

domestic companies to become multinational

enterprises. Particularly for small U.S. biotechnology and computer start-up companies, alliances with foreign MNEs can provide access to

international financing, manufacturing technology, and distribution networks.

International strategic alliances permit MNEs

to unbundle their portfolios of various assets and

to transfer them to partners. Hence, in deciding

what their core competencies are, U.S. MNEs are

becoming less vertically integrated. They are

allowing portions of their R&D, manufacturing,

marketing, and other capabilities to be managed

outside the firm through foreign alliances.

59 ~yo~ White Paper, op. cit., footnote 2, p. 4
Chapter 5-international Strategic Alliances I 133

Alliances constitute a new MNE tool for

mobilizing in response to high product development costs, reduced time between product generations, and the technological convergence occurring in many industries. As a result, ISAs create

shifting, competing coalitions of MNEs, as opposed to competing firms. They allow MNEs to

join together in specific products or markets,

while retaining autonomy in others. One analyst

observes that dominant U.S. MNEs, such as

AT&T and IBM, ‘‘engage in a network of

partnerships, playing a central role that allows

them to enter/exit alliances according to their

comparative advantages at the moment. "60 Indeed, it is not unusual for MNEs to be partners in

one consortia or alliance and competitors in

others. IBM and Siemens, for example, have

formed their own alliance and cooperate in JESSI

in semiconductor development, but compete in

mainframe sales. For survival, most MNEs can no

longer afford not to be involved in international

strategic alliances. Thus, ISAs may encourage, in

some cases even necessitate, a follow-the-leader

strategy.

The complex network of allied firms and

competing coalitions of MNEs, engendered by

ISAs, is restructuring the world economy. International strategic alliances are leading to further

market concentration in high-technology industries, and, in some cases, to mergers and acquisitions, raising the potential of global oligopolistic

markets and the creation of international cartels.

Referring to the ability of MNEs involved in

strategic alliances to set technical standards and

thereby reshape existing industries globally, one

observer suggests, ‘‘In the future, new frontiers

between industries will thus be the result of rules

of the game defined within the framework of

alliances between dominant firms of technologybased oligopolies.’ ’61

Finally, there is a concern that ISAs may prove

to be a one-way street leading to the transfer of

key U.S. technologies to overseas competitors.

Some analysts argue that multinational joint

ventures are disproportionately transferring technology and other key assets from the United

States to Japan.62 Although there has been little

concrete evidence to support or disprove this

view, the question nevertheless remains: Can

U.S. firms learn to consistently create and manage

international alliances in ways that guard against

transferring key assets to ambitious partners,

while enhancing their competitive advantage?

In reviewing U.S.-Japanese strategic alliances,

various studies conclude that Japanese MNEs use

strategic alliances more effectively because they

make greater efforts to learn from their U.S.

partners. 63 In part, this willingness and ability to

absorb technology and other resources from

alliances may stem from the greater experience

Japanese firms have accumulated via their alliances with other companies in their own country.

Indeed, some analysts believe that ‘collaborative

research has become the defining feature of

Japanese research practice and the sine qua non

for competitiveness in many technologyintensive sectors.64

By contrast, some U.S. firms take a short-term

perspective as a way of avoiding investments and

regaining competitiveness with minimum effort.

One study found that U.S. companies involved in

ISAs with Japanese partners were more interested

a Cibtm& ( ‘Alliances as Learning Expcrirnents, ” op. cit., footnote 5, p. 53.

61 Charles-Albert Michalet, ‘ ‘Strategic Partnerships and the Changing Internatiomlization Process, ” Mytelka (cd.), op. cit., footnote 1,

p. 47.

62 Reich et al, op. cit., footnote 36, p. 79.

63 Refer to, for exmple, hv et al., op. cit., footnote 37; Hamel et al., op. cit., footnote 30, pp. 133-139; hi and SlocW Op. cit., foomote

46.

M L3vy et al., op. cit., footnote 37, p, 120.
134 I Multinationals and the National Interest: Playing by Different Rules

in reducing the costs and risks of entering new

product lines or markets than in acquiring new

skills .65

While the view that international strategic

alliances are weakening U.S. companies and

thereby eroding national economic competitiveness has garnered much media attention, the

reality may be different. There is evidence to

suggest that more U.S. MNEs are effectively

mastering ISAs, through the internalization and

competitive deployment of assets transferred by

foreign companies. An illustrative example of the

benefits to be gained from a two-way street

approach is the General Motors-Toyota NUMMI

automotive alliance in the United States.

This collaborative venture between two leading industry rivals gave General Motors the

opportunity to learn frost-hand about the Toyota

Production System—a key manufacturing technology that is among Toyota’s foremost competitive assets. In exchange, Toyota, via NUMMI,

had the opportunity to learn whether its manufacturing system, using unionized American workers

and U.S. auto parts suppliers, could be transplanted successfully to the United States. This

ISA is an undisputed success. The acclaim GM

has received with its new Saturn series is a result,

in part, of the company’s experience with Toyota’s labor, supplier, and just-in-time production

practices. The confidence Toyota gained through

NUMMI was a deciding factor in encouraging

greater localization and the establishment of a

manufacturing plant in Kentucky.

65 ~el et al., op. cit., footnote 30, p. 134.
Multinational

Enterprises

and Global

Capital

Markets

T

his chapter highlights important developments in the

financial environment of contemporary MNEs. Two

interrelated themes run throughout. The first concerns

global integration, which is reshaping multinational

finance and thereby complicating the task of national economic

management. Domestic market openness, the development of

offshore money markets, international capital movements associated with large macroeconomic imbalances, exchange rate

volatility, technological change, and financial innovation are all

working to erode the long-standing structures of national finance.

Such policy instruments as capital controls, constraints on the

establishment of nationwide banking networks, and limitations

on ownership linkages between financial and industrial firms

have thus come under enormous pressure.

The activities of MNEs both contribute to this pressure and

represent adaptations to the resulting structural changes. Policymakers seeking either to secure the economic benefits

associated with MNEs or to address their social and political

consequences must therefore take into account the existence of

increasingly global capital markets. In such an environment, the

effects of various policies directed at the performance of MNEs

are now more difficult to anticipate, and the possibility of

unintended consequences is greater.

The inherent tension between the multinational logic of firms

and the national logic of governments is nothing new. As the

second theme of this chapter brings out, however, the tension

may not have uniform effects across all industrial nations. The

pace and extent of structural change differ at the national level,

and enduring asymmetries can skew both business competitive-

.———

6

135
136 I Multinationals and the National Interest: Playing by Different Rules

ness and the social impact of global financial

integration. National differences in the degree of

financial openness and transparency remain. They

can stem from subtle regulatory barriers or

disparities in tax and accounting systems; they

can also reflect the extent to which relatively

concentrated national financial networks influence the allocation of capital. Thus, the chapter

emphasizes the transitional condition of international capital markets and the need for further

comparative research along both national and

sectoral lines.

Following a summary of chapter findings, the

supporting analysis examines the changing financial structures confronting MNEs. The international rules of the immediate post-war system

were clearly aimed at encouraging the free flow of

goods and services, and therefore the free flow of

short-term trade finance. (Box 6-A provides

relevant historical background.) They were not,

however, intended to encourage the unrestrained

flow of all forms of capital. Countries remained

free to control both speculative short-term flows

and foreign direct investment (FDI). In order to

preserve that right, they explicitly built safeguards into the rules of the Bretton Woods

system.

Over time, and especially as a result of U.S.

pressure, a movement to promote a new norm of

international capital mobility gathered steam. The

financial policies of the major industrial countries

at the broadest level eventually converged around

that norm, a convergence linked throughout the

post-war period with the policy underpinnings of

expanded direct investment flows and the associated principle of reciprocal national treatment.

It is now evident that, since the end of World

War II, a set of explicit and implicit rules

impeding the free flow of capital across borders

has been replaced by a still-evolving set of rules

permitting and even encouraging that flow.

Many reasons for the shift toward increasingly

global financial markets have been suggested.

The most prominent include:

1.

2.

3.

4.

the pressures for regulatory convergence

generated by the expanding activities of

MNEs themselves and of financial intermediaries (banks, securities companies, insurance companies, etc.);

perceived needs to supplement national

savings pools with external resources, especially in light of persistent trade and fiscal

imbalances;

imperatives to accommodate technological

change; and

shifts in political preferences at the national

level.

These changes have opened national financial

markets to one another and created a partly

overlapping set of international financial markets.

Rapidly expanding volumes of capital now flow

through those markets, as figure 6-1 indicates.

The nature and extent of these capital flows are

altering the framework within which multinationals make their strategic investment decisions.

Financing issues must be addressed in a context

that presumes exchange rate volatility and international capital mobility. This dynamic financial

context adds a further dimension of complexity,

as well as new, if risky, opportunities.

Similarly, the tension between the logic of

global financial integration and the continued

responsibility of national governments for national economic performance is becoming increasingly apparent. The contrasting expectations

placed on MNEs exemplify that tension. On the

one hand, their performance is increasingly measured relative to other multinationals; they must

therefore take full advantage of any new opportunities presented by a changing international

environment. On the other hand, governments

look to them to provide stable, high value-added

jobs, technological innovation, and other benefits. Moreover, nations compete with one another

to attract these firms and benefits.

Against the backdrop of burgeoning international capital movements, governments have

been trying to coordinate rules in order to harness
Chapter 6–Multinational Enterprises and Global Capital Markets I 137

Box 6-A–international Capital Mobility in Retrospect

The new regime of international capital mobility represents a distinct change in the normative order developed

in the aftermath of World War II.1 During the discussions leading up to the l944 Bretton Woods Conference, one

of the sticking points between the principal negotiators, the United States and Great Britain, involved the issue of

official controls on short-term capital movements in a pegged exchange rate system. Although the chief British

spokesman, John Maynard Keynes, had moved away from his own 1933 view that finance was not one of those

“things which should by their nature be international,” he continued to believe strongly in the right of the individual

state to impose capital controls as and when it alone perceived the need to arise.2 The U.S. position, articulated

most forcefully by Harry Dexter White, approached the matter differently. Although willing to concede that

“disequilibrating” capital flows were both conceivable and undesirable, White envisaged a monetary order that

would actively discourage all types of financial restrictions that “hamper trade and the international flow of

productive capital.”3 (The Word “productive” here was carefully chosen; it was generally understood to distinguish

such flows from “speculative” flows.)

The U.S. position obviously reflected the expectation that as the major creditor of the post-war order, the

United States stood to benefit from as liberal an environment for international investment as it was possible to

create. By the same token, however, the Americans were also intent on ensuring that access to the financial

resources of the new international monetary institution they wanted to establish would be limited. In the face of

undesired capital outflows, the Americans preferred that the country experiencing the problem adjust its exchange

rate and/or the domestic policies responsible. They therefore contemplated a central regulatory role for the future

International Monetary Fund (IMF).

In 1944, the final Bretton Weds compromise affirmed the priority of adjustment in the event of sustained

capital outflows but Ieft the option of controls to the discretion of individual states, provided only that such controls

were not intended to restrict trade.4 In the subsequent experience of the IMF, the difficulty of making dear

1 This box draws on John B. Goodman and iads W. Pauiy, ‘The New PotMcs of international Capitaf Mobility,”

lnfernatbnalBuskssand Tmdef.awfaper$ No. 29, University of Toronto Facuityof Law, 1890; forfurthsrbackground,

see Eric Heiieiner, 77w Emergence of Global Fhanoe: States and the Gbba/katkm of I%mcial Mmkets (Ithaoa, NY:

Corneil University Press, forthcoming).

2 J.M. Keynes, “Nationai Seif-Sufficiency,” Yak I?evkw, vd. 21, No. 4, 1988, qUOt9d b ChSti M*Wr,

/ntemationa/ Cap&dhfownenta(Cam brfdge, Engfand: CamMdge University Press, 1987), p. 86. For his iaterview, see

the retevant section of his 1942“Proposafs for an intematfonai Cfeadng Union;’ rsprodwecf in J. Keith Horseffeid, cd.,

7he Internatlonalhfonetary f-und, 1945-7965, voi. 3 (Washington, DC: internatbnai Monetary Fund, 1969), p. 13.

3 Ke~s, i~dm, fwtnote 2, p. 86. The view that aii capitaf contrdsshoufd ~ d~ra@~t~ ~even more

prominent In the U.S. position, a development students of the Subject have attributed totheresurgent inffusnce of the New

York financial oommunity after the war ended. See Maroeiio de Cecco, “ti~ins of the postwar par~~:’

Cambdc@e Journal of Economics, WA 3,1979, pp. 49-61. As noted bslow, however, that infiuence evidently was not

strong enough durtng the 1960s to prevent the U.S. Government from experimenting with capitai oontrdswhen the nesd

arose.

4 ~ Article vi, ~ctions 1 and 3 of the Afi~~ of A~ of the intematbnat Monetary Fund. For his par$

Keynes interpreted this compromise as foiiows: “Not merely as a featurs of the transition, but as a permanent

arrangement the pfan aocordsto every memberGovernment theexpiicit dghttocontroi ait capitai movements. What used

to be heresy is now endorsed as orthodox . . . ftfdbws that our right to control the domestk capitaf market is scoured on

finnerfoundations than ever before, and fsformafiy aocepted asa propsr part of agreed internatbnai arrangements,” as

quoted in Joseph Goid, internatbnal Capital Movements lhferthe Lawofthe Internatbnal Monetary Fund, Pamphiet

Series, No. 21 (Washington, DC: International Monetary Fund), p. 11.

(cQntbWd on tnurtpqe)
136 I Multinationals and the National Interest: Playing by Different Rules

Box 6-A-lnternational Capital Mobility in Retrospect-Continued

distinctions between illegitimate exchange restrictions and legitimate capital controls soon became apparent. 5

Among the leading industrial states, however, tensions related to such difficulties began to ebb after the restoration

of currency convertibility in 1958.

The new prominence of the capital mobility objective received explicit expression in 1961 in the founding

documents of the industrial countries’ Organization for Economic Cooperation and Development (OECD). In

particular, on December 12, 1981, the Council of the OECD adopted the Code of Liberalization of Capital

Movements, in which the member states agreed to “progressively abolish between one another” restrictions on

movements of capital ’to the extent necessary for effective economic cooperation.”6 Although the Code

represented the most explicit international statement of intent regarding the discouragement of capital controls

since Bretton Woods, it left significant room for member states to make exceptions for certain types of capital

transfers and to take any actions considered necessary for the “maintenance of public order or.. . the protection

of essential security interests.”7 In the event of severe balance of payments problems, the Code permitted a

member state to derogate temporarily from its liberalization obligations.a

For the signatory states, in short, the OECD Code extended and clarified the fundamental normative

consensus of Bretton Woods. But it did not change the essential rules governing international finance. Freer capital

movements across borders were to be encouraged in the context of a liberal international economy. But states

retained the right to impede that movement whenever conditions warranted. During the decade following the

formation of the OECD, the importance states attached to that right would become evident in their actions.

Despite the OECD Code, in the wake of persistent current account imbalances experienced throughout the

1980s and early 1970s, virtually all leading industrial states resorted to various types of controls on short-twin

capital movements.9 Even the United States embarked on a series of experiments designed to control

disequilibrating outflows and defend the pegged exchange rate system designed at Bretton Woods.to Similar

5 Tot~o~ex~@e, note that ieadeand iagsincurrent payments caneffeotivelycreate %@talftows’’that may

or may not be equilibrating for a country’s overall external balanoe.

6 organ~t~n for Economic Cooperation and Development, CodS Of L&%MzXk)rl Of @X”ta/hfOVWW7f$ wti:

OECD, October 1988, Artkie 1. Aiso see OECD, Introducflon to the OECD Codes of f-berakatbn (Pads: OECD, 1987).

Furthermore, the signatories agreed to “endeavor to extend the measures of liberalization to all members of the

International Monetary Fund.”

7 organ&t@n for Economic CooPeratbn and i)evelopment &XleOff.lbl’d&?f10/? Of C@~a/MOVW7W& ~w.,

m 3.

8 l~d,, ~7,

9 ~cur~t ~nt of a natbn’s balance of payments records such items as -ipts for exp@ and

expenditures on imports. An excess of the former over the tatter translates into a current amount surplus; an excess of

the latter over the former creats@ a current acoount dsfkit. An enduring defidt often implies that the exohange rate is

overvalued. if the holders of finandai assets expeot a devaluation, their attempts to exchange those assets for assets

denominated inaourrencyexpectedto be revalued upward can oompoundthe pressure on the exohange rate. in certain

oases, such capital fiows may force unneoessa ryorexoessiveexohange rate ohangss. They may push the mteawayfrom

its otheti~ “naturai” equilibrium, in theory, floating exchange mtes might be expeoted to ameliomte this problem. In

practice, unrestricted capital flows, Including purely speculative fiows, oan iead to an exchange mte that oontinuaily

“overshoots” or “undershoots” the equiiibdum ievel that would bring the current account into batance.

10 Un@r the t~ms of thg B~tton WAgr~~t, signatory dates agrmd to dedare a “par value” for their

ourrendes in terms of gold. The U.S. dollar, which turned out to be the key prke in the system, was set at 1/35 of an ounce

of gold. The par value was to be defended when it came under pressure, but aoope was retained for changing it in

exoeptbnal drcumstanoes. Exohange mtes were therefore neither fixed nor fixating, but “pegged.” On the U.S. resort to

oontrois, see John Conybeare, U.S. FbrelQn Economic Pokyancfthe Intematlonal Ca@a/Mad@s: 7he Case of Capital

Export controls, 1983-74 (New Yo~ NY: Garland, 1988).
Chapter 6-Multinational Enterprises and Global Capital Markets! 139

the efficiencies promised by freer flows of capital may still benefit from regulatory, accounting, and

and to stabilize the markets through which those fiscal asymmetries and from privileged relationflows take place. To some extent, this involves ships with national financial institutions. Altrying to come to grips with the broader implica- though the trend toward globe-spanning markets

tions of differences that remain in the underlying has been underway for some time, the legacy of

structures of major markets. traditional financial structures persists to varying

Recent research suggests that some MNEs, degrees. U.S. MNEs, for example, must contend

particularly those based in Japan and Germany, with a system that insists on complete transpar-
140 I Multinationals and the National Interest: Playing by Different Rules

Figure 6-l-Capital Account Balances of the U.S.,

Germany, and Japan in Selected Periods

80

6C”

40-

$

~

20-

50

m

g -20

a

-40-

-60

-80-

69.1— — 1

1.6 7.6 4.8

—

-2.4

n Us .

= Germany

~ Japan -55.3

1970-72 197981 1989-91

NOTES: These aggregate statistics include short as well as long-term

capital. A negative sign indicates a capital outflow. Data arein nominal

dollars.

SOURCE: International Monetary Fund (IMF), /riternationa/ t%anda/

Statistics Yearbook, 7992 (Washington, DC: International Monetary

Fund, 1992).

ency, consistent earnings, and an arms-length

relationship between management and ownersa system conventionally depicted as consumeroriented. German and Japanese MNEs, conversely, still ought to benefit from less transparent, producer-oriented systems that either provide

more stable, longer term, and more patient

sources of capital or that endow corporate managers with longer investment planning horizons.

The interplay between forces promoting greater

financial openness and residual market asymmetries is reshaping the environment within which

multinational managers make their decisions on

future investments. In terms of both scale and

complexity, financing issues have assumed greater

prominence in corporate strategic planning. To

the extent that managers are adapting their firms

to this new financial environment, their decisions

complicate the task of crafting effective new rules

to govern the international economy. The evolution of MNE strategies also raises new challenges

for governments attempting to preserve traditional social values. Nations thus find themselves

in a narrow corner. On the one hand, they seek the

jobs, investment, new technology, and skills that

financially adaptable MNEs can provide. on the

other hand, they must craft rules that strike anew

balance between competitive efficiency, fairness,

and enduring social priorities in a political

framework still fundamentally centered on the

nation.

CHAPTER FINDINGS

1. The major capital markets within which

MNEs make their financing decisions developed in different national policy contexts.

Financial regulatory and supervisory policies

still have the most direct influence on underlying market structures. But a much broader

range of policies influence those structures, as

well as the amount, cost, and availability of

the capital channeled through them. These

include monetary and exchange rate policies,

overall fiscal policies, corporate tax rules and

depreciation schedules, antitrust policies, and

accounting standards. Such policies effectively constitute the rules of the financial

game within national capital markets.

2. The structure, depth, and operations of national capital markets can provide important

advantages to MNEs. In the early post-war

period, American capital markets provided

U.S. firms with high volumes of relatively

low-cost capital. For some companies, this

helped fuel expansion overseas and, eventually, development into MNEs. Today, the

much different financial market arrangements

of other countries may be well-adapted to

provide capital advantages to their own firms.

3. From the end of World War II until the 1970s,

the structures of national capital markets, and

the rules defining them, differed markedly

across advanced industrial countries. The

U.S. market, for example, was geographically

decentralized, distinguished clearly between

commercial banks and securities companies,

and discouraged banks from owning shares in

nonfinancial corporations. The Japanese sys-
Chapter 6–Multinational Enterprises and Global Capital Markets I 141

tern was more centralized and state-directed,

albeit with an American-inspired separation

of commercial banks and investment banks.

In the German system, principal banks were

distinguished by their universal character and

their ability to own nonfinancial fins.

4. Certain factors enabled structural differences

between the most important national capital

markets to be maintained in the early post-war

years. Implicit or explicit access rules, for

example, limited the participation of foreign

banks and securities companies in domestic

markets. Capital flows between those markets

were, in retrospect, relatively manageable.

Indeed, in view of the priority assigned to

stable exchange rates, all governments considered control and influence of capital flows

not only acceptable but necessary at various

times. MNEs could accommodate themselves

to different capital control regimes, although

with attendendant losses in efficiency.

5. Since the early 1970s, structural differences

across national capital markets have eroded,

although they have not disappeared. Capital

controls are being dismantled across the

advanced industrial world and beyond. The

forces behind this development include pressures associated with variable exchange rates,

changing perceptions of the appropriate balance between risk-taking and market stability,

and heightened competition between governments for the jobs, prestige, and other benefits

expected to flow from a more developed

financial services industry. Thus, the financial

planning environment for NINEs has changed.

6. The expanding activities of MNEs themselves

significantly compromised the capacity of

governments to maintain capital controls.

Leads and lags in invoicing and payments,

transfer pricing practices, access to funding

sources in a range of markets, and the ability

to shift some operations to different regulatory jurisdictions-all helped undercut the

efficacy of controls.

7. During the 1980s, national markets for long

and short-term capital became more deeply

integrated as an overlapping set of international markets grew spectacularly. The general deregulatory logic of this movement

implied a trend toward convergence in both

financial market structures and the capital

costs facing MNEs, but the pace and ultimate

extent of such convergence remained problematic and contentious.

8. Despite the logic of convergence, differences

persist in the structures through which capital

is raised and allocated in the major industrial

countries. At the very least, the legacy of past

differences endures. In the 1990s, individual

investors and borrowers still view the U.S.

system of capital investment as comparatively

decentralized, fluid, short-term-oriented, and

efficient. By contrast, Japan and Germany still

appear more centralized, oriented toward

longer time horizons for investors, characterized by closer links between nonfinancial

firms and financial intermediaries, and adapted

to provide potentially higher social returns.

9. Global financial trends since the 1970s have

had mixed consequences for MNEs. On the

one hand, the opening of markets and the

development of new techniques has greatly

expanded their financing options. On the

other hand, financial uncertainties have increased partly because of fluctuating exchange rates and shifting interest rate differentials (figures 6-2, 6-3, and 6-4) and partly

because the overall financial environment is

more open and complex. In effect, a relatively

clear set of nationally based rules of the

financial game has not yet been replaced by an

equally clear set of new multilateral rules.

10. For an increasing number of fins, multinationalization represents a strategic response

to the rapidly changing financial environment. Diversified operations in a number of

jurisdictions allow firms to take advantage of

remaining regulatory, tax, and other differences and to hedge some of the risks associ-
142 I Multinationals and the National Interest: Playing by Different Rules

Figure 6-2-Deutsche Mark–U.S. Dollar Monthly Average Exchange Rates, 1970-1988

3.5-

3 -

a

~ 2.5-

ti

5 2-

b /

; 1.5-

n

1

0.5

i

0! I I I 1 T 1 T I T I 1 T 1 1 1 1 I 1

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

SOURCE: IMF data as dted in Paul %lckar and Toyoo Gyohten, C%m@ng Forfunes: T/w Wdcfs Mcweyand the 77mat to Amedca’s Lead&ush@

(New York, NY: Tiies Elooks, 1992), pp. 370-371.

11.

ated with increased financial uncertainty. At

least in theory, locating managerial, production, and support facilities in the market of

final sales can mitigate the effects of excessive swings in financial variables. Many such

facilities represent the diversification of an

overall financial portfolio from the point of

view of the MNE’s home office (see chapter 2).

The continuing evolution of global capital

markets and the broadening embrace of adaptive strategies by MNEs pose new challenges

for national governments. Those challenges

arise from the fact that many firms, and

citizens generally, hold those governments

accountable for ensuring economic growth,

shielding particular sectors or particular

groups of workers from excessive or unfair

competition, and otherwise defending important social values.

GOVERNMENT POLICIES AND

FINANCIAL MARKETS

Modern financial markets did not spring up

spontaneously. Critical to their existence are

public policies that constitute the rules within

which they operate. All countries subject these

markets to a high degree of specific regulation.

Because of their centrality in the overall economy, moreover, they have been heavily influenced by broader official policies and practices.

Table 6-1 illustrates some of the most important

of these policies.

Governments specify, enforce, and adjudicate

the fundamental property rights of market participants. Directly or indirectly, they license intermediaries (banks, brokers, etc.). They may insure

savers against loss, or protect investors. Through

regulatory, supervisory, tax, and other financially

related policies, they establish the rules for savers,

investors, and intermediaries. Those rules are

influenced by distinctive cultural, legal, and

political traditions and have therefore differed

from nation to nation. Such differences can create

difficulties for MNEs, but they can also provide

significant opportunities.

In the decades following World War II, the

rules governing national markets for both shortterm finance and long-term capital differed markedly across advanced industrial countries. The

United States, for example, prohibited commercial banks from underwriting corporate bond or

stock issues or owning shares in industrial enter-
.

Chapter 6–Multinational Enterprises and Global Capital Markets | 143

Figure 6-3-Japanese Yen-U.S. Dollar Monthly Average Exchange Rates, 1970-1988

400

r 1

350 f– -—\ I

1 0 0

I

0, 1 I I I I I I [ I I )

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

SOURCE: IMF data as cited in Volcker and Gyohten, Changing Fortunes, pp. 37G371.

prises; the banking market was also segmented

along State lines. Reflecting this geographic and

functional segmentation, as well as the size,

scope, and mainly domestic orientation of the

overall economy, the U.S. stock and bond markets

were decentralized but deep. The British capital

market shared some of these characteristics, but,

the banking system was less segmented and more

outward-oriented. The French market was more

centralized and state-directed; the role of banks

was especially prominent and the government

used them to steer industrial development. The

Japanese system had marked similarities to the

French system, although the links between government and banks were more indirect, with a

U.S.-style separation of commercial banks and

investment banks in place after the war. The

German system was also characterized by relatively underdeveloped stock and bond markets

and by a prominent role for banks, but the

principal banks were distinguished by their universal character (that is, they were permitted to

engage in a wide range of commercial an d

investment banking activities).

In the period just after World War II, national

financial markets were deliberately insulated by

the architects of the new international monetary

system. Faced with the possibility of extending

the principles of global liberalism from the arena

of trade to the arena of finance, most countries

recoiled. At the Bretton Woods Conference in

1944, the United States, Great Britain, and others

finally agreed that countries should be obliged

over time only to abolish restrictions on financial

flows directly related to trade. They accepted no

obligation to open their national financial markets

to foreign participation, to liberalize longer term

capital inflows or outflows, or to avoid using

national financia1 policies in pursuit of larger

political or economic aims.

The reluctance of governments to match trade

liberalization with financial liberalization is understandable. Capital is inherently quite mobile,

but labor is not. If a national population is

subjected to bracing international competition

through trade flows, countervailing financial

flows might be necessary to cushion the effects,

both economic and political. Especially under a

system designed to minimize movements in

exchange rates, governments needed took to

facilitate necessary adjustments to international

payments imbalances. The ability to direct national savings toward national investments ap-
144 I Multinationals and the National Interest: Playing by Different Rules

Figure &4-interest Rate Differentials in Japan and Germany vis-a-vis the U.S., Quarterly 1982-1991

6~

4

~ -2

-6

- l o

\

/

\/

I 1 I I 1 I 1 1 1 I I I I [ I 1 I I I I I I 1 I I 1 I 1 I 1 I # I 1 I ! 1 I I I

41234123412 341234123412 341234123412 341234 1

1982 1983 1984 198s 1986 1987 1988 1989 1990 1991

NOTES: Interest rates are calculated on an end-ofquarter basis and are graphed according to how many percentage points they varied from the

U.S. interest rate at the time.

SOURCE: Adapted from the Bank for International Settlements, 6ZndAnnua/ Report (Basie, Swkerfand: 61S, 1992), p. 144.

peared to be the necessary concomitant to a liberal

trading system with fixed exchange rates.

FINANCIAL MARKETS AND MNEs

Firms develop multinational strategies in response to their operating environments; financial

markets comprise an important part of that

environmental National differences in regulations

and tax policies, for example, can translate into

differences in the availability and cost of capital

across borders. By expanding operations across

national borders, a firm can advance its strategic

goals. It can often more readily generate capital

internally (for example, by broadening the sources

of earnings) or externally (through increased

access to national or international capital markets). Moreover, if one of a company’s inherent

advantages is derived from the availability of

bountiful amounts of low-cost capital, expanding

into foreign markets where rivals lack such an

advantage needs little rationalization.

The fundamental issue related to contemporary

developments in financial markets can be captured by the term “financial uncertainty. ” Conceptually, this is nothing new. Businesses have

always had to deal with an unpredictable external

environment. But the level of financial uncertainty has been increasing since the 1970s, and

has become highly problematic. Extreme interest

rate volatility, unstable and highly unpredictable

exchange rate movements, and the rapid pace of

innovation in financial instruments-these and

other developments have made routine planning

more difficult and added a new dimension of

complexity to long-term investment decisions.

In order to justify a large-scale productive

investment, MNEs must minimize financial uncertainty. The development of various risk man1 The research assistance of Anthony Perl is gratefully acknowledged. For relevant background, see U.S. Congress, Office of Technology

Assesamag Competing Ecorwn”es: America, Europe, and the Pacific Rim, OTA-ITE-498 (Washington DC: U.S. Government Printing

Office, October 1991); “Financ ing Long-Term Investments,” chapter 3 of U.S. Congress, OffIce of Technology Amessmeng Making Things

Better: Competing in Manufactun”ng, OTA-ITE-443 (Washington DC: U.S. Government printing Office, March 1990); and, International

Competition in Services, O’X14-lTE328 (Wsshingtoq DC: U.S. Governrnent Printing Gfilce, July 1987).
Chapter 6–Multinational Enterprises and Global Capital Markets | 145

Table 6-l-Selected Policies Influencing Financial Market Structures

General Specific

National

Monetary policy Licensing rules

Exchange rate arrangements Supervisory practices/rules

Tax policies Disclosure rules

(including. depreciation rules) Functional restrictions (investment/commercial banking, insurance,

Capital controls etc.)

Trade policies Geographic restrictions

Foreign direct investment rules Ownership restrictions (bank/industry, industry/bank etc.)

industrial/technology policies Payments system practices

Price controls (interest rate ceilings, etc.)

Competition policies

Market access policies (right of establishment, national treatment,

reciprocity)

Accounting standards (often non-governmental)

International

Exchange rate regime Central bank agreements on supervisory practices, capital adequacy,

Economic policy coordination efforts (G-71 EC, etc.) etc.

Tax treaties Securities/banking markets regulatory coordination (EC single market

OECD capital and investment instruments

program, NAFTA services rules, OECD capital and GATT services

negotiations, IOSCO work programs)

SOURCE: Office of Technology Assessment, 1993.

agement techniques and tools has become a

growth field both for MNE managers and financial intermediaries. But hedging techniques are

costly and fail to eliminate all financial uncertainties. Indeed, they may create new ones.

No one fully understands the risks inherent in

contemporary global financial markets. Paul Volcker, former chairman of the Federal Reserve

Board and no radical critic, saw fit to conclude a

recent book with the following observation:

The economic case for an open economic order

rests, after all, largely on the idea that the world

will be better off if international trade and

investment follow patterns of comparative advantage. ., . But it is hard to see how business can

effectively calculate where lasting comparative

advantage lies when relative costs and prices

among countries are subject to exchange rate

swings of 25 to 50 percent or more. There is no

sure or costless way of hedging against all

uncertainties; the only sure beneficiaries are those

reaming the trading desks and inventing the

myriad of new devices to reduce the risks-or to

facilitate speculation . . . . But these risks and

costs seem to be driving more of the industrial

investment of operating businesses in developed

countries toward producing for local or regional

markets. In other words, the decisions in the real

world are often defensive and are designed to

escape exchange rate uncertainties and protectionist pressures rather than to maximize efficiency. That inevitably leads to diluting some of

the important benefits of open markets, which is

maintaining tough competition among the world’s

dominant producers.2

Although MNE managers may hope for the day

when excessive exchange rate and other financial

2 Paul Volcker and Toyoo Gyohteu Changing Fortunes: The World’s Money and the Threat to American Leadership (New Yorlq NY:

Times Books, 1992), p. 293. Also see C. Randall Henning, International Monetary Policymaking in the United States, Germany, and Japan

(Wash@to% DC: Institute for International Economics, forthcoming).
146 I Multinationals and the National Interest: Playing by Different Rules

pressures subside, few expect it soon. U.S. firms

with significant revenues generated overseas, for

example, must be concerned about potential

losses caused by an unanticipated fall in the value

of the dollar. If they have significant physical or

financial assets overseas, they are also concerned

about valuation changes that can translate into net

losses on consolidated balance sheets. In addition, they must take into account the possibility

that they or their foreign rivals may gain an edge

through the relative depreciation of national

currencies.3

Intermediaries have responded with a dizzying

array of new products. Most involve some variation on the future sale or purchase of financial

assets or liabilities, options to engage in such

transactions, or the swapping of future cash flows

with another party.4 All such techniques, of

course, carry a cost that must be borne by the firm

or its customers, and few allow firms to cover

longer term uncertainties at an acceptable cost.

Excessive caution with respect to longer term

investment can still be the consequence. Moreover, the financial volatility associated with those

uncertainties can encourage firms to initiate risky

financial transactions extraneous to their core

business in pursuit of speculative gains. But it is

the prospect of longer term losses that can incline

firms toward excessive caution in their long-term

investment planning. While firms have been

learning to deal with the more immediate consequences of financial volatility, there remains the

possibility that such volatility can exert a deleterious influence on the long-term investments that

create the jobs, incomes, and substantive innovations of the future.

Beyond financial engineering, MNEs can consider a range of strategic options for dealing with

excessive financial uncertainties. They can try,

for example, to limit their financial exposure

through deliberate strategies of global diversification. By spreading plant, equipment, supply

networks, and costly personnel to their final

markets, MNEs can attempt to hedge their cash

flows and their balance sheets. Longer term

productive investments may still be discouraged

by the expectation of future monetary and financial turbulence, but the prospect of competitive

losses associated with such turbulence can be

reduced by embedding such natural hedges into

the firm’s structure. The actual impact of financial

volatility may therefore vary by industrial sector.

Governments accountable for developments

within national economies and national capital

markets, of course, might view the consequences

of financially driven strategic decisions by MNEs

differently. The kinds of market imperfections

that contribute to exchange rate volatility and

financial uncertainty might be the result of

deliberate policies; the cross-border arbitrage

activities of MNEs might appear as unwelcome

threats to the integrity of those policies.s Conversely, if a government presides over broad and

deep national capital markets and sees it as

important to maximize the resulting benefits for

its own citizens, the multinationalization of firms

obviously threatens to transfer at least some of

those benefits abroad.

Critics of MNEs have long held that this

transfer of national capital advantages is exactly

what U.S. firms accomplished in the decades that

followed World War II. In effect, they contend

that those companies combined relatively cheap

U.S. capital and technology with cheap labor in

production facilities abroad. It arguably followed,

from such a view, that such activities eroded both

the relative capital advantage of the United States

and the relative international competitiveness of

s See Judy Lewent and A. John Kearne Y, ‘{ Iden@@ ~ Hc@@ Cmency Risk at hferc~” Journal ofApplied Corporate Finance, vol.

2, No. 4, winter 1990, p. 20.

4 For a ~mt@ysis, Se G1-oup Of Thirty, Denva”ves: Practices and Principles (_Wdl.@@~ ~: 1993)

5 Arbiwe iIIVOIVeS ~dexsimulta.neoua and opposite transactions in separate markeCs in the hope that profits mresult from

temportuy price differentials.
Chapter 6-Multinational Enterprises and Global Capital Markets | 147

firms that stayed home. Implicit in such a view,

however, is the assumption that the returns to the

nation from the activities of MNEs-for example,

through dividend flows not adequately compensate for this erosion.

Whether the ultimate returns on multinational

activity are in fact adequate from a national point

of view is a matter of perception and political

judgment. The advocates of multinational enterprises have typically argued that the transfer of

U.S. capital advantages abroad promised to redound to the benefit of the United States. At the

possible cost of shifting some jobs abroad, it

promoted the development of a more open world

economy, increased options for American consumers and investors, and ultimately addressed

traditional U.S. security concerns. However, questions have arisen concerning the extent to which

such benefits are contingent on the assumptions

that the policies of leading countries are all

converging toward liberal norms and that firms

competing in global markets are not playing by

different rules.

Such differences in rules can arise from structural distinctions in the markets through which

domestic and multinational firms raise their

capital. For most of the twentieth century, those

markets have been recognizably national in their

fundamental structures. Although such distinctions are eroding, partly through the normal

operations of MNEs, they have not yet

peared.

FINANCIAL MARKET STRUCTURES:

A PRIMER

disapWith words like “flow, “ “liquidity,” “deepening, ” and “spillover” rampant in the vocabulary of bankers and economists, it is no coincidence that hydraulic analogies frequently enter

discussions of international finance. National

financial markets have often been depicted as

reservoirs for national savings and investment;

international markets and cross-border sales and

purchases of financial assets and liabilities (financial intermediation) as canals linking those reservoirs; national financial controls as darns designed to stop flows into those canals; and

broader national policies as locks constructed to

regulate flows both within national reservoirs and

into cross-national canals.6 The contents of national reservoirs may be described as more or 1ess

fluid; the faster changes in one part of the

reservoir cause accommodating changes elsewhere in the same reservoir, the more fluid are

those contents and the more unified is that

reservoir. The more fluid are the contents of

neighboring reservoirs, and the more open the

canals between them, the faster will changes in

the level of one reservoir move to another.

Similarly, as long as closure is the rule, turbulence

in one reservoir matters little to those depending

on other reservoirs. But when the reservoirs are

open, turbulence can spread quickly.

In the early years of the post-World War II era

only one national reservoir was reasonably full,

that of the United States. Moreover, both in the

United States and elsewhere, the contents of

national reservoirs were quite viscous. Interest

rate controls, geographic restrictions on the operations of intermediaries, and fictional barriersfor example, between the operations of commercial and investment banks-all increased viscosity. In addition, by deliberate policy design, the

darns between national reservoirs were formidable; they could be replaced by canals only slowly,

and the locks in those canals were carefully

regulated.

Figure 6-5 gives a rough idea of the resulting

structural differences in the most important national banking markets during much of the

post-World War II period. The key differences

highlighted are the degree to which a relatively

few banks (as opposed to securities companies

and other types of intermediaries) were allowed to

6 Here and elsewhere, the chapter was inspired by Ralph Bryant’s International Financial Zntermed”ation (WashingtorA DC: Brookings

hlStitUtiOQ 1987).
148 I Multinationals and the National Interest: Playing by Different Rules

Figure 6-5-A Typology of Post-World War II Banking Market Structures

I

France Japan

Italy Canada

Great Britain

“

- 

‘

--- ‘---””-- ‘- 

‘

- ‘––

+-

%gmented

Switzerland 1

Germany

C&3 Decenttal@3d

United States

SOURCE: Office of Teehnoiogy Assessment, 1993.

dominate the national financial system, and the

degree to which direct linkages were permitted

between commercial banking (essentially, taking

deposits and making loans) and investment banking (among other things, underwriting the issuance of stocks and bonds).7

Today, the picture is much different. Inside the

national reservoirs of advanced industrial countries, fluidity has been greatly increased by the

deregulation of interest rates and the breakdown

of barriers between financial intermediaries. Especially since the late 1970s, dams have been

dismantled at a rapid pace, canals have been

widened considerably, and locks have progressively been left open. Highly regulated banks

have been losing customers, especially MNEs, to

stock, bond, and commercial paper markets. In

some cases, nonfinancial MNEs have even become their competitors. In response, banks have

sought riskier customers in their domestic markets and pushed aggressively for a loosening of

traditional regulatory constraints. As geographic

and functional limits have eroded, there has been

a gradual movement across most banking markets

toward more universal-type banking structures.

Most dramatically, banks have also expanded

their involvement in international markets (see

figures 6-6 and 6-7).

Although it would be stretching the facts to

depict the dismantling of dams and the opening of

canals as having created a truly global reservoir,

a disturbance in one reservoir can generate

crashing waves in another.8 In fact, since the

1970s the turbulence associated with persistent

7 Universal banks are able to engage in both sorts of activities; in addition, they may be able to buy and hold for their own accounts the

securities issued by industrial firms.

s For an accessible survey of developments and a summary treatment of relevant economic literature on the subjec~ see “Survey of the

World Economy,’ The Economist, Sept. 19, 1992, pp. 5-48.
Chapter 6–Multinational Enterprises and Global Capital Markets I 149

Figure 6-6-Deposit Banks’ Foreign Assets

by Residence of Bank,

1977-1991

4

’

000 r——

1

~ Germany

3

’

500 

~ Franc e n

3,000 I m Japan rlk+

5

~ 1,500

m

1,000

500

0

1977 1979 1981 1983 1985 1987 1989 1991

SOURCE: IMF, /nterrWiona/ Finamia/Stafisfics Yearbook, 1992, p. 61.

macroeconomic imbalances and various specific

events (the failure of the Herstatt Bank in

Germany, the collapse of Continental Illinois

Bank, the October 1987 Wall Street panic, and

the BCCI case) has often combined with this new

openness to engender financial crises that demand

coordinated international responses.

This is precisely what some policymakers

feared after World War II, leading them to

construct a post-war monetary system that left

countries free to retain and strengthen the dams

and locks of the war years. But perceptions soon

changed and governments effectively began encouraging the vast expansion of international

capital movements through their fiscal, monetary,

trade, and financial regulatory policies. They

were also pulled along, either by the actions of

Figure 6-7-Cross-Border Bank Credit to

Non-Banks by Residence of Lending Bank,

1977-1991

‘“”~ –

.D

800- ~ Germany

~ France

70” ‘“ m Japan

~ 600- = UK

= ~ Us .

~ 500-

o

1977 1979 1981 1983 1985 1987 1989 1991

SOURCE: IMF, /nternationa/Financia/Statistics Yearbook, 7992, p. 67.

other governments9 or by the activities of MNEs

and financial intermediaries. The outcome has

been the adoption of policies aimed at capital

decontrol and the integration of financial markets.

CAPITAL DECONTROL AND FINANCIAL

INTEGRATION

Capita-1 controls were a response to the political

sensitivities associated with international capital

movements (see box 6-A). During the early

decades of the Bretton Woods system, all advanced industrial states resorted to them at one

time or another and all approached their eventual

liberalization cautiously.l0 They included a broad

range of explicit restrictions, special taxes, or tacit

arrangements designed to discourage certain kinds

9For fi~w, isI he 1980S he united States targeted Japanese f~ncial liberalization as a key to resolving hde disputes.

10 Much debate swounds tiereasomfor this caution and thepotent.idconsequemces of its apparent abandonment. mkeningbacki explicitly

or implicitly, to such seminal books as Karl Polanyi’s The Great Tran.rjlormatiort (130stoR MA: Beacon Press, 1957), much of that debate

concerns the resurgent chimera of the ‘‘self-regulating market’and, ultimately, the changing dimensions, effects, and implications of

interdependence in the fwncial sector. Relevant works include: Susan Strange, Casino Capitalism (Oxford: Basil Blaclmvell, 1986); Robert

Cox, Power, Production, and World Order (New York NY: Columbia Univemity Press, 1987); Robert Gilpiq The Political Economy of

International Relations (Princetou NJ: Princeton University Press, 1987); James Hawley, Dollars and Borders (ArmoIIIL NY: Ml?. S-,

1987); Charles Kindleberger, International Capital Movements (Cambridge, England: Cambridge University Press, 1987); Jeffry Friedeq

“Invested Interests: The Politics of National Economic Policies in a World of Global Finarxe,” International Organization vol. 45, No. 4,

autumn 1991, pp. 425-51; and Michael C. Webb, ‘‘International Economic Structures, Government Interests, and International Coordination

of Macroeconomic Adjustment Policies, ’ International Organization vol. 45, No. 3, summe~ 1991, pp. 309-342.
150 I Multinationals and the National Interest: Playing by Different Rules

of financial transfers between residents and nonresidents.11 In an era of pegged exchange rates,

most maintained such controls either to achieve

balance-of-payments goals or to create the space

needed for the pursuit of autonomous national

economic policies.

Capital flows are critical to the balance of

payments since, together with developments in

the current account they determni

- e the volume of

reserves available for defending a pegged exchange rate or influencing a flexible rate.12 Free

capital flows can also frustrate monetary policy.

A government conducting a more restrictive

policy compared to the rest of the world may

therefore decide to impose controls on capital

inflows or to lift them on outflows; a government

conducting a relatively expansionary policy may

decide to impose controls on outflows or to lift

them on inflows. All of the measures adopted in

such a context directly affected MNEs and

financial intermediaries. They also encouraged

those firms to pursue evasive strategies in response.

Since the late 1970s, governments in the

advanced industrial world have moved decisively

to facilitate international capital mobility. More

countries moved to abolish capital controls and

. dismantle associated bureaucratic machinery. To

be sure, capital flows continue to encounter

frictions at national borders.13 Still, it is clear that

state policies that formerly accommodated the

possibility of controls on short-term capital movements have lately converged in the opposite

direction. Such policies suggest a fundamental

break with the practices through which the central

rules of the Bretton Woods system were adapted

and implemented.

Capital decontrol forms part of a complex and

interacting set of public policies adopted across

the advanced industrial world since the 1970s, the

end-result of which has been to encourage a freer

flow of capital across borders. Through transfer

pricing practices, leads and lags in managing their

accounts receivable and accounts payable, and

participation in offshore currency markets, MNEs

played an important role in that dismantling

process. In addition, the domestic financial deregulation that swept throughout the world during

the 1980s reduced the viscosity of financial flows.

Britain initiated this trend in the late 1970s.

Adoption of a variety of liberalization measures

followed in subsequent years in the United States,

France, Germany, Japan, and other industrial

countries. 14 Governments thus sought to address

some of the more acute difficulties that had come

to be associated with controls.15

Domestic deregulation complemented, and was

partly driven by, the deepening that occurred in

11 *~fbr Economic Coopemh“on and Developme@ Controls on Internacz”onal Capital Movements (Paris: OECD, 1982).

12 ~&scusaion “ draws on John B. Ooodmanand Imuia W. Pm@, “The Obsolcaceae of Capital Controls? Bconomic Management in an

Age of Gk3bed Markets,” Wor&iPolisics, vol. 46, No. 1, October 1993.

13 ~wB- MOW &Mow~Policy in Inter&pendentNan”ons (WddngtOXL ~: lhobgs hL$thutioIL 1980). ~ ~@

rckvantareMardnFeldstein and Charles Horio4 “Domeatic Savings and International Capital Fl~” Econom”cJonrnal vol. 90,hrE 1980,

pp. 3143&, Mdrl lwdatcill# “Domestic Savinga and Intemah“onal Capital Movements in the Img Run and the Short R-” European

&o?w?nichu”ew VO1. 21, 1983, pp. 129-153; ‘fhrrum“ Bayom@ “Savings-Investment Correlations: Immobile Capi@ Government Policy,

or Eudogesloua Behavior,” IMF Working Papers, WP/89/66, Aug. 22, 1989; Intemab “onal Monetary Fund Staff, “Detednmts am.t Systauic

coQaeqllC!nCCS of Mcrnational Capital Flows,” fMF Occa”onaf Paper Series, vol. 77, March 1991; Martin Feldatein and Phil@pe Baccti

“Narional Saving and Irmm@od hrvesrmen~” in B. Douglas Bernheim and John B. Shoven (eds.), Narional Saving and Econonu”c

Pe@onnance(-o,IL: Urnvemity of Chicago press 1991), pp. 201-22G and Jeffivy ~L“IntcmMtional Capital Mobility: A Review,”

Papers and Proceedings of the Annnal Meeting of C/U American Econom”c Association, 1991.

14 ~rneamma irduded tk abolition of controls on interest rates, the relaxation of exchange controls, permission for inkmakies to

introdwe m instrmmlts (e.g., tankcahkaks “ of deposit money market funds), the mlaxatI“on of barriers to the participation of foreign

institutions m national banking ad Securities mslketa, and h “dlsmantl.ing of cartels that traditionally managed local stock and bond markets.

15-1- included= -vement of funds (and the best corporate customers) out of banks and into less-regulated securities markets, the

cmvding out of plivate investmcslt by rising governmentalf~ing needs, the inefficient allocation of available fmancing, ad kd to

_tith Oh ~tmtrk for the jobs and investment promised by a burgeoning f-id~i~ti~.
... —

Chapter 6–Multinational Enterprises and Global Capital Markets I 151

Table 6-2—lnternational Financial Transactions, 1978-1990 (In billions of dollars)

1978 1980 1982 1984 1986 1988 1989 1990 1991

International bank lending

(net stocks) . . . . . . . . . . . . . . . . . 530 810 1,020 1,285 1,790 2,380 2,640 3,350 3,610

International bond financing

(net stocks) . . . . . . . . . . . . . . . . . NA NA NA 390 700 1,085 1,252 1,473 1,651

New international bond issues

(net flows) . . . . . . . . . . . . . . . . . . 29 28 58 90 163 144 166 122 163

Euro-commercial paper

outstanding . . . . . . . . . . . . . . . . . NA NA NA 14 53 59 70 80

NOTE: NA indicates that data was not available.

SOURCE: Bank for International Settlements, Anrwa/ l?epork, various issues; International Monetary Fund, International Cap”fa/ Markets:

Deve/oprnents, prospects, and Po/icy Lssues (Washington, DC: International Monetary Fund, 1992).

the cross-national Euro-currency markets. Capital

decontrol, financial deregulation, and the expansion of international financial markets worked

together to widen and deepen the canals that link

national financial reservoirs. More concretely,

this translated into a remarkable expansion of

cross-border bank lending, a growing movement

of corporate bond issuers into new offshore

markets, and the development of new commercial

paper markets wherein MNEs, in particular, could

raise funds from investors without going through

banking intermediaries. Table 6-2 charts these

trends in international financial transactions.

Although such data obscure the fact that the

capital flowing through these markets is far from

uniform-for example, obligations denominated

in U.S. dollars have historically dominated most

market segments—the overall picture is of a

startling rise in the volume of cross-border

financial transactions. A recent survey by The

Economist puts the numbers into perspective.l6 In

the early 1980s, the ratio between the crossborder lending of banks and the aggregate gross

domestic product (GDP) of Organization for

Economic Cooperation and Development (OECD)

countries was 4 percent; 10 years later it stood at

44 percent. Partly reflecting a rising fiscal deficit

and a search for new financing sources, the

proportion of U.S. Government bonds held by

foreigners rose from 7 percent in 1970 to 17

percent in 1988. (For Germany, comparable

figures were 5 percent in 1970 and 34 percent in

1988.) Between 1980 and 1990, the annual

volume of cross-border transactions in stocks

ballooned from $120 billion to $1.4 trillion, a

compound growth rate of 28 percent a year. Table

6-3 provides an indication of the expanding

foreign participation in national stock and bond

markets.

The rate of expansion in other financial markets has also been dramatic. Daily turnover on

foreign exchange markets in the mid- 1980s was

estimated at just over $300 billion; in the early

1990s it is estimated at over $900 billion. As table

6-4 shows, during the same period cross-border

markets for various types of financia1 derivatives

mushroomed in both absolute and relative terms

as MNEs, other investors, and financial intermediaries sought ways to hedge their financial risks

or to profit from financial volatility.

This growth in international financial transactions has occurred while governments have been

seeking a new balance in their financial policies.

While aiming to maximize the efficiency gains

promised by open, competitive markets, they

must also attempt to minimize the potential costs

associated with increased market instability. In

contemporary financial markets, the interests,

lb “Swey of fie World Economy,’ op. cit., footnote 8, p. 9.
152 I Multinationals and the National Interest: Playing by Different Rules

Table 6-3-Cross-Border Transactions In the Stock and Bond Markets of Selected Countries, 1970-1990

(as a percentage of GDP)

1970 1975 1980 1985 1990

United States . . . . . . . . . . . . . . . . . . . . . . . 3 4 9 36 93

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA 2 7 61 119

(West) Germany . . . . . . . . . . . . . . . . . . . . . 3 5 8 34 58

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA NA 8 21 53

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA 1 1 4 27

United Kingdom . . . . . . . . . . . . . . . . . . . . . NA NA NA 368 690

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 10 27 64

NOTE: NA indicates that data was not available.

SOURCE: Bank for International Settlements, 62r7dAnnua/ RePort(Basle, Switzerland: 61S, 1992), p. 193.

operations, and inherent structures of MNEs are

at the center of this balancing effort. By linking

national markets, they effectively embody the

conditions of financial interdependence currently

confronting all governments. In such a context,

governments face incentives both to cooperate

and to compete with other governments in structuring and overseeing the markets within which

MNEs operate.

In principle, mechanisms for advancing their

competitive impulses are relatively straightforward; governments can regulate or deregulate, tax

or subsidize, open or close the markets they

oversee. As those markets become more deeply

integrated, however, mechanisms for cooperation, unavoidably intergovernmental in character,

become more difficult to create, just as the risks

they must address become more complex. As

financial markets expanded during the 1970s and

1980s and greater numbers of corporations and

financial intermediaries embarked on multinational strategies, a disjunction became increasingly evident between the global logic of financial integration and the continuing reality of

decentralized political authority over financial

markets. In 1974, for example, the failure of

Herstatt Bank in Germany and the Franklin

National Bank in the United States sent regulators

around the world scrambling for ways to insulate

their national markets from the potential fallout in

the worst case or to stabilize their interdependent

markets in the best case. The dilemma became

even more acute with the onset of the developing

country debt crisis that followed Mexico’s near

default in August 1982.

In the absence of clear international governing

arrangements, regulators have been concerned

about the widening of potentially dangerous

regulatory gaps that can distort competitive

conditions to the detriment of national or global

welfare. Internationally linked financial markets

and the continued responsibility of national

political authorities for both market stability and

macroeconomic management have highlighted a

need for more coordinated prudential oversight in

the financial sector.17

The results of intergovernmental efforts in the

financial regulatory arena have thus far been

uneven. Some successes have been achieved in

promoting the norm of capital mobility, encouraging higher and more common capital requirements for international banks, and enhancing the

safety of cross-border payments-clearing systems. More difficult have been efforts to coordinate the treatment of other kinds of banking risks,

regulations governing securities firms and markets, tax policies influencing financial flows, and

approaches to managing the systemic risks poten17 S=F~~Ro Ntis and l-Iu@T. Patrick (da.), Regulating InternationalFinancial Markets:lssues andPolicies (Dcmirccht: Khwcr

AcadanicPublishers, 1992); Joan Spcro, “Guidiog Global Finance,’’Foreign Policy, No, 73, winter 1988/89, pp. 114-34; and Ethan Kapsteiq

Governing the Global Economy: International Finance and the State (Cambridge, MA: Harvard University Press, forthcoming).
Chapter 6–Multinational Enterprises and Global Capital Markets I 153

Table 6-4-Selected Financial Derivative Markets, 1986-1991 (In billions of dollars)

Instruments 1986 1987 1988 1989 1980 1991

Interest rate options. . . . . . . . . . . . . . . . . . . . . 516 1,174 1,588 2,054 3,231

Currency options and futures . . . . . . . . . . . . . 49 74 60 66 72 77

Stock index options and futures . . . . . . . . . . . 18 41 66 108 158 210

Interest rate swaps . . . . . . . . . . . . . . . . . . . . . 400 683 1,010 1,503 2,312 2,750

Currency and interest/currency swaps . . . . . 100 184 320 449 578 700

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA NA NA 450 561 630

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,083 1,591 2,630 4,164 5,735 6,900

Ratio of total to OECD GDP. . . . . . . . . . . . . . 0.10 0.13 0.19 0.29 0.35 0.40

NOTE: NA indicates a non-applicable category during these years.

SOURCE: Bank for international Settlements, 62nd Annua/ Report, p. 192.

tially created by new financial products.18 Complicating such coordination efforts is the possibility that MNEs and intermediaries will seek to

avoid the higher costs that can be entailed. If all

leading states are not included in the coordination

process, business activity might drift to those not

included. Similarly, if less tightly regulated or

less heavily taxed markets exist within smaller

jurisdictions (e.g., Luxembourg, Cayman Islands,

Netherlands Antilles, Channel Islands), opportunities for circumvention can remain.

Global financial markets are thus evolving in a

context defined, on the one hand, by increased

openness and innovation and, on the other hand,

by the efforts of governments and central banks to

find new ways to ensure overall market stability

and safety. Together with the effects of fluctuating exchange rates, this context confronts MNEs

with both incentives and opportunities to engage

in hedging strategies.

The MNE structure itself provides the surest

and most enduring mechanism both for coping

with financial uncertainties and for taking advantage of new financial opportunities. Having

operations in an expanding number of jurisdictions can offset various financial risks. Firms may

also establish multicurrency credit lines, issue

bonds and equity shares in offshore markets,

decentralize the funding operations of foreign

subsidiaries, and bypass traditional financial intermediaries. Firms can accomplish this by issuing their own securities in a broadening range of

foreign markets. As figure 6-8 suggests, this has

reduced the direct financing role of banks across

the industrial world, although there remain striking differences among particular national cases, a

matter examined below. In very practical terms,

the pursuit of such activities furthers the process

of global financial integration.

FINANCIAL INTEGRATION AND NATIONAL

STRUCTURES

While various indicators and the experience of

MNE managers attest to the broadening trend

toward financial market integration, significant

room for debate remains on the question of how

far that trend has actually progressed across

specific markets and sectors. Economists typically measure integration in terms of the convergence of prices. France and Germany, they would

argue, may be said to have an integrated capital

market when the effective cost of capital for

investments of equivalent risk is the same in Brest

as in Stuttgart.

In fact, intense theoretical and empirical debate

surrounds the issue of how far financial integra18 s= ~termtio~ M~ne~ p~d, International capital Jfar~ts: &velop~nts,prospects, and Policy Issues (w&#lillgtO~ ~: Im,

September 1992), pp. 10-24.
154 I Multinationals and the National interest: Playing by Different Rules

Figure 6-8-indicators of the Relative importance of Banks in the Financing of Corporations in the U.S.,

Germany, and Japan

A—Bank Deposits as a Percentage of Corporate B-Bank Loans as a Percentage of Corporate

Financial Assets

r 1

Financial Liabilities

[

1990 1990

1985 1985

1980 1980

8CW0 8(W0 40?/0 20?40 0?!0 0?/0 20% 400/0 80Y0 800/0

SOURCE: IMF, /ntermW/ona/ C@ta/ Markets: Deve/opmenfs, Prospects, and Po/icy kwues (Washington, DC: International Monetary Fund,

1992), p. 3.

tion measured in such terms has progressed.l9 On

one side of the debate are those who argue that

differences in national capital costs are more

apparent than real. Measurement problems account for much of any obvious difference, they

contend, and the erosion of national barriers to

capital mobility should eventually close any

residual gaps. On the other side are those who

argue that systematic differences remain in the

effective capital costs facing, for example, similarly situated U. S., Japanese, and German corporations. Despite difficult definitional standards,

proponents of this position often conclude that at

the heart of the matter are enduring differences in

the time-horizons of the ultimate providers of

capital to such corporations.

Beyond the theoretical debates of economists,

analysts have tried to gather data on the perceptions of corporate executives concerning comparative capital costs and investment time horizons.

One recent study surveyed senior officials in 15

capital-intensive U.S. firms under significant

competitive pressure from Japanese rivals. Views

about the availability or importance of low-cost

capital to the Japanese were deeply divided.

Executives perceiving themselves to be slightly

ahead of their rivals minimized the importance of

capital cost differences, while those behind emphasized the issue. Across the board, however,

came the view that their Japanese competitors

behaved ‘as if’ they had lower capital costs. The

authors of the study concluded: ‘‘Once leadership

is lost in a particular market, the firm that is able

to behave as if it has a lower cost of capital—

whether or not it actually does-has an obvious

advantage. It will be willing to invest at a more

19 SW U.S.CO~SS,~lce of Technology Assessxnen~ Making Things Better: Competing in Manufactm”ng, Op. cit., fOOtnOte 1, ~ta

3. For a compreknsive and timely review of the analytical literature on the issue, see W. Carl Kester and Timothy A. Luehrmam

“Cross-Counhy Differences in the Cost of Capital: A Survey and Evaluation of Recent Empirical Studies,” Michael Porter et al., Capital

Choices (BostorL MA: Harvard Business School Press, forthcoming).
Chapter 6-Multinational Enterprises and Global Capital Markets I 155

rapid clip than its competitors. ’ ’20 But what

factors can contribute to the perception of firms

that they can behave as if they had lower capital

costs than their rivals? One of the most prominent

hypotheses relates to fundamental financial structures rooted in national traditions of corporate and

market governance. 21 At that level, the widely

hailed phenomenon of financial market integration takes on a different look.

A recent study for the private-sector Council on

Competitiveness points out that the wellsprings

of productive investment are complex and variable.22 Beyond project-specific circumstances, national macroeconomic factors clearly exert a

strong influence. Also influential are nationally

distinctive mechanisms for allocating capital.

These mechanisms may be seen as having two

interactive dimensions, one external to the business and one internal. The external dimension

refers to the structure of the major capital market

within which the enterprise operates, usually its

‘‘home’ market. The internal dimension refers to

the ownership structures, management practices,

and behavioral norms embedded in the firm itself.

Capital for specific projects is effectively raised

from either or both sources. In an aggregate sense,

such systematic differences exist in the capital

allocation mechanisms available to U. S., Japanese, and German firms that two distinct types

may be drawn. The study characterizes the U.S.

mechanism as a ‘‘fluid capital” system centered

around transient owners and the need for corporate managers to maximize narrowly defined

investment returns (e.g., stock prices). Conversely, the Japanese and German systems are

labeled ‘dedicated capital,” with their centers of

gravity being permanent owners and managers

driven by the goal of corporate perpetuity. Figure

6-9 depicts the interactive variables at work in

these two systems, while table 6-5 sketches broad

distinctions in ownership patterns.

Viewed as ideal types, each of these two

systems of capital allocation has its own

strengths. In theory, the U.S. system more quickly

allocates resources and captures emerging opportunities. It also provides higher returns to”individual investors and produces fairer, more transparent financial markets. The German and Japanese

systems, conversely, tend to boost productivity in

existing businesses, promote internal diversification into closely related fields, and promise what

one analyst terms “higher social returns.”23

Arguments concerning the negative consequences

of both systems abound, but the most common

accusation is that the U.S. system can encourage

firms to underinvest in their core businesses and

leave shareholders with few instruments for

disciplining corporate managers, while the German and Japanese systems can tend toward

overinvestment and inefficiencies that make it

difficult to redeploy resources into emerging

Sectors. 24

Both systems are under some pressure from the

trend toward more open and interpenetrated

national markets. For this reason, many economists expect the value of the respective benefits

@ Joseph Morone and Albert Paukoq “cost of Cqi@k The~“ Perspective” Cdfornia ManagementRm”ew, vol. 33, No. 4,

summer 1991, pp. 9-32. Also see James Poterba and Lavrence H. Summers, “TimeHorizons of AmaieanFin-ns: New I?videme fivrn aSrnvey

of CEOS,” Porter et al., Ibid.

21 S=, foremp]e, JOhOZy.SnKUI, Governments, hfarketsamf&owh: Finam”afSYstemsandthePolitics ~1~“ Change (lkNY:

Cornell Univemity Press, 1983); Micluiel Bonus et al., The Highest Stakes: The Economic FoundatI”ons qfrheNew Secun”ty System (NewY@

NY: Oxford University Press, 1992); and Allen B. Frankel and John D. Montgomery, “Fiieial Stmeture: An International PcqxxtivG”

Brookings Papers on Econom”c Activity, vol. 1, 1991, pp. 257-310.

m Michael porter et al., Capital Choices, Changing the Way America Invests in Industry, a repofi FMto *COti on

Competitiveness and co-sponsored by the Haxvard Business Schoolj June 1992.

23 Ibid.

~ mid., p. 13. Also see Alfred CkdkX, ‘‘Competitive Performance of U.S. Industrial EM-: A ~tofi~ P-tiw” p-et ~“$

op. cit., footnote 19.
156 I Multinationals and the National Interest: Playing by Different Rules

Figure 6-9-External and Internal Capital Allocation Mechanisms

UNITED STATES JAPAN and GERMANY

Maximization of measurable investment returns Secure corporate position

C)wWative Pefformamx

capital bed

budgeting compensation

\’ h 7’/

——. —-

UNITED STATES JAPAN and GERMANY

Fluid capital Dedicated capital

SOURCE: Adapted from Michael Porter et al., CupJta/ Chokxw, A Report to the Council on -mpetltlveness and co-sponsored by the Harvard

Sushwss School, Juno 1992, pp. 9-10.
Chapter 6–Multinational Enterprises and Global Capital Markets I 157

they provide to firms to be equilibrated eventually. For MNE managers, however, ‘‘eventually’

can seem a long time. Even though figure 6-8

indicates a broad shift away from banks in the

field of corporate finance, it is noteworthy how

bank-centered the Japanese and German systems

remain.25 It also bear-s underlining that the extent

of actual regulatory change varies across countries, a variance that can have protectionist

effects. 26

During periods of heightened financial uncertainty, as well as when facing very long-term and

large-scale investment decisions, an MNE belonging to a relatively less open, bank-centered

network may have a distinct and lasting advantage over MNEs more dependent on decentralized

and open capital markets. To the extent that the

bank at the center of such a network becomes

fully engaged in dynamic international financial

markets, the associated NINE may have the best

of both worlds: access to leading-edge financial

innovation and information as well as credible

assurance of fall-back capital resources for both

emergencies and new opportunities.27

MNEs AND MULTILATERAL COOPERATION

Multinational enterprises are inherently adaptable. As long as they can establish themselves in

different national jurisdictions, they are capable

of adapting to any feasible international capital

regime. When capital controls and rigid regulatory structures were in place, they had little

difficulty funding their operations in separated

national markets or in incipient offshore markets.

Table 6-S-Estimated Comparative Pattern of

Ownership and Agency Relationships in

U.S., Japanese, and German Industry

(In percent)

Us. Japan Germany

Individuals . . . . . . . . . . . . 30-35 20 4

Institutional owners . . . . . 2 40 27

Institutional agents . . . . . . 55-60 6 3

Corporations. ... , . . . . . . 2-7 30 41

Government . . . . . . . . . . . Negligible Negligible 6

Foreign investors . . . . . . . 6 4 19

SOURCE: Michael Porter et al., Cap’tal Chokes, A Report to the

Council on Competitiveness and co-sponsored by the Harvard Business School, June 1992, p. 42.

But when capital decontrol became the norm,

their financial options expanded and their dependence on banks generally declined, albeit to

different degrees. Because of this enhanced flexibility, and despite the increased risks involved,

MNEs appear to prefer an open international

financial system.

Nevertheless, MNEs cannot themselves ensure

the stability of open financial markets. For this,

they must rely on governments and central banks.

Beyond financial oversight functions, they also

seek more specific governmental assurances (e.g.,

in support of large-scale investment in leadingedge high technologies) and, often, indirect assistance in underwriting health care, pension, and

other costs.

The costs of such governmental services must

be borne by someone. Fully open capital markets

and the availability of multinational options

potentially work to ensure that the most mobile,

creditworthy, and externally oriented fins, secZS Mjc~el L. Ger~chhm ~en~y presented extensive evidence on this score for the Japanese case. See misalliance Capitdim: The Social

Organization of Japanese Businest (Berkeley, CA: University of California Press, 1992); and “Twilight of the Keiretsu? A Critical

Assessment, ” Journal oflapanese Studies, vol. 18, No. 1, winter 1992, pp. 79-118. Also see Louis Pauly, Regulatory Politics In .lapan: The

Case of Foreign Bank”ng (IthacA NY: Cornell East Asian Series, No. 45, 1987).

26 me us. Trade Representative’s Office recently challenged Japan on just such ~unds. S* ~lce of tie Ufitd s~t~ ‘r~e

Representative, 1993 Trade Estimate Report on Foreign Trade Bam”ers (W%shingto% DC: U.S. Government Printing Office, 1993), pp.

158-160.

27 See AMed ste~c~ and Christjan Huveneers, “On the Performance of Differently Regulated Financial Institutions: Some Empirical

Evidence, ’ CEPS (Cenrrefor European Policy Srudies) Research Report, No. 12, December 1992. Universal banking structures, the authors

conclude, may provide better support for the long-term investment strategies of the nonfiicial sector than the segmented structures

chamcteristic of the United States and the United Kingdom.
158 I Multinationals and the National Interest: Playing by Different Rules

tors, and factors of production avoid their full

impact. In other words, taxes imposed directly or

indirectly on national firms to help pay for new

social programs now have more direct effects on

the international competitiveness of those firms;

they can also more readily prompt them to pursue

multinational strategies. In the absence of countervailing action, this suggests that the least

mobile firms, sectors, and factors will bear most

of the burdens created when governments respond to pressures for expanded business and

social guarantees.

If consequent political tensions provided an

impetus to efforts aimed at reversing the trend

toward capital decontrol, “ unilateral would

hold little promise of success. The erosion of

national political influence implied by the greater

openness of contemporary financial markets and

by the jurisdiction-spanning activities of MNEs

and financial intermediaries now makes it necessary to address such tensions above the national

level. This is the logic that has driven policy

planning within the European Community and

that has lately pushed central bankers to collaborate more intensively in other settings.

To the extent that global financial developments have distinctive and asymmetrical consequences for individual nations, the implications

go beyond issues of financial regulation and firm

competitiveness. If modern democracy may still

be said to rest on a social contract between

government and the governed, the twin and

related forces of global financial integration and

multinational corporate expansion undermine many

of the traditional ways in which that contract has

been satisfied. They make much more problematic, for example, the effective targeting of subsidies, and they diminis‘ h the capacity of governments to control the pace and direction of

adjustment to economic change. In short, while

they can both open new avenues for enhancing

economic growth and innovation, they make it

difficult to direct financial resources drawn from

a national base toward the solution of national

problems. Given the costs and uncertain benefits

of attempting to reverse the trend toward global

financial integration, and mindful of the enhanced

ability of firms to circumvent such an effort, the

political dilemmas that result from its potentially

uneven impact imply the need to craft new

bargains at the multilateral level.
Index

Academic research. See University research

ACCJ. See American Chamber of Commerce in Japan, Trade

Expansion Committee

Acquisitions and mergers, Japanese attitude toward, 73-75

Administrative guidance by Japanese government, 16,83,

84-86

Advanced Micro Devices, Fujitsu alliance, 100, 124

Aerospace industry

government support of, 31

ISAs and, 121, 123

Aerospatiale/Dassault-Breuget, McDonnell-Douglas

alliance, 130

AIDS drug research, 124

Airbus, 123, 126

AMD. See Advanced Micro Devices

American Chamber of Commerce in Japan, 72,75,76

Antitrust laws, 127-128

Apple

Sharp alliance, 124

Toshiba alliance, 124

Asia. See also specific countries

industrialization strategies, 33-34

Asset pooling, 124

Asymmetries in government policies, ownership, and control

influence on new competitors, 33-36

ISAs and, 126-129

trade friction and, 38-41

U.S.-based MNEs and, 33, 36-38

Asymmetries in national policy regimes

competitiveness and, 7

description, 4, 15-16,68-71

Japan example, 71-79

AT&T

divestiture, 128

international competition and, 13

Olivetti alliance, 125, 128, 130, 132

Philips alliance, 124, 128, 130, 132

Automotive industry. See also specific companies

automakers with plants in the United States, 63-64

domestic content issue, 84,94-99

EC-Japan agreement on Japanese auto imports, 69

FDIUS and, 51-52

ISAs and, 121

Japanese Government encouragement of investment in the

United States, 84

keiretsu and, 75-76,86-87,91-93

labor costs, 25

protectionist policies and, 30

Section 301 filing, 85

voluntary restrictions on Japanese automobile imports, 33

Bayh-Dole Act, 107, 109-110

Biotechnology industy

ISAs and, 118, 119, 121, 123, 124

Japanese investment in, 99, 104-106

Bluegrass Automotive Manufacturers Association, 93

BMW, 63

Boeing, 13, 126

Bretton Woods Conference, 8, 137-139, 143, 149

Britain. See United Kingdom

Bull, 32, 128

Bush administration

FDIUS policies, 62

national treatment policy, 48

Business Global Partnership Initiative, 84

CAFE. See Corporate average fuel economy

Canadian Free Trade Agreement, 94,98

Canon, 103

Capital decontrol, 149-153

Capital flows, 136, 150

Capital mobility, 137-139

159
160 | Multinationals and the National Interest: Playing by Different Rules

CFIUS. See Committee on Foreign Investment in the United

states

CFTA. See Canadian Free Trade Agreement

Chemical industry, ISAs and, 119, 121

China National Aero-Technology Import and Export Corp.,

50

Chrysler

protectionist policies and, 30

sourcing and procurement strategy modification, 92

Coca Cola Co., 72

Committee on Foreign Investment in the United States,

49-50

Comparison Labs, Inc., 129

Competing Economies, 12-13,44

Computer industry

ISAs and, 123, 124, 126, 127

Japanese investment in, 99, 100, 101, 103

Contract research, 111

Corning, Samsung alliance, 130

Corporate average fuel economy, 94,99

Corporate philanthropy, 112

Council on Competitiveness, 155 .

Daihatsu, 67

Dai-Ichi Kangyo Bank, 88

Daimler-Benz, 63

cooperation with Mitsubishi Corp., 90

national champion example, 69

DEC, 125

Dedicated capital system, 155

Depression cartels, 76

Distributed MNEs

description, 2,27-28

factors influencing formation of, 28-29

location influence, 30

trade friction and, 40-41

Domestic content issue, 84,94-99

Dow chemical, Japanese market and, 72

DRAMS. See Dynamic random access memory

semiconductors

Dynamic random access memory semiconductors, IBMSeimens-Toshiba alliance, 24-26

EC. See European Community

Economies of scale and scope

competition and, 3

definition, 22-23

ISAs and, 124

Environmental Protection Agency, fuel economy standards,

Equity markets, 59

ESPRIT. See European Strategic Program for R&Din

Information Technologies

Europe. See also European Community

EC-Japan agreement on Japanese auto imports, 69

FDIUS expansion, 55,57

ownership of MNEs, 35-36

protectionist policies, 68

support for national champions, 33, 69

European-based MNEa

export-oriented, 32

government support for, 31-32

protectionist policies and, 30,31

regional focus, 31

regional type, 29

source of FDI in the United States, 32

translational type, 29

European community

high-tech industry standards, 128

import of Japanese autos agreement, 69

ISAs and, 119, 127

preferential treatment of member countries, 9-10

regulation of pharmaceuticals, 105

European Strategic Program for R&D in Information

Technologies, 127, 129

Exchange rates

deutsche mark vs. dollar, 142

yen vs. dollar, 60-61,74, 143

Exemption cartels, 76

Exon-Florio Provision, 49

Export-Import Bank of Japan, Product Import Promotion

Financing Program, 78

Export-oriented MNEs

description, 2,26-27

factors influencing formation of, 28

location influence, 30

national differences, 29

trade friction and, 40

Fanuc, 67

FDI. See Foreign direct investment

FDIUS. See Foreign direct investment in the United States

Federal Trade Commission, investigation of Japanese

transplant sourcing practices, 93

Fiat, national champion example, 69

Financial markets. See Global capital markets

Fluid capital system, 155

Fokker, McDonnell-Douglas alliance, 130

Ford, Gerald, CFIUS creation, 49

Ford Motor Co.

Japanese market and, 72

Mazda alliance, 92, 125

protectionist policies and, 30

sourcing and procurement strategy modification, 92

Foreign direct investment

asymmetries in national policy regimes, 4,7,15-16,68-79
Index | 161

European-based MNEs and, 32

FDI in the United States, 47-68

findings, 4447

history of, 68-69

host country share, 52

inward flows, 5, 45

ISAs and, 126-127

Japan example, 71-79

national treatment policy and, 46

Foreign direct investment in the United States

advantages for Japanese firms, 86

benefits, 44,62-64

calculating, 53-54

changes in the cost of capital and, 57-60

description, 47-51

disadvantages, 62,64-68

effect on employment, 65-66, 67

financial data, 64,82

foreign affiliate employment, 56

importance of foreign MNEs in the United States, 51-57

importance to the U.S. economy, 48

incentives from States and municipal authorities, 2, 66-67

macroeconomic investment theory and, 57

macroeconomic theory, 57

portfolio investment and, 47

reversal of flow toward, 57-62

trends, 81-83

U.S. direct investment abroad and, 50-51,79

Foreign Exchange Control Law of 1949,60

Fortune 500 International list, 33,36-37

France

capital liberalization and, 60

capital market, 143

discrimination against foreign firms, 68, 69

government support of industry, 31

inward FDI policies, 46

labor costs, 25

restrictions on FDI, 7

state-owned banks, 59-60

Franklin National Bank failure, 152

Fujitsu

Advanced Micro Devices alliance, 100, 124

plant closing, 67

TRW alliance, 131

Fuyo, 88

General Agreement on Tariffs and Trade, 18,77

General Ceramics Ltd., 50

General Motors

attempt to purchase Isuzu shares, 73

protectionist policies and, 30

sourcing and procurement strategy modification, 92

Toyota alliance, 125, 134

Valmet joint venture, 25

Germany

discrimination toward foreign firms, 68, 69

interest rate differentials, 144

national banks, 59

ownership and agency relationships, 157

relative importance of banks, 154

Global capital markets

capital decontrol and financial integration, 149-153

cross-border stock and bond transactions, 151, 152

external and internal capital allocation mechanisms, 156

financial derivative markets, 153

financial integration and national structures, 153-157

financial uncertainties, 144-146

findings, 140-142

governme nt policies and, 142-144

international financial transactions, 151

MNEs and, 144-147, 157-158

policies influencing, 145

post-World War II banking market structures, 148

structure, 147-149

Global MNEs

description, 2, 27

factors influencing formation of, 29

trade friction and, 40-41

GM. See General Motors

Green.field site construction or licensing, 73,74

HDTV. See High-definition television technology standards

Herstatt Bank failure, 152

Hewlett-Packard, 125

High-definition television technology standards, 128-129

High-tech industry. See also Computer industry; Information

technology industry; Semiconductor industry

biotechnology investments, 104-106

Japanese investment in, 99-106

marketing rights goal, 102-103

relationship types, 103-104

sources of investment, 101-103

standards for, 128-129

technology acquisition goal, 102, 103

Hitachi, 67

Honda

domestic content issue, 98

incentives from States and municipal authorities, 67

investment in the United States, 85

protectionist policies and, 30

sourcing behavior, 96-97

USCS audit, 95

IBM

international competition and, 13

ISAs and, 127
162 I Multinationals and the National Interest: Playing by Different Rules

licensing of patents to Japanese firms, 72

Siemens alliance, 133

strategic alliance example, 24-26

successful U.S. investments example, 70-71

Toshiba alliance, 100

ILPs. See Industrial liaison programs

IMF. See International Monetary Fund

Import substitution policies, 33-34

India, import substitution policies, 33

Industrial Bank of Japan, 88

Industrial liaison programs, 111-112

Information technology industry, ISAs and, 118, 119, 121

Intel

antitrust suit, 128

Sharp alliance, 100

Intellectual property rights in Japan, 77

International Investment and Trade in Services Survey Act,

47

International Monetary Fund, Committee of Twenty, 139

International strategic alliances

asset pooling and, 124

cartelization issue, 116

competition and, 125-126, 131-132

cost and risk sharing and, 123-124

description, 100, 117

distribution of, 118-119

economies of scale and scope and, 124

example, 24-26

findings, 116-117

formation by industry and industry/country, 119-121

goals differences, 131

government role, 116,126-129

increase in, 116, 118, 121-123

management style differences, 130-131

market access and, 125

MNEs and, 123-126

overeagerness and, 130

reasons for establishing, 122

success factors, 129-134

time factors, 125

type of collaboration by region, 121

underfinancing and, 130

U.S. Government policy and, 132-134

U.S. MNEs and, 132-134

ISAs. See International strategic alliances

Isuzu, 67

Italy

capital liberalization, 60

discrimination toward foreign firms, 68, 69

government support for MNEs, 31

inward FDI policies, 46

restrictions on FDI, 7

Itoman Corp., 90

Japan. See also Keiretsu; Ministry of International Trade and

Industry

Anti-Monopoly Law, 76,88

asymmetry in national policy example, 71-79

attitude toward acquisitions and mergers, 73-75

“Buy Japanese” attitudes, 77

capital liberalization and, 60, 84

discrimination toward foreign firms, 69

EC-Japan agreement on import of Japanese autos, 69

expansion of equity market, 58-59

export-oriented form, 32

FDIUS and, 61-62

Foreign Exchange Control Law, 78

greenfield establishments, 73,74

high land prices, 78-79

import substitution policies, 34

importance of FDIUS, 52, 55

intellectual property rights, 77

interest rate differentials, 144

inward FDI level, 79

Meiji Restoration, 83, 103

MNE policies, 34

monopolistic practices, 76

ownership and agency relationships, 157

patent protection, 77

procurement issue, 77-78

proscription of investments that threaten national security

or public order, 76-77

protectionist policies, 30,68

relative importance of banks, 154

restrictions on FDI, 7,68-69,72-74

successful U.S. investments examples, 70-71

tax policies that discourage FDI, 78

U.S. high-tech firms and, 99-106

yen value, 60-61,74,84

Japan Development Bank, 78

Japan Export and Trade Organization, 84

Japanese firms

administrative guidance by government, 16,83,84-86

domestic content issue, 84,94-99

export-oriented type, 29

FDIUS advantages, 86

follow-the-leader tendency, 101

government support for, 31, 32

increase in number of MNEs, 33

number of firms in the United States, 81-83

predatory investment behavior, 104

U.S. university research and, 84, 106-113

zaibatsu, 83, 88

JESSI. See Joint European Submicron Silicon Initiative

John Brown, 39

Joint European Submicron Silicon Initiative, 127, 129, 133
Index | 163

Keiretsu

automotive industry example, 75-76

description, 73-75,83-84,86-88

horizontal, 88-90

influence on market access and competition, 91-94

one-set-ism, 88

supplier relationships in the United States, 93

vertical, 90-91

Keynes, John Maynard, 137

Komatsu, 67

Labor costs, rationalizing production and, 25

Licensing agreements, 72,74

Licensing of patents to Japanese firms, 72

Malaysia MNE policies, 34

Mamco Manufacturing g of Seattle, 50

Massachusetts Institute of Technology

foreign corporate tiding, 109

industrial liaison programs, 112

Media Lab, 111

Matsushita Electric Industrial Co., 90,91

Mazda 92, 125

McDonnell-Douglas

Aerospatiale/Dassault-Breuget alliance, 130

Fokker alliance, 130

Taiwan Aerospace alliance, 123

Microsoft, antitrust suit, 128

Ministry of International Trade and Industry

Business Global Partnership Initiative, 84

FDIUS and, 61

ISAs and, 127

liberalization policy, 79

licensing of IBM patents to Japan, 72

stable shareholders and, 73-75

Texas Instruments and, 35

MIT. See Massachusetts Institute of Technology

MITI. See Ministry of International Trade and Industry

Mitsubishi Corp.

cooperation with Daimler-Benz, 90

keiretsu example, 88,89

Monsanto alliance, 131

stable shareholding acquisitions, 73

Mitsui, 73, 88

Monsanto, Mitsubishi alliance, 131

Motorola

ISAs and, 131

Japanese market and, 72

successful U.S. investments example, 70

Toshiba alliance, 132

Multinational enterprises

background, 6-11

concerns about, 1-6

factors influencing type, 28-29,31

financial markets and, 144-147

financial uncertainty and, 144-146

findings, 13-15

multinational cooperation and, 157-158

national differences, 29-32

policy issues, 15-19

rationalizing production, 25

reasons to establish foreign operations, 23-24

rise of modem industrial corporations, 21

social impact, 10-11

strategic alliances, 24-26

structure, 1, 22-29

types, 2,26-28

NAFTA. See North American Free Trade Agreement

National bank-led systems, 59

National champion strategy, 31,32,33,69, 127

National Cooperative Research Act, 128

National treatment policy, 17-18,33,35,46,4849, 64-68

NBC, HDTV alliance, 129

NEC, ISAs and, 127

Netherlands, labor costs, 25

New materials industry, ISAs and 118, 121, 122

Next Computer Corp., Canon investment in 103

Nippondenso, 92-93

Nissan

investment in the United States, 85

national champion example, 69

parts supplies from United States, 87

plant closings, 67

protectionist policies and, 30

U.S. companies as suppliers, 93

Nontariff barriers, 126

North American Free Trade Agreement, 11,94,98-99

NUMMI. See General Motors; Toyota

OECD. See Organization for Economic Cooperation and

Development

Offshore markets, 157

Oligopolistic competition, 116, 126

Olivetti, AT&T alliance, 128, 130, 132

Omnibus Trade and Competitiveness Act, 49

Super 301 provisions, 8-9

One-set-ism, 88

Open Software Foundation, antitrust suit, 128

Optoelectronics industry, ISAs and, 122

Organization for Economic Cooperation and Development

capital liberalization and, 60

competition for workers, 21

founding of, 138

gross domestic product, 151

international investment and MNEs and, 70-71
164 I Multinationals and the National Interest: Playing by Different Rules

national treatment policy, 69

outflow of investment capital, 46

Patents

Federal policy, 109

in Japan, 77

research results, 111

Pharmaceutical Strategic Alliances, 118

Philips

AT&T alliance, 124, 128, 130, 132

HDTV alliance, 129

Photomask industry, Japanese investment in, 99-100

Plaza Agreement, 60

Portfolio investment, 47

Protectionist policies, 18,30-31,61,68

RACE. See Research for Advanced Communications in

Europe

Rationalization cartels, 76

Reagan administration, FDIUS policies, 62

Reciprocity, 6, 18-19

Regional MNEs

description, 2,27

factors influencing formation of, 29

trade friction and, 40

Renault, national champion example, 69

Research. See Sponsored research; University research

Research for Advanced Communications in Europe, 128,129

Research parks, 112-113

Resource-based MNEs

description, 2, 26

trade friction and, 39-41

Risk-sharing partnerships, 24-26

Robotics, ISAs and, 122

Roll-up, 95

Samsung Co., Corning alliance, 130

Sanwa 88

Sarnoff Research Center, HDTV alliance, 129

Seiko, 67

SEMATECH, 127

Semiconductor industry

IBM-Seimens-Toshiba alliance, 24-26

ISAs and, 121, 125

marketing rights, 102, 103

national champion, 32

Semiconductor Trade Agreement, 103

Senate Committee on Banking, Housing, and Urban Affairs,

11

Senate Committee on Commerce, Science, and

Transportation, 11

Sharp

Apple alliance, 124

Intel alliance, 100

Siemens

IBM alliance, 133

strategic alliance example, 24-26

Siemens-Nixdorf, government support for, 32

Silicon Valley, 99, 100, 102, 103

Singapore, MNE policies, 34

Sony Corp., 93

South Korea

export-oriented MNEs, 29, 32

government support for MNEs, 32

import substitution policies, 34

increase in number of MNEs, 33

labor problems, 10

MNE policies, 34

Specific reciprocity, 6, 18-19

Sponsored research, 110

Stable shareholding, 73-75. See also Keiretsu

Strategic alliances. See International strategic alliances

Structural Impediments Initiative, 70,75,87

Sumitomo

keiretsu example, 88

Mazda bailout, 92

stable shareholding acquisitions, 73

Sun, 125

Taiwan Aerospace, McDonnell-Douglas alliance, 123

Takatoshi, Sokubei, 88

Technology licensing, 111

Telecommunications industry

deregulation, 128

European-based MNEs and, 31-32

ISAs and, 122, 123

Texas A&M University, ocean-drilling program, 108-109

Texas Instruments, 34,35, 70

Thailand, MNE policies, 34

Thompson, HDTV alliance, 129

Tokai Group, 88

Tokuyama Soda Co., 50

Toshiba

Apple alliance, 124

IBM alliance, 100

keiretsu example, 91

Motorola alliance, 132

strategic alliance example, 24-26

Toyota

Bluegrass Automotive Manufacturers Association, 93

foreign participation in company prohibition, 75

General Motors alliance, 125, 134

incentives from States and municipal authorities, 67

investment in the United States, 85

national champion example, 69

parts defects, 86-87
Index I 165

protectionist policies and, 30

stable shareholding acquisitions, 73

suppliers for, 90

Toys “R” Us, 75

Trade Act 85

Trade friction, MNEs influence on, 2, 38-41

Trafalgar House, 39

Translational MNEs

description, 2,27

factors influencing formation of, 29

trade friction and, 40

Transparency in decisionmaking process, 76-77, 136

TRW, Fujitsu alliance, 131

United Auto Workers, protection from Japanese firms, 85

United Kingdom

capital market, 143

Export Credit Guarantee Department, 39

labor costs, 25

United States. See also Foreign direct investment in the

United States; U.S.-based MNEs

affiliates of foreign companies financial data, 64,65

antitrust laws, 127-128

capital market, 143

national treatment policy, 17-18, 33, 35, 48-49, 64-68

ownership and agency relationships, 157

ownership of MNEs, 34-35

policy implications of ISAs, 132-134

protectionist policies, 18,30-31,61,68

relative importance of banks, 154

trade deficit cause, 79

voluntary restrictions on Japanese automobile imports, 33

yen value vs. dollar, 60-61, 74, 143

United States Trade Representative, 77

University and Small Business Patent Policy Act, 107,

109-110

University research

contract research, 111

corporate funding extent, 108-109

corporate philanthropy, 112

corporate-university relationships, 110-113

industrial liaison programs, 111-112

Japanese investment in, 106-113

legislative background for funding, 109-110

research parks, 112-113

sponsored research and technology licensing, 110-111

Uruguay Round of the General Agreement on Tariffs and

Trade, 18,77

U, S.-based MNEs

competitiveness issue, 7

decline in dominance of, 22,36-38

distributed type, 30

global type, 29

ISAs and, 116, 132-134

location influence, 30-31

protectionist policies and, 30-31

U.S. Customs Service, 94

Honda audit, 95

Us.

U s .

U.S.

U.S.

U s .

U s .

direct investment abroad, 64-65,79

Eximbank, 39

Federal Communications Commission, 128-129

International Trade Commission, 85

Justice Department, 85

Trade Representative, 85

USCS. See U.S. Customs Service

USDIA. See U.S. direct investment abroad

Valmet, joint venture with GM, 25

Value-added chain

European-based MNEs and, 32

government policies and, 36

setting up, 3

Venture capital, 100-101

VERs. See Voluntary export restraints

Volkswagen

national champion example, 69

protectionist policies and, 30

Voluntary export restraints, 5,84-85

Voluntary restrictions on Japanese automobile imports, 33

VW. See Volkswagen

Zaibatsu, 83, 88

 U.S. GOVERNMENT PRINTING OFFICE 1993.343-283/96951