Research Puzzles Arising from the Internationalization of U.S. Food Processors

manufacturing affiliates grew by 125%; during the same period, FDI into the U.S. foodmanufacturing industries soared 790%. There are certain features of these parallel capital flows that are not sufficiently explored by Handy and MacDonald. First, one rather consistent feature of FDI is that of geographic cross-penetration, the two-way flows that occur between countries at similar levels of development. Crosspenetration (or reciprocity) of FDI holds in the long run for individual industries as well as broader sectoral groupings (Connor 1977). Unlike international portfolio investment (such as bonds), but like trade in differentiated products, FDI flies in the face of comparative national advantage based on immobile factors of production. The suggestion that mobile tangible and intangible assets drive FDI flows seems to be correct. The major geographical shift in U.S. food-processing FDI since the 1960s from Canada and Latin America to Europe appears to be an intensification of cross-penetration. The reasons for increased cross-penetration between the United States and Europe are unlikely to be simply the convergence incomes, preferences, and food distribution systems (indeed, the U.S./Latin American convergence may have been relatively greater). There is one geographic pairing for which reciprocity in FDI may be breaking down, namely, Japan and the United States. In 1987, U.S. assets owned by Japanese investors ($197 billion) doubled over 1986 levels, and these large flows of investment appear to have been sustained in 1988-89. Japan is now the largest single owner of U.S. assets, having jumped from third to first place in 1987. By contrast, U.S. assets in Japan were much lower in 1987, about $88 billion or 44% of the Japanese stake in the U.S., and increasing much more slowly. One reason for the imbalance in Japanese/U.S. FDI may be the crushing U.S. net overseas debt, which by the end of 1988 had reached $533 billion. The United States was a net creditor until 1984, but by 1992 net U.S. debt is expected to reach $1 trillion. The puzzle is why cross-penetration has risen for U.S./European FDI but has slackened for U.S./Japanese FDI. One market-structure explanation of crosspenetration is that it represents strategic responses of rival firms to an incursion of a rival effected by FDI. By reacting in this way, interfirm rivalry develops along more geographic contact points, which may induce more forbearance between rivals. A related cooperative strategy is the bunching of initial investments in the same industry-country locations first detected by Knickerbocker. His test was fairly crude (three-digit SIC and affiliate counts only). Data are available to test this bunching notion for inward U.S. FDI. A second feature of FDI not mentioned by Handy and MacDonald is the mode of entry. Since data began to be collected in the late 1970s, about two-thirds of the value of investment outlays on U.S. affiliates in all industries has been via mergers and acquisitions. In food processing, virtually all new foreign investments are by acquisition, and most deals are effected through already established foreignowned U.S. affiliates that borrow most of the John M. Connor is a professor, Department of Agricultural Economics, Purdue University.