Japan and the Global Economy: Issues and Trends in the 1990s

Japan and the global economy

Japan and the global economy Issues and trends in the 1990s

Edited by Jonathan Morris

London and New York

First published 1991 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2003. Simultaneously published in the USA and Canada by Routledge a division of Routledge, Chapman and Hall, Inc. 29 West 35th Street, New York, NY 10001 © 1991 Jonathan Morris All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data Japan and the global economy: issues and trends in the 1990s. 1. Japan. Foreign investment I. Morris, Jonathan 1958– 332.6730952 ISBN 0-203-41407-1 Master e-book ISBN

ISBN 0-203-72231-0 (Adobe eReader Format) ISBN 0-415-06456-2 (Print Edition) Library of Congress Cataloging in Publication Data Japan and the global economy: issues & trends in the 1990s/ [edited by] Jonathan Morris. Includes bibliographical references and index. ISBN 0-415-06456-2 1. Investments, Japanese. I. Morris, Jonathan, 1958– II. Title: Japan and the global economy. HG4538.J27 1991 332.6’7352–dc20 90–23870 CIP

Contents

List of figures List of tables List of contributors Acknowledgement General note

vii ix xiii xv xvi

1 Globalization and global localization: explaining trends in Japanese foreign manufacturing investment Jonathan Morris 2 The changing geography of Japanese foreign direct investment in manufacturing industry: a global perspective Peter Dicken 3 Structural origins of Japan’s direct foreign investment Rob Steven

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4 Japanese direct investment in the United States manufacturing sector Neil Reid

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5 Japanese foreign direct investment in the United States: the case of the automotive transplants Richard Florida and Martin Kenney

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6 Japanese manufacturing investment in Canada: regional presence and integration strategies Jonathan Morris

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7 Reshaping the international division of labour: Japanese manufacturing investment in South-East Asia Tessa Morris-Suzuki

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Contents

8 Pursuing the new international economic order: overseas investment and trade of Japan, the Asian NIES and ASEAN 154 Teruzo Muraoka 9 Japanese direct investment and Australian economic development David W.Edgington

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10 Japanese foreign manufacturing investment in the EC: an overview Jonathan Morris

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11 Japanese direct investments in West Germany: trends, strategies and management problems B.Nino Kumar

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Index

235

Figures

2.1 Growth of Japanese overseas direct investment, 1962–85 2.2 Cumulative growth of Japanese overseas direct investment by major region, 1951–85 2.3 Incremental growth of Japanese overseas direct investment by major region, 1971–85 2.4 The location of Japanese overseas direct investment, 1985 2.5 Sectoral profiles of Japanese overseas direct investment by major region, 1985 4.1 States and regions of the USA 4.2 State share of Japanese manufacturing employment up to the end of 1979 4.3 State share of Japanese manufacturing employment for the period 1980–7 4.4 State share of Japanese manufacturing employment up to the end of 1987 5.1 Japanese automobile assembly transplants in the USA 5.2 Japanese transplant parts assemblers and suppliers in the USA 7.1 The division of labour in Asia 9.1 Japanese direct investment in Australia by industry type—cumulative totals from 1951/2 to 1982/3 and 1987/8

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16 17 18 20 21 71 72 74 78 94 105 148 175

Tables

1.1 Sony’s European manufacturing operators 1.2 Honda’s operations in North America 2.1 The changing sectoral composition of Japanese overseas direct investment, 1960–85 2.2 The sectoral composition of Japanese overseas direct investment by major region, 1981 and 1985 2.3 Motives for Japanese firms seeking production bases overseas 4.1 Foreign direct investment in the US manufacturing sector by country of origin at the end of 1986 4.2 The growth of Japanese direct investment in the US manufacturing sector, 1977–86 4.3 Foreign direct investment capital inflows into the US manufacturing sector by country of origin for the year 1986 4.4 Construction and acquisition dates of Japanese-owned manufacturing plants in the US, 1912–87 4.5 Sectoral distribution of Japanese investment in the US at the end of 1986 4.6 Distribution of employment in Japanese manufacturing plants in the US across two-digit Standard Industrial Classification codes at the end of 1987 4.7 Distribution of employment in Japanese manufacturing plants in the US across three-digit Standard Industrial Classification codes at the end of 1987 4.8 Geographic distribution of employment in Japanese manufacturing plants in the US by region 4.9 Geographic distribution of employment in Japanese manufacturing plants in the US by state ix

5 7 19 22 34 64 64

65 66 67

68

69 73 76

x

Table

4.10 Japanese share of employment in US industrial sectors at the two-digit Standard Industrial Classification code level at the end of 1986 4.11 Industrial subsectors (three-digit SIC code level) in which Japanese manufacturers accounted for over 1 per cent of employment at the end of 1986 4.12 Importance of greenfield versus acquired entry for Japanese manufacturing investors in the US at the twodigit Standard Industrial Classification code level at the end of 1987 5.1 Japanese automobile assembly plants in North America 5.2 Work organization and industrial relations in transplant assemblers 5.3 Work organization and industrial relations in transplant suppliers 6.1 Automobile and auto component firms in Canada 6.2 Main customers of Japanese-owned subcontracting firms in Canada 7.1 Japan’s exports to Asia by product 7.2 Japanese investment in Asia by industry 7.3 Markets for produce of Japanese investment projects in South-East Asia 7.4 Japan’s trade with South-East Asia, 1976 and 1986 8.1 South Korea and Taiwan statistics on overseas direct investment by region, 1968–88 8.2 South Korea and Taiwan statistics on overseas investment by industries 8.3 Taiwan statistics on approved outward investment in ASEAN countries, 1959–June 1989 8.4 Difference range of Taiwan overseas investment with host countries, 1987–8 8.5 Taiwan statistics on approved outward investment in ASEAN countries by industries, June 1989 8.6 The position of South Korea and Taiwan in ASEAN foreign investments 8.7 Small and medium business’ position in their export markets, by ANIE 10.1 Distribution of Japanese manufacturing plants in the EC by country, 1989

79

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83 95 97 100 116 126 138 140 142 150 156 157 159 160 162 163 169 198

Table

10.2 Location of Japanese manufacturing plants by UK region, 1988 11.1 Japanese manufacturing investment in West Germany, 1973 (estimated) 11.2 Japanese direct investment in West Germany, 1973 11.3 Recent trends in Japanese direct investment in West Germany 11.4 West German direct investment in Japan 11.5 Industry-wise distribution of Japanese direct investments in West Germany 11.6 Japanese manufacturing units in West Germany by industry, 1987 11.7 Geographic distribution of West Germany subsidiaries of Japanese companies, 1988 11.8 Ownership pattern of manufacturing affiliates of Japanese companies in West Germany, 1987 11.9 Equity structure of Japanese-German joint ventures in West Germany

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201 216 217 217 217 218 219 220 222 222

Contributors

Jonathan Morris is a Lecturer in Organizational Behaviour and a member of the Japanese Management Research Unit at Cardiff Business School, University of Wales College, Cardiff, UK. Peter Dicken is a Professor in the School of Geography at The University of Manchester, England. David W.Edgington is an Assistant Professor in the Department of Geography, University of British Columbia, Canada. Richard Florida is a Professor at the Centre for Economic Development in The School of Urban and Public Affairs, Carnegie Mellon University, Pittsburgh, USA Martin Kenney is a Professor in The Department of Applied Behavioral Sciences at The University of California at Davis, USA B.Nino Kumar is a Professor at The Universitat der Bundeswehr, Hamburg, West Germany. Tessa Morris-Suzuki is a Professor in The Department of Economic History at The University of New England, Australia. Teruzo Muraoka is a Professor in The Faculty of Economics, Niigata University, Japan. Neil Reid is a Researcher in The Department of Geography, Arizona State University at Tempe, USA. Rob Steven is a Professor of Political Science in The University of Christchurch, New Zealand.

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Acknowledgement

I wish to thank Ms Louise Jones for her preparation of the manuscript.

xv

General note

Where the word ‘billion’ appears in the book, this refers to the US billion (a thousand millions).

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1

Globalization and global localization Explaining trends in Japanese foreign manufacturing investment Jonathan Morris

INTRODUCTION Japanese foreign direct investment generally, and manufacturing investment (JMI) in particular, has displayed a strong growth trajectory in the 1970s and 1980s. As Dicken notes in Chapter 2, while there have been geographical variations in its destination, all major world regions have been the recipients of such investment. While the EC, for example, has lagged behind North America, as Morris’s chapter on JMI in the EC illustrates, it has nevertheless witnessed extremely fast growth particularly in the late 1980s which, for various reasons, Morris argues will continue into the 1990s. A recent study by Julius (1990), for example, illustrates that Japan had the biggest percentage growth in outflow between 1983 and 1988. Moreover, whereas other major OECD countries were also experiencing substantial inward flows in investment between 1980 and 1988, those into Japan were extremely low. Given the explosion of JMI in the 1970s and 1980s, the purpose of this chapter is to provide a contextual framework with which to explain this growth as a backcloth to the other contributions. The correct question perhaps would be why it has taken so long to occur, given the overseas investment activities of companies from other major OECD countries, notably the USA and the UK. Indeed, as Dicken’s chapter notes, there has been a lively debate on the ‘uniqueness’ of Japanese manufacturing investment patterns, although Emmott (1989) has recently argued that the investment patterns of major Japanese corporations will come more and more to mirror those of their US counterparts. The motives and rationales for JMI are returned to in a number of the contributions in this book. Morris’s chapters on JMI in the EC and Canada, for example, both explore this theme, as does Steven in Chapter 1

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3, Reid in Chapter 4 on JDI in the USA, and Kumar on Japanese JDI in West Germany. Broadly, they can be summarized into three main motives. First, there is the growth in costs associated with exporting from Japan. As Steven’s chapter illustrates, this was largely due to the so called ‘yen crisis’ which developed out of the Plaza Agreement on exchange rates in 1985 and which saw the yen double in value against the US dollar within two years. As Reid’s chapter indicates, 40 per cent of the cumulative Japanese investment in 1989 came in the two years following this crisis, in 1986 and 1987. Closely associated with this has been increasing wage pressures in Japan. As Steven argues in his contribution, Japan changed from a relatively low wage economy to a high wage one, although the Japanese working class received little benefit from this process (see also, Steven 1988). The second motive has been the protectionist tendencies displayed in North America and, more particularly, in the EC. These have manifested themselves a number of ways including ‘voluntary agreements’ on cars, formal quotas and tariffs, and more sophisticated measures in the EC, whereby Japanese products made in Japanese plants within the EC are counted as ‘Japanese made’ unless certain local content levels are achieved. As Morris points out in Chapter 10, this has proved a potent force in directing JMI towards the EC, as it has in the USA, according to Reid, and Florida and Kenney. The final, major, motive has been the need to be producing in the major markets in order to effectively sell in these markets on a large scale. Morris’s surveys of Japanese manufacturing firms in Canada and the EC illustrate that this has been as important a motive for Japanese FMI as the push of the high value of the yen and the pull of protectionist measures. Moreover, this is the thrust of the argument that ‘global localization’ as much as ‘globalization’ explains and provides a framework for Japanese FMI. ‘GLOBALIZATION’ AND ‘GLOBAL LOCALIZATION’ The argument I wish to develop here is that in the late 1980s and early 1990s the key theme of Japanese FMI will be global localization rather than globalization per se. Indeed, the distinction between the two terms could be seen as being one of stages. Globalization could be seen as a first stage in Japanese FMI where Japanese manufacturers set up manufacturing operations overseas in a relatively basic form, where the investments are essentially final assembly operations closely controlled by the parent in Japan, and where few components are sourced locally and little research and development is carried out.

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Global localization can be seen as the next stage of the FMI process where the investments ‘deepen’ and Japanese manufacturers attempt to become ‘insiders’ in foreign markets, as US companies such as Ford, 3M, and IBM have done in Western Europe.1 Crudely, this would include a move from assembly to full manufacture, the transfer of in-house key component production from Japan to the area of investment, and a greater use of local suppliers. It would also include transferring some of the decision making from the parent organization in Japan to local management and the transfer of R&D functions. This is a process discussed by Florida and Kenney in their chapter on Japanese automotive transplants in the US and by Morris on Japanese FMI in the EC. Two case studies are provided in the next section of this paper as exemplars of such a process. A note of caution is, however, added by Kumar’s chapter on Japanese FMI in West Germany as to the extent of such a process. The next question to be answered is why should such a process occur, that is, why are certain Japanese companies moving from the stage of globalization to global localization? In the semiconductor industry, for example, it is not immediately obvious why major Japanese corporations should be moving from assembly to full manufacturing (wafer fabrication) as NEC and Fujitsu are in Europe. In this industry the fabrication stage is now capital intensive and therefore not prone to high labour costs, and transportation costs are minimal. The answer to this question lies in the rationale for global localization, that is, that such a strategy is essentially market driven. As the last section illustrated, Japanese corporations are increasingly seeing a need to produce in the markets that they are selling in, and the only effective way to compete is by following a global localization strategy and opting for full manufacture. In this way these companies can be flexible to meet ‘local’ market demands without having to wait for months for orders to appear from Japan or to wait for design changes from the corporate R&D centres based in Japan. Robins (1989) has described this as the process by which leading edge companies are restructuring themselves into ‘flexible transnational’. It also explains in part why there has been such a rush of so-called strategic alliances across a range of industries and between companies from the major trading blocs (Cooke and Wells 1990; Wells and Cooke 1990; Womak et al. 1990) As Robins further argues: They must now operate in all markets simultaneously. Global corporations are increasingly involved in time based competition:

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they must shorten the innovation cycle, cut seconds from the process time in the factory, accelerate distribution and consumption. (Robins 1989:21) As a consequence of this market-driven production philosophy, firms must also take on new organizational structures such as the ‘flat organization’ or ‘polycentricism’. The case studies of Sony and Honda which follow are ample illustrations of this, and an even better case would be IBM which, consciously or unconsciously, acts as a role model for the Japanese corporations (Morris and Imrie 1991). GLOBAL LOCALIZATION: TWO CASE STUDIES One problem with the study of Japanese overseas investment is that it tends to treat all Japanese corporations as an amorphous mass. As Cusumano (1985) has illustrated, however, even firms in the same industrial sector—in this case Toyota and Nissan—can display very different business strategies. The two case studies described here are in some ways untypical, as they are at the leading edge of global localization among Japanese companies. Nevertheless, it is arguable that these firms display characteristics in their internationalization strategies which other Japanese corporations are starting to adopt. Sony Sony have been at the forefront of the globalization of the Japanese consumer electronics industry; they were the first company to start production in North America when they located a plant at San Diego in California in the early 1970s and their Bridgend plant in South Wales was the first Japanese television plant in the EC (Morris 1987; Morris and Imrie 1991). Essentially, Sony have divided their production and market into three major supranational trading blocs—Japan and the western Pacific rim (Japan, East and South-East Asia, and Australasia), North America (including Mexico), and Western Europe. This has also been driven by Sony’s export orientation. Indeed they are one of Japan’s most international companies with only 34 per cent of total sales in 1988 in Japan (Wagstyl and Buchan 1989). Accordingly, production is being reorganized on an integrated scale in these blocs: (a) Japan, East and South-East Asia, Australasia. There has been a considerable shift of production of consumer electronic products and components from Japan to other south and east Asian countries. This

Trends in Japanese FMI

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is especially true of lower value added and mature products such as consumer electronics, as opposed to the new product markets into which Sony has been diversifying such as semiconductors, computer workstations, computer disk drives and high-definition televisions. As part of this strategy, for example, in 1989 Sony announced the location of a plant in Singapore to produce tubes for colour television assembly factories in Malaysia and Thailand which will replace production from Japan. (b) North America. The San Diego facility has been considerably expanded since its inception in the 1970s to produce higher volumes of its initial product, colour televisions, but also to produce a diversified product range. Computer workstations, for example, are the latest product to be added to the plant. In addition the company has set up a R&D centre at San Jose in California, to service the North American operation. (c) Western Europe. Sony’s extensive European-wide complex of plants is rivalled only by that of Matsushita Electric. Moreover, this is set to expand further in the 1990s. The hubs of the operation are the Bridgend plant in South Wales, the largest plant and the only one to produce colour television picture tubes, and the Stuttgart operation in West Germany where, in addition to a large plant producing colour televisions, the European CTV headquarters are located. The company now has eight Western European plants spread across the UK, France, West Germany, Spain, Italy, and Austria (see Table 1.1). Table 1.1 Sony’s European manufacturing operators

Source: Sony Corporation.

While there is a degree of duplication between plants, production is also strongly integrated. The Bridgend plant, for example, supplies picture tubes to the West German and Spanish plants. Similarly, the Colmar plant makes components and sub-assemblies for other

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European plants. Sony’s expansion in Western Europe extends beyond the number of plants. It includes diversification of product lines and global localization through increased local sourcing. On some products, for example, local content levels are close to 100 per cent. This localization policy is being achieved in three ways. First, Sony have made extensive use of the growing number of Japanese suppliers who have located in the EC and in the UK in particular (Morris and Imrie 1991). Morris and Imrie estimate that there are at least fifteen such suppliers currently operating. Second, through transferring production of key and other components from Japan to Europe (CTV tubes would be one such example). Moreover in the 1990s Sony plan to transfer the production of semiconductors, video cassette recorder heads, optical pick ups and magnetic tape coating (de Jonquieres and Dixon 1989). Third, Sony are upgrading local suppliers through their supplier development programme in the EC and attempting to localize component sourcing to areas proximate to their main plants in order to fully operate a just-in-time system. In South Wales, for example, the corporation is aiming to source 80 per cent of its local content within a five mile radius or one hour’s drive time (Morris and Imrie 1991). Sony’s global localization strategy in Western Europe, therefore, comprises transferring production of a wide variety of products and sourcing high percentages of content locally. Its product range is set to diversify considerably further in the 1990s to mobile communications, computers, medical electronics, robotics and security systems, plus the key components already mentioned (de Jonquieres and Dixon 1989). In addition to transferring production, Sony is transferring some of its R&D capacity to the EC. Bridgend is already the R&D centre for CTVs, and the company plan two telecommunications R&D centres, in the UK and West Germany and a high definition (HDTV) research centre in West Germany. Research for HDTV in North America will be centred at the San Jose facility. The commitment to this policy of global localizaton is repeated in the autonomy given to international managers. In 1989, for example, Sony Corporation appointed a European and an American to its main board, the first Japanese company to do so. This is part of a strategy of a largely self-sufficient industrial and management infrastructure with substantial freedom to run its own affairs.

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Honda Honda’s place in Japan’s motor vehicle industry is very similar to that of Sony’s in the electronics field; it was a late entrant into the market, is considerably smaller than the two major companies and has used its internationalization strategy as a competitive advantage—given its relative weakness in its domestic market. Honda’s initial production overseas dates to the late 1960s when it took a share in a domestic Malaysian producer. It now has a network of production facilities throughout south, south-east and east Asia, in Taiwan (1983), Malaysia (1978), Indonesia (1975 and 1978), Thailand (1984), and India. Honda holds a minority share in all seven plants which produce motorcycles, vehicles, and vehicle parts. It also has a plant in New Zealand. Despite Honda’s entry into the Asian market via local production, it is in North America that the company’s global localization efforts are concentrated, although the company will follow this with major production facilities in the UK. Honda’s first, and main plant at Marysville, Ohio, is part of Honda’s North American-wide production complex which comprises eight manufacturing operations (see Table 1.2). Table 1.2 Honda’s operations in North America

Sources: Economist Intelligence Unit 1989; JAMA Canada 1988; Morris 1989

Car production started at Marysville in 1982, following motorcycle production, and as such Honda were the first Japanese company to build a manufacturing operation. Moreover, the company were also the first Japanese company to build engines in the USA at the Anna facility and the first to produce automatic transmissions. The company is the most integrated of the Japanese producers in North American automobile production; they were the first to export

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Japan and the global economy

vehicles outside of North America, have the largest R&D and engineering facilities, and the highest local content of the Japanese transplants in the USA. The company is now the fourth largest vehicle producer in the USA after the ‘Big Three’ domestic producers (Economist Intelligence Unit 1989). Currently Honda of America is undergoing a five step strategy to become self-reliant in the USA, including: boosting exports; increasing local content to 75 per cent by 1991; expanding production engineering; developing the second US assembly plant at East Liberty, and increasing R&D activities. The Ohio and California R&D centres have already doubled in size and will increase employment further from 100 to 500. Honda, therefore, have gone through a rapid expansion of capacity in their various integrated North American facilities. The Marysville plant, for example, started with a planned capacity of 150,000 cars per annum which has subsequently been upgraded to 500,000 units. In addition, significant investment has taken place at the facility to upgrade it from an assembly to a full manufacturing operation, with plastic moulding, stamping, welding, painting, and sub-assembly facilities. The plant supplies components to Honda’s plants in Ontario and at East Liberty, Ohio. The two main omissions are engines and automatic transmissions, which will be built elsewhere. Car engine production started at the Anna plant in Ohio in 1985, which has undergone reinvestment to increase capacity to 500,000 engines, plus an iron casting facility for front and rear suspension components, and aluminium cylinder head and aluminium wheel production facilities. Two further car assembly units have started production—one at East Liberty, Ohio, which will produce a capacity of 150,000 cars per year, and a plant at Alliston in Ontario which has a capacity of 80,000 cars per annum. As Florida and Kenney illustrate in Chapter 5, Honda, therefore have pushed forward a strategy of global localization of car production in North America in little over one decade. This has included siting R&D and engineering facilities, in transferring full manufacturing operations, and in increasing local content through transferring the production of components from Japan to Honda operations in North America. Local content has also been increased, however, by increasing component sourcing from locally based suppliers. Local content levels at Honda in North America will be 75 per cent by 1991. Indeed, as Florida and Kenney note, it is claimed that by the mid 1990s it will be as high as that at Chrysler. This has been achieved by being the most ‘Americanized’ of the Japanese transplants. For example, 95 per cent of the steel for fabricated

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components is from the US and 50 per cent of machine tools are from US-based plants. The company has three subsidiary component suppliers: Bellemar Parts Industries produces seats and exhaust systems from plants on-site at Alliston and Marysville; KTH Parts Industries produces stamped parts in St. Paris, Ohio, and CALMAC produces air conditioning units at Cerritos, California. Other supplier firms are spread throughout North America in places as far flung as Florida, Massachusetts, and Canada. However, as Florida and Kenney’s chapter notes, the vast majority of the 220 suppliers are found in the states in the auto-corridor from Michigan to Tennessee. This is particularly true of the forty Japaneseowned suppliers to Honda, all of which are within a one-hundred-mile radius of Marysville. Indeed, over a half are in Ohio with a marked concentration around the Ohio Interstate Highway 75 which has been dubbed ‘parts supplier alley’ (Economist Intelligence Unit 1989). These tend to be dedicated to the Honda plant, while the out-of-state suppliers tend to serve more than one transplant. The spatial clustering is unsurprising given the just-in-time supply system in operation at Marysville, with two hour stocks and certain suppliers delivering to the plant on an hourly basis. Honda’s global localization strategy is best illustrated, therefore, by the North American example. In Western Europe the company’s activities have been far more limited although this will change in the 1990s. In the late 1970s Honda entered into a manufacturing and technical agreement with British Leyland (now Rover) in the UK. Rover produced Honda cars under licence at one of their UK plants which later developed into joint development work. This culminated in 1989 with Honda taking a 20 per cent share of Rover’s car business and Rover taking a 20 per cent share of Honda’s UK operations. Honda’s plans in the UK include an engine plant at Swindon which is already operational, and an assembly plant, also at Swindon, which will produce 100,000 cars per annum by 1994. The engine plant will increase production from 70,000 to 200,000 units per annum. The cars will start with a local content of 60 per cent which will rise to 80 per cent within eighteen months. JAPANESE FMI, GLOBAL LOCALIZATION AND ‘REGIONAL’ DIFFERENTIATION A persuasive argument was put forward in the late 1980s by a number of leading US economists that trading blocs are the emerging forces of the world economy and that institutions which regulated trade on an

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inter-country basis, such as GATT (General Agreement on Tariffs and Trade), are largely defunct (see for example, Thurow, cited in Wolf 1989). In a sense this is as a contributory factor in, and a result of, global localization. A further conclusion might be that the model of Frobel et al. (1980) of a new industrial division of labour, in which capital takes flight to cheap sources of labour for its labour intensive assembly operations while control is maintained by headquarters located in the core OECD countries, is redundant. This, in part, is true. However, there are clear signs that different spatial divisions of labour have emerged, both at an intraregional and a national scale. The new intraregional division of labour is best illustrated by MorrisSuzuki’s contribution to this volume (see Chapter 7). In it, she argues that a complex intraregional division of labour amongst Japanese companies has emerged in South-East Asia, with a number of different levels and a basic pyramidical structure. At the top of the pyramid is Japan itself, where major Japanese corporations have retained their headquarters and R&D facilities plus higher value added production facilities. Standardized product manufacture and low value added activities have been located offshore. Initially, countries such as South Korea and Singapore were the destination for such investment, but with labour costs rising and the currencies of these countries strengthening a third tier within this intraregional division of labour has emerged, including Malaysia, Thailand, and Indonesia. Labour intensive activities in consumer electronics, for example, are being increasingly located in these countries. This, as Muraoka illustrates in Chapter 8, is providing a complex level of interaction between the three main ‘actors’ in south and south-eastern Asia—Japan, the east Asian newly industrializing economies (NIEs), and the ASEAN countries. As Edgington further adds, certain of the Japanese corporations have included Australia in this wider western ‘Pacific Rim’ region; he reports in Chapter 9, for example, that 80 per cent of components for the Matsushita Electric plant came from Japan, Malaysia, Singapore, and Taiwan. While the Japanese consumer electronics producers have been at the forefront of the creation of this intraregional division of labour, Japanese car producers are now engaging in a similar strategy. Toyota, for example, is investing $215 million in an expansion of its ASEAN network in order to integrate the various component plants to serve one another plus Toyota plants in Japan. This intraregional division of labour is best illustrated in Japan, southeastern and eastern Asia. However, such a process is also emerging in

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North America and Western Europe. The chapter by Morris on Japanese FMI in Canada, for example, cites the case of Matsushita Electric who have located labour intensive production processes in northern Mexico and final assembly facilities in the US and Canada; and Nissan has large component plants in Mexico which serve Nissan’s final assembly plant in Tennessee (Morris and Imrie 1991). In the case of Western Europe such a division is less well defined. However, it is clear that Spain and the UK are emerging as low cost centres for production in both the automotive and electronics industries and that one of the major reasons why Japanese manufacturers have not invested to a greater extent in West Germany is, in part, due to its high labour costs and rigid industrial labour law, as Chapter 10 by Morris and Chapter 11 by Kumar illustrate. CONCLUSIONS This chapter has attempted to provide a conceptual framework for the remaining chapters. As such it has argued that international firms are internationalizing in new forms. They are no longer merely duplicating production in foreign countries or setting up final assembly operations, but are starting to replicate all parts of the production process in the major markets which they serve. Japanese companies are following US and Western European companies in this regard. Good illustrations would be firms such as IBM which has a decentralized system of production and R&D (see Morris and Imrie 1991; Chapter 9). Several questions remain, however, including the extent to which firms are moving from stage one to stage two (internationalization to globalization), how many firms are moving from stage to stage, and the degree of transfer of key parts of the ‘production process’—particularly R&D. The research evidence provided in this chapter, and the chapters by Florida and Kenney, and Morris, (Chapter 10), would suggest that certain firms have moved extensively from stage one to stage two. Moreover, this includes a growing number of firms; Nissan in the UK, for example, announced in mid-1990 that it was increasing its local content to 89 per cent from launch of two new product models as opposed to the original plan of 69 per cent with a consequent European spend of £600 million rather than £400 million (Cornelius 1990). The question of R&D transfer, however, remains. Although, as Morris’s chapter on JMI in the EC illustrates, a number of major Japanese manufacturing firms are locating R&D facilities in Western Europe, the date that they get to the stage of IBM in Europe, where

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individual research units are reponsible for product development on a world-wide basis, seems remote. NOTE 1

Interestingly, as a debate surrounding the future of Japanese car transplants in the EC has raged, US-owned companies have been at the forefront of criticisms of such a continued policy of attraction.

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REFERENCES Cooke, P. and Wells, P. (1990) ‘Strategic alliances in ICT: learning by interaction’, Regional Industrial Research Report 4, Regional Industrial Research, University of Wales College, Cardiff. Cornelius, A. (1990) ‘Nissan to shed U.K. trade deficit’, The Guardian, 27 June, p. 11. Cusumano, M.A. (1985) The Japanese Automobile Industry: Technology and Management at Nissan and Toyota, Cambridge, Mass.: Harvard University Press. Economist Intelligence Unit (1989) Japanese Motor Business 19, March. Emmott, W. (1989) The Sun Also Sets: Why Japan will not be Number One, London: Economist Publications. Frobel, F., Heinrichs, J., and Kreye, O. (1980) The New International Division of Labour, Cambridge: Cambridge University Press. Jama Canada (1988) Report of the Japanese Automobile Industry in Canada, Willowdale, Ont.: JAMA. De Jonquieres, G. and Dixon, H. (1989) ‘Sony plans to increase European investment in preparation for 1992’, Financial Times, 31 July, p. 16. Julius, D.A. (1990) Global Companies and Public Policy: The Growing Challenge of Foreign Direct Investment, London, Pinter. Morris, J. (1987) Japanese Manufacturing Investment in the EC.: The Effects of Integration, Report to DG1, EC, Brussels. ——(1989) The Changing Structure of Canadian Industry in the 1980s: The Role of Japanese Manufacturing Investment, Report to Department of External Affairs, Ottawa, Canada. ——and Imrie, R. (1991) Transforming the Buyer-Supplier Relation: Japanese Style Buyer-Supplier Relations in a Western Context, London: Macmillan. Robins, K. (1989) ‘Global Times’, Marxism Today, 20 December, p. 27. Steven, R. (1988) ‘The high yen crisis’, Capital & Class 34, 86–117. Wagstyl, S. and Buchan, J. (1989) ‘Sony starts to peddle dreams’, Financial Times, 28 May, p. 29. Wells, P. and Cooke, P. (1990) ‘The geography of international strategic alliances in telecommunications: the cases of Cable and Wireless, Ericsson & Fujitsu’ Environmental & Planning A (forthcoming). Wolf, M. (1989) ‘Academics now advocate trading blocs’, Financial Times, 30 October, p. 19. Womak, J., Jones, D., and Roos, D. (1990) The Machine that Changed the World: The Triumph of Lean Production, New York: Rawson Associates.

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The changing geography of Japanese foreign direct investment in manufacturing industry A global perspective1 Peter Dicken

INTRODUCTION Japanese foreign direct investment (FDI)—the setting up of manufacturing plants and sales offices, of banks and finance houses— has become the focus of considerable political and media attention and hyperbole in the UK. In a more sober academic vein, Dunning (1986) has recently produced the first detailed survey of Japanese participation in British industry as a whole. At a subnational scale, most interest has centred upon Wales, were a substantial concentration of Japanese manufacturing plants has emerged (Dicken 1983; Morgan and Sayer 1983, 1985; Morris 1987). The issue has been high on the political agenda since 1979, as the Conservative government began to make very energetic attempts to encourage Japanese firms to set up manufacturing plants in the UK. In the financial services sector, the ‘big bang’ of October 1986 saw a very rapid proliferation of foreign, including Japanese, finance houses establishing operations in London. The political edge has sharpened markedly as the Japanese trade surplus has continued to grow and as trading frictions have intensified. In the case of trade, the issues are a mixture of a high level of import penetration of European (and United States) markets by Japanese firms and the apparently covert barriers which inhibit imports into Japan and also close some parts of the Japanese market to foreign firms (the recent dispute involving the attempt by Cable and Wireless Plc to enter the Japanese telecommunications market is a case in point). Quite apart from this broader confrontational dimension, Japanese FDI is seen by the UK government as being potentially the most dynamic and influential source of internationally mobile investment. This is partly because of the nature and characteristics of Japanese 14

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firms themselves but also because of changes in the flow of inward investment from other sources. American firms still dominate the foreign-owned sector in the UK, but, at least in manufacturing, there has been an overall slackening in the growth of US overseas investment since the late 1960s and an increased orientation towards continental Europe (Dicken 1980). At the same time, many continental European firms have preferred to serve the UK market from mainland locations (Dunning 1979) so that the growth of direct investment in UK manufacturing from European sources has been relatively modest. As yet, however, the volume of Japanese manufacturing activity in the UK (as in Europe as a whole) is quite limited: in 1986 there were approximately 45 Japanese manufacturing plants employing roughly 11,200 workers. This compares with an official figure in 1983 of 25 plants employing 3,700 workers. There is no doubt that the Japanese presence in the UK is growing quite rapidly though it remains far smaller than is often believed. It is worth remembering that total Japanese manufacturing employment in the UK in 1986 was less than the number employed in Ford’s Dagenham plant alone and is minuscule compared with the 450,000 employed in US-owned manufacturing plants. Nevertheless, Japanese firms continue to be courted assiduously by the UK government at the highest levels, and by UK promotional agencies from the Invest in Britain Bureau, through the regional promotional agencies, down to the county and district levels (though with some notable exceptions). For example, some forty local authorities put in bids for the Nissan plant when it was first announced in the early 1980s. More generally, a growing number of promotional agencies have direct or indirect representation in Japan itself. Foreign direct investment is both an economic and a political phenomenon. In the case of Japanese FDI it is especially difficult to disentangle the two dimensions. Its geographical form is the outcome of a complex interaction between economic and political forces, both internal and external. The aim in this chapter is to set Japanese manufacturing investment in the UK into its broader global context; to examine the changing global pattern of Japanese FDI, and to explore some of its underlying mechanisms and causes. GLOBAL TRENDS AND PATTERNS IN JAPANESE FOREIGN DIRECT INVESTMENT As shown in Figure 2.1, the post-Second World War time series of Japanese FDI can be divided into three broad phases:

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1 For the first twenty-five years, up to 1971, the annual growth rate of the FDI was very modest, rising somewhat in the second half of the 1960s. 2 Between 1971 and 1980, the trend was initially sharply upwards and then fluctuated considerably during the remainder of the decade. 3 Since 1980, apart from a small fallback in 1981 and 1982, the trend has been steeply upwards. Events since 1985 seem likely to continue this trend.

Figure 2.1 Growth of Japanese overseas direct investment, 1962–85 Source: Ministry of International Trade and Industry, Direct Overseas Investment from Japanese Companies, annual, various issues.

Some of the major influences contributing to this temporal variation are indicated in Figure 2.1; they will be discussed in more detail at a later stage in the chapter. The aggregate curve masks significant geographical variations. As shown in Figure 2.2, in terms of cumulative investment, North America was the location for the largest share of Japanese FDI (32.2 per cent), followed by Asia (23.3 per cent), Central and South America (18.7 per cent), and Europe (13.2 per cent). The graph shows an interesting variation over time in the relative importance of Asia and North America as host regions for Japanese FDI. Up to 1974, North America was ahead

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of Asia; between 1974 and 1981, Asia occupied first place; since 1981, North America has resumed its leading position as a host region. The recent spectacular growth of Japanese direct investment in North America is seen more clearly in the graph of annual incremental change (Figure 2.3). In fact, 1981 seems to have been a quite anomalous year for Japanese FDI in Asia with a net investment gain completely out of line with earlier or later trends. This 1981 surge seems to reflect very largely a massive investment in resource-based activities in Indonesia. It can be seen from Figure 2.3 that Japanese FDI in Europe accelerated after 1983. The finer detail of the global geography of Japanese FDI in 1985 is shown in Figure 2.4. The dominant position of the United States is very clear. Apart from the anomalous position of Panama and Liberia,

Figure 2.2 Cumulative growth of Japanese overseas direct investment by major region, 1951–1985 Source: Ministry of International Trade and Industry, Direct Overseas Investment from Japanese Companies, annual, various issues.

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the leading host countries after the United States are Indonesia, Brazil, Australia, the United Kingdom, Hong Kong, Singapore, Netherlands, South Korea, Canada and West Germany. Underlying these broad aggregate trends in Japanese FDI, and its overall geographical distribution, is considerable variation in its sectoral composition. The general picture has changed very considerably since 1960 (see Table 2.1). In 1960, more than half the total overseas direct investment was in the primary resource-based sector (of which 60 per cent was in mining); 27 per cent was in manufacturing industries; and 22 per cent in services. By 1985, only 16 per cent of the total was in the resourcebased sector (but 90 per cent of this was in mining); 30 per cent was in

Figure 2.3 Incremental growth of Japanese overseas direct investment by major region, 1971–1985 Source: Ministry of International Trade and Industry, Direct Overseas Investment from Japanese Companies, annual, various issues.

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manufacturing; and 54 per cent in services. In the case of services, there were some major shifts. In 1960, 65 per cent of the investment was in commerce, and 18 per cent in finance, banking, and insurance. In 1985, 29 per cent was in commerce, and 25 per cent in the financial sector. Indeed, Japanese banks are now at the top of the world league table in terms of assets. Table 2.1 The changing sectoral composition of Japanese overseas direct investment, 1960–85

Source: Ministry of International Trade and Industry, Direct Overseas Investment fromJapanese Companies, annual, various issues.

This sectoral pattern is strongly differentiated geographically as indicated in Table 2.2. In 1985, Asia and Oceania had the most evenly spread sectoral pattern. Japanese FDI in both Europe and North America is far more skewed sectorally, particularly towards services. In Europe less than one-fifth of the investment is in manufacturing compared with almost three-quarters of the total in services. In North America, manufacturing is relatively more important (almost 30 per cent) but there, too, the major emphasis is on services. This geographical-sectoral pattern is shown in more detail in Figure 2.5, which brings out the different sectoral profiles more clearly. Some of the more significant features include: (a) the small amount of Japanese investment in all manufacturing categories in Europe compared with North America, Asia, and Latin America. Japanese direct investment in Europe is over-whelmingly in the financial and commercial sectors; (b) the detailed sectoral contrasts between North America and Asia. First, in North America, the dominant sector is commerce, followed by banking and insurance, followed by real estate. In Asia, these sectors are relatively unimportant. The leading sector for Japanese FDI in Asia is mining. Second, the manufacturing profiles of the two regions are substantially different. In Asia, the major foci of

Figure 2.4 The location of Japanese overseas direct investment, 1985 Source: Ministry of International Trade and Industry, Direct Overseas Investment from Japanese Companies, annual, various issues.

Figure 2.5 Sectoral profiles of Japanese overseas direct investment by major region, 1985 Source: Ministry of International Trade and Industry, Direct Overseas Investment from Japanese Companies, annual, various issues. Mini

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Japanese FDI are metal manufacturing, chemicals, and textiles. In North America, the leading sectors are electrical machinery and transport machinery. Table 2.2 The sectoral composition of Japanese overseas direct investment by major region, 1981 and 1985 (expressed in percentage of regional stock)

Source: Ministry of International Trade and Industry, Direct Overseas Investment from Japanese Companies, annual, various issues.

In summary, Japanese FDI at the global scale has grown rapidly, though unevenly, since the early 1970s. Its major geographical foci are North America and Asia. Its sectoral composition has been changing and there are substantial geographical differences in sectoral profiles. But although the growth of Japanese FDI has, indeed, been very rapid—far more rapid than that of either North America or Europe—it remains relatively less significant to the Japanese economy than to the North American and European economies. Recent estimates by the Japanese External Trade Organisation (JETRO 1987), suggests that approximately 4 per cent of the total output of Japanese firms is produced overseas, whereas the comparable figures for the United States and West Germany are around 20 per cent. In Japan, the volume of exports far exceeds that of overseas production;

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in the United States and the UK the reverse is the case. But the Japanese position has undoubtedly been changing and overseas direct investment has become far more important than at any time in the past. To understand how this has come about—and where it has occurred—we need to examine some of the characteristics of the Japanese economy as well as the changing external environment facing Japanese firms. EXPLANATION OF GENERAL TRENDS AND GEOGRAPHICAL PATTERNS Some observers seem to regard all transnational corporations (TNCs) as being essentially the same: profit-seeking, capital-accumulating institutions whose behaviour is totally explained by the general laws of motion of capital and their place in the various internationalizing circuits of capital. Obviously there are some general truths in this view. But it tends to obscure the existence of historically—and geographically—specific forces and circumstances which help to create a degree of differentiation and variety among the world’s population of TNCs. In fact beyond the most general levels, all TNCs are not the same. An important influence—shown especially clearly in the case of Japanese firms—is that of the home country environment. As Ozawa has pointed out, business enterprises are ‘creatures of history, policy and circumstance’ (Ozawa 1979:x). The particular ‘history, policy and circumstance’ of Japan’s recent economic development have helped to produce a very distinctive form of transnational involvement. The precise nature of this involvement has, in turn, created particular kinds of response among Japan’s trading partners and competitors. It is the specific combination of these internal and external forces which explains the particular form of Japanese foreign direct investment. This is not the place to explore in any depth the complexities of the Japanese economy and the society in which it is embedded. However, three aspects seem to be particularly worthy of attention in the present context: 1 characteristics of Japanese industrial structure; 2 government-business relationships in Japan; 3 the role of trade and foreign direct investment in the Japanese economy.

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Characteristics of Japanese industrial structure Four aspects of Japanese industrial structure are especially relevant: (a) Compared with western business enterprises, Japanese companies seem to take a longer-term view (Abegglen and Stalk 1985; Franko 1983; Kono 1984). This is reflected in attitudes towards the time-scale over which a particular investment must make a profit. (b) The structure of Japanese industry tends to be strongly dualistic. The two sectors of the economy tend to have a number of quite distinctive characteristics but they are linked together in specific ways. The large Japanese firm tends to operate in a highly centralized, often paternalistic, manner reflected in the so-called lifetime employment system and in the mutual obligations between company and worker. In contrast, the small firm in Japan has few of the structural characteristics of the large firm: lifetime employment is generally absent, and wages and conditions tend to be substantially poorer. However, much depends upon the kinds of relationship which small firms have with large firms. A substantial proportion perform the role of subcontractors to the large firm. In many cases, these subcontracting firms are either de jure or de facto subsidiaries of larger firms. A complex network of ownership, and functional and often traditional links, bind large firms and small firms together. Each of the major Japanese firms is surrounded by a constellation of tightly linked suppliers, all of which are expected to operate within the broad production philosophy of ‘total quality control’, part of which is the ‘just-intime’ supply system (Sayer 1986; Schonberger 1982). A very fine interfirm division of labour operates but one which tends to be organized in a strongly hierarchical manner (Sheard 1983; Tsurumi 1976). In the case of the Japanese automobile industry, for example, Sheard quotes an estimate that ‘on average the production system of any one specific automaker comprises 171 first layer, 4700 second layer and 31600 third layer subcontractors’ (Sheard 1983:56). (c) A further important aspect of Japanese industrial structure is the close relationship which tends to exist between manufacturing firms, banks, and the trading companies (Abegglen and Stalk 1985, Tsurumi 1976). In some cases, though not all, this is a relationship based upon ownership, as in some of the giant trading companies such as the Mitsubishi Corporation.

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(d) These giant trading companies—the so–go– sho–sha—are a unique and particularly important component of the Japanese economy (ARTEP 1981; Burton and Saelens 1983; Nakase 1981; The Oriental Economist 1985; Tsurumi 1976; Yoshino and Lifson 1986; Young 1979). Nakase defined the so–go– sho–sha as a ‘huge conglomerate-type union of commercial and industrial capitals, having mainly grown up from the trading companies of the former Zaibatsu concerns, backed up by bank capital’ (Nakase 1981:71). Burton and Saelens argue that these organizations played a critical role in the development of the Japanese economy over the past thirty years bearing, for example, the responsibility for the management of Japan’s external economic links through their ability to procure raw materials, market Japan’s finished goods, acquire foreign exchange and serve as the major vehicle for the implementation of Japan’s foreign economic policy. (Burton and Saelens 1983:249) More graphically, Clairmonte and Cavanage called them the apotheosis of institutional integration of commodity and manufacturing trade…wedded to a plethora of industrial, financial and service operations…. Ineluctably, corporate power of such magnitude has transcended geo-political frontiers of the island empire, with banks providing financing; the shoshas ensuring the purchasing, marketing, carrying of inventory and market research; and industrial subsidiaries being the production arm. (Clairmonte and Cavanagh 1983:458–9) In the mid-1970s, more than 50 per cent of all Japan’s exports and imports were channelled through the ten leading so–go– sho–sha, each of which handled between 20,000 and 25,000 products. The dominance of the so–go– sho–sha seems to have waned somewhat as some of the newer and rapidly growing Japanese manufacturing firms, such as Sony, have increased in importance outside their sphere of influence. But their importance, particularly in the internationalization of the Japanese economy, should not be underestimated. As Ozawa (1979) points out, the so–go– sho–sha led the way in Japanese overseas direct investment by setting up branch offices and sales and distribution networks throughout the world from the 1950s onwards. In the mid 1970s, the

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five leading sogo shosha accounted for more than 40 per cent of the total overseas investment of Japan’s top fifty firms. When the emphasis in the Japanese economy began to shift from a sole reliance on exporting to increasing direct investment overseas, this already established international marketing and intelligence-gathering infrastructure was a major advantage to Japanese manufacturing firms moving abroad for the first time. In particular, the vast and complex network of sales and marketing operations established over the years by the so–go– sho–sha, together with the financial and other support services provided, made possible overseas investment by small-sized and medium-sized manufacturing firms. In effect, the so–go– sho–sha performed an ‘umbrella’ role for smaller firms, providing ‘the knowledge and entrepreneurship that enable[d] small, parochial firms to invest abroad at a stage when United States firms would not consider it’ (Roemer 1976:95). Indeed, one of the most distinctive characteristics of Japanese FDI in manufacturing has been the much greater involvement of small-sized and medium-sized firms compared with that of most other source nations (Tsurumi 1976). Government-business relationships in Japan There is a large and growing literature in English on the political complexion of the Japanese economy (see, for example, Allen 1981; Dore 1986; Hosomi and Okumura 1982; Johnson 1982; Magaziner and Hout 1980; Tsurumi 1976). Again, this is not the place to do more than select some aspects of this relationship which are especially relevant in helping to explain Japanese overseas direct investment. Magaziner and Hout have contrasted the government’s economic role in Japan and in the west in the following way: Historically, the State assumed an active economic role in Western economies in order to correct what were considered to be the private sector’s economic and social failures. Japanese historical tradition, on the other hand, grants to government a legitimate role in shaping and helping to carry out industrial policy. Japanese businessmen share with government leaders and officials a sense of the importance of co-ordinated national development and are generally amenable to and, in fact, expect government intervention to advance this goal. Senior businessmen view government guidance of industry as a normal state of affairs. They may not always enjoy the process or approve of the specific actions but they see the process as legitimate, and in the main, useful. (Magaziner and Hout 1980:29)

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In similar vein, Dore points to ‘a strong sense of national purpose and the ability of the bureaucracy to mobilise a relatively disinterested consensus around a view of what is “in the national interest”’ (Dore 1986:129). Tsurumi (1976) traces these characteristics back to Japan’s early attempts to industrialize after its emergence from a feudal state in the late 1860s. The philosophy which developed was strongly nationalistic: foreign investment and foreign goods were kept out as far as possible, but foreign technology was actively sought and ‘indigenized’. In the post-Second World War reconstruction of the Japanese economy, and indeed down to the present day, these deeply ingrained attitudes have remained important. They go some way towards explaining the current difficulties facing the Japanese government in its attempts to respond to increasingly vociferous criticisms of the country’s trade policies. Nevertheless, there is a high level of consensus among the major interest groups in Japan on the need to create a dynamic national economy. Indicative national economic planning has been the norm, its processes being channelled primarily through such institutions as MITI (Ministry of International Trade and Industry), which was established in 1949. Both Dore (1986) and Johnson (1982) have pointed to the intimate personal links which exist between the MITI bureaucracy and leading political and business institutions. Dore argues that ‘many centuries’ absorption of the Confucian tradition helps government officials to start off with something like a halo of authority…. It is this which supports and makes relatively effective the “guidance” which MITI offers with no particular statutory authority’ (Dore 1986:131). He also suggests that a further ‘factor facilitating a positive government role is the fact that Japan has a powerful set of industry associations which embrace the major firms in each industry, with few outsiders’ (Dore 1986:131). The situation which has evolved in Japan, therefore, is one in which the state plays a central role, not through direct state-ownership but rather in terms of guiding a highly competitive market economy. Such guidance has taken a whole variety of forms but, essentially, since the 1950s, Japanese economic policy has been one of selectively targeting particular industries for special treatment. At least until the late 1960s, and in some cases beyond this, industrial policy operated within a cocoon of protectionism against imports of manufactured goods and of foreign capital. MITI, together with the Ministry of Finance, exerted very stringent controls on all foreign exchange and over the import of technology. In fact, imported technology played a most significant

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part in the rebuilding of the Japanese economy. Technology was imported largely through licensing from foreign suppliers—and by ‘reverse engineering’—and not via the direct investment of foreign firms in Japan itself. This situation was, therefore, very different from that existing in post-war Europe, where US firms literally flooded in during the 1950s and 1960s, bringing with them their technological superiority. In the Japanese case, the technologies themselves were carefully chosen to meet the needs of particular industries: those regarded by MITI as being the ones necessary to achieve national objectives. The selected industries were further aided by preferential financing and tax concessions and were also protected from foreign competition. Within Japan, however, intense competition was encouraged between rival Japanese firms with the effect that domestic production costs were kept down and efficiency increased. Within the selected industries, MITI encouraged mergers to create large-scale enterprises, though such moves were not always successful. For example, MITI failed in its attempts to radically restructure the automobile industry. Initially, MITI focused its energies on basic industries of steel, electric power, shipbuilding, and chemical fertilizers, but then progressively encouraged the development of petrochemicals, synthetic textiles, plastics, automobiles, and electronics. The results in these sectors were remarkably impressive. The Japanese economy was transformed from one based upon low-value, low-skill products, such as cheap clothing and textiles, to one based upon high-value, capitalintensive products. The foundation of this transformation was the clearly targeted selective nature of Japanese industrial policy within a strongly protected domestic economy. It was helped, too, by the fact that the world trade as a whole was growing at unprecedented rates. By the early 1970s, however, it was becoming evident that the spectacular growth of Japanese industry had created substantial problems within the country itself. In 1971, a new industrial policy began to emerge with which attempts were made to meet the problems of environmental pollution, urban congestion, rural depopulation and so on, by shifting the focus of Japanese industry towards hightechnology, knowledge-intensive industries. Selective government assistance was moved away from the established capital-intensive industries, such as automobiles and steel, and towards the newly emerging high-technology sectors. In 1974, MITI published the first of its series of long-term visions of how the Japanese industrial structure ought to evolve to meet changed circumstances, both domestic and international.

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The role of trade and foreign direct investment in the Japanese economy Post-war Japanese economic policy has been strongly mercantilist. Growth in exports, particularly in the manufacturing sector, has been a major focus along with the building of a strong domestic economy. Amongst other things, manufactured exports provided the foreign exchange necessary for Japan to import the industrial raw materials which are in such short supply domestically (including, of course, oil). A key element of the country’s policy was the specific treatment of foreign investment. For much of the post-war period, both inward and outward investment were extremely closely regulated. The technological rebuilding of the Japanese economy was based, as we have seen, on the purchase and licensing of foreign technology and not on the entry of foreign branches or subsidiaries. Although the inward investment laws have since been liberalized and foreign firms do indeed operate in Japan their relative importance remains rather small. Until 1971, not only did all overseas investments by Japanese firms have to be approved (a requirement which still notionally applies) but also there was a ceiling placed on the permitted size of overseas assets. As noted earlier, most of the overseas investments in this period were by the trading companies and involved either the procurement of raw materials or the establishment of an overseas marketing network to facilitate Japan’s export activities. The very modest level of overseas direct investment shown in Figure 2.1 reflects the restrictions imposed by government and also the fact that the relatively low level of domestic labour costs provided little incentive for Japanese firms to look overseas for cheaper labour locations. In the late 1960s, however, a number of developments began to combine together to stimulate a major shift in government attitudes towards overseas investment. These included: 1 the increasing foreign exchange value of the yen; 2 the increased cost, and in some cases actual shortages of supply, of key industrial raw materials both domestic and procured from abroad through trade channels; 3 a growing shortage and increasing cost of domestic labour. In this respect, Tsurumi argues that an important factor was the disappearance of the ‘dual wage structure’ in which ‘a vast number of low-paying and less-profitable firms coexist[ed] beside high-paying, growing large firms’ (Tsurumi 1976:28)

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As a result of this combination of factors, Japanese overseas investment took off very sharply in the early 1970s. Its growth was interrupted by the oil crisis precipitated by the Organization of Petroleum Exporting Countries (OPEC), which hit the Japanese economy especially hard, but resumed its upward trajectory after the mid-1970s, this being particularly strong in the 1980s. The kinds of pressures—both internal and external—which built up throughout the 1970s and 1980s help to explain both the overall growth of Japanese overseas investment and also its particular sectoral and geographical composition at a global scale. Internally, there emerged a major shift in government attitude towards overseas investment. As Ozawa observed: For Japan…overseas production has suddenly emerged as a national requirement encompassing practically the entire spectrum of her industries and enterprises, small and large alike. The segments of industrial activities that are no longer suitable, environmentally or otherwise, for the Japanese economy need to be transplanted abroad, and overseas resources must now be developed more directly to insure [sic] supplies…. Furthermore, overseas investment is now viewed as an essential device by which to upgrade Japanese industry. (Ozawa 1979:228–9; emphasis added) Thus, overseas direct investment by Japanese firms came to be seen as an integral part of Japanese industrial policy; it is not something which ‘just happens’. These changes in internal policy towards overseas investment were also, in part, influenced by developments in Japan’s external trading and financial environment. From the mid-1970s to the late 1970s, there emerged an intensification of trade friction which focused primarily on Japan’s burgeoning trade surplus in general and, more specifically on the country’s spectacular export success in individual manufacturing industries. Japanese export activity has been extremely finely targeted—a ‘laser-like’ selectivity—whereby ‘the proportion of its output exported in four of the 14 main industrial product areas (motors, electrical equipment, steel and precision goods) has run at two to three times the OECD average’ (The Economist 1987). There had been instances of trade friction between Japan and the United States and Europe as early as the 1950s in the textile industry. The resulting bilateral ‘voluntary export restraint’ agreements in textiles evolved through the Long-Term Arrangement of 1962, within the General Agreement on Tariffs and Trade (GATT), into the international Multi-Fibre Arrangement of 1974. In the 1970s, the major foci of

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trade friction between Japan and the other industrialized nations were motor vehicles and consumer electronic goods (notably colour televisions). In the 1980s, other products have become subjects for trade conflicts, especially video cassette recorders, photocopiers, and semiconductors. Thus, a whole series of bilateral trade restraint agreements have come into being. One major source of such restrictions has been to stimulate Japanese firms into increased overseas direct investment. Problems of trade friction between Japan and the west show no sign of abating. One important result of Japan’s spectacular export success has been a high trade surplus. This poses immense problems for the European economies but possibly even more so for the United States which now runs an unprecedented trade and budgetary deficit. A byproduct of these large-scale asymmetries in the world trading system is its effect upon the relative exchange rate of national currencies. By the autumn of 1985, the problem had become so serious that the Group of Five Finance Ministers agreed on measures to achieve a realignment of the Japanese yen, particularly against the United States dollar. In mid1985, the exchange rate was around 260 yen to the dollar. Since then, the dollar’s decline in general, but especially against the yen, has been dramatic; in the spring of 1988, the yen/dollar exchange rate had fallen to around 130. The potential implications of such a massive revaluation of the yen for the level and geographical distribution of Japanese FDI are enormous. At the time of writing, however, it is too early to assess the longer-term effects. If the revaluation were to be short-lived then so too would be any spatial adjustment. But this seems unlikely given the deep-seated problems of the US economy. In any case, the persistence of trade friction seems assured. In 1986, MITI published the results of a survey of the attitudes of Japanese firms to the ‘appreciated yen and the trade environment’ (MITI 1986), which, together with other evidence from reports of the investment intentions of leading Japanese firms, indicate some of the ways in which adjustment seems likely to occur. According to the MITI survey Japanese firms are attempting a fundamental change of management orientation in the direction of multifaceted internationalisation. There is a qualitative change in the way businesses are dealing with the yen’s current appreciation as compared with their response during the strong yen period of 1977–78. At that time, many companies sought to shore up exports with a mix of strategies that included raising the dollar price of exports, calling on subcontractors to lower

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prices, strengthening competitiveness in areas other than price, and reducing in-house production costs. Now, however, fewer firms are adopting such policies, preferring instead a course of diversification away from exports through such means as shifting to overseas production, increasing overseas procurement of parts and materials and stepping up domestic sales. (MITI1986:66; emphasis added) Such adjustment strategies are bound to have substantial repercussions both on small firms, especially subcontractors, and also on the labour force in Japan. Anecdotal evidence suggests that the pressure on subcontractors to reduce their prices is widespread. So, too, is pressure on some of them to relocate overseas to serve the newly established plants of their Japanese customers. A recent survey of Japanese subcontractors showed that 28%…had already been hit by the transfer of parent operations overseas since the yen started its climb in September 1985, while another 19% were threatened by plans now under way. On top of this, more than 50% of the companies had been hurt by parent companies turning to offshore suppliers, especially in Taiwan and South Korea, for items previously sourced with Japan. This has involved not only components for subsequent re-export but goods destined for the domestic market like silk textiles, buttons, musical instruments, cigarette lighters and, most significantly, integrated circuits—the ‘industrial rice’—of modern Japan. (Far Eastern Economic Review 1987b:45) GEOGRAPHICAL VARIATIONS IN THE MODE OF INVESTMENT We noted earlier the substantial geographical variations which exist in the sectoral distribution and profiles of Japanese overseas direct investment. Underlying these geographical patterns is a further—and changing—pattern of differences in the modes of investment and in the motives on which these are based. Foreign direct investment can be divided into two broad types: market-oriented investment and supply-oriented investment. The latter, in turn, can be further subdivided into materials-oriented and costoriented investment. Through an application of this kind of simple typology to Japanese overseas direct investment, the following sequence of development is suggested:

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(a) An initial emphasis on materials-oriented, resource-based overseas investments in order to secure supplies for Japanese domestic industrial production. The geographical focus of this investment was primarily South-East Asia (notable Indonesia), Australia, and Brazil. (b) Some market-oriented manufacturing investment in both Latin America (again much of this was in Brazil) and in East and SouthEast Asia. Essentially, this was a response to the operation of import-substitution policies by a number of countries, particularly those with large domestic markets. (c) As domestic labour costs rose in the late 1960s, Japanese firms began to transfer some types of manufacturing—notably textiles and light assembly industries—to locations in East and South-East Asia. One of the motives was the need to maintain competitiveness. But manufacturing investment in East and South-East Asia was also partly stimulated by the adoption by many countries in the region of an export oriented industrialization strategy (Colman and Nixson 1986; Dicken 1986; Donges 1976; Kirkpatrick et al. 1984). An important component of this strategy was the attraction of foreign firms through a whole package of investment incentives. (d) In the 1970s, as we have seen, overseas direct investment came to be seen as a vital element in the restructuring of the Japanese economy towards higher-value and more technologically intensive manufacturing production. Again, the major geographical focus was East and South-East Asia, although substantial resourcebased projects were also located in Latin America and Australia. A number of older heavy industries (often noxious) were also relocated out of Japan, often to sites of raw materials in Asian countries. Again, political conditions in host countries helped to reinforce this trend. In some cases an influential factor was the existence of less stringent pollution control regulations. More generally, both Asian and Latin American countries with major resource bases were anxious to encourage on-site processing to raise the value-added yield. At the same time, the shift of low-skill lighter manufacturing industries to East and South-East Asian countries continued. (e) By the mid-1970s, the bulk of Japanese overseas investment in manufacturing was still in East and South-East Asia. However, the intensification of protectionist measures against high import penetration in certain sectors generated the beginnings of substantial geographical reorientation of Japanese manufacturing

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investment towards North America and, to a far lesser degree, Western Europe. (f) The massive realignment of the yen against the dollar since late 1985 has reinforced this broad geographical reorientation, although it has also given a further stimulus to the transfer of some types of production to locations in East and South-East Asia. As a result of these developments the motives for, and the structure of, Japanese manufacturing operations in East and South-East Asia on the one hand and in North America/Europe on the other are rather different. Such differences in investment motives are illustrated very clearly in Table 2.3. In the industrialized countries, the dominant motives are the need to deal with trade friction, and to secure or to expand markets. In the developing countries, the dominant motivation is to take advantage of lower production costs. However, it is interesting to note that this factor also appears in the context of the industrialized countries as well. Indeed, if the dollar/yen differential remains, this factor could well increase in importance. Already, it has been suggested ‘with fewer than 160–170 yen to the dollar, American labour costs in the car industry will be lower than Japan’s (The Economist 1986:73). In the case of electronics, in particular, an important motive was also to respond to moves overseas by customer companies. Table 2.3 Motives for Japanese firms seeking production bases overseas

Source: MITI 1986, Figure 2.2.4. Note: a Companies were asked to rate motives for seeking production sites overseas, assuming 100% as their total motives. Results were then summed by industry and by region. The motives are coded as follows: 1 To deal with trade friction; 2 To secure or expand overseas market for reasons not related to trade friction; 3 To respond to moves overseas by customer companies; 4 To take advantage of lower production costs overseas; 5 To hedge risks related to exchange rate fluctuations; 6 Others.

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The structure of Japanese manufacturing investment in East and SouthEast Asia, in particular its relationship with the domestic sector in Japan, is more complex than that in the industrialized countries of the west (see Morris-Suzuki 1984; Nakajo 1980; Sekiguchi 1983). The emphasis is still primarily on the lower-skilled processes and on lower-value products. The recent spate of yen-induced investments in the region reinforces this pattern. For example, ‘Matsushita, the world’s biggest manufacturer of consumer electronics, says it will soon shift production of all audio goods with a retail price below $100 to Taiwan and Singapore’ (The Economist 1986:74). Aiwa, the audio equipment manufacturer, has recently closed down its Japanese operation and transferred the entire assembly line to Singapore. In the case of the longer-established Japanese investments, several writers have argued that they form part of a complementary division of labour between Japan and the East and South-East Asian host countries (Kim et al. 1986; Nakajo 1980). Nakajo, for example, suggests that quite a fine intra-industry division of labour has developed in the region’s textile industry between different textile production processes and different types of textile products. In many cases, the division of labour is also intrafirm in nature, either vertical or horizontal, but most commonly vertical as Japanese firms have assigned parts of a production sequence to their Asian subsidiaries. He quotes evidence that a MITI survey of some 900 Japanese firms, which showed that almost 60% [of the instances of direct overseas investment by Japanese manufacturing firms] represents the transfer of some of the company’s production processes overseas from the standpoint of the division of labour, either the final processes as in ‘knock-down’ production or the intermediate processes through parts and semifinished products. (Nakajo 1980:474) As a result, he argues, Japanese firms have managed to establish systems of division of labour between themselves and their subsidiaries in those countries in a very efficient manner. In so doing, they have been able to increase their exports to those countries while, at the same time as softening the impact of increased imports from them, using them as a catalyst for converting their domestic production systems in such a way as to make use of the growth potential of the Asian NICs (newly industrialising countries) in their own operations. (Nakajo 1980:469)

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In contrast, the structure of Japanese manufacturing operations in North America and in Western Europe is far simpler than that in East and South-East Asia. In part, this probably reflects the greater recency of the Japanese manufacturing presence in the west. But it also reflects differences in the nature of the underlying forces at work. All the evidence suggests that most Japanese firms would have preferred to serve markets in industrialized countries by exports from Japan or the Far East on a continuing basis. This is especially true of the consumerproducts industries though perhaps less so in producer-goods industries (Dunning 1986). The tight network of supplier relationships in Japan, together with the particular system of labour relations in operation there, have made Japanese manufacturers extremely reluctant to break away and shift production overseas to a totally different socioeconomic environment. In each of the industries in which the Japanese have eventually invested on any scale in the west, domestic production continued to be economic in the absence of non-tariff barriers. In motor vehicles, for example, Jones (1983) estimates that Japanese producers had a landed cost advantage over both North American and European firms of between 20 and 30 per cent. Cawson (1987) suggests that in Europe the production costs of Japanese colour television manufacturers are 19 per cent higher and those of video cassette recorders 43 per cent higher than in Japan. Only with the massive revaluation of the yen since 1985 have these economic conditions begun to change. It is reasonable to argue, therefore, that the majority of Japanese investments in consumer-products industries in North America and Western Europe between the early 1970s and the second half of the 1980s were established almost entirely because of actual or threatened market protectionist measures. Other benefits of a market presence (for example, knowledge of local market conditions) were already in existence through the dense network of sales and distribution subsidiaries. In both the United States and Western Europe, the leading edge of such manufacturing investment was the consumer electronics sector, particularly firms manufacturing colour telvisions and, later, video cassette recorders. In each case, exports from Japan were very quickly displaced by local production—from the mid-1970s in the United States and the early 1980s in the European Economic Community (EC). These investments have to be seen in the context of Japan’s attainment of the dominant world position in consumer electronics within a timespan of less than twenty years (Dicken 1986, Chapter 10). In 1984, Japan accounted for 44 per cent of total world production of consumer electronics and for nearly 90 per cent of

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video cassette recorder production. In both the United States and Europe, the pioneer Japanese investor was Sony which set up a plant in San Diego (California) in 1972 and in Bridgend (South Wales) in 1974. Since then, every major Japanese colour television manufacturer has set up new plants or acquired existing ones. In the United States, such inward investment was strongly stimulated by the threat, and eventual implementation, of a voluntary export restraint agreement in 1977. According to Turner, in Europe the licence for the phase alternation line (PAL) system was deliberately used to encourage Japanese companies to invest (rather than export into) Europe. This conditional access to PAL technology was one of the main reasons behind the early CTV (colour television) investments which Sony and Matsushita made in the United Kindom in 1974 and 1976 respectively. (Turner 1987:36) In addition, the UK had operated a voluntary restraint agreement with Japan since 1973 in colour televisions. Since 1977, when Hitachi was blocked in its attempt to establish a plant in the UK, the British attitude towards Japanese investment in the consumer electronics sector has been extremely open. Attitudes have been far more variable in the rest of the EC, being particularly restrictive in France and Italy and rather more open in West Germany. More recently, France has adopted a much more liberal policy and is now actively encouraging Japanese investment. In the colour television sector, the EC adopted a community-wide voluntary export restraint agreement with Japan in 1981. During the mid-1980s, a whole series of disputes has arisen in other sectors, notably video cassette recorders, photocopiers, and microwave ovens. The European Commission is at present imposing antidumping legislation on Japanese producers and is threatening to do the same against the import of components for assembly in Japanese plants in Europe, many of which are regarded as mere ‘screwdriver’ operations. The other major sector in which Japanese direct investment has become especially important in the west is motor vehicles. The story is similar to that in consumer electronics: rapid growth of Japanese import penetration based on highly competitive production methods, the threat or reality of import restrictions followed by inward investment. Now all the major Japanese motor vehicle manufacturers either have or plan to have full-scale production plants in North America, although only Nissan has gone as far as this stage in Europe with its plant in north-

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east England. In fact, it has been the entry of the motor vehicle manufacturers which, above all, has crystallized some of the broaderscale ramifications of Japanese direct investment in the industrialized economies. The whole question of the impact of a foreign branch plant on a host economy, whatever its geographical scale, is exceedingly complex—far more so than is often implied by either academics or politicians. In the debate over the entry of Nissan into the UK, and of the other Japanese vehicle producers into North America, two major areas of controversy have become particularly important. One relates to the kinds of management and labour practices in Japanese plants, the second to the relationships between plants and their component suppliers (Dicken 1987; Schoenberger 1987). Even allowing for the media hype over Japanese working practices it is clear that the demonstration effect is beginning to become quite powerful. The major American and European vehicle manufacturers are making desperate attempts to reform working practices in their plants to match Japanese practice. Here, it is clear that a major advantage for the Japanese firms is that they are beginning with a completely clean slate, often on greenfield sites, whereas American and European producers have to try to engineer what amount to revolutionary changes within an inherited structure. The issue of component supplies is even more complex in many ways. Apart from the employment created in the principal plant itself, it is through the linkages to component supplies that other jobs are either created or destroyed and technology transferred. The initial problem is that Japanese firms are accustomed to a very particular kind of relationship with their domestic suppliers. It is very difficult to transfer this relationship quickly to a new environment as the early consumer electronics firms discovered. The Japanese firms have two choices: to purchase ‘locally’, or to import from existing suppliers. The latter strategy is under very severe pressure as governments in host countries attempt to stipulate particular levels of local content. From the Japanese viewpoint, the problem may be the unavailability of local suppliers of the required type and quality. One response to this, of course, is to persuade their traditional suppliers to move overseas. In the US motor vehicle industry this has already happened to a marked degree. In 1980, there were 10 Japanese parts-producers in the United States; by 1985 there were 31; today there are 76, and it is estimated that soon there will be well over 100 (Far Eastern Economic Review 1987a). While this may create jobs with one hand it may take them away with the other as existing domestic suppliers get squeezed. In entirely new industries, such as video cassette

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recorders, which are totally dominated by Japanese producers, such a process may preclude the development of indigenous suppliers. These questions of management-labour practices and supplier relationships are at the forefront of the current debate over the role and impact of Japanese direct investment in the industrialized countries. Less widely debated—but probably more significant in the long run—is the question of technological dominance which threatens when entire sectors are taken over by foreign firms but where research, development, and design functions remain in the home country of the foreign firm. Dunning (1984; 1986) has pointed to this potential danger in the growing Japanese presence in the UK. It is, of course, part of the broader longstanding debate over the possible truncating effects of foreign control, which has been extensively argued over in countries such as Canada (Britton and Gilmour 1978; Hayter 1982). In Britton and Gilmour’s view, as the proportion under foreign control rises, an industry becomes a shell. In terms of its products, the industry seems to be complete and comprehensive, but large elements of the production system are missing or deficient. Each increase in reliance on a differentiated technology, which comes with each increment in the proportion of foreign control, increases the industry’s propensity to import capital equipment, parts, and components, as well as managerial, technical, administrative, marketing, scientific and other skills. Ultimately, the growth potential of the foreign-dominated industry groups is severely curtailed. (Britton and Gilmour 1978:98) Although it is possible to exaggerate such possibilities and to ignore some of the beneficial effects of such inward investment the danger is certainly there. For sure, to date, Japanese firms have demonstrated a very strong propensity to keep their R&D close at home. In so far as this inhibits innovative developments in overseas plants—as opposed to straightforward manufacture or assembly—it will indeed reduce the growth potential of the host economy in those sectors in which Japanese investment has become so very highly concentrated. One of the difficulties, as Robert Reich has observed, is that once one gets off the learning curve it is very difficult, if not impossible, to get back on again. None of this is to argue that the industrialized countries should close their doors to Japanese direct investment; what it does imply is a careful monitoring of the overall net effects of such investment with a particular eye to its long-term repercussions.

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CONCLUSIONS Japanese foreign direct investment, at the global scale, displays a distinctive geographical and sectoral pattern which, at least so far, is substantially different from that of FDI from the other major source nations. As far as manufacturing industry is concerned, the bulk of Japanese FDI was, initially, in developing countries, particularly those in East and South-East Asia. Most of the Japanese investment in North America and Western Europe was in the service industries, notably those activities related to trade and commerce. During the last decade, however, this global pattern has undergone substantial modification. Major relative shifts have become apparent, particularly reflected in the very rapid growth of Japanese manufacturing investment in North America (particularly the United States) and, to a much lesser extent, in Western Europe. Indeed, although Japanese FDI in the UK and in Europe has grown rapidly in recent years it remains, in a global perspective, a relatively small proportion of the total. Most Japanese FDI in Europe is concentrated in the financial and commercial sectors. The causes of both the initial global structure of Japanese FDI and also its changing form are to be found in an evolving mixture of internal and external forces. The changing geography of Japanese FDI at the global scale—as well as at smaller scales—is fundamentally the outcome of politico-economic processes. A clear organizational distinction appears to exist in the structure of Japanese manufacturing investment in the East and South-East Asian region on the one hand, and that in North America and Western Europe on the other. In East and SouthEast Asia, a complex intrafirm division of labour has developed, whereas in the west the Japanese plants tend to be directly market-oriented, established primarily because of trading frictions. Within Japan itself, political attitudes towards foreign direct investment have changed, first in the late 1960s and, again, in the second half of the 1970s. Externally, the trade and industry policies of national governments, in both the developing and the industrialized world, have been especially important. The Japanese have been—and to a considerable degree continue to be— very cautious or reluctant overseas investors. Apart from such push factors as the need for raw materials and for cheaper production-cost locations in East and South-East Asia, the operation of importsubstitution and export-oriented industrialization policies in developing countries have been very significant in shaping the early patterns of Japanese FDI. More recently, the increasingly protectionist responses of North America and Western Europe to the ‘laser-like’ trading strategies of Japanese producers have become the single most important

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element in explaining the growth of Japanese foreign direct investment in the industrialized countries. The whole issue has become extremely sensitive politically and this shows no immediate sign of abating. Indeed, new sources of trade tensions involving Japan seem to occur almost daily. At the same time, Japanese investment is being sought by virtually all the industrialized countries, partly to offset trade imbalances and to create employment, but partly, too, in order to import what are perceived to be desirable attributes of Japanese industrial organization and practice. The threat for many industrialized countries is that, although Japanese FDI may not be excessive in terms of the whole economy, it does tend to dominate specific industrial sectors. It is in these sectors that a real danger exists of a loss of indigenous technological capability. As yet it is too early to assess the longer-term effects of the massive revaluation of the yen on the growth and spatial distribution of Japanese FDI. However, the signs so far are that its effects will be felt in both the East and South-East Asian economies, as Japanese firms shift the manufacture of lowerprice products offshore, and also in the industrialized countries of the west as Japanese overseas production displaces uncompetitive exports to these countries, the process being reinforced by protectionist trade policies. In consequence, the Japanese domestic economy is likely to face the kinds of adjustment problems long experienced in those industrialized countries whose larger firms have become increasingly international in their operations and which have altered the geographical balance of their activities on a global scale. NOTE 1

We acknowledge Pion Limited for allowing us to reproduce this paper from Environment and Planning A, vol. 20, 1988.

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REFERENCES Abegglen, J.C. and Stalk, G.Jun. (1985) Kaisha: The Japanese Corporation, New York: Basic Books. Allen, G.C. (1981) The Japanese Economy, London: Weidenfeld & Nicolson. ARTEP, (1981) The general trading companies of Japan and export-led industrialization’, in E.Lee (ed.) Export-led Industrialisation and Development, Geneva: International Labour Office. Britton, J.N.H. and Gilmour, J.M. (1978) The Weakest Link, Ottowa: Science Council of Canada. Burton, F.M. and Saelens, F.H. (1983) ‘Direct investment by sogo shosha in Europe’, Journal of World Trade Law 17, 249–58. Cawson, A. (1987) ‘European consumer electronics’, seminar presented to the European Studies Research Group, University of Manchester, England. Clairmonte, F.F. and Cavanagh, J.H. (1983) ‘Transnational corporations and the struggle for the global market’, Journal of Contemporary Asia, 13, 446–80. Colman, D. and Nixson, F. (1986) Economics of Change in Less Developed Countries, Oxford: Philip Allan. Dicken, P. (1980), ‘Foreign direct investment in European manufacturing industry: the changing position of the United Kingdom as a host country’, Geoforum 11, 289–313. ——(1983) ‘Japanese manufacturing investment in the United Kingdom—a flood or a mere trickle?’, Area 15, 275–84. ——(1986) Global Shift: Industrial Change in a Turbulent World, London: Harper & Row. ——(1987) ‘Japanese penetration of the European automobile industry: the arrival of Nissan in the United Kingdom’, Tijdschrift voor Economische en Sociale Geografie 78, 59–72. Donges, J.B. (1976) ‘A comparative survey of industrialisation policies in 15 semi-industrial countries’, Weltwirtschaftliches Archiv 112, 626–57. Dore, R.F. (1986) Flexible Rigidities: Industrial Policy and Structural Adjustment in the Japanese Economy, Stanford: Stanford University Press. Dunning, J.H. (1979) ‘The UK’s international direct investment position in the mid-1970s’, Lloyds Bank Review 132, 1–21. ——(1984) ‘Japanese investment in UK industry: Trojan horse or catalyst for growth?’, Multinational Business 4, 1–6. ——(1986) Japanese Participation in British Industry, Beckenham: Croom Helm. Economist (1986) ‘Japanese industry squeals more than it hurts’, 17, pp. 73–4. ——(1987) ‘Japan über alles’, 16, p. 18. Far Eastern Economic Review (1987a) The sum of the parts’, 30, p. 74. ——(1987b) ‘Weakening backbone: the high yen hits small employers hardest’, 22, pp. 44–5. Franko, L.G. (1983) The Threat of Japanese Multinationals—How the West Can Respond, Chichester, Sussex: John Wiley. Hayter, R. (1982) ‘Truncation, the international firm and regional policy’, Area 14, 277–82. Hosomi, T. and Okumura, A. (1982) ‘The Japanese industrial policy’, in J. Pinder (ed.) National Industrial Strategies and The World Economy, Beckenham: Croom Helm.

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JETRO (1987) White Paper on World and Japanese Overseas Direct Investment, Tokyo: JETRO. Johnson, C. (1982) MITI and the Japanese Economic Miracle: The Growth of Industrial Policy, 1925–1975, Stanford: Stanford University Press. Jones, D.T. (1983) ‘Motor cars: a maturing industry?’, in G.Shepherd, F. Duchene, and C.Saunders (eds) Europe’s Industries: Public and Private Strategies for Change, London: Frances Pinter. Kim, K.I., Kim, K.H., and Lesage, J.P. (1986) ‘An empirical study of the transnational production sharing of the Asian NICs with Japan’, Journal of International Business Studies 17, 117–130. Kirkpatrick, C.H., Lee, N., and Nixson, F. (1984) Industrial Structure and Policy in Less Developed Countries, Hemel Hempstead: Allen & Unwin. Kono, T. (1984) ‘Long-range planning of UK and Japanese corporations—a comparative study’, Long Range Planning 17, 58–76. Magaziner, I.C. and Hout, T.M. (1980) Japanese Industrial Policy, London: Policy Studies Institute. MITI (1986) White Paper on International Trade: Background Information, Tokyo: MITI. Morgan, K. and Sayer, A. (1983) ‘The international electronic industry and regional development in Britain’, WP-34, Department of Urban and Regional Studies, University of Sussex, Falmer, Brighton, Sussex. ——(1985) ‘A “modern” industry in a mature region: the remaking of management-labour relations’, International Journal of Urban and Regional Research, 9, 383–404. Morris, J.L. (1987) ‘Industrial restructuring, foreign direct investment, and uneven development: the case of Wales’, Environment and Planning A 19, 205–24. Morris-Suzuki, T. (1984) ‘Japan’s role in the new international division of labour—a reassessment’, Journal of Contemporary Asia 14, 62–81. Nakajo, S. (1980) ‘Japanese direct investment in Asian newly industrialising countries and intra-firm division of labour’, The Developing Economies 18, 463–83. Nakase, T. (1981) ‘Some characteristics of Japanese-type multinational enterprises today’, Capital and Class 13, 61–98. Oriental Economist (1985) ‘Sogo shosha in revival—from key industries to new businesses’, 53, pp. 26–37. Ozawa, T. (1979) Multinationalism, Japanese Style, Princeton, N.J.: Princeton University Press. Roemer, J.E. (1976) ‘Japanese direct foreign investment in manufacturing: some comparisons with the US pattern’, Quarterly Review of Economics and Business 16, 91–111. Sayer, A. (1986) ‘New developments in manufacturing: the just-in-time system’, Capital and Class 30, 43–72. Schoenberger, E. (1987) ‘Technological and organizational change in automobile production: spatial implications’, Regional Studies 21, 199–214. Schonberger, J. (1982) Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity, New York: The Free Press. Sekiguchi, S. (ed.) (1983) ASEAN-Japan Relations: Investment, Singapore: Institute of Southeast Asian Studies.

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Sheard, P. (1983) ‘Auto-production systems in Japan: organization and locational features’, Australian Geographical Studies 21, 49–68. Tsurumi, Y. (1976) The Japanese are Coming, Cambridge, Mass.: Ballinger. Turner, L. (1987) Industrial Collaboration with Japan, Andover: Routledge & Kegan Paul. Yoshino, M.Y. and Lifson, T.B. (1986) The Invisible Link: Japan’s Sogo Shosha and the Organization of Trade, Cambridge, Mass.: MIT Press. Young, A.K. (1979) The Sogo Shosha: Japan’s Multinational Trading Companies, Boulder; Calif: Westview Press.

3

Structural origins of Japan’s direct foreign investment

Rob Steven

In the six months to October 1989, the Direct Foreign Investment (DFI) that poured out of Japan for the first time topped $30 billion and pushed – the accumulated total to a whopping $217 billion (Okurasho 1989). The speed and escalating scale of this development is most sriking when it is recognized that in the entire period to March 1981, the accumulated total was only $36 billion. It is thus a phenomenon of the 1980s and it has sent Japan into the next decade as a major imperialist power, indeed the leading power in the Asian and Pacific region. In this essay I wish to explain Japan’s new investment imperialism as an outcome of a political economic crisis whose roots were deep in the structure of Japanese capitalism. The seeds of this crisis lay in Japan’s tradition of low-cost production combined with the weakness of its organized labour movement, on which conditions the cutting edge of Japanese capital became characterisically dependent. As this weapon increasingly put US and European capital at a disadvantage, rivalries amongst the advanced powers eventually climaxed in the near doubling of the value of the yen, and at the stroke of a pen converted Japan from a low-cost into a high-cost country. Although Japan’s higher money wages did not translate into higher living standards for most workers, they were sufficient to force a qualitative shift in the pace of DFI, into Asia, the US, Australia, and Europe. The higher yen made Japanese wages simultaneously too high and too low: from the point of view of employers’ costs, they became too high to sustain previous levels of manufacturing employment, but from the point of view of their market demand, wages remained too low to absorb the output of the consumer goods industries into which Japanese capital had restructured in the late 1970s.1

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ORIGINS OF LOW-COST PRODUCTION Because the predominant force behind the transition from feudalism to capitalism in Japan was the threat from western imperialism rather than social revolution, capital-labour relations came to rely on and gradually even to reinforce the most successful and adaptable feudal institutions of social control. Key elements of the rigid ritualized hierarchies of Tokugawa feudalism, which had divided lord from vassal, samurai from commoner, landlord from peasant, and man from woman, were all used to impose an extra-economic coercion onto the earliest forms of wage labour. With backward techniques of production, the only way to compete with the west was by forcing labour’s share to the barest minimum. And in spite of sporadic peasant unrest, little real threat to the feudal social structure came from the lower classes, and patterns of feudal authoritarianism and organization which were peculiar to Japan provided the form for the development of capitalist institutions, particularly the factory and the state. These were the circumstances which shaped each of the main features of Japan’s industrial relations system that persists to the present day. They established the practice of using ‘half-paid’ young women in the most labour-intensive industries. With textiles as the mainstay of Japanese capitalism almost throughout the pre-war period and the mainstay of exports well into the 1950s, young women formed the core of the industrial proletariat. Their appalling wages and conditions remain the central feature of factory work to this day. All the extra-economic pressures the society could muster, from its feudal hierarchies and ritualized authoritarianisms to the overbearing patriarchal practices of the samurai class, were brought to bear on these women (Tsurumi 1990). Because the conditions of this core served as the basis of capital accumulation, when concessions were made to labour these were to workers outside the core, first to the most educated and skilled male labourers and then to the majority of males generally, although by no means evenly. What they essentially got was relative job security and a system of withheld wages which were eventually paid to those who accumulated long service. And so the second pillar of the modern system was laid: a rigid separation between ‘regular’ workers, that is, ones who serve the same employer long enough to eventually receive the wages that are withheld when they are young, and various types of irregulars, those who must leave before the withheld wages are ever paid (Steven 1983).

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Through the patriarchal pressure on them to break their service and parent young children, women have almost universally fallen into the second category. The majority of men, on the other hand, gradually moved into the upper classes when rapid capital accumulation began to raise the technical base of Japanese capitalism. They entered the bourgeoisie, the middle classes, and the labour aristocracy in the public sector and in large private companies. And so the first and second pillars of the modern system were moulded together in close parallel with each other: the insecure core of the working class was predominantly and increasingly female. The third pillar of the modern system also owes its origins to the use by capital of feudal and petit bourgeois institutions. The Tokugawa period saw a proliferation of both urban and rural manufacturing and craft production by family units. In some cases, such as textiles, large factories developed close relations with these units, either in ways familiar in Europe, such as the ‘putting out’ system, or through transforming a technical division of labour into an institutional one— for example, the labour costs of silk reeling could be even further reduced if undertaken by scattered family based production units (Tsurumi 1990). Throughout the pre-war period, far from disappearing with the growth of the zaibatsu (conglomerates like Mitsubishi, Mitsui and Sumitomo), the small-firm sector flourished and adapted to its modern role of specializing in labour-intensive production under contract from the larger firms. Thus was born the much heralded kanban (Just-in-Time) system, through which components are made by myriads of subcontractors who must deliver them only just as they are needed. For decades this would be berated by westerners as a feudal relic impeding the development of Japan, but now it is suddenly being seen as the very essence of modernity. However, its most useful feature is not the alleged efficiency of the communications and information network which binds ‘parent’ to ‘child’ companies, but the powerlessness imposed on labour through the institutional separation of each and every functional task, making organization of the labour force almost impossible. The wages in the small-firm sector remain just over half those of the giant firms, although a hierarchy of pay scales parallels the hierarchy of firms which exist in relationships of subcontracting and re-subcontracting (Steven 1983). All three pillars of the system function in very close and mutually supportive ways to isolate the low-paid and insecure core of the working class—women, irregulars, and those in the small-firm sector—from a labour aristocracy mainly of males in giant corporations and government

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who comprise no more than 20 per cent of the modern working class (Steven 1983). Capital-labour relations in Japan thus assumed hierarchical institutional forms and quasi-feudal ideologies, all of which were increasingly reproduced by the fundamental functions they performed in the process of capital accumulation. They provided Japanese capital with a cutting edge which would eventually slice away at the dominance of US capital. In the pre-war period, when Japanese technology lagged far behind that of the west, the advantage of the Japanese labour system manifested itself only in light labour-intensive industries, particularly textiles. And so the ability of Japanese companies to take over Asian markets hitherto controlled by British and American capital was limited to such industries. RISE OF THE BASIC MATERIALS INDUSTRIES Since most of the surplus created by the labour-intensive light industries was used to build the more technologically advanced heavy industries, the foundations of the industrial sector which would launch the ‘Japanese miracle’ were firmly laid before the Second World War. And then after the war, the continued importation of western technology combined with Japan’s distinctive labour regime to create double digit growth rates almost throughout the long boom. The industrial focus shifted from the light to the heavy chemical and basic-material processing industries; imports came to centre mainly on raw materials and fuels, exports on iron and steel, ships and chemicals. Although this early warning of the enormous competitive power resulting from advanced technology in harness with a quasifeudal labour system did not go unheeded, it did not yet pose a direct threat to most western capital, since the latter had the machinery industries as the centre of their accumulation process. Besides, they also had their own abundant raw material supplies or had preferential access to those of their former colonies, now their neo-colonies. The west marvelled at the Japanese ‘miracle’ but did not feel overtly threatened by it. It was the oil crisis which first fully unleashed the forces of investment imperialism from Japan. Having almost no raw materials or fuel of its own, Japanese capital was struck the most severe blow of all the capitalist powers by the rise in oil and other raw material prices. Its response was to develop a strategy that would serve it well in the next crisis, a decade later. First and foremost, it would play to its strengths and try to squeeze as much of what it had lost to foreign rentier capital (capital owning

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raw materials) out of a workforce which could always somehow be made to accomodate another blow. And so the ‘cost-down’ of the 1970s resulted in massive job losses (with giants like Matsushita and Hitachi shedding 12,000 and 9,000 jobs respectively) and an unparalleled drive to raise productivity through the introduction of new technology, speedups, and wage cuts. The second prong of Japanese capital’s anti-recessionary strategy was to move overseas to secure more cheaply the raw materials which had knocked the bottom out of its prosperity. And so the first major wave of DFI began, although there had been an earlier wave into east Asia (mainly Taiwan and South Korea) accompanying the restructuring out of the light and into the basic materials industries. The 1970s thus saw the influx by Japanese companies mainly into countries like Indonesia, Malaysia, and the Philippines, which were rich in raw materials and vulnerable to the means Japanese companies had for securing them. The final strategic move by Japanese capital in the face of the oil crisis was to initiate a process of industrial restructuring away from the basic materials processing industries and into ones which gave less weight to Japanese capital’s vulnerabilities and more to its strengths. The move into machinery was bound to have been made sooner or later, but by the mid-1970s when it really took off, Japan’s technical backwardness had been considerably reduced by a careful combination of importing as much science and technology as possible and then letting this acquire its own new dimensions in a capital accumulation process which excluded foreign participation more thoroughly than anywhere in the capitalist world. Particularly in the consumer branches of transport machinery (motor cars) and electrical machinery (household appliances, TVs, and eventually more sophisticated electronic goods like CD players and video tape recorders), the most invincible weapon of all came to predominate: leading edge technology plus Japan’s notorious labour system (Steven 1988). ORIGINS OF THE HIGH YEN CRISIS Japan’s restructuring out of raw material processing into machinery resulted in a totally new problem. Hitherto, capital, had little difficulty in securing markets, mainly because an unusually high proportion of total demand was absorbed by investment in plant, equipment, and raw materials. Capitalists focused heavily on making things for which they themselves provided the market, and far from a Keynesian welfare state being the instrument of demand management,

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the state relied mainly on varying the official discount rate and the investment programmes of the nationalized industries. Investment in electric power capacity was a favourite, since it stimulated the whole range of industries associated with construction and iron and steel. To the extent that capital did engage in the production of mass consumer goods, the low earning and spending power of the Japanese masses did not seriously interrupt accumulation, mainly because deficient demand for consumer goods could always be met by increasing the demand for investment goods. Compared to what was to happen in the next period of restructuring, the industrial structure associated with raw material processing was also one strongly associated with domestic demand for investment goods. It was what might be called a boom led by the production and circulation of Department I goods (means of production). However, the shift into the consumer branches of the machinery industries very soon threw up the barrier of deficient demand, and if Japanese capital was to continue to take advantage of its unique strength in these industries, that is, its maturing technical base in combination with its flexible labour system, it would need to find a way round this bottleneck. The obvious solution lay in export markets, particularly those of the advanced countries which were sustained by high wages and Keynesian demand management. By the end of the decade, within a matter of only a few years, Japanese capital had completed one of the most radical and rapid restructuring processes on record. Labour productivity had soared and Japan’s unit wage costs in most consumer branches of machinery fell below those in the US for the first time. Investment, output, and exports all came to centre on machinery, and the advanced countries, particularly the US, became their strategic market place. For example, the proportion of cars exported leapt from 43.9 per cent in 1974 to 56.3 per cent a decade later, while the share of colour TVs exported doubled in the same peiod from 31.3 per cent to 62.2 per cent. In 1975–85, machinery’s share of exports leapt from 53.8 per cent to 71.8 per cent, almost half of which went to the US and almost a fifth to Western Europe (Steven 1990, pp. 17ff.). To Japanese capital, this new export-led accumulation model represented more than a convenient solution to the underconsumptionism which accompanied its industrial restructuring. The geographical separation of the production and circulation processes offered it the best of all possible worlds: the cheapest production costs in Japan combined with the most luxurious markets in the US and Europe.

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However, the other capitalist powers—chiefly the US—soon felt acutely threatened by this development. On the one hand, Japan’s greater competitiveness in certain branches of the electronics industry was treated as a matter of national security, since US capital’s leading edge was in the military-related branches of electronics such as aerospace, and the Pentagon was intimately involved with all the leading eletronics companies. On the other hand, the US external deficit increased by leaps and bounds in the early 1980s, and Japan’s share of this at times approached a whopping 50 per cent. Moreover, unemployment in the US was becoming more chronic, and growing numbers of union voices joined in the clamour to protect the US market from this new Japanese invasion. By September 1985, when the rivalry between Japanese and US capital showed signs of escalating to new and even dangerous levels, the finance ministers of the great powers agreed that a monetarist solution—currency adjustments—would be the best way of dealing with it. THE HIGH YEN CRISIS By August 1986 the value of the yen had soared from ¥ 240 to the US$ to ¥160, and then by January 1988 to ¥120. Only towards the end of 1989 did it begin to settle back close to the ¥150 mark. Japanese capital’s international competitiveness was instantly slashed, since Japan was suddenly transformed into a country with the highest wages in the world. It was almost as if Japanese unions had won a 100 per cent wage rise, and many components which used to be made so cheaply under the kanban system had come to outprice even US made ones. Strange as it may seem, the rise of the yen did not translate into any rise in living standards for the Japanese working class. In spite of the fall in import prices and the additional dive in oil prices, Japanese workers were too weakly organized to win any of the gains from the higher yen for themselves. It was a constantly remarked on phenomenon by the press that the consumer price index failed to follow the plunge in wholesale prices brought on by the revaluation. Capital was able to appropriate almost the entire benefit of cheaper imports, which it used to compensate for the pressure on profits due to the surge in export prices. Whereas before September 1985, the lower living standards of Japanese workers in relation to their US counterparts to some extent corresponded with their lower money wages, afterwards the situation was almost incomprehensible. Japan’s money wages rose above US money wages, but its real wages were still only a bit more than 60 per cent of American real wages (Steven 1988).

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Most of the reasons for the different purchasing powers of US and Japanese wages lie in the conditions which originally made Japan a site of low-cost production. The high level of social control which capital wields over labour has enabled capital to carve out for itself virtual rackets round each of the most essential wage goods, thus qualitatively further inflating the costs of what are, even under circumstances of less total control over labour, workers’ largest outlays: housing, education, medicare, and food. Housing is the most notorious, since in Tokyo over ten times a worker’s annual income is now needed to buy a flat in a condominium, while in New York only three times a worker’s annual income can buy a house. Because of the scarcity of land in relation to Japan’s population, capital has targeted real estate as its chief means of storing wealth and evading taxes. From time to time, this political strategy leads to enormous jumps in the value of land, giving landowners extra, but totally predictable, shares of the total social surplus. It also ensures that sharply falling land values are impossible under present political arrangements. Today the value of real estate in metropolitan Tokyo alone exceeds that of the entire US. Many distinctive features of Japan’s political economy stem from the astronomical value of urban land. For example, if one includes among the assets of Japanese companies the market value of the real estate they own, then the value of their shares grossly understates the value of their assets. In a western situation, such companies would be seen as ripe for takeover and asset stripping. However, in Japan the security of land prices puts a very powerful and distinctive brake on any downward tendency in share prices, making a stock exchange crash virtually a political impossibility. Another pivotal role played by land prices is through their effect on the general level of prices. Whenever there are signs that opportunities for productive investment are drying up, surplus capital shifts into real estate and starts a new trend in land prices which soon spills over into wholesale and retail prices as well. The earliest signs of inflation in Japan are always in land prices, and they are triggered by surplus capital, not the extra spending power of workers. Similar rackets, though on vastly smaller scales, surround the high costs of education, health, and food in Japan. In each case, ‘normal’ scarcities are artificially inflated by the controlling capitalist interests, and workers have to set aside, in some cases in the form of lifelong savings, extra monies to cover them. The so-called and much heralded Japanese penchant for saving results, not from a miserly culture, but from the need to survive. All of these rackets have reduced the

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disposable income of Japanese workers below levels which make them an effective and sustained market for consumer goods. The rise of the yen had little effect on this. Because capital was soon able to appropriate the benefits of the higher yen in the form of higher profits, it neither raised the living standards of Japanese workers nor their potential as a market for the consumer goods previously exported to the advanced countries. COSTS OF THE HIGH YEN What the higher yen did achieve was to raise production costs in Japan relative to costs elsewhere, and to slash the yen value of sales in foreign markets. It thus put sudden and heavy pressure on the profitability of the export industries, particularly those selling machinery to the advanced countries. The high yen recession of 1986– 7 was characterized by winners and losers. Windfall profits accrued to the raw material importing industries, such as electric power, and those, such as finance and real estate, which through skyrocketing land prices could also claim a lion’s share of the benefits of cheaper imports. The losers were concentrated among the motor vehicle and electronics companies whose markets were heavily concentrated in the US and Europe (Steven 1988). Among car makers, only Suzuki and Fuji increased their income in fiscal 1986, while large actual losses were sustained by Japan’s second largest car maker, Nissan. Almost all the major electrical companies recorded decreases in income, and quite a few also went badly into the red: Sony, Sanyo, Canon, Sansui, Akai and JVC. The trough of the recession was around November 1986, by which time capital had already set in motion its well-proven three-pronged strategy: industrial restructuring, domestic ‘cost-down’, and direct foreign investment. Industrial restructuring The earliest calls by the Nakasone government—for example as manifested in the special ¥06 trillion expenditure programme to stimulate domestic demand—for a shift away from Japan’s export-led accumulation model did not present a clear picture on which domestic industries were to be targeted. There was a lot of talk about moving from a production-based system to a service economy, but it was soon realized that this was not possible, since the goods to be serviced would have to be made somewhere. However, to the extent that the service

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sector has expanded and contributed to domestic demand, the required goods have been produced in and imported from Asia, by Japanese companies which, as we shall see, have relocated there. However, there has also been a shift to productive industries for which the demand is domestic. But this has not come from the Japanese working class, which is organizationally too weak to win wages that could put it in the forefront of the market. The new domestic demand has come from a variety of industries, whose common factor is that upper class spending power provides the market. Industries producing both investment and consumer goods have been involved, although the emphasis has been on the former. The first sign of a return to domestic investment as the motor of capital accumulation in Japan appeared at the height of the yen crisis. The seeds of the capital investment boom of 1988 were already present in the construction boom, primarily housing, that took off during early 1987. Although the housing boom came to an expected halt with the saturation of the limited market—new housing prices showed the full effect of the new land prices—a capital investment boom of almost unprecedented proportions soon followed. For the first time since the early 1970s, private plant and equipment expenditure exceeded 20 per cent of GNE. In 1988 real domestic demand expanded by 6.9 per cent, a rate not heard of for more than a decade, but more than a half of this (3.5 per cent) was contributed by the growth of private equipment investment and only 2.6 per cent by the growth of private consumption. In 1989 and 1990 the boom was expected to slow, with the overall rate of growth falling from 5.1 per cent in 1988 (the fall in external demand contributed -1.7 per cent) to 4.3 per cent in 1989 and 4.5 per cent in 1990. The decline in external demand, and so the rate of improvement in Japan’s balance of payments, was expected to slow from -1.4 per cent in 1986, -1.0 per cent in 1987 and -1.7 per cent in 1988, to -1.0 per cent in 1989 and -0.7% in 1990 (Economisuto 1989). However, although the trade dispute with the US showed very slow but steady signs of improvement, the fortunes of the Japanese working class have not been affected. This was not because the restructuring of the late 1980s represented a simple return to the pre-oil crisis industrial structure, for this was not the case. The productive power Japanese capital had gained in the mass consumer goods industries was not abandoned; the industries were instead increasingly relocated—in Asia when low-cost labour was the key to success, and in the US and Europe when technology provided the greater cutting edge. In future, mass consumer goods will increasingly be imported.

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In so far as the consumer goods industries are being expanded locally, the emphasis is now on luxury goods, that is, ones for which the buying power comes from the upper class. The land and stock price booms that accompanied the high yen recession (and that were only briefly interrupted by the crash of October 1987) added a ‘new rich’ to the comparatively large upper and middle classes which emerged from the long boom (Steven 1983). Today, one could conservatively estimate that about 30 per cent of Japan’s population falls into the category of an upper class market, that is, regular buyers of luxury consumer goods. Its size and spending power contrasts markedly with that of the rest of the population, whose day to day lives continue to reveal the struggle associated with Japan’s traditional system of low-cost production. Neither was there a return to basic material processing, since the investment goods industries now flourishing focus more on the manufacture of plant and equipment than on the materials they require. With the increasing overseas production of mass consumer goods, the exports of Japanese companies are now also concentrating more on the ‘top’ end of the consumer market. For example, the big car makers have all started to compete fiercely on the basis of their new luxury models. The result of these changes is that more and more of Japan’s exports are comprising hai-teku (‘high tech’) investment and consumer goods. But far from signalling the break-up of Japan’s tightly-controlled labour system, the industrial changes have, if anything, further consolidated the old regime. Domestic cost-down Capital’s immediate response to the rise of the yen was an all-round tightening of the belt at home. The whole range of expedients were used, and although—in response to western criticism that Japan’s advantage stemmed from an outmoded labour system—there was some rhetoric about relaxing them later on, the overall situation confronting most workers today is worse than the one they endured before the rise of the yen. An early manifestation of the trend was the ‘complete rout for labour’ in the 1987 wage negotiations, when capital conceded ‘the thinnest ever’ wage rises (Journal of Japanese Trade and Industry 1987), while in the most hard-pressed industries, bonuses were even slashed. The next year, the average nominal wage increase was a mere 4.3 per cent, compared to 3.4 per cent in 1987, although bonuses, the most flexible feature of Japan’s wage system, were raised by an average of about 6.0

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per cent. (Rodosho 1989, fuzoku tokeihyo: 62 ff.). It was clear that if domestic demand was to expand, then this would not result from any real rise in working class spending. Employment was also speedily adjusted by means of the flexibilities employers enjoy in this area. In the ‘sunset’ industries, such as iron and steel, companies like Nippon Steel made large-scale cuts of up to 7,000 jobs. Those most acutely affected by the high yen, such as Nissan and Toshiba, were just as ruthless, although most of the workers affected were not ‘regulars’. It was estimated that correcting Japan’s external surplus would ultimately require the loss of between one and two million jobs, and even the official unemployment figures surged over the 3 per cent level. However, these figures tell us little about the real levels of unemployment in a country like Japan, where there are so many different types of tenure that, what might be a clear distinction between employment and unemployment in another setting, simply becomes a continuum, from regular workers who put in very long hours of overtime, to day labourers or part-time workers on limited hours. Since none of these can be counted as officially unemployed, officially the problem disappears. Occasionally even the government lets on, as it did in a survey which compared employment in Japan and the US. On every measure except the official rate, Japan’s joblessness in 1988 was higher than that of the US (Keizai kikakucho 1988:122). Overtime is another key component of Japan’s flexible employment system. Employers prefer overtime to hiring new workers, partly because of the extra cost involved in hiring and firing, partly because overtime pay is lower than regular pay. Overtime is paid at only 1.25 times the regular monthly rate, a rate which does not include the bonuses added to make up the annual rate. The bonuses are, in effect, a proportion (about 30 per cent) of annual income withheld to be varied downwards as well as upwards. By making overtime virtually compulsory, employers can force what amount to wage reductions. This is the most fundamental reason why, in spite of all the rhetoric to the contrary, Japan has longer working hours than any other major power, by 200–500 a year. In 1988 overtime even increased by 8.1 per cent to reach its highest level, thus bringing total working hours to their highest levels since the 1960s – – (Rodosho 1989, fuzoku tokeihyo: 66). Part of the cost-down brought on by the higher yen was the Revised Labour Standards Act, effective from April 1989, which officially abolished the regular eight-hour day. This revolutionary step was concealed by the reduction of the number of regular hours per week from 48 to 40. It meant that people could be legally compelled to work

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for over ten hours a day for a number of days straight, at regular rather than overtime rates, so long as over a period of three months the average was no more than forty hours a week. The flexibility which employers had always enjoyed became fully legal and no longer even requires overtime pay. Most of the other flexibilities in Japan’s labour system were also used to ensure that the burden of the higher yen shifted onto the working class. Through the cutting of subcontract prices, most notably by Toyota, workers in small firms bore their extra share of the burden. And the capital investment boom previously referred to also raised labour productivity through the extensive rationalizations made possible by the widespread introduction of new technology. Direct foreign investment As on previous occasions, industrial restructuring and domestic ‘costdown’ were accompanied by a systematic programme of DFI. The foreign investment is necessary so that the industries out of which capital restructures do not disappear altogether, but simply find more hospitable environments elswehere. The cost-down is necessary because it is simply not possible to shift everything overseas. Although on each occasion capital has combined the three strategies, this time the scale has been much greater, because the two main concerns relating to the high yen crisis are so much more serious: the sudden ballooning of costs in Japan and the acute threats Japanese capital faces in the markets of the advanced countries. The patterns of investment have been closely associated with the domestic problems that have spurred them. Indeed, just as capitalism is essentially a social relation that assumes the form of economic exchanges, so the internationalization of capitalism is the geographical relocation of this social relationship in response to bottlenecks in existing locations. Patterns of foreign investment are therefore essentially patterns of political activity in foreign countries. Three tendencies in particular stand out. The first is that the traditional target in Asia continues and is a direct response to the problem of escalating costs from the high yen. Labourintensive manufacturing is no longer an activity which can be cheaply carried out in Japan. Even components, which in the past could be cheaply squeezed out of vulnerable subcontractors, must now be made where low-cost labour is plentiful and securely controlled. The burgeoning investments by electrical and motor vehicle companies in ASEAN are the clearest manifestation of how the current contradictions

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of Japanese capitalism, particularly the high yen, are being displaced into Asia (Steven 1990). The second pattern of DFI comprises those high tech projects which are being sent into the advanced countries. Traditionally, Japanese manufacturing companies invested in Europe and the US mainly in order to service the products they exported to these markets. However, now they are recognizing that, if they are to sell high-tech products with impunity in the backyard of the high-tech countries, they are going to have to make these products locally, usually in some kind of association with a local partner. This is one of the most rapidly expanding categories of DFI, its most striking example being the motor vehicle plants coming into operation in the US. The many new joint ventures and technical tie-ups between Japanese and western firms in the advanced countries do not simply reflect the need to maintain access to their markets. They reflect real political alliances among the advanced powers, alliances which consolidate their technical lead over the underdeveloped world and so the means by which they dominate that world. Modern imperialism, in which state power is the preserve of the local ruling class, functions more through cooperation among the imperialist powers than through rivalry, and the most fundamental form of co-operation is sharing technology, imperalism’s foremost weapon. The final pattern of investment first manifested itself strongly in the early 1980s: in commerce, finance, and real estate in the advanced countries. If the high-tech manufacturing investments in the advanced countries consolidate the alliances among the imperialist powers, and if the labour-intensive manufacturing investments in Asia function to extract wealth from the neo-colonies, then the unproductive investments in the advanced countries ensure the realization and ‘equitable’ distribution of this surplus among the advanced powers. Japanese capitalism can no longer survive the contradictions of rigidly separating its production site, Japan, from its circulation site, the US and Europe. DFI is to be the deus ex machina to resolve the mounting contradictions: production has to move to Asia and the advanced countries, and a sound institutional base in the latter must be set up to ensure an uninterrupted circulation process. Japan’s emerging accumulation model, like its predecessor, is a product of struggle. Two major political forces have played key roles in its development. The importance of organized labour in Japan has been in its comparative weakness, its inability to win wages and conditions that would send capital into industries for which it provided the primary demand. So domestically, Japanese capital is concentrating on upper

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class buying power, for both consumer and producer goods. The other key political force has been US capital, which is increasingly willing to have Japanese capital enter its domain only in alliance with itself, in joint ventures and in technical tie-ups, and not just to send cheap Japanese-made goods into the country. And so Japan has had to find low cost production sites in Asia and to penetrate the US and European markets from within. DFI is the dens ex machina through which Japanese capital still tries to preserve the best of all possible worlds: low cost production sites and high wage market places. NOTE 1

I have relied heavily on Nihon Keizai Shinbun for much of the detail on which my interpretive judgements in this essay are based. Specific references to a lot of them can be found in my writing listed in the references.

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REFERENCES Economisuto, Tokyo: Mainichi Shinbunsha, 18 December 1989, pp. 48–9, 67. Journal of Japanese Trade and Industry Tokyo, July/August 1987, p. 7. Keizai kikakucho sogo tokeikyoku [General Statistical Bureau of the Economic Planning Agency] (1988) Shitsugyo (Sono kozo to shinkokudo) [Unemployment: Its Structure and Gravity] Tokyo: Okurasho insatsukyoku. Okurasho [Ministry of Finance] ‘1989 Jugatsu ni okeru tainai oyobi taigai shoken toshi nado no jokyo [Security and Other Investment in Japan and Overseas in October 1989], 1 December 1989. Rodosho [Ministry of Labour] (1989) Rodo hakusho [Labour White Paper], Tokyo: Nihon Rodo Kyokai. Steven, R. (1983) Classes in Contemporary Japan, London: Cambridge University Press. ——(1988) ‘The high yen crisis in Japan’, Capital and Class 34, spring. ——(1990) Japan’s New Imperialism, London: Macmillan. Tsurumi, E.Patricia (1990) Factory Girls: Women in the Thread Mills of Meiji Japan, Princeton: Princeton University Press.

4

Japanese direct investment in the United States manufacturing sector

Neil Reid

INTRODUCTION Japanese foreign direct investment (FDI)1 has grown at an astonishing rate since the early 1970s (Heller and Heller 1974; Roemer 1976; Yoshino 1976; Ozawa 1979; Sekiguchi 1979; Dicken 1980, 1983, 1988; Allen 1981; Marsh 1983; Tsukazaki 1987; Japan External Trade Organisation (JETRO) 1988; Morris 1988). In recent years North America, particularly the United States, has become a major destination for much of this investment. In 1986, for example, North America received over $10 billion of Japanese FDI, which represented almost 47 per cent of Japan’s FDI for that year (Tsukazaki 1987). Although the majority of Japanese direct investment in the US economy is in nonmanufacturing sectors (see Table 4.5), manufacturing investment is an important component of Japanese direct investment in the US. By the end of 1987 over 180,000 Americans were employed in 945 US-based Japanese manufacturing plants. Of these 945 plants, 383 (40.6 per cent) were either acquired or constructed in the two years of 1986 and 1987 alone. Thus, the growth of Japanese direct investment in the US manufacturing sector has been particulary explosive in recent years. The very recent nature of the majority of Japanese direct manufacturing investment in the US economy means that relatively little is known, for example, about either its current sectoral or geographic distribution. The purpose of this chapter is to bring our knowledge of Japanese direct investment in the US manufacturing sector as up to date as possible. This will be achieved by utilizing the most comprehensive data bases on Japanese direct investment in the US manufacturing sector currently in existence. These are Japan’s Expanding US Manufacturing Presence: 1986 Benchmark Survey and Japan’s Expanding US Manufacturing Presence: 1987 Update, recently published by the Japan Economic Institute in Washington, D.C.2 61

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This chapter is divided into six main sections. The first section sets the historical context for Japanese FDI in general, and direct investment in the US manufacturing sector in particular. It does so by tracing the major reasons behind the growth of Japanese direct manufacturing investment in the United States in the post-1970 period. The second section describes the growth of Japanese direct manufacturing investment in the US from the early decades of the twentieth century up through the end of 1987. Section three examines the sectoral distribution of Japanese direct manufacturing investment in the US economy. Section four examines the geography of this investment in the US, paying particular attention to changes in its spatial distribution that have taken place since the late 1970s/early 1980s. Section five examines penetration of the US economy by Japanese manufacturers and assesses the extent to which this is occurring. Finally, section six assesses the potential economic impact of Japanese direct investment in the US manufacturing sector in terms of creation/destruction. JAPANESE DIRECT INVESTMENT IN THE UNITED STATES MANUFACTURING SECTOR: ITS HISTORICAL CONTEXT The Second World War left the Japanese economy devastated—rampant inflation, scarcity of capital, three million dead, nine million homeless, and the majority of industry physically destroyed by the ravages of war were among the many problems facing Japan in the period immediately following the cessation of hostilities (Yoshino 1976; Marsh 1983). While all these problems received the attention of the Japanese government, reconstruction of Japan’s domestic manufacturing base became a major priority (Ozawa 1979). This the Japanese successfully achieved, to the extent that she was soon able to successfully re-enter the international trade arena and, by 1963, had regained her pre-war share of international trade (Allen 1981). In the early years of her post-war recovery textiles were an important component of Japan’s export trade, finding markets mainly in neighbouring Asian countries such as South Korea, Indonesia, and Pakistan. From the mid-1960s, however, Japanese exports changed both their structural and geographic composition. Exports in the post-1965 period were increasingly directed towards the United States and increasingly comprised a narrow range of consumer durables such as automobiles, television sets, and radios. So successful was Japan in her trading relations with the United States that a huge trade imbalance soon resulted. Put in simple terms Japanese exports to the United States greatly exceeded US exports to Japan. By 1971 Japan had built up a

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$3.2 billion trading surplus with the United States. The US reaction to the development of this huge trade imbalance was two-fold. First, she introduced restrictions on a number of Japanese imports. Second, in August 1971 she let the exchange value of the dollar slide from 360 yen to the dollar to 300 yen to the dollar. In Japan this event became known as the ‘Nixon Shock’ (it was a shock to the Japanese because the 360 yen to the dollar exchange ratio had existed unaltered since 1949) (Allen 1981). In any event, devaluation of the dollar had the immediate effect of making Japanese imports more expensive in the United States. The Japanese response to the US action was two-fold. First, she began to divert some of her export trade to Western Europe, with whom she also soon built up a huge trading surplus. Second, she began circumventing the effect of both the newly-imposed import restrictions and the stronger yen by investing in production capac ty in the United States. Capital for investment in overseas production capacity was provided by several decades of successful trading in international export markets. Now some of these markets, particularly the US, were in danger of slipping away. This Japan could not afford to let happen. As Toshitomo Tonaka, director of the overseas private investment division at the Japanese Ministry of Finance said in 1981, ‘the USA remains our most important market abroad, so vital that we could not live without it’ (quoted in Marsh 1983:50). From 1970 onwards, therefore, Japanese manufacturing investment in the United States began to steadily increase, with the result that by the end of 1987 there were 945 Japanese manufacturing plants either fully operational or under construction in the United States. THE GROWTH OF JAPANESE DIRECT MANUFACTURING INVESTMENT IN THE UNITED STATES By the end of 1986 Japan, with 4.4 per cent (by value) of all manufacturing FDI in the United States, was the seventh largest foreign direct investor in the US manufacturing sector, behind the United Kingdom (22.0 per cent), the Netherlands (21.6 per cent), West Germany (11.7 per cent), Switzerland (11.4 per cent), France (8.8 per cent), and Canada (7.9 per cent) (see Table 4.1). Although comprising a relatively small proportion of manufacturing FDI, Japan’s share has been increasing in recent years. In 1977, for example, Japan’s share of manufacturing FDI in the US economy stood at only 2.4 per cent (see Table 4.2). Despite its increasing relative importance in the US manufacturing sector, in absolute terms Japan still invests less annually in the US manufacturing sector than a number of other industrialized

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countries. In 1986, for example, seven other countries (the United Kingdom, West Germany, the Netherlands, Sweden, Switzerland, Canada, and France) all invested more capital in the US manufacturing sector than Japan. In 1986, the United Kingdom was the largest direct investor in the US manufacturing sector with investments worth $3,292 Table 4.1 Foreign direct investment in the US manufacturing sector by country of origin at the end of 1986

Source: Survey of Current Business, 1987

Table 4.2 The growth of Japanese direct investment in the US manufacturing sector, 1977–86

Source: Survey of Current Business, 1979, 1980, 1981, 1982, 1985, 1986, 1987.

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million. This represented 28.7 per cent of all manufacturing FDI in the US for that year. Japan, with $304 million worth of direct investments, accounted for only 2.6 per cent of direct manufacturing FDI in the US economy in 1986 (see Table 4.3). Table 4.3 Foreign direct investment capital inflows into the US manufacturing sector by country of origin for the year 1986

Source: Survey of Current Business, 1987.

For reasons outlined in the previous section Japanese foreign direct investment is essentially a post-1969 (particularly post-1980) phenomenon. Of the 945 Japanese manufacturing plants currently in operation or under construction in the United States, only 12 (1.2 per cent of the total) were constructed or acquired prior to 1970. In the 1970s the Japanese added a further 192 (20.3 per cent of the total) plants to their US-based manufacturing capacity. It is in the 1980s, however, that the majority of Japanese direct investment in the US manufacturing sector has taken place. Between 1 January 1980 and 31 December 1987 the Japanese either constructed or acquired 741 (78.5 per cent of the total) US manufacturing plants, bringing the total number of plants to 945. These 741 plants include 85 that were under construction, only becoming operational in 1988 and 1989. In 1986 and 1987 alone, 383 (40.6 per cent of the total) Japanese manufacturing plants were constructed or acquired in the US (see Table 4.4). If the construction/acquisition rate of recent years continues the number of Japanese manufacturing plants in the US will soon exceed 1,000. Although Japanese direct investment in the US manufacturing sector has been increasing at a particularly rapid rate in recent years, it still represents a relatively small proportion of total Japanese direct

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Table 4.4 Construction and acquisition dates of Japanese-owned manufacturing plants in the US, 1912–87

Sources: McKnight 1987, 1988. Notes: Numbers in parentheses are percentages. This table includes plants that were in operation or under construction on 31 December 1987—hence, the inclusion of 1988 and 1989 plants.

investment in the US economy. By the end of 1986 Japanese manufacturing investment in the United States stood at $3,017 million. This represented 12.9 per cent of total Japanese direct investment in the US economy. The vast majority of Japanese direct investment in the US was in the wholesale trade ($12,963 million), which accounted for 55.3 per cent of the total. Other important destinations for Japanese direct investment were banking ($2,745 million) and real estate ($2,480 million), which have received 11.7 and 10.6 per cent of Japanese direct investment capital respectively (see Table 4.5). In recent years manufacturing’s share of Japanese direct investment in the US economy has been declining. In 1977 manufacturing accounted for 18.9 per cent (by value) of total Japanese direct investment in the US. This has decreased gradually each year until 1986 (as noted above) when

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manufacturing investment only accounted for 12.9 per cent of the total Japanese direct investment in the US (see Table 4.2). Table 4.5 Sectoral distribution of Japanese investment in the US at the end of 1986

Source: Survey of Current Business, 1987. Notes: D=data suppressed to avoid disclosure of individual companies. Percentage column does not add up to 100 due to missing data.

THE SECTORAL DISTRIBUTION OF JAPANESE DIRECT MANUFACTURING INVESTMENT IN THE US At the two-digit Standard Industrial Classification (SIC)3 code level, two industrial subsectors (measured in terms of employment) dominated Japanese direct manufacturing investment in the US (see Table4.6 ). These are ‘Electronic and other electrical equipment and components, except computer equipment’ (39,602 employees or 21.8 per cent of total employees) and ‘Industrial and commercial machinery and equipment’ (31,694 employees or 17.4 per cent). Together these two sub-sectors employ 71,296 workers (39.2 per cent of employees). Two other sub-sectors have shares in excess of 10 per cent. These are ‘Transportation equipment’ (21,442 employees or 11.7 per cent) and ‘Primary metals industries’ (19,596 employees or 10.7 per cent). More detailed analysis of the sectoral distribution of Japanese manufacturing investment can be carried out by examination of threedigit SIC codes. At the three-digit level the leading Japanese industrial sub-sectors are ‘Motor vehicles and motor vehicle equipment’ (20,290 employees or 11.1 per cent), ‘Steel works, blast furnaces, and rolling and finishing mills’ (15,433 employees or 8.5 per cent), ‘Electronic components and accessories’ (13,089 employees or 7.2 per cent),

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Table 4.6 Distribution of employment in Japanese manufacturing plants in the US across two-digit Standard Industrial Classification codes at the end of 1987

Sources: McKnight 1987, 1988. Notes: Numbers in parentheses are percentages. This table includes employment in plants that were in operation or under construction on 31 December 1987.

‘Computer and office equipment’ (12,075 employees or 6.6 per cent) and ‘Miscellaneous plastics products’ (10,013 employees or 5.5 per cent) (see Table 4.7). Together these five subsectors employ 70,900 workers (38.9 per cent of employees). In trying to explain the above sectoral distribution of Japanese manufacturing investment in the US economy it is informative to draw upon Dicken’s simple typology of FDI. According to Dicken, foreign direct investment can be divided into two basic types. First, there is ‘market-oriented’ investment. This type of investment most often occurs

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Table 4.7 Distribution of employment in Japanese manufacturing plants in the US across three-digit Standard Industrial Classification codes at the end of 1987

Sources: McKnight 1987, and County Business Patterns, 1986. Notes: Numbers in parentheses are percentages.

when a manufacturer is trying to either maintain or increase sales in a foreign market, but is prevented from doing so because of the erection of tariff barriers, the imposition of quotas, or the establishment of

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voluntary export constraints. Second, there is ‘supply-oriented’ investment. This type of investment occurs when a manufacturer invests overseas in order to access raw materials. The majority of Japanese direct manufacturing investment in the US can be categorized under the former of these two types. Mention has already been made of the fact that the United States is the primary market for Japanese manufacturers of a whole host of consumer durables, ranging from automobiles to television sets. In addition to final demand, a large number of customers for Japanese manufacturers are found in other industries. The importance of such markets is reflected in Table 4.7. During the 1970s Japanese exporters to the US were faced with an increasing barrage of tariff barriers and quotas from the US. In order to circumvent these barriers many Japanese manufacturers invested in production capacity in the US. For example, in 1981 Japan agreed to limit her automobile exports to the US to 1.68 million vehicles per year.4 This represented 22 per cent of the US market. Establishment of such quotas induced Japanese automakers such as Honda and Toyota to establish production capacity in the US (Reid 1989). Investment by auto manufacturers and their component part suppliers now represents over 11 per cent (measured in terms of employment) of all Japanese direct manufacturing investment in the US (see Table 4.7). It should be noted, however, that the figure of 11.1 per cent for ‘Motor vehicles and motor vehicle equipment’ underestimates the true extent of Japanese auto-related investment in the US. This figure only includes those manufacturing plants classified under SIC code 371. Many other component part makers are classified under different SIC codes. For example, the Ogihara America Corporation, which has a plant in Howell, Michigan, produces automotive body stampings, but is listed under the threedigit SIC code 346 (‘Metal forgings and stampings’). Indeed, automotive component part makers are listed under twenty-eight different three-digit SIC codes. This includes SIC code 371. My calculations suggest that, in addition to the 20,290 workers employed in plants listed under SIC code 371, there are a further 17,317 workers employed in plants which are distributed throughout twenty-seven other three-digit SIC codes. Taking account of these additional employees increases the number of Japanese-employed workers in auto-related sectors to 37,607. This represents 20.5 per cent of the total Japanese employed manufacturing workforce in the United States.

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Figure 4.1 States and regions of the USA

THE GEOGRAPHY OF JAPANESE DIRECT MANUFACTURING INVESTMENT IN THE UNITED STATES In order to examine the spatial distribution of Japanese direct manufacturing investment in the United States, the country was divided into four regions—the Industrial Heartland, the Far West/ Southwest, the Southeast and the Interior (see Figure 4.1). These regions are consistent with those used by O hUallachain (1985) in his study of foreign direct investment in the United States. Before examining the geography of Japanese manufacturers throughout these four regions, it would be useful to provide some background information on the economic structure and recent economic fortunes of these regions. As the name suggests, the Industrial Heartland is the traditional centre of manufacturing activity, both foreign and domestic, in the United States. This region includes the states of the northeastern United States and the upper midwest. The economy of this region was traditionally based on heavy industries such as steel production and automobile manufacture and, like many similar regions in the industrialized nations of the world, since the early 1960s has been experiencing economic distress with the decline of its traditional industries. In contrast, the regions of the Far

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Figure 4.2 State share of Japanese manufacturing employment up to the end of 1979

West/ Southwest and Southeast have, in recent decades, fared considerably better economically than the Industrial Heartland. The Far West/ Southwest has done particularly well, with much of its economic growth tied to its ability to attract high-technology industries to its towns and cities. Manufacturers have been particularly attracted to these two regions by the good climate and a highly-skilled, often non-unionized, labour force. The final region, the Interior, comprises many of the Great Plain states, including Kansas, Montana, and Idaho. Traditionally, this has been an agricultural region with relatively little industrial development. Up until 1980 the majority of Japanese direct manufacturing investment was located in the Far West/Southwest region of the United States. At the end of 1979 this region was home to 58.6 per cent (25,231 workers) of the Japanese-employed workforce in the United States (see Table 4.8, Figure 4.2). Most of this Japanese investment in the Far West/ Southwest region was located in the state of California. At the end of 1979 California accounted for 38.2 per cent (16,413) of the Japaneseemployed manufacturing workforce in the US (see Table 4.9, Figure 4.2). The second most important region in terms of Japanese direct

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manufacturing investment at the end of 1979 was the Industrial Heartland. This region employed 20.3 per cent (8,767 workers) of Japan’s US manufacturing workforce. The third most important region was the Southeast which was home to 18.7 per cent (8,041) of Japaneseemployed workers. Finally, came the Interior region of the country which was relatively unimportant in terms of Japanese direct manufacturing investment, being home to only 2.4 per cent (1,028) of the Japanese workforce (see Table 4.8, Figure 4.2). In addition to California, mentioned above, other states which received significant levels of Japanese direct manufacturing investment were Alaska (9.1 per cent of employment) and Texas (8.1 per cent of employment) (see Table 4.9, Figure 4.2). Table 4.8 Geographic distribution of employment in Japanese manufacturing plants in the US by region

Sources: McKnight 1987, 1988. Notes: Numbers in parentheses are percentages. This table includes employment in plants that were in operation or under construction on 31 December 1987.

In the post-1979 period the geography of Japanese direct manufacturing investment in the United States changed quite dramatically. In this period Japanese manufacturers displayed a decreasing preference for locations in the Far West/Southwest region, and an increasing preference for locations in the Industrial Heartland and Southeast regions. The Industrial Heartland was a particularly important destination for Japanese manufacturers in this period. Of the 139,380 new Japanese jobs that were created in the period 1980– 7, 67,403 (48.4 per cent) were in the Industrial Heartland (see Table

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Figure 4.3 State share of Japanese manufacturing employment for the period 1980–7

4.8, Figure 4.3). In addition to the Industrial Heartland, the Southeast has also received an increased share of Japanese direct manufacturing investment since 1979. This region became home to an additional 34,724 Japanese manufacturing jobs, which represents 24.9 per cent of all Japanese jobs created in this period. As noted above, the Japanese manufacturers have displayed a decreasing preference for locations in the Far West/Southwest region which received 33,326 new Japanese manufacturing jobs since 1979. This represents 23.9 per cent of Japanese manufacturing jobs created in this period. The Interior region of the country continued to be a relatively unimportant destination for Japanese direct manufacturing investment, accounting for under 3 per cent of new Japanese manufacturing employment (see Table 4.8, Figure 4.3). Despite the shifting focus of geographic investment away from the Far West/Southwest region, California still remained the main recipient of Japanese direct manufacturing investment (see Table 4.9, Figure 4.3). In the post-1979 period California became home to 15,580 new Japanese manufacturing jobs (11.1 per cent of the total created in this period). Consistent with the regional trend outlined

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above, however, a number of Industrial Heartland and Southeastern states also gained a considerable number of new Japanese manufacturing jobs. Posting particularly impressive gains were Illinois (14,390 jobs), Michigan (11,052 jobs), Indiana (8,949 jobs), Tennessee (8,183 jobs), Ohio (8,614 jobs), and Kentucky (8,319 jobs) (see Table 4.9). As Figure 4.3 clearly shows, Japanese investment in the post-1979 period is clearly concentrated (in addition to California) in this handful of Industrial Heartland and Southeastern states. This shift in the geographic focus of Japanese direct manufacturing investment in favour of the Industrial Heartland and the Southeast can be partly explained in terms of the fact that since the early 1980s a large number of Japanese automakers and their component part suppliers have invested in production capacity in the United States. In 1982, Honda became the first Japanese automaker to produce automobiles in the United States. Since then, Honda have been joined by a further 7 Japanese auto assembly plants and over 120 component part makers who now have production capacity in the US (Reid 1989). The US auto industry is geographically concentrated in a handful of Industrial Heartland (particularly Ohio, Illinois, and Michigan) and Southeastern (particularly Georgia, Kentucky, and Tennessee) states (Rubenstein 1986). Such a geographic concentration has occurred because the automakers have located close to the North American population centre of Vandalia, Illinois in order to minimize the distribution costs of their final product to the consumer (Rubenstein 1986). The Japanese automakers have followed the same locational strategy of their American counterparts. Japanese auto assembly plants and component part makers who have established US production capacity since 1979 employ 37,171 workers. This represents 26.7 per cent of jobs in US-based Japanese manufacturing plants in the post1979 period. Prior to 1980 there were only four Japanese auto part makers in the US, employing 918 people. This represented only 2.1 per cent of employment in US-based Japanese manufacturing plants in the pre-1980 period. Of the 67,403 jobs created in Japanese manufacturing plants established in the Industrial Heartland in the post-1979 period, 20,718 (30.7 per cent) were attributable to auto assembly plants and component part makers. Of the 34,724 Japanese manufacturing jobs in the Southeast in this period, 11,790 (33.9 per cent) were auto-related. In the Far West/Southwest, however, there were only 3,877 auto-related Japanese jobs created in this period. This represented 11.6 per cent of all Japanese jobs created in this region in this period. Clearly then heavy Japanese investment in the

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Table 4.9 Geographic distribution of employment in Japanese manufacturing plants in the US by state

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Sources: McKnight 1987, 1988. Notes: Numbers in parentheses are percentages. This table includes employment in plants that were in operation or under construction on 31 December 1987.

US auto industry is a major factor in explaining the shift in the geographic focus of Japanese direct manufacturing investment in the post 1979 period. This shifting preference by Japanese manufacturers for the Industrial Heartland and Southeast over the Far West/Southwest region meant that by 1987 the latter had lost its number one ranking as home for Japanese direct manufacturing investment. By 1987 the Industrial Heartland was the clear leader with 76,170 (41.8 per cent) of Japaneseemployed manufacturing workers. In second place was the Far West/ Southwest with 58,557 (32.1 per cent) of Japanese workers. Third, came the Southeast with 42,765 (23.4 per cent) of Japanese workers. Finally, lagging a poor fourth, came the Interior with only 4,955 (2.7 per cent) of Japanese manufacturing workers (see Table 4.8, Figure 4.4). Despite the Far West/Southwest region losing its number one ranking as the home for Japanese direct manufacturing investment in the post1979 period, California still remains the number one state for such investment (see Table 4.9, Figure 4.4). By the end of 1987 California was home to 31,993 Japanese manufacturing workers (17.4 per cent of the total). The second place state was Illinois with 16,037 (8.8 per cent) workers. Other states with significant levels of Japanese manufacturing investment included Michigan (12,576 workers), Indiana (9,379 workers), Tennessee (9,136 workers), Ohio (8,999 workers), and Kentucky (8,669 workers) (see Table 4.9, Figure 4.4). Thus, despite becoming a relatively less popular destination for Japanese direct manufacturing investment in the post-1979 period California remained the clear leader within the US. By 1987 there was also a significant geographic concentration of Japanese manufacturing investment in a

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Figure 4.4 State share of Japanese manufacturing employment up to the end of 1987

handful of Industrial Heartland and Southeastern states (see Table 4.9, Figure 4.4). By 1987, only 4 of the 50 states had no Japanese direct manufacturing investment—Idaho, Montana, North Dakota and Wyoming (see Table 4.9). JAPANESE PENETRATION OF THE US MANUFACTURING SECTOR A major concern for host countries of FDI is the extent to which their economy is being taken over and controlled by foreign direct investors. Potential problems associated with a high level of foreign control of a host economy include ‘loss of sovereignty and autonomy over key areas of economic decision-making’ (Dicken 1986:378), increasing technological dependence on foreign companies, and truncation of various parts of the economy. While the negative impacts of a high level of foreign control of a host economy tend to be most acute in lessdeveloped countries, there are a number of cases in the industrialized nations where high foreign penetration is having a detrimental effect on the economy (perhaps the best documented example of this is Canada;

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see Britton and Gilmour 1978). Commenting on the increasing levels of Japanese FDI Dicken believes that ‘the threat for many industrialised countries is that, although Japanese FDI may not be excessive in terms of the whole economy, it does tend to dominate specific industrial sectors’ (Dicken 1988:651). The purpose of this section is to examine the extent to which Japanese investors in the US manufacturing sector have penetrated, (a) the manufacturing sector as a whole, and (b) specific manufacturing subsectors. At the end of 19865 Japanese manufacturing plants in the US employed 127,175 workers. This represented only 0.66 per cent of manufacturing workers in the United States. At this aggregate

Table 4.10 Japanese share of employment in US industrial sectors at the twodigit Standard Industrial Classification code level at the end of 1986

Sources: McKnight 1987, and County Business Patterns 1986

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Table 4.11 Industrial subsectors (three-digit SIC code level) in which Japanese manufacturers accounted for over 1 per cent of employment at the end of 1986

Sources: McKnight 1987, and County Business Patterns 1986.

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level, therefore, it would seem that Japanese penetration of the US manufacturing sector has not proceeded very far. If one breaks the US manufacturing sector down into its constituent parts, however, there are some subsectors where the Japanese have penetrated quite substantially. At the two-digit SIC code level Japanese penetration is most advanced in the ‘Primary metals industries’. By 1986 Japanese manufacturers accounted for 2.46 per cent of employment in this subsector (see Table 4.10). In three other subsectors the Japanese accounted for over 1 per cent of employment. These are ‘Rubber and miscellaneous plastic products’ (1.68 per cent), ‘Electronic and other electrical equipment and components, except computer equipment’ (1.35 per cent), and ‘Industrial and commercial machinery and equipment’ (1.10 per cent) (see Table 4.10). At the three-digit SIC code level Japanese penetration has proceeded further and there are 31 subsectors where the Japanese employed over 1 per cent of the workforce in 1986 (see Table 4.11). Penetration is greatest in the ‘Household audio and video equipment, and audio recordings’ subsector where the Japanese employed 7.42 per cent of the workforce. Other significant subsectors where the Japanese employed relatively large proportions of the workforce include ‘Tires and inner tubes’ (5.38 per cent), ‘Steel works, blast furnaces, and rolling and finishing mills’ (5.36 per cent), ‘Public building and related furniture’ (4.53 per cent), and ‘Pottery and related products’ (4.26 per cent) (see Table 4.11). It is important to note that these figures refer to 1986. Given the large amount of Japanese direct manufacturing investment that has occurred since then (55,272 jobs have been added), the extent of Japanese penetration has probably increased. Finally, it should be noted that despite heavy Japanese direct investment in the US auto industry, penetration of SIC code 371 (‘Motor vehicles and motor vehicle equipment’) is still under 1 per cent. In summary, it can be said that while the Japanese have not achieved significant levels of penetration of the US manufacturing sector as a whole, they have made quite significant penetration into a small number of subsectors. Penetration levels of 5 and 6 per cent may not seem high, but given the relatively recent nature of Japanese direct investment in the US manufacturing sector these numbers are quite impressive. At the moment, the level of Japanese direct manufacturing investment is too small to seriously worry about, among other things, loss of decision-making autonomy. However, if the recent explosion of Japanese direct investment in the US

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continues into the 1990s then such concerns may become the focus of increasing attention.

JAPANESE DIRECT MANUFACTURING INVESTMENT IN THE UNITED STATES AND ITS POTENTIAL IMPACT ON JOB CREATION When a manufacturer makes the decision to establish production capacity overseas, he can do so by one of two basic mechanisms. Either he can purchase an existing manufacturing plant in the country of interest, or he can build a completely new plant from the ground up. The former mechanism is usually termed entering the host country by ‘acquisition’, while the latter is commonly referred to as ‘greenfield entry’. Generally, host countries prefer foreign direct investors to enter their country via the latter of these two mechanisms as, ‘a new plant obviously adds initially to the host country’s stock of productive capacity whereas acquisition merely transfers ownership of existing capacity to a foreign firm’ (Dicken 1986:359). The implication of this statement is that greenfield plants create jobs, whereas acquisitions are neutral with respect to job creation. However, as Dicken (1986) himself points out it is not as simple as this, and greenfield entries by a foreign direct investor can actually result in net job loss for the host country economy. This is a point to which I will return later, when an assessment is made of the potential effect of Japanese manufacturers on job creation/ destruction in the US economy. It is not only the host country that tends to prefer greenfield entry as the mode by which a foreign manufacturer enters their economy. According to Dicken (1988), many Japanese manufacturers prefer this as the mode of entry. The reason behind this preference is that it is on greenfield sites that the Japanese have the best chance to introduce their revolutionary (at least in American eyes) production techniques and management practices. Greenfield entry allows Japanese manufacturers not only to build their plant from the ground up, but also to build their labour force from the ground up. Thus, they can hand-pick their labour force and train them in their own production techniques and management practices. Given the arguments of the preceding paragraph, one would expect Japanese direct investors in the US manufacturing sector to have a

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Table 4.12 Importance of greenfield versus acquired entry for Japanese manufacturing investors in the US at the two-digit Standard Industrial Classification code level at the end of 1987

Source: McKnight 1987. Notes: This table includes employment in plants that were in operation or under construction on 31 December 1987. Greenfield percentage for ‘Leather and leather products’ cannot be calculated because the denominator is zero.

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preference for greenfield over acquired sites. However, evidence suggests that this is not the case. While 537 of the 945 (56.8 per cent) Japanese manufacturing plants in the US entered the country via greenfield entry (see Table 4.4), these plants only account for 48.2 per cent of employment in Japanese manufacturing plants (see Table 4.12). Also there is evidence that the Japanese may now have a preference for acquisition over greenfield entry. Up until 1986 there were only three years, 1968 (one acquisition versus zero greenfield entries), 1969 (two acquisitions versus one greenfield entry) and 1973 (13 acquisitions versus 12 greenfield entries), when acquisitions exceeded greenfield entries. In 1986, however, acquisitions outnumbered greenfield entries, 86 to 58. This was the first year acquisitions outnumbered greenfield entries by what could be considered a significant amount. In 1987 there were also significantly more acquisitions than greenfield entries— 137 against 102 (see Table 4.4). The fact that greenfield entries outnumber acquisitions for the years 1988 and 1989 does not necessarily indicate a return to the hegemony of the former mode of entry. Table 4.4 includes plants that were in operation, under construction, or in the process of being acquired on 31 December 1987. This means that the plants listed against 1988 and 1989 were not actually operational when Table 4.4 was compiled, but were in the process of being acquired or constructed. The nature of the acquisition process is such that acquired plants will not show up in Table 4.4 at this early stage. On the other hand, many of the greenfield entry plants, in order to be operational by 1988 or 1989, were already under construction in 1987. The net result is that the data for 1988 and 1989 is skewed in favour of greenfield plants. Indeed, if the pattern of 1986 and 1987 is repeated the number of acquired plants should eventually exceed the number of greenfield plants. As yet, however, such data are not available. Data on mode of entry were also analysed to see if mode of entry varied sectorally. For each two-digit SIC code the number of workers in greenfield plants and the number of workers in acquired plants was calculated (see Table 4.12). Table 4.12 clearly shows that the relative importance of each mode of entry type varies across industrial subsectors. In two, ‘Transportation equipment’ and ‘Furniture and fixtures’, employment in greenfield plants accounts for over 90 per cent of Japanese employment in these subsectors. Greenfield entry is almost totally dominant in the ‘Transportation equipment’ subsector (essentially auto assembly plants and their component part suppliers), where 98.2 per cent of employment is in greenfield plants. With regard to Japanese investment in the US automobile industry, it has

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been clearly shown elsewhere that such greenfield plants tend to be in small towns which have no traditional association with the automobile industry (Reid 1989). This is clearly a response to the fact that the US auto industry has a long and turbulent history of labour-management relations. Japanese automakers and their component part suppliers are fearful that if they go into the large urban areas, which were the traditional centres of US automobile production, introduction of their distinctive production techniques and management practices (such as the just-in-time delivery system and quality circles) may be hampered by a militant and inflexible workforce. Thus, they prefer greenfield sites in small towns and rural areas. As previously noted, host countries tend to prefer greenfield entry over acquisition, as it has the potential of both adding to their stock of productive capacity and creating jobs. One would, therefore, expect that the potential for new job creation would be particularly high in auto-related subsectors. However, as also alluded to above, this may not be the case. Foreign direct investment can lead to net job loss for the host economy, even though this investment enters the host economy via greenfield entry. Foreign direct investors compete with domestic manufacturers for customers. If the foreign direct investor can manufacture a product more cheaply and efficiently—for example by fewer workers—then he has the potential to erode the customer base of the domestic manufacturer. Taken to its ultimate conclusion, erosion of the domestic manufacturer’s customer base may bring about cessation of production, resulting in net job loss for the host economy. The impact of the closure of a domestic manufacturer in the face of foreign competition may be exacerbated if the foreign-owned manufacturer imports the material inputs to his production process from outside the host economy. Empirical research has shown that foreign-owned manufacturers tend to establish less backward and forward material linkages with the host economy than domestic manufacturers (see for example Britton and Gilmour 1978; McAleese and McDonald 1978). Japanese manufacturing plants tend to be particularly guilty of failing to establish strong linkages with other domestic manufacturers (O hUallachain 1984; Dicken 1986). Unfortunately, to date there have been relatively few studies of the net effect on jobs of Japanese direct manufacturing investment in the US. The most comprehensive studies conducted have focused on the potential impact on jobs of Japanese direct investment in auto-related sectors. This is perhaps not surprising given the fact that auto-related

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investment accounts for over 20 per cent (by employment) of Japanese direct manufacturing investment in the US. Recent empirical research suggests that, for the reasons outlined above, Japanese investment in the US auto industry may result in a net job loss in the industry. A study carried out by the United Auto Workers union (UAW) in January 1986 estimated that there could be up to 200,000 fewer auto-related jobs in the US by 1990 ‘because Japaneseaffiliated automakers have greater labor efficiency and they import more parts and components than do US automakers’ (United States General Accounting Office 1988:16). It is important to note, however, that the purpose of the UAW study was to ‘raise consciousness about the potential impact of Japanese-affiliated automakers on jobs’ (United States General Accounting Office 1988:16). As such their calculations were based on assumptions about the labour efficiency and sourcing patterns that were designed to yield maximum job losses. A subsequent study by the United States General Accounting Office (1988) calculated that the impact of Japanese auto-related investment on jobs could range from a net job loss of 45,000 to a net job gain of 112,000, depending upon the labour efficiency and sourcing patterns of Japanese manufacturers. As yet it is too early to tell which of these calculations, if any, will prove correct. However, the potential for net job losses in the auto industry as a result of increasing Japanese direct investment clearly does exist. Although similar studies have not been conducted for other industries, the same concerns must surely exist. CONCLUSIONS This chapter has provided an overview of Japanese direct investment in the US manufacturing sector. It has shown that Japanese direct investment is a relatively small, but growing and increasingly important, component of the US economy. Such investment is concentrated in a few key manufacturing subsectors, such as automobiles, steel, electronic components, computer equipment, and audio equipment. Investment in auto-related subsectors is particularly strong. Japanese direct manufacturing investment is also geographically concentrated. Major recipient states are California and a handful of Industrial Heartland and Southeastern states, such as Illinois, Michigan, Indiana, Tennessee, and Ohio. Many of these Industrial Heartland states have gone to great lengths to attract Japanese direct manufacturing investment to their locales, perceiving it as a vehicle for job creation and economic regeneration. Such perceptions may be ill-founded, however. Some studies have suggested, in auto-related

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subsectors at least, greater labour efficiency and greater purchasing of material inputs from outside the host economy by Japanese manufacturers may be squeezing indigenous manufacturers out of business resulting in net job loss. As Japanese auto-related direct investment is particularly strong in the Industrial Heartland the implications may be serious for certain states in this region. Perceived net job creator could turn out to be net job destroyer. It should be noted, however, that the results of the job-impact studies that have been conducted are inconclusive, and indeed some suggest that Japanese auto-related investment could actually create jobs. Studies of the job-impact of Japanese direct investment in other manufacturing subsectors have yet to be carried out. NOTES 1

2

3

4 5

Foreign Direct Investment is defined by the US Department of Commerce as ‘the ownership or control, directly or indirectly, by one foreign corporation or person of 10% or more of the voting securities of an incorporated US business enterprise, or an equivalent interest in an unincorporated US business enterprise’ (US Department of Commerce 1988b:37). This chapter draws heavily on data contained in two recently published data bases. These are S.McKnight, Japan’s Expanding US Manufacturing Presence: 1986 Benchmark Survey, Washington, DC., Japan Economic Institute, 1987, and S.McKnight, Japan’s Expanding US Manufacturing Presence: 1987 Update, Washington, D.C., Japan Economic Institute, 1988. The second, and most up to date of these surveys (McKnight 1988), contains data on all 945 Japanese manufacturing plants in operation, under construction, or in the process of being acquired on 31 December 1987. Throughout this chapter, whenever 1987 statistics are cited these always include those plants under construction, or in the process of acquisition at the end of 1987, in addition to those already operational. The US Department of Commerce subdivides industrial sectors on the basis of Standard Industrial Classification (SIC) codes. SIC codes exist at the two-, three-, and four-digital level; each subsequent level comprising a more specific industrial subsector than the former. Thus, for example, SIC code 37 is defined as ‘Transportation equipment’. SIC code 37 can be further subdivided into a number of three-digit codes. For example, SIC code 371 comprises ‘Motor vehicles and motor vehicle equipment’, while SIC code 374 refers to ‘Railroad equipment’. Each three-digit SIC code can then be subdivided into four-digit SIC codes, which provide a more specific definition of industry. In 1985 the automobile quota was increased to 2.3 million vehicles per year. Penetration levels were calculated for 1986, and not 1987, because data from the US Department of Commerce on domestic manufacturing levels for the latter year are not yet available.

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6

The author would like to thank the Arizona-Nevada Academy of Science who partially funded the research for this chapter. The author would also like to thank Barbara Trapido of the Department of Geography, Arizona State University for her cartographic assistance.

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REFERENCES Allen, G.C. (1981) The Japanese Economy, London: Weidenfeld and Nicolson. Britton, J.N.H. and Gilmour, J.M. (1978) The Weakest Link: A Technological Perspective on Canadian Industrial Underdevelopment, Ottawa: Science Council of Canada. Dicken, P. (1980) ‘Foreign direct investment in European manufacturing industry: the changing position of the United Kingdom as a host country’, Geoforum 11; 289–313. ——(1983) ‘Japanese manufacturing investment in the United Kingdom: a flood or a mere trickle?’, Area 15 (4), 273–84. ——(1986) Global Shift: Industrial Change in a Turbulent World, London: Harper & Row. Heller, R.H. and Heller, E.E. (1984) Japanese Investment in the United States: With a Case Study of the Hawaiian Experience, New York: Praeger. Japan External Trade Organisation (1988) JETRO White Paper on World Direct Investment: Overseas Direct Investment in an Era of Globalisation, Tokyo: Japan External Trade Organisation. McAleese, D. and McDonald, D. (1978) ‘Employment growth and the development of linkages in foreign-owned and domestic manufacturing enterprises’, Oxford Bulletin of Economics and Statistics 40, 321–40. McKnight, S. (1987) Japan’s Expanding US Manufacturing Presence: 1986 Benchmark Survey, Washington D.C.: Japan Economic Institute. ——(1988) Japan’s Expanding US Manufacturing Presence: 1987 Update, Washington, D.C.: Japan Economic Institute. Marsh, F. (1983) Japanese Overseas Investment: The New Challenge. London: The Economist Intelligence Unit Limited. Morris, J. (1988) ‘The who, why and where of Japanese manufacturing investment in the UK’, Industrial Relations Journal 19 (1), 31–40. O hUallachain, B. (1984) ‘Linkages and foreign direct investment in the United States’, Economic Geography 60 (3), 238–53. ——(1985) ‘Spatial patterns of foreign direct investment in the United States’, Professional Geographer 57 (2), 155–63. Ozawa, T. (1979) Multinationalism, Japanese Style: The Political Economy of Outward Dependency, Princeton: Princeton University Press. Reid, N. (1989) ‘Spatial patterns of Japanese investment in the United States’ automobile industry’, Paper presented to the 31st Annual Conference of the Western Social Science Association, Albuquerque, New Mexico, 26–29 April 1989. Roemer, J. (1976) ‘Japanese direct foreign investment in manufactures: some comparisons with the US pattern’, Quarterly Review of Economics and Business 16 (2), 91–111. Rubenstein, J.M. (1986) ‘Changing distribution of the American automobile industry’, Geographical Review 76 (3), 288–300. Sekiguchi, S. (1979) Japanese Direct Foreign Investment, Montclair, New Jersey: Allanhead, Osmun & Co. Tsukazaki, S. (1987) ‘Japanese direct investment abroad’, Journal of Japanese Trade and Industry 4, 10–15. United States Department of Commerce (1979) ‘Foreign direct investment in the United States in 1978’, Survey of Current Business 59 (8), 38–51.

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——(1980) ‘Foreign direct investment in the United States in 1979’, Survey of Current Business 60 (8), 38–51. ——(1981) ‘Foreign direct investment in the United States in 1980’, Survey of Current Business 61 (8), 40–51. ——(1982) ‘Foreign direct investment in the United States in 1981’, Survey of Current Business 62 (8), 30–41. ——(1985) ‘Foreign direct investment in the United States: country and industrial detail for position and balance of payments flows, 1985’, Survey of Current Business 65 (8), 47–66. ——(1986) ‘Foreign direct investment in the United States: Detail position and balance of payments flows, 1985’, Survey of Current Business 66 (8), 74– 88. ——(1987) ‘Foreign direct investment in the United States: detail for position and balance of payments flows, 1986’, Survey of Current Business 67 (8), 58–84. ——(1988a) County Business Patterns, 1986: United States, CBP-86–1, Washington, D.C.: US Government Printing Office. ——(1988b) International Direct Investment: Global Trends and the US Role, Washington, D.C.: US Government Printing Office. United States General Accounting Office (1988) Foreign Investment Growing Japanese Presence in the US Auto Industry, Washington, D.C. Yoshino, M.Y. (1976) Japan’s Multinational Enterprises, Cambridge, Mass.: Harvard University Press.

5

Japanese foreign direct investment in the United States The case of the automotive transplants1 Richard Florida and Martin Kenney

INTRODUCTION Since the early 1980s, most major Japanese car makers have opened transplant manufacturing facilities in the United States. Currently there are eight major transplant assembly facilities in the United States and three more in Canada. According to our most recent estimates, there are 270 transplant automotive parts suppliers in the United States. By the early 1990s, the transplants will be turning out roughly 2.5 million vehicles—one-fifth of all cars produced in the United States. The total amount of transplant investment (including assemblers and suppliers) currently exceeds $10 billion dollars. This chapter summarizes findings from a two-year study of the automotive transplants, which was designed to shed new light on the organization of work and production, the main factors influencing their location, and the rise of ‘just-in-time’ automobile production complexes in the United States. The first section discusses the research design of the study. The second section provides an overview of transplant automobile investment in the United States. The third section discusses the transfer of Japanese production and work organization at both transplant assemblers and suppliers. The fourth section explores unionization and industrial relations in the transplants. The fifth section examines the rise of integrated ‘just-in-time’ supplier complexes in the US. The conclusion synthesizes our empirical findings to shed insight on the basic elements of the ‘Japanese model’ of industrial organization and its relevance to current debates over industrial restructuring.

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RESEARCH DESIGN The research upon which this chapter is based was undertaken in three parts. The first part involved the compilation of a comprehensive database on transplant assemblers and suppliers in the US. The database includes information on the name, location, corporate parent, investment, employment, and related variables for the 11 North American assembly plants and 270 transplant parts suppliers (both wholly-owned Japanese and Japanese-US joint venture suppliers). This database was used, among other things, to compile maps of the location of transplant assemblers and their suppliers. The database is linked to a related database on Japanese steel and rubber investments in the US, and is continuously updated to include current plant sitings and investments. The second part of the research involved a detailed case study of the Honda assembly facility which includes a motorcycle assembly plant, two main automobile assembly plants, an engine and transmission casting facility, and a major R&D centre, and its surrounding supplier complex. The Honda case study was based upon detailed field research including plant visits and in-person interviews with Honda officials at transplant facilities and in Japanese facilities, and related plant visits and in-person interviews with Honda suppliers in the US and Japan. US site visits and interviews were conducted by members of the research team; Japanese interviews were conducted by Martin Kenney during a six month visiting professorship in Japan. The third part involved a mail survey of transplant suppliers. At the time the survey was conducted, we identified a total of 229 transplant parts suppliers in the US. The survey was originally sent to 196 of the total 229 transplant suppliers for which full addresses could be obtained and yielded 73 completed surveys—a response rate of 37.2 per cent. The survey asked questions about the transfer of Japanese production organization, wages, unionization, major factors influencing the decisions to relocate in the US, major factors influencing the choice of location in the US, and the presence of ‘just-in-time’ industrial linkages between suppliers and transplant assemblers. JAPANESE AUTOMOTIVE TRANSPLANTS IN THE UNITED STATES Japan’s major car companies have invested heavily in the United States over the past five years. Honda, Isuzu, Mazda, Mitsubishi,

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Nissan, Subaru, and Toyota have all built major North American facilities. They have done so both to gain access to the huge US market and to circumvent growing American protectionism (for example, the 1981 Voluntary Restraint Agreement which limits exports of Japanese cars to the United States). The US market also affords a major growth opportunity. Some of Japan’s smaller automakers, like Honda, see transplant investment as an opportunity to expand outside the brutally competitive Japanese car market (Sakiya 1987). There are now eight major automobile assembly plants in the United States and three more in Canada. This represents an investment of roughly $6.5 billion dollars. By the mid-1990s, the North American transplants are expected to produce more than 2.5 million motor vehicles and employ more than 30,000 workers. Figure 5.1 shows the locations of North American transplant assemblers. Transplant assemblers are located in a well-defined ‘transplant corridor’ which drifts slightly south of the more traditional North American auto belt, stretching from southwest Ontario and southeast Michigan on the north, in an almost straight line south through Ohio, Kentucky, and Tennessee, and west to Indiana and Illinois (Mair, Florida, and Kenney 1988). Interestingly, with the exception of Ohio, no state has more than one transplant assembler. The locational pattern of transplant assemblers in the lower Midwest stands in sharp contrast to the attempts by US car makers to minimize labour costs by relocating production to low wage areas of the Sunbelt or Third World (Frobel et al. 1980; Bluestone and Harrison 1982). Transplant investment in the automobile industry has come in three waves (see Table 5.1). Honda, Nissan, and NUMMI were the first to set up American plants. Honda opened a motorcycle plant in rural Ohio in 1979 and opened its Marysville, Ohio automobile assembly plant in 1982 (Sakiya 1987). Nissan began truck production in Smyrna, Tennessee in 1983 and followed with cars in 1985 (Runyon 1987). NUMMI opened its doors in 1984 (Krafcik 1986). These successes prompted a ‘second wave’ of transplant investments as other Japanese manufacturers decided to open US factories. In 1987, Mazda opened a US factory on the site of an old Ford engine foundry in Flat Rock, Michigan (Hill et al. 1988; Nobuto 1987). Toyota opened a second US plant in Georgetown, Kentucky in 1988. That same year, Mitsubishi and Chrysler launched a joint venture—Diamond Star Motors—in Normal, Illinois (Nakane 1987). Subaru-Isuzu opened a joint venture plant in Lafayette, Indiana in 1989 (Yamamoto 1988).

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Figure 5.1 Japanese automobile assembly transplants in the USA Source: Compiled by the authors.

Nissan and Ford recently announced a joint venture to begin production in 1991 in Avon Lake, Ohio. The ‘third wave’ of Japanese investments are expansions of existing transplant facilities. Honda added an engine and transmission plant in 1986, a second assembly plant in 1988, and plans to open a major R&D facility shortly (personal interviews). In 1988, Honda purchased a $31 million automotive test centre from the State of Ohio where it will house a new, 500 person R&D facility. This is in keeping with the Japanese practice of locating R&D close to production facilities to improve interaction and communication. Honda is considering a third automobile assembly plant to produce either a down-market subcompact or luxury Acuras. Nissan has added an engine and transmission facility in Smyrna, Tennessee. Toyota is also building an engine and transmission facility in Georgetown, Kentucky, and has announced a joint venture to produce forklifts with Toyoda Automatic Loom near Columbus, Ohio (Ward’s Auto World, July 1989:121). Large numbers of Japanese transplant automobile parts suppliers

Sources: Compiled by authors from the most current data available (the Japanese Automobile Manufacturers Association, Japan Economic Institute, US International Trade Commission, Business Week). Note: *Employs workers organized by the UAW

Table 5.1 Japanese automobile assembly plants in North America

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have followed transplant assembly facilities to the United States. According to our most recent data, there are now 270 transplant automotive parts suppliers (both wholly Japanese owned and JapanUS joint venture suppliers) in the United States. This represents a total investment of more than $4 billion dollars. Three types of transplant automotive suppliers have come to the United States. The first group (which comprise the large majority) are original equipment manufacturers who supply inputs directly into the production process, such as glass, brake systems, seats etc. The second group are ‘after-market’ or replacement part suppliers who make replacement parts (for example, batteries, brake pads, mufflers etc.) for Japanese imports. For example, one of Japan’s leading battery companies, Japan Storage Battery, has recently launched a joint venture with a US firm. The final group are ‘capital goods’ manufacturers which provide manufacturing equipment to transplant assemblers. There are now 16 Japanese machine tool companies in the United States, 2 major conveyor belt companies with 5 US plants, and 2 manufacturers of automotive paint sytems. There has also been a related wave of transplant steel and rubber investments in the United States, which we do not count as parts suppliers. Over the past five years, 56 Japanese steel companies and 17 Japanese-owned rubber plants have opened in the United States, many of which are located in the Midwestern ‘transplant corridor’ (Kenney and Florida 1989). Additional waves of transplant assembly and supplier investment can be expected in the future. Subaru-Isuzu, for example, expects to double the output of its Indiana plant, while Toyota expects to double output at both NUMMI and Kentucky. Japanese truck manufacturers such as Hino, Nissan Diesel, and Fuso may also open US factories in the future. Interestingly, a number of transplant producers expect to export from the US. Nissan already ‘reverse-exports’ a few Tennessee-made pickup trucks to Japan (Ward’s Auto World, January 1988; personal interview, Nissan Trading Company official, January 1989). Honda reverse-exports American-made cars to Japan, shipping 5,000 automobiles in 1988 and 50,000 more in 1989. Honda plans to begin shipping US-made Hondas to Korea—a country which excludes Japanese imports but allows US cars (Ward’s Auto World January 1988). Toyota has recently announced plans to ship 5,000 automobiles to Taiwan (Wall Street Journal, 22 December 1985). It is likely that Japanese companies will attempt to export US-made automobiles to Europe, placing the US government in the awkward position of either protecting the right of US-made

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automobiles to be exported to Europe or allowing Europe to exclude US-made automobiles. WORK AND PRODUCTION ORGANIZATION A major aspect of the research was devoted to understanding the transfer of Japanese production organization to the United States. The major characteristics of the Japanese system are now well known: small numbers of job classifications, work teams, worker rotation and decentralized decision making (Aoki 1984; Koike 1984, 1987; Shimada 1983). This differs markedly from the high numbers of job classifications and strict functional specialization characteristic of US automobile production (Aglietta 1979; Altshuler et al. 1984; Katz 1985). The Japanese system is characterized by high levels of ‘learning-by-doing’ (Koike 1987; Shimada and MacDuffie 1987; Aoki 1986, 1987), a high degree of ‘functional integration’ on the shop-floor and across the R&Dmanufacturing spectrum (Imai, Nonaka, and Takeuchi 1984), and is able to tap the intellectual as well as physical capabilities of workers (Kenney and Florida 1988). Table 5.2 provides some basic information on production organization and industrial relations for transplant assemblers and a comparison or ‘control’ group of Big Three auto-makers. This table includes information on wages, unionization, job classifications, work teams, worker rotation, and related variables.

Table 5.2 Work organization and industrial relations in transplant assemblers

Sources: US General Accounting Office, 1988; Wall Street Journal (16 August 1989); personal interviews by authors.

Wages at the transplant assemblers are comparable to wages at Big Three assembly plants, around $11.00 per hour to start and

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$12.50 per hour after a year on the job. Transplant suppliers also pay relatively high wages, on average, $7.21 per hour to start and $8.01 after a year on the job for ‘low skill’ workers, and more than $11.00 for ‘high skill’ workers. Total annual compensation for transplant suppliers averages $21,268 per year. This is slightly below the wage levels at US parts suppliers (US International Trade Commission 1987). The transplants have successfully transferred Japanese production organization to the United States. There are 4 job classifications for production workers at Nissan and NUMMI, 3 each at Honda, Toyota and Diamond Star, and just 2 at Mazda. This compares to an average of over 90 job classifications at Big Three car makers. Work teams are the norm in transplant assemblers. Teams of between 5 and 15 workers are used in each of the transplants. At Honda, for example, teams are headed by ‘team leaders’ who are also workers. ‘Production co-ordinators’, recruited from the shop-floor, oversee the work performed by various teams. Above this is a narrow band of plant managers and vice-presidents (personal interviews). The transplant assemblers have implemented worker rotation, worker quality control circles, systems for worker input, and decentralized decision making, although these are not practised as intensively as they are in Japan. Honda workers, for example, rotate mostly within their own team or to adjacent teams. Workers are encouraged to apply for rotation, although in some instances management will suggest that a worker rotate to a new job. Honda managers indicate that US workers are likely to stay in jobs longer than Japanese workers in order to build up basic job-related skills (personal interviews). According to Honda executives, it will take a ‘few years’ for a full rotation system to be established in the US (personal interviews). Honda’s US assembly lines are similar though by no means identical to those used in Japan. They allow sub-assembly work to be done in areas adjacent to the main line and can be quickly recon-figured to assemble either Civics or Accords. Inventory control also differs from US standards. Honda’s Marysville assembly plant works on a tightly scheduled ‘just-in-time’ system similar to that in Japan. Production coordinators are in constant communication with teams and update inventory requirements through radio headsets. In some cases, experimental automated vehicles have been used to supplement this process, in other cases sideline inventories have been replaced altogether by overhead conveyors which move related parts above the assembly line. Our comparison between Honda’s US and Japanese practices

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indicates a high degree of similarity in the organization of production. As a consequence, productivity at Honda’s Marysville plant is comparable to Honda’s Japanese plants (site visits to Honda’s US and Japanese plants). Honda also uses rigorous recruitment and training techniques to select, acclimatize and to socialize workers to Japanese production organization. In contrast to the typical US practice of hiring ‘off the street’, Honda puts potential workers through a battery of tests and other screening procedures to identify employees who work well in teams, who are dedicated to their jobs, and who will not be absent (personal interviews). Previous job records or high school records are scrutinized for absenteeism. After an initial screening, potential employees go through extensive interviews with personnel officials, managers, and at times members of his or her potential team. Training begins with a six- to eight-week introductory period, after which workers are inserted into teams where they continue to learn from, and be socialized by, senior employees. Team leaders and managers will often be sent to Japan for additional training and ‘indoctrination’. At Honda, a variety of additional skill-upgrading and training courses including an associate’s degree programme are offered at the plant site (personal interviews). Simply put, at Honda, and at other transplants, the acclimatization of US workers to Japanese production organization is not left to ‘chance’, workers are moulded to the Japanese system through a highly selective process of recruitment and socialization. A main focus of our research explored the use of Japanese production organization at transplant suppliers. Our survey provides conclusive evidence that transplant suppliers, as well as assemblers, have successfully implemented Japanese work organization. More than 85 per cent of respondents indicate that they use between one and five job classifications for production workers. In actual numbers, 23 suppliers use one job classification per production worker, 10 use two, 11 use three, 10 use four, and 4 use five. Only 9 suppliers had more than five job classifications for production workers. Most transplant suppliers make use of work teams and rotation. Some 87 per cent said that they rotate workers within teams, while roughly 66 per cent said workers rotate among teams. M o r e o v e r, w o r k e r s h a v e s i g n i f i c a n t d i s c r e t i o n i n t h e performance of shop-floor tasks. Some 68 per cent of respondents indicate that shop-floor workers are responsible for quality control and roughly 80 per cent indicate that production workers perform maintenance on their own machines. Another 61 per cent indicate

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Table 5.3 Work organization and industrial relations in transplant suppliers

Source: Transplant Supplier Survey, by authors (June 1988).

that production employees share responsibility for designing their own jobs. Transplant suppliers believe that the system of work organization they are implementing in the United States is quite similar to the one they use in Japan. When asked how comparable they thought their plants here are to ones in Japan, more than 75 per cent indicated that they are the same or very similar. In sum, production organization at both transplant assemblers and suppliers is comparable to Japanese practices in Japan. The transplants have effectively implemented a system of production and work organization that decentralizes decision making and encourages shop-floor initiative and learning. The cumulative findings from our survey research, personal interviews, and case studies leave us at odds with commentators like Parker and Slaughter (1988) who contend that the success of the Japanese transplants is due to the relentless exploitation of workers or what they call ‘managementby-stress’ (also see Dohse et al. 1985). The transplants are successful because they organize work to mobilize the full capabilities of their

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workers. Simply put, a unique synthesis of ‘smart work’ and ‘hard work’ is the key to the transplants’ success. As one worker in a transplant automobile facility put it: Management and factory work very well together here. Most companies run the management and the factory like two separate companies, the former being more of the brain part and the latter the muscle. This company has a very good coordination between the two. The effective implementation of Japanese production organization enables the transplants to achieve productivity ratings which rival their Japanese sister plants. According to Krafcik (1989), the productivity levels of a number of transplants compares favourably to the productivity of Japanese automobile plants and is significantly better than that of the Big Three auto-makers. UNIONIZATION AND INDUSTRIAL RELATIONS The conventional wisdom that transplant auto-makers avoid US unions is only partly true. On the one hand, transplant assemblers are basically split between those who recognize the union and those who are nonunionized. Four assemblers, Honda, Nissan, Toyota (Georgetown) and Subaru-Isuzu, are non-unionized and have sought to avoid unionization. Four other assemblers, NUMMI, Mazda, Diamond Star, and NissanFord are unionized. On the other hand, transplant suppliers have largely chosen to implement Japanese production organization without US unions. Just 4 of the 73 suppliers who responded to the supplier survey are unionized. In each case that a Japanese transplant has dealt with the UAW, it has had a Big Three car maker as a partner. NUMMI, Diamond Star, and Nissan-Ford are joint ventures between Japanese car makers and Big Three producers: and, although Mazda is not explicitly a joint venture, it has close ties to Ford. In fact, Hill et al. (1988) indicate that Ford helped sway Mazda’s decision to open a US facility by having Mazda produce its new ‘Probe’, selling land and buildings to Mazda at bargain prices, and providing important advice on how to deal with the union. Ford holds a one-quarter equity position in Mazda as well. In the cases of two of the unionized transplants, NUMMI and Mazda, long negotiations between management and the UAW were undertaken to restructure traditional US labour-management relations in the light of Japanese production organization. Under an

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agreement between General Motors (GM), Toyota, and the UAW, the number of job classifications was reduced from nearly 200 to just 4, 1 for production workers and 3 for skilled trades (Krafcik 1986). NUMMI is especially interesting since it occupies an old GM plant which according to a top GM executive ‘was one of the worst plants in the industry’. Past GM employees were given hiring preference and approximately 85 per cent of the initial work-force was comprised of ex-GM workers. Although tenure is not formally guaranteed, NUMMI workers receive stronger job security as a result of the agreement than UAW workers employed by US auto-makers. The UAW is consulted on layoffs, major investment decisions, changes in production scheduling, and other traditionally management prerogatives. Mazda’s Flat Rock plant experienced a similar process of negotiation and restructuring of labour-management relations (Nobuto 1987). Basically, the union agreed to new work rules in return for preferential hiring of displaced Ford employees and a wage rate that was pegged at 85 per cent of Ford’s (Hill et al. 1988). Mazda workers are organized in teams and there are just two basic classes of manufacturing employees— production and maintenance workers—though there are a series of job titles for skilled trades workers. Displaced Ford workers were given special preference to enter the hiring pool, although they did not receive special preference in actual hiring decisions. The reasons why this type of industrial relations restructuring was necessary can be understood in terms of the rigidities of the existing ‘Fordist’ pattern of US labour-management relations or what Katz (1985) refers to as ‘job control unionism’, in which both wages and tenure security are tied to specific job classifications. This is not to say that production organization simply calls forth a particular type of labour-management relation, but that the two must exist in a rough symmetry or correspondence. If not, existing forms can become an impediment to change. Kochan, Katz and McKersie (1986:86) observe that: [W]ork practices and rules can accumulate and become outmoded because of changes in technology, product or job design or plant layout. Yet they are often hard to change; change can alter workers’ status, employment security and promotion opportunities either by affecting the scope of job responsibilities or by altering such things as worker security and transfer rights. At NUMMI and to a lesser extent at Mazda, a concerted effort was

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needed to ‘unfreeze’ traditional US labour-management practices in order to create an environment amenable to Japanese production organization. Even though both NUMMI and Mazda are unionized (and perhaps because of this), workers at both plants have put forward a range of complaints and grievances. Workers at NUMMI, for example, have complained that the new plant runs at a much higher pace than the old GM-Fremont plant, that work is more continuous, and that speed-up occurs frequently. NUMMI workers have also asserted that low rates of absenteeism reflect fear of suspension rather than contentment with their jobs. And, NUMMI’s turnover rate has been significantly above the average for the GM system. On the other hand, many of these same workers have also indicated that their jobs are both more rewarding and more secure under NUMMI management than they were under GM management. The four remaining transplants have aggressively avoided the UAW. Basically, these transplants have placed their factories in rural ‘greenfield’ locations outside existing union strongholds as a strategy to avoid unionization (Mair, Florida, and Kenney 1988). Honda, for example, is located in the small central Ohio town of Marysville, a rural community with a population of less than 7,500. Nissan is located in Smyrna, Tennessee, a town of some 8,300 people. Toyota’s plant is in Georgetown, Kentucky, a community of 10,900. Transplant suppliers also prefer to locate in suburban or rural areas outside union strongholds. More than one-third of all transplant suppliers are located in rural ‘nonmetropolitan’ areas. Another 28 per cent are located in small suburban communities with populations of less than 25,000. Just 15 per cent of transplant suppliers are located in cities which have populations of more than 100,000. Rural greenfield locations enable Japanese transplants to gain the benefits of an existing transportation and industrial infrastructure, while avoiding areas with high levels of unionized labour or long histories of industrial conflict. Honda executives indicate that their site selection reflects a preference for rural workers who have a ‘good work ethic’ over urban workers who have ‘picked up’ bad habits (personal interviews). The selection of greenfield sites also tends to have a discriminatory effect toward blacks and other minorities. Cole and Deskins (1988) conclude that: Japanese firms can stay within Equal Employment Opportunity Commission guidelines and still hire very few blacks. By placing their

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plants in areas with very low black populations, they in effect exclude blacks from potential employment. Honda settled an Equal Employment Opportunity Commission (EEOC) suit charging discrimination on the basis of its requirement that employees live within a 30-mile radius of the plant, thus effectively excluding minorities from jobs. As a result of this settlement, Honda agreed to hire and provide back pay to 370 black and female workers, increase its minority recruitment efforts, and expand its hiring radius to include Columbus, Ohio (Embrey 1988). In addition to site selection, both Honda and Nissan have raised wages and benefits in part to fend off unionization. Honda, for example, introduced a new bonus scheme, established a grievance system and employee credit union, and distributed stock to veteran employees as part of a successful effort to defeat a major UAW organizing drive in 1985. Much more serious struggles occurred at Nissan where there have been widespread reports of employee discontent (Business Week 1989b). A recent vote over unionization which was held after a bitter certification campaign resulted in a staggering defeat of the union by a 70–30 margin. This was a major setback for the UAW which had made Nissan a test case (Patterson 1989). ‘JUST-IN-TIME’ SUPPLIER COMPLEXES Another main aspect of the research explored the transferability of Japanese ‘just-in-time’ supplier organization to the United States. Both the conventional wisdom and the academic literature at the time we began this study suggested that the Japanese transplant assemblers were simple ‘branch plant’ operations with low US content that put together cars that were ‘knocked-down’ and imported from Japan. Figure 5.2 is a map showing the location of both Japanese assemblers and suppliers in the United States. As this map clearly shows, each of the transplant assembly plants is surrounded by a dense network of transplant suppliers. Indeed, the great bulk of transplant suppliers are located in states that also have transplant assemblers. According to our most recent estimates, there are 55 transplant parts companies in Ohio, 42 in Michigan, 39 in Kentucky, 31 in Indiana, and 24 each in Illinois and Tennessee. These six states account for roughly 80 per cent of all transplant parts suppliers in the United States. The basic characteristics of the Japanese system are widely known.

Figure 5.2 Japanese transplant parts assemblers and suppliers in the USA Source: Updated from Mair, Florida, and Kenney (1988). Note: Includes both wholly Japanese owned and Japanese-US joint venture parts suppliers.

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Basically, Japanese suppliers are organized in a ‘pyramidal’ system of first-tier, second-tier, and third-tier suppliers (Sayer 1986, Nisoguchi 1987b, Sheard 1983). A recent report by Dodwell Marketing Consultants (1985) estimates that there are 500 first-tier suppliers, a few thousand second-tier suppliers, and more than 20,000 third-tier suppliers in Japan. Suppliers are located close to major assembly plants so they can deliver parts according to ‘just-in-time’ inventory requirements. First-tier suppliers have an especially close relationship to assemblers, and may be partly owned by them. In Japan, first-tier suppliers interact frequently with assemblers and frequently work alongside car makers to develop new products (Asanuma 1985a, 1985b). They also help to organize the supply process, creating completed subassemblies out of the components they receive from their own suppliers (Nisoguchi 1987a). Japanese auto-makers prefer long-term stable arrangements with one or two suppliers as opposed to the typical US practice of multiple sourcing. Japanese suppliers provide as much as 70 per cent of the components that go into a car (Mitsubishi Research Institute 1987). Meanwhile, US auto-makers rely on suppliers for just 30 to 50 per cent of inputs (Glasmeier and McCluskey 1987; US International Trade Commission 1987; Altshuler et al. 1984). The development of a transplant automobile supplier complex has proceeded in three stages. Initially, Japanese assemblers built facilities in the Midwest to take advantage of the indigenous infrastructure of parts suppliers (personal interviews). However, they quickly discovered that US suppliers could not adapt to just-in-time quality and delivery requirements (Ward’s Auto World, July 1987; January 1988). Even obtaining basic inputs like high quality steel or glass proved to be difficult (personal interviews). Unfamiliar with the just-in-time system and considering Japanese quality demands unreasonable, initially many US parts suppliers simply chose not to supply the transplants. The shortage of qualified parts suppliers left Japanese automobile assemblers little choice but to build a new parts industry in the US. Transplant assemblers thus encouraged their Japanese suppliers to come to the US (Ward’s Auto World, July 1987). More recently, Japanese parts suppliers have begun to come on their own to tap the growing market for their products. The survey findings indicate that assemblers played an enormous role in decisions of transplant suppliers to move to the US. More than 75 per cent said that they relocated to maintain close ties to a major Japanese customer. In addition, 90 per cent of respondents said that they chose their specific locations to be close to major customers.

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Interestingly, traditional location factors like the local labour market or local labour costs had a much smaller effect on supplier location. Just 55 per cent of suppliers said that the local labour market was an important determinant of location, while 58 per cent said that labour costs were a significant factor. Transplant assemblers have frequently helped to form or finance new supplier ventures. Assemblers own part equity in 12 of 73 suppliers in the supplier survey. When Honda was unable to locate a US-owned supplier for seat sub-assemblies, it entered into an agreement with two of its Japanese suppliers to form Bellemar Parts to supply it with seat sub-assemblies. In another instance, Honda provided financial assistance to four of its Japanese suppliers to form KTH parts, a transplant supplier which produces small stampings for fuel tanks, wheel housings, and dashboard parts in Ohio (Ishiro 1986; Berry 1987). In still another instance, NUMMI got one of Toyota’s major Japanese suppliers, Sumitomo Denso, to help Packard Electric (a US-owned parts supplier) design and lay out Packard’s new plant supplying wire harnesses to NUMMI (Nisoguchi 1987b). We performed a number of analyses to examine the inner-workings of transplant just-in-time complexes that are emerging in the United States. Based upon a variety of sources (for example, trade journals, the supplier survey, and follow-up phone calls) we identified end-users for 113 of the transplant suppliers. Roughly half of this group (70 of 113 companies), supplied only the transplants; another 17 or 15 per cent supplied both the transplants and Big Three car makers; and 26 supplied only Big Three car makers. Out of the group that supplied transplant assemblers, we were able to definitively link 36 to Nissan, 33 to Honda, 17 each to Toyota and Mazda, 13 to Diamond Star, 6 to Subaru-Isuzu, and 3 to NUMMI. Based on this information, we were able to estimate the average distances between assemblers and their first-tier suppliers. Generally speaking, the majority of suppliers were located close to their end-user: 29 (27.9 per cent) were located within a 50-mile radius, 13 (12.5 per cent) within a 50- to 100-mile radius, 22 (21.2 per cent) within a 100- to 200-mile radius, 26 (25.0 per cent) within a 200- to 400-mile radius, and just 14 (13.5 per cent) beyond a 400-mile radius. The supplier survey asked a series of questions regarding the delivery patterns of transplant suppliers. Approximately 80 per cent of the respondents to the supplier survey conform to just-in-time delivery requirements. Forty per cent are located inside a two-hour shipping radius of end-users, and the remainder are located within an eight-hour radius. Every supplier we visited said they deliver according to just-in-

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time schedules. Honda executives corroborated this, indicating that virtually all their components are delivered according to just-in-time delivery schedules. Honda’s seat subassemblies, for example, are ordered by computer from an adjacent Japanese supplier just as cars start down the line (personal interview 1987). However, executives we interviewed at Honda and its suppliers said that the distances separating the two are typically longer in the United States than in Japan (personal interviews). NUMMI, which is supplied by a larger number of US-owned parts suppliers than the other transplants, organized a supplier council of seventy mostly US-owned suppliers to facilitate information sharing and product improvement (Krafcik 1986). The growing literature on industrial linkages suggests that they are most effective when they include information transfer and interaction between suppliers and end-users (Dore 1983; Holmes 1986). The supplier survey allowed us to look systematically at the levels of interaction, personnel sharing, joint R&D, and other indicators of linkages between suppliers and assemblers. According to the survey, 97 per cent of transplant suppliers are contacted immediately by phone when they deliver a defective product. Eighty-two per cent indicated that engineers from their major customer came on site when they were setting up US operations, and 86 per cent said that engineers from their major customer make site visits now to help overcome quality control or production problems. Participation in the development of new products also occurs frequently. More than 65 per cent of suppliers in the survey participate closely with assemblers in the development of new products. Honda engineers, for example, developed new production techniques for a small Ohio plastics firm that became a Honda supplier. Honda intends to use its Marysville R&D centre to integrate both transplant and US suppliers into the design of future cars (personal interviews). Because of these tight linkages, transplant assemblers are reticent to hire employees away from their suppliers. Personnel officials at Honda for example told us that they do not consider applications from employees of Honda’s main suppliers (personal interviews). This is in keeping with the Japanese practice of discouraging and inhibiting employee-initiated mobility. But the supplier survey indicates that this pattern of tight interactive linkages does not extend further down the supply chain. For example, just 43 per cent of the (first-tier) suppliers in the survey receive just-in-time deliveries from their (second-tier) suppliers. We used survey information to estimate average travel times between first- and second-tier suppliers. Generally speaking, the distances

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separating first- and second-tier suppliers are considerably longer than those between assemblers and their first-tier suppliers. Just slightly more than 40 per cent of second-tier suppliers are within a six-hour driving radius of their major customer; an additional 18 per cent are located within a 6 to 10 hour radius, but more than 40 per cent are located more than ten hours away from their main customer. In addition, the responses to the supplier survey indicate that second-tier suppliers have little interaction in design or development of new products. Less than 30 per cent of first-tier suppliers integrate second-tier suppliers in new product development. This contrasts sharply with Japan where tight linkages extend to second- and third-tier suppliers. Based on these findings, we are led to conclude that transplant complexes in the US are ‘stretched out’ versions of Japan’s dense justin-time complexes. While the transplant assemblers are successfully assembling a first-tier supplier ring, (our comparative research indicates that most of the first-tier of Japanese suppliers to Honda, Nissan, Toyota, and Mazda have now opened US branches), they lack the dense layers of second- and third-tier suppliers that characterize the Japanese automobile industry. However, a number of first-tier suppliers are forging links to US producers, extending the supplier complex backward to include local companies. For example, one very small machine shop in rural Ohio has capitalized upon previous expertise in rebuilding tractor engines and farm machinery and now rebuilds robot heads for Honda and Honda suppliers (personal interview). In effect, Honda is using the indigenous manufacturing infrastructure of central Ohio and surrounding areas to build a multi-tier just-in-time complex. Interestingly, with plenty of space to accommodate growth, the relatively uncrowded landscape of the US may ultimately prove to be better suited to the development of just-in-time complexes than the densely crowded industrial landscape of Japan. Only time will tell whether or not the transplants are able to build full-blown just-in-time complexes like those of Japan. CONCLUSIONS Over the past five years or so, Japanese automobile manufacturers and their suppliers have moved into the United States at a remarkable pace, creating an entire ‘second system’ of automobile production in the lower Midwest. The findings of our research clearly indicate that the Japanese model of automobile production is transferable to the US, contradicting the notion that Japanese production organization is somehow dependent

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upon Japanese culture or other uniquely Japanese characteristics. The Japanese model of production is at bottom a set of organizational techniques and relationships which can and are being effectively exported to the US. Our findings enable us to distil a number of key organizational features of the Japanese model. These include: 1 new modes of production and work organization which tap the intelligence of shop-floor workers leading to a unique synthesis of smart and hard work; 2 high levels of functional integration both inside and outside the plant; 3 a highly organized ‘pyramidal’ organization of suppliers anchored by large assemblers. While the basic characteristics of the Japanese model differ markedly from the traditional US and Western European ‘Fordist’ model of automobile production, it is incorrect to conclude from this that the Japanese model is just another variant of ‘flexible’ production described by Piore and Sabel (1984). On the contrary, there is little justification in this case study to support the contention made by Sabel (1989) that the Japanese system is moving toward ‘convergence’ with the flexible specialization model of small networked firms. At bottom, the Japanese system of automobile production that has been transferred to the US remains a system of mass production of automobiles. While this system is able to produce a series of cars on one assembly line, it is certainly not the small-scale batch production similar to that found in high fashion apparel and foot-wear. More importantly, it must be recognized that the main agents in the export of the Japanese model to the US are large firms such as Honda, Toyota, Mazda, Nissan, and others, who have actively constructed just-in-time industrial galaxies in the US. These large firms continue to play the critical role of ‘hubs’ or ‘anchors’ in these complexes, bringing a source of discipline, a structure for interaction, and a central co-ordinating mechanism for flows within the network of producers (see Florida and Kenney 1990). Our findings lead us to conclude that the Japanese model represents a distinct path, one that is perhaps better suited to the demands of advanced industrial mass production than either the earlier model of Fordist mass production or the utopian formulation of ‘flexible’ specialization. More research on the Japanese model and its transferability is necessary to better understand the dynamics of global industrial restructuring.

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NOTES 1

This research was funded in part by the US Department of Agriculture and the Ohio Board of Regents. We would like to thank the many managers and employees of Japanese transplants who consented to site visits, provided interviews, responded to telephone enquiries, and completed mail surveys. Special thanks are due to Marshall Feldman for his early input, Andrew Mair and James Curry for their collaboration on various phases of this project, and John Stamm of the Ohio Department of Development for his help arranging site visits. We gratefully acknowledge the research assistance provided by Barry Getzow and Suri Goplan. We thank Gordon Clark, Amy Glasmeier, Norman Glickman, Bennett Harrison, and Richard Walker for comments on earlier drafts. We, of course, take full responsibility for errors and omissions.

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REFERENCES Aglietta, M. (1979) A Theory of Capitalist Regulation: The US Experience, London: New Left Books. Altshuler, A., Anderson, A., Jones, D., Roos, D, and Womak J. (1984) The Future of the Automobile, Cambridge, Mass.: MIT Press. Aoki, M. (ed.) (1984) The Economic Analysis of the Firm, Amsterdam: NorthHolland. ——(1986) ‘Horizontal versus vertical information structure of the firm’, American Economic Review 76 (5), 971–83. ——(1987) ‘The Japanese firm in transition’, in K.Yamamura and Y. Yasuba (eds) The Political Economy of Japan, Volume 1: The Domestic Transformation, Stanford, Calif.: Stanford University Press. Asanuma, B. (1985a) ‘The organization of parts purchases in the Japanese automotive industry’, Japanese Economic Studies, summer, 32–53. ——(1985b) ‘The contractual framework for parts supply in the Japanese automobile industry’, Japanese Economic Studies, summer, 54–78. Berry, B. (1987) ‘Honda goes American, Iron Age, 16 May. Bluestone, B. and Harrison, B. (1982) The Deindustrialization of America, New York: Basic Books. Business Week (1989a) ‘Shaking up Detroit: How Japanese carmakers are beating the Big Three on their own turf.’, 14 August, 74–80. ——(1989b) ‘The UAW vs Japan: it’s showdown time in Tennessee’, 24 July, 64–5. Cole, R. and Deskins, D. (1988) ‘Racial factors in site selection and employment patterns of Japanese auto firms in North America’, California Management Review 31 (1), 10–22. Dodwell Marketing Consultants (1985) The Structure of the Japanese Auto Parts Industry, Tokyo: Dodwells. Dohse, K., Jurgens, U., and Malsch, T. (1985) ‘From Fordism to Toyotism? The social organization of the labour process in the Japanese automobile industry’, Politics and Society 14 (2), 45–66. Dore, R. (1983) ‘Goodwill and the spirit of market capitalism’, British Journal of Sociology 36, 3404–59. Embrey, G. (1988) ‘Honda to pay discrimination penalties’, Columbus Dispatch, 24 March, A1. Florida, R. and Kenney, M. (1989) ‘Work organization and industrial relations in transplant automobile assemblers and suppliers’, School of Urban and Public Affairs Discussion Paper, Carnegie Mellon University, Pittsburgh, Pa. ——(1990) ‘High technology restructuring in the USA and Japan’, Environment and Planning A. Frobel, F., Heinrichs, J., and Kreye, O. (1980) The New International Division of Labor New York: Cambridge University Press. Glasmeier, A. and McCluskey, R. (1987) ‘U.S. auto parts production: an analysis of the organization and location of a changing industry’, Economic Geography 63, 142–59. Hill, R.C, Indergaard, M., and Kuniko, T. (1988) ‘Flat Rock, home of Mazda: the social impact of a Japanese company on an American community’, Paper presented at the Eighth Annual Automotive Conference, University of Michigan, March.

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Holmes, J. (1986) ‘The organization and locational structure of production subcontracting’, in A.Scott and M.Storper (eds) Production, Work, Territory, Boston: Allen & Unwin. Imai, K.I., Nonaka, I. and Takeuchi, H. (1984) ‘Managing the new product development process: how Japanese companies learn and unlearn’, Institute for Business Research, Discussion Paper No. 118, Hitosubashi University, Tokyo. Ishiro, K. (1986) ‘Internationalization in Japan’s auto parts industry’, Digest of Japanese Industry and Technology 221, 24–32. Katz, H. (1985) Shifting Gears: Changing Labor Relations in the U.S. Automobile Industry, Cambridge, Mass.: MIT Press. Kenney, M. and Florida, R. (1988) ‘Beyond mass production: production and the labour process in Japan’, Politics and Society 16, 121–58. ——(1989) ‘Reindustrialization with deindustrialization: Japanese steel,rubber and automobile production in the United States’ , Carnegie Mellon University, School of Urban and Public Affairs, Discussion Paper No. 58, Pittsburgh, Pa. Kochan, T., Katz, H., and McKersie, R. (1986) The Transformation of American Industrial Relations, New York: Basic Books. Koike, K. (1984) ‘Skill formation in the U.S. and Japan’, in M.Aoki (ed.) Anatomy of the Japanese Firm, Amsterdam: North-Holland. ——(1987) ‘Human resource development and labour management relations’, in K.Yamamura and Y.Yasuba (eds) The Political Economy of Japan, Volume I: The Domestic Transformation, Stanford, Calif.: Stanford University Press. Krafcik, J. (1986) ‘Learning from NUMMI’, unpublished manuscript, MIT International Motor Vehicle Program, Cambridge, Mass. ——(1989) ‘A new diet for US manufacturers’, Technology Review 92 (1), 28– 38. Mair, A., Florida, R., and Kenney, M. (1988) ‘The new geography of automobile production: Japanese transplants in North America’ Economic Geography 64, 352–73. Mitsubishi Research Institute (1987) The Relationship between Japanese Auto and Auto Parts Makers, prepared for the Japanese Automobile Manufacturers Association, Washington, D.C., February. Nakane, Y. (1987) ‘Interview with Yoichi Nakane, President of Diamond Star Motors’, JAMA Forum 6 (2), 9–14. Nisoguchi, T. (1987a) ‘Competing systems of automotive components supply: an examination of the Japanese “clustered control” model and the “Alps” structure’, Unpublished paper, MIT International Motor Vehicle Program, Cambridge, Mass. ——(1987b) ‘New trends in American auto components supply: is global management always culturally bound?’, unpublished manuscript, MIT International Motor Vehicle Program. Nobuto, O. (1987) ‘Interview with Osamu Nobuto, President of Mazda USA’, JAMA Forum 6 (1), 10–14. Parker, M. and Slaughter, J. (1988) ‘Management by stress’, Technology Review, October 36–46. Patterson, G. (1989) ‘The UAW’s chances at Japanese plants hinge on Nissan vote’, Wall Street Journal, 25 July, A1, A12. Personal interviews, conducted during 1987 and 1988.

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Piore, M. and Sabel, C. (1984) The Second Industrial Divide, New York: Basic Books. Runyon, M. (1987) ‘Interview with Marvin Runyon, President Nissan USA’, JAMA Forum 5 (3), 16–22. Sabel, C. (1989) ‘Flexible specialization and the reemergence of regional economies’, in P.Hirst and J.Zeitlin (eds) Reversing Industrial Decline, New York: St Martin’s. Sakiya, T. (1987) Honda Motors: The Men, the Management, the Machines, New York: Kodansha International/Harper & Row. Sayer, A. (1986) ‘New developments in manufacturing: the just-in-time system’, Capital and Class 30, 43–72. Sheard, P. (1983) ‘Auto production systems in Japan: organizational and locational features’, Australian Geographical Studies 21, 49–68. Shimada, H. (1983) ‘Japan’s success story: looking behind the legend’, Technology Review, May-June, 46–52. ——and MacDuffie, J. (1987) ‘Industrial relations and humanware’, Sloan School of Management Working Paper, MIT, Cambridge, Mass. US General Accounting Office (1988) Foreign Investment: Growing Japanese Presence in the U.S. Auto Industry, Washington, D.C., March. US International Trade Commission (1987) U.S. Global Competitiveness: The U.S. Automotive Parts Industry, Washington, D.C., December. Ward’s Auto World (various issues). Wall Street Journal (various issues). Yamamoto, T. (1988) ‘Interview with Tamon Yamamoto, President SubaruIsuzu Automotive’, JAMA Forum 6 (3), 9–14.

6

Japanese manufacturing investment in Canada Regional presence and integration strategies Jonathan Morris

INTRODUCTION The aim of this contribution is twofold. First, it will provide a description and analysis of the relatively recent growth of Japanese manufacturing activity in Canada. Second, its purpose is to illustrate the arguments outlined in other chapters of this book, notably the introductory chapter. That is, that regional world markets and production arenas are developing, that it is increasingly necessary for major world ‘players’ to be active within each regional market, and that this offers an explanation for a large part of Japanese manufacturing investment in Canada. HISTORICAL TRENDS OF JAPANESE MANUFACTURING ACTIVITY IN CANADA Japanese foreign direct investment (FDI) in Canada dates from 1965 but, until recently, has been almost completely overshadowed by activity in the USA. Blain and Norcliffe (1988) outline four main phases of this investment activity, the first of which was through trading companies and resource-based projects. The end of these years of initial activity coincided with the ‘energy crisis’ in 1973 with a switch to energy-based and forest-product ventures (Hata 1987; McMillan 1987). In the 1980s growing protectionism has led Japanese companies to start local production plants in greater numbers. Record levels of Japanese investors, encouraged by the relative weakness of indigenous manufacturing and the slide of the Canadian dollar, were recorded in 1981 (Blain and Norcliffe 1988). While accurate up-to-date figures and data on Japanese investments in Canada are difficult to come by, Langley (1987) estimates that in 115

Table 6.1 Automobile and auto component firms in Canada

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1985 the total was US $1,675 million, 2 per cent of total Japanese FDI compared to the 30.2 per cent found in the USA. An estimate for 1988 is that forty-two wholly- or partly-owned Japanese manufacturing plants were operating in Canada, with the majority located in southern Ontario and smaller concentrations in Quebec and British Columbia. As Table 6.1 illustrates, the bulk of plants were manufacturing automobiles, automobile components, or related products, with an estimated twentytwo plants, which partly explains the geographical concentration in Ontario at the northern end of the ‘transplant corridor’ (see Chapter 5). The only other sectors were electronics—with four colour television plants and one component plant—and general engineering. Ontario’s predominance is reinforced by the size of some of its plants, including the three large automobile manufacturers Honda, Toyota, and GMSuzuki (CAMI); these three represent a combined investment of $1200 million and will employ 3,700 at full production (JAMA Canada 1986, 1988; author’s survey). Moreover, their planned output of 300,000 units by 1990 compares with the total Canadian car output of 1.02 million in 1988 (Done 1989). JAPANESE MANUFACTURING IN CANADA: THE EMPIRICAL EVIDENCE The empirical evidence is drawn from a sample of 16 Japanese owned manufacturing plants surveyed in August/September 1988, 11 on a face-to-face interview basis and 5 through questionnaire. Ten were drawn from automobiles, components and related industries with the remainder drawn from furniture, sports equipment, metal manufacture, mechanical engineering and consumer electronics (see also Morris 1989b, 1990). The start-up dates of plants reflected the late start of Japanese FDI in Canada; only five had located prior to 1980 and five had started production as late as 1988. Fully-owned subsidiary was the most popular form of ownership, although seven were joint ventures. The latter route has been particularly attractive for many of the subcontracting firms which have followed the large Japanese auto assemblers to North America (JAMA Canada 1986, 1988; see also chapters by Florida and Kenney, and Reid). Employment patterns Total employment in the 16 plants was 6,290 but the majority (14) employed under 750. The two largest, both automobile assemblers,

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employed over 1,000. This employment total included 112 Japanese staff in the 14 plants. Of these workers, a high percentage tend to be on direct production, which reflects a number of factors including the type of plants. Few, as we shall see later, had any large-scale research and development (R&D) and in a number of cases sales functions were also carried out elsewhere. The plants also tended to employ a high percentage of male workers which is reflective of their sectoral orientation and is in stark contrast to the picture in Western Europe where electronics investments have, until recently, predominated and where job creation has been far more oriented towards jobs filled by females (Morris 1987, 1988). The issue of the use of skilled workers was also raised; are these plants, for example, essentially ‘screwdriver’ assembly plants requiring few skilled workers? Defining skills was, of course, problematic. For example, skill provision through the apprentice-based system is being replaced by in-house, company specific training, nowhere more than in Japanese companies. In Canada, which lacks the extensive apprenticebased system of Western Europe, this problem of definition is even more acute. In total ten of the plants reported using skilled workers, with the highest percentage being 9 per cent of direct workers in one automotive plant producer. Nevertheless, Honda for example, had no such skilled workers; they had circumvented the general lack of apprentice-based skilled workers by having their own extensive on-line training and recruiting from trade schools and community colleges. Similarly CAMI reported a chronic lack of skilled workers and relied on in-house training and recruitment from technical colleges. Recruitment and training The Honda and CAMI cases raise the wider issue of training in those companies which in turn reflects the wider ethos of total quality control (Feigenbaum 1988). The selection of the workforce was a central part of the setting up of these facilities. A variety of methods were used to recruit direct production workers: newspaper advertisements, informal ‘word of mouth’ methods, the use of government agencies, city unemployment registers, private recruitment agencies, and recruiting directly from schools. While newspaper advertisements were the most popular method, a number of firms used a combination of methods. The degree of difficulty of recruitment varied considerably—the CAPTIN (Toyota) plant in British Columbia received 3,000 applicants for an initial 70 jobs while plants in metropolitan Toronto had extreme difficulty in recruiting.

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The three large automobile producers are good illustrations of the Japanese commitment to the recruitment process. All three had carefully chosen locations within southern Ontario but had chosen rural rather than industrial centres. The explicit intention of choosing such locations was to employ young, ‘green’ labour with little industrial experience, let alone automobile industry experience. The average age at the Honda plant in Alliston, for example, was 27 and 85 per cent lived within a 30-minute drive time. ‘Attitude’ was the main criterion for recruitment, nevertheless 90 per cent of workers had a Grade 12 education and 40 per cent a community college diploma or university degree. Potential workers face three interview schedules (Daw 1987). At CAMI twentyeight hours are set aside for aptitude tasks—personal psychology, dexterity, problem solving, and human relations skills (Daw 1987; Morris 1989b, 1990). The company has sent 200 of its workers for training in Japan. The third automobile manufacturer, Toyota, is reported to be extremely choosy about recruitment, only high school graduates are recruited in Japan and the Canadian plant has a similar aim. Recruits face two days of aptitude tests with further measurement of leadership qualities and the ability to work in teams (Utting 1988). At CAPTIN, in British Columbia, the management have sought a ‘family orientated team approach’; recruits résumés are screened, general interviews take place, followed by a second, before they can receive a final application form. A six-month probation then ensues. The choice of new rural locations and the incorporation of new workers into the labour forces of these plants coincided with a cool attitude towards labour unions. Only 5 had unionized labour forces, 2 of which were joint ventures where the North American parent plants were already unionized, and 2 were take-overs of existing businesses which were already unionized. PLANT TYPES, MARKETS AND INTEGRATION At an earlier stage, the question was posed as to what type of operations these firms had set up. Did these plants have head office functions, did they have R&D facilities, sales functions, and are they integrated into an overall North American operation—both in production and distribution terms? In order to give an answer, the question of markets served must first be addressed. The vast majority of firms were continental in their market orientation, only four purely served the Canadian market including one which acted as a just-intime supplier to CAMI. The surprising feature of the remaining plants

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was not that they served the US market, but the volume of exports— 1 purely served the US market, a further 6 exported the bulk of their output to the US and only 3 supplied primarily within Canada. The CAPTIN wheel plant in British Columbia primarily served Toyota in Japan, although it also supplied Toyota plants in California, Kentucky, and Ontario. It is evident that a substantial minority of these plants, and the largest ones in particular, were export-based platforms exploiting the advantages of a Canadian location to serve the North American market—the vast majority of which is, of course, in the USA. This integration process was not, however, confined to markets and distribution, but extended in some cases to production. Matsushita Industrial Canada, a producer of colour televisions, were integrated into a network of plants covering Mexico, Canada, and the US. Chassis and receivers are supplied from two large Matsushita-owned factories in northern Mexico, along with other components from a factory in Atlanta, Georgia, to a factory in Chicago where they are part assembled before cabinets and tubes are added in Toronto and the CTVs are reexported to the USA. The large automobile producers are similarly integrated with US plants; both Honda’s Alliston facility and Toyota’s plant at Cambridge will be supplied with engines from sister plants in the US and these plants will largely produce cars for the North American market which are not produced in the US, a departure from the patterns of car production in Canada in the 1960s and 1970s which replicated US production (Holmes 1987a, 1987b). The auto producers have been considerably assisted by the 1965 Autopact although there is now uncertainty over the role of the Free Trade Agreement (Drache and Gertler 1990; Finn 1988), and the Canadian automobile industry has suffered far less than its US counterpart. Canada has benefited from a number of advantages; southern Ontario is situated at the northern end of the reconcentrated North American auto belt, has a strong supply base and has cost advantages given exchange rate differences and lower wage rates. In 1987, for example, the differential for hourly wage rates in the auto industry was US$7 and, moreover, Japanese wage rates in Japanese-owned producers in Canada were several dollars below those in the Big Three producers. Given this degree of integration, it was unsurprising that 5 plants supplied to sales offices in the US, while 7 plants had sales functions in situ and 4 elsewhere in Canada. The on-site sales office plants tended to include smaller plants or non-consumer oriented production, ie, subcontractors or basic materials producers.

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The majority of respondents also reported that their head office was on-site while 6 reported to North American head offices, 3 in metropolitan Toronto and 3 in the USA. Six of the respondents felt that they were closely controlled by the parent organization, a further 4 that they were fairly closely controlled, and 6 that they had a reasonable degree of autonomy. In the last group, one respondent reported that they only had to refer to investment decisions of $1 million plus back to Japan while at the opposite extreme one plant had two-monthly extensive visits from Japan. These integration strategies also partly explain the almost complete absence of R&D facilities at the plants. In only two cases was largescale R&D undertaken, in tandem with a Japanese centre. Eleven of the plants reported that the bulk of their activity was carried out in Japan, although four carried out limited development work. This lack of R&D in Japanese overseas plants generally has been subject to considerable criticism. However, this can be tempered by several observations. First, it is, to a certain extent, the logical outcome of moves to ‘global’ standardized products, which would tend to lead to corporate and geographical centralization of R&D. Despite this, even in standardized consumer products, there are regional product differentiation strategies. Matsushita, for example, produce wide screen CTVs exclusively for the North American market. As such they employ forty people in a Chicago based R&D centre. Similarly, Honda have a large US-based facility which will employ 500 by 1990. This is seen by the company as fundamental for the identification of market needs and will carry out design work for cars specifically for the regional market. The company’s R&D facilities in Japan will concentrate upon product and model changes for Honda’s ‘world’ cars. The other cases where R&D is shared tend to be in the joint ventures. A second mitigating factor is the age of plants—eleven started production in the 1980s—and one would expect some of them to transfer at least some development work as they become established. Certainly, even if firms do not transfer R&D facilities to their Canadian plants, a number—roughly half—intended to increase production volumes, either through producing an increased range or through producing greater volumes. Greater volumes would be achieved through a combination of increased market share and import substitution. Seven respondents reported that imports were still being made from Japan, in one case up to 70 per cent of North American sales. The process of transference had been considerably quickened in recent years by the increased value of the yen vis-à-vis the dollar, and in

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some cases production of increasingly high value added goods was being transferred. THE RELOCATION AND LOCATION PROCESS While the increasing value of the yen was an important factor in changing investment plans, it did not feature to any great extent in the initial investment decision (only two respondents mentioned it), which was unsurprising given that ten of the plants had located before the 1985 Plaza agreement which led to a sharp revaluation of the yen (see Dicken, Chapter 2; and The Economist 1987). Far greater in importance, and following the argument proposed in Chapter 1, was the necessity to be producing within all of the major markets—in this case the North American one. Of the 16 firms 13 felt that this was paramount, and for the 8 firms who acted as subcontractors there was the necessity to be close to their main, often Japanese, customers. With Japanese firms actually transferring production overseas, major plants moving towards just-in-time systems, and the cost of supplying components from Japan both in terms of transport and the yen, the alternatives for sub-contractors are clear—transfer or lose business. While market proximity was clearly the main motivating factor against a background of exchange rate fluctuations which were extremely unfavourable to the export of standard goods, firms were also clearly aware of the political economy considerations. While only two respondents mentioned protectionism, it is hard to believe that the myriad of import quotas, tariffs, ‘voluntary trade restrictions’ etc. have not acted as a considerable spur to relocate; certainly, as Chapter 10 illustrates, this has been the case in the EC. Given the imperatives of relocating, why was Canada chosen rather than the USA? A range of replies was received to this question. Nine plants, of course, sold from half to all of their output in Canada. In this sense the seven plants who mainly served the US market were the most interesting. Again the replies were mixed, 2 took over existing plants, 1 already had a US plant, and 3 cited cost factors, (wages in two cases and energy in one). The firms that served the US market were engaged in autos or auto-component manufacture and were therefore close to the main US market and benefited from the Autopact. Notably, in choosing specific towns and cities for plant locations, firms had opted for non-metropolitan locations—8 of the 12 southern Ontario based plants were outside the metropolitan Toronto and Mississauga regions. Both auto and non automobile

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plants showed a propensity for seeking young unskilled ‘green’ labour on direct production. LOCAL CONTENT, BUYER-SUPPLIER RELATIONS AND SUBCONTRACTING The question of local content—that is, what proportion of any good is produced in the host country or economic bloc—has proved an emotive issue in all arenas where foreign companies and Japanese ones in particular, invest. ‘Japanese urged to put local content into cars’ and ‘Little assembly seen in Honda plant’ are among the most alarmist headlines that have appeared in the Canadian press in recent years (Clifford 1984; Milner 1987; Stewart-Patterson 1987). Beyond these eye-catching headlines, however, lies an extremely important issue and one which is crucial to any cost-benefit analysis of Japanese investment. If, at their extreme, Japanese overseas plants are mere ‘screwdriver’ units assembling knock-down kits then large numbers of jobs remain in Japan in manufacture and component supply. It becomes an even more serious issue if Japanese plants go beyond an import substitution role and start taking market share from indigenous producers, this already having occurred in consumer electronics and seeming likely to occur in the automotive industry. Not only do the assembly plants displace Canadian jobs but components jobs are also lost if local content levels are low (United Auto Workers 1987). The vast majority of the survey plants clearly went far beyond the screwdriver assembly characterization and this was particularly true of the larger plants, including the three automobile manufacturers. Before discussing the issue in greater depth, several points should be raised. First, a number of plants are new and local content levels would be expected to rise over time. Second, ‘local content’ encapsulates a myriad of definitions; hardliners in the EC motor industry, for example, have argued that it should include R&D and engineering costs. While the discussion will attempt to clarify what the respondents meant by local content, replies were not always precise. Third, local content refers to North American content, not merely Canadian content. Despite these caveats there are a number of imperatives which will tend to increase local content. The increased value of the yen is one important factor; all but two of the respondents said that it had impacted upon their investment decision, both initial and subsequent, and in three cases it led to a search for more local components. Of

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equal importance is the issue of trade restrictions. While only four respondents said that this was an issue in the initial investment decision it is likely that this will become increasingly important in the future and that the two North American administrations will move towards a more systematic method of treating not only imports, but imports via components, along the lines adopted in the EC as both production and markets become polarized into the three major markets. The third factor is just-in-time production; if Japanese transplants are to move to such a production system—and the signs are that a number already are—then they will need suppliers in close proximity to the transplant (Morris 1988; 1989a). The debate is made more complex by the fact that the plants in the survey were intimately interlinked in a number of cases. As Table 6.2 illustrates, all but one of the Japanese-owned subcontractors supplied to Japanese OEMs (original equipment manufacturers) in Canada and the USA, with four also supplying to North American producers. The pattern in the USA, where the transplants are longer established, is even more complex with the larger first-tier suppliers plus smaller second-tier plants (see Chapter 5). Recent developments have extended Japanese influence along the value chain with all five large Japanese steelmakers buying into US steel producers: Kobe Steel, for example, are to enter into a joint venture with US Steel in Ohio for the production of high quality bars for the automobile industry (Rodger, 1989). Overall, local content levels reported by the respondents were relatively high—only two plants were below 50 per cent, (two small plants assembling knock-down kits, both at 5 per cent). Four of the plants had levels of approximately 50 per cent, two 65 per cent, two over 85 per cent, two over 90 per cent, and three 100 per cent. The three plants with 100 per cent levels were those which were heavily reliant upon a few basic raw materials, plastics, metals, etc. The three large auto producers had relatively low levels—two at 50 per cent and one 65 per cent—which was unsurprising given the complexity of automobile production and the amounts of capital investment necessary to achieve economies of sales in the production of certain parts of the car (notably engines). As a point of comparison, colour television producers only had to purchase tubes locally to achieve over 50 per cent local content. While tube production represents a large investment, all but one of the producers had made such an investment and one was in the process of doing so. Moves to increase levels have occurred along three main lines. First, by transferring greater amounts of production from Japan; second, by

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Table 6.2 Main customers of Japanese-owned subcontracting firms in Canada

Source: UN Commodity Trade Statistics, various years. Note: *Excluding the Middle East, China, North Korea and North Vietnam

using Japanese-owned subcontracting plants in North America, and third, by using North American owned suppliers. In the first case, for example, none of the OEM automobile manufacturers had engine plants or transmission manufacture in Canada. However, both the Honda and Toyota facilities are supplied with engines produced by sister plants in the USA. The involvement and motivations of Japanese subcontractors in locating in North America and the decisions by Japanese OEMs to be supplied by them are complex. There are a number of advantages for Japanese OEM’s to encourage their supplies to transfer; they may be part owned by the OEM’s and even if not, Japanese OEMs may have dealt with these firms over long periods. Equally, the OEMs may feel uncertain as to the ability of North American owned suppliers to meet their specifications on quality standards and delivery time. Finally, subcontractors and suppliers for certain types of items may simply not be available in North America. In electronics this is certainly the case and in the automobile industry, given that the Big Three have traditionally produced parts in-house, large-scale supply firms may not exist.

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Even where subcontract firms do exist in North America, Japanese OEMs may well feel that they are of insufficient status to supply to them, in part due to the traditional supplier system which has operated in North America. JAMA Canada, for example, using a 1986 analysis of the Canadian parts industry by the Canadian Automotive Parts Manufacturers Association, pointed to the fact that very few—less than ten—Canadian companies could be designated as first-tier suppliers. Among other things, first-tier suppliers must have a substantial R&D capacity and be able to produce modular parts. Canadian—and North American—suppliers have had to face a significant shift from the traditional western ‘competitive’ buyer-supplier system to the Japanese relational system. The latter is characterized by a small number of key suppliers on long term contracts supplying to the OEM on a single source basis. Small amounts of components would be supplied at frequent intervals as part of the just-in-time system. The relationship is close with technical collaboration. The former was characterized by relatively short contracts offered to a large number of suppliers and with little collaboration, who would supply large batches infrequently (Morris and Imrie 1991; Oliver and Wilkinson 1988; Sako 1987; Turnbull 1989). The shift from competition to collaboration imposes significant changes in culture, managerial organization, and production organization. Above all, the subcontractor needs to be flexible in the face of extremely variable demand; orders may be made on a three-monthly basis but may be considerably revised weekly. Such flexibility was illustrated by two Canadian-owned subcontractors which have successfully adapted to the new ethos in buyer-supplier relationships—Magna Corporation and the Woodbridge Group. Magna’s strategy has been to devote considerable resources to R&D expenditure and to maintain a flexible response by operating an extremely decentralized and polyvalent workforce. Its 8,000 workers are divided into a large number of small non-unionized production units—107 in 1987—located throughout the Canadian and US auto belt from Ontario to Tennessee and often grouped into company industrial parks (Anderson and Holmes 1989; Magna International 1987). The company has also entered into joint ventures with Japanese-owned subcontracting firms DDM, Fujima International and Dualtec. The Woodbridge Group employs 3,700 workers at 27 sites—including technical centres and production plants—across the North American auto belt (Woodbidge Group, n.d.). It too has entered into joint ventures

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with a Japanese partner, the INOAC Group. The company has recognized the need for close proximity to OEMs in order to operate on a just-in-time supply basis and has opened six new strategically placed plants in the past few years in order to meet this need, including four in the southern part of the autobelt. There were moves, therefore, to adopt Japanese-style subcontracting relationships in the Japanese transplants which had diffused to Canadian-owned suppliers. In order to gauge the extent of this transformation, the respondents were asked a number of questions: did they operate just-in-time systems, did they single-source components, did they enter into technical collaboration with suppliers, and did they insist on quality assured supplies. Just-in-time supply systems were operated by half of the plants, all but one—a CTV producer—was in the automotive sector. The plants not using such a system were the two ‘knock-down’ kit manufacturers, four users of raw materials and semi-finished products, and a ‘one off’ plant producer. In the main the just-in-time system was of a daily delivery, rather than a multi deliveries per day, type. However, there is evidence that at the older US transplants the systems are more extensive (ChildHill et al. 1988; Chapter 5). The system in operation at the CAMI plant is illustrative of these initial moves. Just-in-time deliveries started on selected components and the majority of suppliers will be within a four-hour drive time, although they are being encouraged to open new capacity within lower drive times. DDM—a Magna/Daikyo joint venture—will supply them with plastic injected moulded parts from a factory at Tillsonburg, thirty minutes drive away. The supply cycle will be on a just-in-time basis with four-hour ‘windows’. CAMI will give DDM six months of orders but on the Friday of each week will indicate the exact amount required for the following week. Other plants, such as the Woodbridge plant at St. Mary’s will operate on a similar basis. There are some moves, therefore, towards geographical concentration, particularly in the case of new plant locations where subcontractors will locate close to the OEM plants. However, existing supplier plant locations in southern Ontario will remain as long as good delivery times are feasible. Of the other elements of the Japanese-style subcontracting relationship, only six of the respondents reported that they were operating a system of single sourcing components. This, of course, is part of the wider issue of forging links with a few key suppliers and having long-term collaborative arrangements. Eight of the respondents

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reported such a move. Again, the relative infancy of plants should be borne in mind. CAMI’s relationship with its suppliers is a good illustration of how Japanese transplants and Japanese methods are transforming buyer-supplier relationships in North America. As with other OEMs in the auto industry they are attempting to establish long-term relationships with suppliers, or at least to give suppliers a sufficient volume of business to make it worthwhile for them to invest in plant, training, etc. As such, CAMI are concentrating on a small number of suppliers who will be grouped into a first tier—providing subassemblies traditionally carried out in-house in North American firms—and a second tier of suppliers providing individual components. They operate a single sourcing policy and are attempting to introduce a quality assured supply system—i.e., by the supplier— which eliminates cost and inward inspection. The method of supplier choice at CAMI is one in which the company invites quotes from supplier firms. CAMI then undergo an extensive ‘audit’ of these firms in terms of their quality standards, potential for meeting delivery dates, production methods and capacity, financial structures, industrial relations records, etc. This partial emergence of these new trends was confirmed by the experiences of the Japanese-owned subcontractors. Only three supplied on a true just-in-time system—multiple deliveries per day— with two more offering daily delivery. Four operated quality assured supply systems and all but one acted as a sole supplier (although in two cases they were sole suppliers in some instances but not in others). All of the respondents indicated that they operated under long-term contracts of between one and five years. Finally, all but one reported close technical collaboration between themselves and the OEMs, particularly at times of new model introductions and model changes. Indeed, one supplier saw this as a prerequisite for supplying to OEMs—particularly Japanese OEMs—including the provision of ‘full service supply’, design, modelling, engineering, and after-service. PRODUCTION AND WORK ORGANIZATION In the field of buyer-supplier relationships, there are clear signs that the Japanese operations are attempting to transplant not only productive capacity but the essential elements of production organization. Buyersupplier relations, of course, are only one part of the Japanese model of production organization. Certain of the firms are explicitly attempting

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to replicate the Japanese experience in Canada. The CAMI plant, for example, is a model of Suzuki’s highly successful Kasei plant. As such, certain of the plants had introduced advanced degrees of automation; eight respondents regarded their plant to be as highly automated as their Japanese equivalent. While levels of automation are important for achieving competitive advantage in certain industries, they are not the key to explain the success of Japanese companies. Indeed it has been argued that it is the methods of work organization which are more important. Already the moves to just-in-time production and the Japanese model of buyer-supplier relations have been mentioned. There were also early indications of the implementation of quality circles; eight used them or a variant on them, and one was in the process of introducing them. However, their introduction had not altogether been smooth; several respondents reported that they had encountered teething troubles. Many of the plants displayed the more obvious manifestations of Japanese practice. At Honda, for example, all workers were termed associates and wore the same uniforms. There was also evidence of much greater flexibility at a shop-floor level. Honda workers, for example, are employed to carry out a range of functions without rigid job descriptions or pay classifications and all company employees spend at least some time ‘on the line’. Japanese plants have also introduced the notion of team working; at Toyota, for example, functions are carried out by teams of between 4 and 8 ‘multiskilled’ workers in which the team leader plays a crucial and pivotal role. A great deal of responsibility for such issues as productivity and quality is placed at the team level. Quality is paramount and at Honda, amongst other companies, quality assurance is the remit of line workers. Honda was still building up to full production at the time of interview whereas their Canadian management contested that North American owned plant would have been fully operational within two months or so. This was not due to any lack of commitment at Honda, however, but rather that commitment was to achieving quality of product in the first instance before building up volume, rather than the traditional North American practice of ‘getting metal out of the door’. The various strands of production organization—total quality control, flexible working, etc.—allied with lower wage levels (in the auto industry at least), gives those companies a substantial potential and actual advantage which could be crucial given potential over-capacity in the North American automobile industry

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(see Altshuler et al. 1985). Given the partial introduction of some of these Japanese practices, it is instructive to compare productivity levels in the transplants with Japanese plants. Only eight respondents answered this question, the rest felt that such comparisons were inappropriate, in some cases because plants were different. Two of the respondents felt productivity levels were roughly similar whereas in six it was lower, either due to a learning curve effect, due to lower labour productivity or to a lack of backup services. CONCLUSIONS Although, as other chapters in this book have illustrated, Japanese foreign direct investment remains small—both in relation to that of other trading nations and in comparison to Japan’s own domestic production—it is worthy of study for a number of reasons. First, the recent proliferation of Japanese investment is part of the emergence of a new global international division of labour. As Chapter 1 proposed, the world is being subdivided into three regional spheres. In order to compete in these spheres, particularly in consumer products, it is necessary, for market driven and political economy reasons, to produce within that market. Japanese manufacturing activities in Canada must be seen within this context. While a few of the smaller plants only serve the Canadian market the majority are oriented towards the North American market. Most serve the North American market and some sell more in the US market than they do in Canada. In the larger investments, however, the integration is more extensive than merely a market oriented one. In both the auto and electronics industries the Japanese transplants in Canada are part of North American wide production complexes, stretching from Mexico to Canada. This is particularly prevalent in the automobile industry where southern Ontario has become located into the Japanese ‘Auto Alley’ (Center for Business and Economic Research 1988). This second important focus for Japanese investment is in the transference of Japanese manufacturing practice. Certainly the Japanese transplants in North America, as Jones and Womak (1988) point out, ‘have brought more than their screwdrivers’, although the lack of R&D facilities must worry Canadian policymakers. A cautious initial response to the question of the ability of the Japanese to recreate conditions in their transplants must be positive, that such practices have been transferred from Japan, albeit slowly. This is particularly true in the

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areas of total quality control, flexible working, and buyer-supplier relations. NOTE I

wish to acknowledge the Department of External Affairs, Ottawa, and The Canadian High Commission in London for funding. I also wish to thank John Holmes and Glen Norcliffe.

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REFERENCES Altshuler, A., Anderson, M., Jones, D., Roos, D., and Womak, J. (1985) The Future of the Automobile, London: Unwin Paperbacks. Anderson, M. and Holmes, J. (1989) ‘New forms of industrial organisation in the automobile industry: the case of Magna International’, Paper presented to Annual Meeting of The Association of American Geographers, Baltimore. Blain, R. and Norcliffe, G. (1988) ‘Japanese investment in Canada and Canadian exports to Japan 1965–84’ The Canadian Geographer 32, 141–50. Center for Business and Economic Research (1988) Kentucky’s Automotive Supply Industry: Trends and Implications, Kentucky: University of Kentucky. Child-Hill, R., Indergaard, M., and Fujika, K. (1988) ‘Flat Rock, home of Mazda: the social impact of a Japanese company on an American community’, Paper presented to the Eighth Annual International Automotive Conference, University of Michigan. Clifford, E. (1984) ‘Little assembly seen in Honda plant’, Globe and Mail, 11 June, B3. Daw, J. (1987) ‘Honda settles in’, Toronto Star, 12 July, F1. Done, K. (1989) ‘Japan takes on the world’, Financial Times, World Car Industry Survey, 13 September, 1. Drache, D. and Gertler, M. (eds) (1990) Global Competitiveness: State Policy, Growth and Uneven Development in the Canadian Political Economy, Montreal: McGill-Queens University Press. Economist (1987) ‘Japan uber allies’, 17 May, 23. Feigenbaum, A. (1988) Total Quality Control, New York: McGraw-Hill. Finn, E. (ed.) (1988) The Facts on Free Trade, Toronto: Lorimar. Hata, N. (1987) ‘The role of Japanese companies in Canada’, Paper presented to Canada’s Business with Japan Symposium, Ottawa. Holmes, J. (1987a), ‘The impact of new production technologies on the organisation of labour in the North American automobile industry’, Paper presented to IGU Commission on Industrial Change, Cracow, Poland. ——(1987b) ‘Technical change and the restructuring of the North American automobile industry’, in K.Chapman and G.Humphrys (eds) Technical Change and Industrial Policy, Oxford: Basil Blackwell. JAMA Canada (1986) Japanese Automobile Industry in Canada, 1986 Report, Willowdale, Ontario: JAMA. ——(1988) Japanese Automobile Industry in Canada, 1988 Report, Willowdale, Ontario: JAMA. Jones, D. and Womak, J. (1988) The real challenge facing the European Motor Industry’, Financial Times, 28 October, 12. Langley, J.A. (1987) ‘Japanese investment in North America: the new wave’. Paper presented to Conference Board of Canada’s International Business Outlook Conference, Toronto. McMillan, C.J. (1987) ‘Canada’s response to the Japanese challenge: planning for the 1990s’, Paper presented to Canada’s Business with Japan Symposium, Ottawa. Magna International Inc. (1987) Annual Report, Markham, Ontario: Magna. Milner, B. (1987) ‘Japanese investment wave hitting auto part manufacturers’, Globe and Mail, 2 July, 20.

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Morris, J. (1987) Japanese Manufacturing Investment in the E.E.C.: The Effects of Integration, Background Report, DGI, Brussels. ——(1988) ‘The who, why and where of Japanese manufacturing investment in the U.K.’, Industrial Relations Journal 19 (1), 31–40. ——(1989a) ‘Japanese inward investment and the “importation” of subcontracting complexes’, Area 29, 269–77. ——(1989b) The Changing Industrial Structure of Canada in the 1990s: The Role of Japanese Foreign Direct Investment, Final Report to The Canadian High Commission, London. ——(1990) ‘A Japanisation of Canadian Industry?’, in D.Drache and M. Gertler (eds) Global Competitiveness: State Policy, Growth and Uneven Development in The Canadian Political Economy, Montreal: McGill-Queens University Press. ——and Imrie, R. (1990) Transforming the Buyer-Supplier Relationship: The Adaptation of Japanese-Style Buyer-Supplier Relations in a Western Context, London: Macmillan. Oliver, N. and Wilkinson, B. (1988) The Japanisation of British Industry, Oxford: Basil Blackwell. Rodger, I. (1989) ‘Kobe Steel to set up US venture’, Financial Times, 15 February, 6. Sako, M. (1987) ‘Buyer-Supplier relationships in Britain: a case of Japanisation?’ Paper presented to the Japanisation of British Industry Conference, Cardiff. Stewart-Patterson, D. (1987) ‘Japanese urged to put local content into cars’, Globe and Mail, 16 April, B8. Turnbull, P. (1989) ‘“Now we’re motoring”? The West Midlands automotive components industry’, Japanese Management Research Unit Working Paper, Cardiff Business School, UWCC, Cardiff. United Auto Workers (1987) US Auto Jobs: The Problem is Bigger than Japanese Imports, Detroit, Michigan: UAW Research Department. Utting, J. (1988) ‘Team Toyota’, Toronto Star, 24 April, F2. Woodbridge Group (n.d.), The Woodbridge Group, Rexdale, Ontario.

7

Reshaping the international division of labour Japanese manufacturing investment in SouthEast Asia Tessa Morris-Suzuki

In the early 1970s the presence of Japanese multinationals in SouthEast Asia1 was an issue which excited intense political passions. During Prime Minister Tanaka’s 1974 tour of the region, students condemning Japan’s growing economic presence attacked Japanese-owned offices in Thailand, Malaysia, and Indonesia. Several demonstrators were killed and Japanese enterprises were forced to give serious thought to the impact of their economic activities overseas. Since the 1970s, on the other hand, some of the fire seems to have gone out of debates on the role of the Japanese multinational in South-East Asia. To an extent, perhaps, familiarity breeds indifference. Advertisements for Suzuki motorcycles, Nissan cars, and Sony video recorders are now an accepted part of the South-East Asian urban landscape. The interest of the international media has tended to move towards the more controversial expansion of Japanese manufacturing, financial, and real estate investment in North America and Western Europe. Meanwhile, rapid industrialization in many South-East Asian countries has led to the emergence of a growing number of local competitors to Japanese manufacturing multinationals, so diminishing the once powerful sense of Japanese industrial dominance. Appearances, however, are in some ways misleading. From the mid to late 1980s Japanese investment in South-East Asia was growing as rapidly as in the late 1960s. Moreover, the changing nature of Japanese investment in the region was contributing to fundamental shifts in the international division of labour between newer and older industrialized regions. It seems likely that these alterations in the division of labour will be among the most important, and possibly the most contentious, economic issues of the 1990s and beyond. 135

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JAPAN AND THE INTERNATIONAL PRODUCT CYCLE The rise and fall of nations appears to be linked not only (as Paul Kennedy observes) to patterns of military power and military spending, but also to the rhythm in the flow of capital (Kennedy 1988). Robert Gilpin has suggested that both Britain and the United States moved through a cycle in which industrial maturity led to the outflow of capital; overseas investment promoted the industrial development of foreign competitors; and foreign competition in turn initiated the home country’s economic decline (Gilpin 1976). Japan’s rise to industrial maturity, and her emergence as a leading overseas investor, have occurred with unprecedented rapidity. Does this then also mean that Japan is rapidly following the path trodden by the United Kingdom and the United States, and that Japan’s investment in less-developed Asian countries, by promoting their industrialization, will weaken the competitive dominance of Japanese economy itself? Some symptoms of such a historical process are certainly present in Japan’s economic relationship with South-East Asia. The movement from industrial dominance to decline is often seen as being associated with another form of recurrent pattern: the international product cycle outlined by scholars such as Raymond Vernon (Vernon 1971:65–77). In the first phase of this cycle (which might be called the ‘trade phase’) the advanced industrialized country exports its relatively sophisticated manufactured products to less-developed countries. These exports stimulate the growth of demand in the less-developed markets, and encourage the emergence of local enterprises producing similar goods (often protected and encouraged by their national governments). In response to such overseas competition, the corporations of the advanced nation will begin to set up their own manufacturing plants in less-developed nations, hoping to protect their market share by combining their technological and managerial skills with the lower production costs of the host nation. (This is the ‘import-substituting phase’.) Eventually, as overseas production expands, corporations from the developed nation will adopt a truly international perspective, setting up factories around the world in the locations with the lowest price structure, and importing their products back into the home nation (the ‘overseas-sourcing phase’). Vernon identified this international product cycle with the activities of the giant, oligopolistic and technologically sophisticated corporations of the United States. On the other hand, the Japanese economist Kiyoshi Kojima, writing in the late 1970s, argued that a

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characteristic of Japanese foreign investment was for enterprises at the lower end of the technological scale (in labour intensive areas such as textiles, for example), to initiate the product cycle by moving from exports to overseas production (Kojima 1978:85–7). These enterprises, Kojima argued, brought with them technologies which were particularly appropriate to the economic needs of less-developed Asian countries, and so helped host countries to expand and upgrade their manufacturing capacity. As labour-intensive light industries moved from the import-substituting to the overseas-sourcing phase, the industrial base of the less-developed host country would be strengthened, paving the way for import-substituting investment in more capital and knowledge intensive areas such as steel, chemicals, and machinery. Through this step-by-step process, Japanese investment in South-East Asian nations would eventually enable these nations to ‘raise their economies to the level and quality of Japan’s’ (Kojima 1978:168). There is abundant evidence to support some aspects of Kojima’s thesis. As we shall see, the history of Japan’s economic relationship with South-East Asia since the Second World War can readily be divided into three distinct periods, corresponding to the trade phase, the import-substituting investment phase, and the overseas-sourcing phase. The last of these phases has also coincided with a clear tendency for Japan’s manufacturing investment in the region to shift its focus from labour-intensive light industries to heavy industry and machinery manufacture. At the same time, a closer examination of these three phases of Japanese interaction with South-East Asia reveals that the outcome of the international product cycle in this region has proved rather more complex than writers such as Kojima predicted. The trade phase: 1950–65 During the 1950s and much of the early 1960s, South and South-East Asia constituted Japan’s largest export market, with Japanese export dependence on the region reaching a peak of over 40 per cent in 1953. By comparison, in the mid-1950s, about 25 per cent of Japan’s exports went to North America and 10 per cent to Western Europe (Kobayashi 1983:36; Kitamura 1976:132). Japanese trade with South-East Asia, however, is best understood, not in isolation, but in the context of the broader international trading system of which it was a part. From this perspective, economic links between Japan and South-East Asia were moulded, first, by Japan’s status as a late and still immature

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industrializing country and, second, by the inclusion of much of Asia in a political and economic order in which the United States was the dominant partner. Table 7.1 Japan’s exports to Asia* by product, in US$ millions and percentages

Source: UN Commodity Trade Statistics, various years. Note: *Excluding the Middle East, China, North Korea and North Vietnam

The first of these factors meant that Japan still had difficulty in competing on the world market for sophisticated, capital-intensive manufactured products. A major share of Japanese exports therefore consisted of basic or labour-intensive manufactures such as textiles or household electrical appliances, and the largest share of these were exported to the less-developed markets of Asia (see Table 7.1). The second factor meant that the US served as a source both of raw materials and of relatively sophisticated industrial imports for Japan, while at the same time US economic and political influence helped to maintain the open and expanding Asian markets upon which Japan’s exports relied. In short, Japan occupied an intermediate position in a triangular trans-Pacific economic relationship: on the one hand, importing advanced industrial products from the United States (with whom Japan had a substantial trade deficit) and, on the other, exporting simpler industrial products to the South-East Asian region (which had a substantial trade deficit with Japan).

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The import-substituting phase: 1965–75 Raymond Vernon envisaged the transition from the trade phase to the import-substituting phase in microeconomic terms, as a step which would be taken by individual enterprises in response to their own individual circumstances. In the case of Japanese overseas investment, however, this transition needs to be understood in a macroeconomic framework. By the second half of the 1960s, Japan had reached a turning-point in its economic growth: the point at which it was ceasing to be an economic and technological latecomer—a follower in the wake of the advanced industrialized countries—and was becoming an economic leader in its own right. This new situation created challenges to which Japanese enterprises were obliged to respond. Japan was under increasing pressure to open its markets to manufactured imports from other nations, and, in 1971, was forced to float its severely undervalued currency. Wages in Japan, moreover, were rising rapidly and ceasing to be low by international standards. In 1960, for example, Japanese workers (on average) were actually earning some 15 per cent less than their counterparts in the Philippines; by 1970 they were earning four times as much (Nihon Keizai Kenkyû Sentâ 1972:327). These problems in the domestic economy would in themselves have created pressures for overseas investment by Japanese manufacturing enterprises. Such pressures, however, were intensified by developments in the international arena, and particularly in Japan’s South-East Asian markets. By the 1960s South-East Asian nations had, for the most part, overcome the political traumas of the immediate postindependence period. Except in Vietnam, the boundaries between communist and non-communist Asia had been clearly defined, and governments in the non-communist camp were turning their attention to policies for long-term industrial growth. These policies assumed a common pattern, repeated in one country after another throughout the region during the 1960s and into the early 1970s. On the one hand, protective tariffs were imposed on a range of labour-intensive and basic industrial imports, while, on the other, substantial inducements were offered to foreign investors in the manufacturing sector. In Indonesia, for example, one of the first acts of the Suharto government in 1966 was to introduce a package of foreign investment incentives including tax holidays for enterprises in priority industries, accelerated depreciation arrangements, and tariff exemptions on imports of machinery and equipment (Business International 1975:81– 5). In South Korea, the Park regime was even more generous,

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introducing in 1970 a policy which allowed 100 per cent ownership by foreign investors, five-year tax holidays, and the free repatriation of profits (Yoshihara 1978:18). At the same time, the Masan export processing zone (MAFEZ) was established to encourage exportoriented investment by foreign enterprises (Ozawa 1979:89). In the light of these challenges and opportunities, the pattern of Japanese overseas investment from the mid-1960s onwards becomes readily explicable. Japanese investment flowed into South-East Asia on a massive scale, its main objectives being, first, to preserve established markets in Asian less-developed countries and, second, to take advantage of lower off-shore production costs (see Ministry of International Trade and Industry 1977:20). As a result, during the decade from the mid-1960s to the mid-1970s, Asia became the largest host region for Japanese manufacturing investment (receiving almost 40 per cent of the total) and a major share of that investment went into labour-intensive areas of manufacturing such as the textiles industry (see Table 7.2).

Table 7.2 Japanese investment in Asia by industry

Sources: Tsusho Sangyo Sho, Keizai Hakusho, 1987; MITI: Japan’s Overseas Investments, 1977.

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This decade, then, can be identified as the import-substituting phase of Japan’s relations with South-East Asia. Such a bald statement, however, requires some qualification. Throughout the 1960s and 1970s, patterns of Japanese overseas investment were not static, but tended to move with a wave-like momentum from one industry and from one country to another. In geographical terms, Japanese investment in the smaller and relatively advanced nations such as South Korea and Taiwan moved rapidly from the import-substituting to the export-oriented phase. A 1975 survey of overseas ventures by Japan’s Ministry of International Trade and Industry indicates that, by the mid-1970s, more than half the output of Japanese-owned manufacturing projects in these two countries was already being exported. On the other hand, manufacturing ventures in larger and less-developed countries such as Thailand and Indonesia remained very strongly oriented to the domestic demand. In terms of industrial sector, meanwhile, overseas ventures in light industries such as textiles and electrical machinery were beginning to enter the overseas-sourcing phase, while the growing number of newly-established heavy industrial projects concentrated upon serving local markets (Table 7.3). Until the mid-1970s there was little concern in Japan that the outflow of direct investment might weaken Japan’s position in world trade. On the contrary, it was recognized that import-substituting investment in South-East Asia would complement and encourage the growth of heavy industry in Japan. As the Ministry of International Trade and Industry observed in relation to Japan’s overseas investments in textile production: the expanding textile industry in developing countries will eventually translate into increased exports of Japanese textile machinery and thus play a significant role in the improvement of this country’s industrial structure. Ministry of International Trade and Industry 1977:27) This confidence indeed proved to be wholly justified. As manufacturing investment in South-East Asia expanded, Japan’s exports of light industrial goods to the region dropped sharply. At the same time, however, exports of intermediate products such as chemicals and steel soared, in part because Japanese investment projects in industries such as textiles and electrical machinery tended to buy a very substantial – – – – share of their semi-processed inputs from Japan (Tsusho Sangyo Sho 1977:199–200). It comes as no surprise, therefore, to discover that between 1960 and 1976, despite the massive increase in the cost of oil

–

–

–

Source: Tsusho Sangyo Sho, Waga kuni Kigyo no Kaigai Jigyo Katsudo 1977, pp. 197–8. Note: For each region, the figures in Column I show the percentage (by value) sold in the host country; figures in column II show the percentage exported to third countries; and the figures in Column III show the percentage exported to Japan. The ‘All products’ column shows a breakdown by markets of the total quantity of goods sold by Japanese investment projects in the various South-East Asian countries.

–

Table 7.3 Markets for produce of Japanese investment projects in South-East Asia

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imports from Indonesia, Japan’s trade surplus with South-East Asia grew almost exactly as fast as its total trade with the region (Shibusawa 1984:44; Tsusho Sangyo Sho 1988:277). The overseas sourcing phase: since 1975 Since the middle of the 1970s, however, confidence in the positive relationship between overseas investment and domestic economic growth has given way to a mood of growing anxiety amongst economic observers in Japan. In the 1970s the prominent economist Miyohei Shinohara popularized the term ‘boomerang effect’ to describe the way in which the outflow of Japan’s capital into overseas manufacturing ventures was generating a return flow of manufactured imports into Japan (Shinohara 1981:2). More recently, overseas investment by Japanese multinationals has been accused of creating a ‘hollowing out’ (Ku–do–ka) of the domestic economy: that is, of undermining sectors of manufacturing industry which are vital to the nation’s future economic growth (see for example Kitada 1988:51–3). The emergence of these concerns reflects two major shifts in the nature of Japanese investment in South-East Asia from the mid-1970s onwards. In the first place, investment was no longer focused upon the light industrial sector. On the contrary, the major share of Japanese manufacturing investment in Asia was now directed to heavy industries such as chemicals and steel (see Table 7.2). This meant that SouthEast Asian producers of finished manufactured goods were increasingly using locally-made intermediate inputs, rather than importing such goods from Japan. The growth of Japanese heavy industrial investment in the region was, in turn, a consequence of changes both in the host and the home economies. As South-East Asian economies industrialized, so their capacity to support relatively complex and capital-intensive industries increased. At the same time, even more critically, rising energy and land costs within Japan, a growing shortage of suitable domestic sites for heavy industrial expansion, and the introduction of anti-pollution laws in the 1970s persuaded many heavy industrial enterprises of the need to relocate production overseas. Good examples of this are provided by the massive hydroelectricity and aluminium-smelting project on the Asahan River in Indonesia, and by large-scale Japanese investment in Singapore petrochemical production during the 1970s and 1980s. The second crucial change in the patterns of Japanese multinational activity in Asia was the growth of export-oriented investment, not just

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in countries like South Korea and Taiwan, but also further afield in Malaysia, Singapore, Thailand, and elsewhere. This trend was largely a response to the rising value of the yen and to the growth of trade friction between Japan and other industrialized countries. By locating export-oriented production in less-developed Asian nations, Japanese enterprises could often take advantage of the preferential tariff arrangements which such nations enjoyed in the markets of the first world. They could also help to reduce Japan’s trade surpluses, and so (it was hoped) deflect the rising tide of protectionist sentiment in Europe and the United States. The trend towards export-oriented foreign investment was apparent throughout the 1970s and 1980s, but became particularly evident after the Plaza Agreement of 1985, which led to a virtual doubling of the value of the yen against the US dollar. In the three years following the agreement enormous sums of Japanese investment poured into SouthEast Asian manufacturing, with Thailand, Malaysia, and Singapore being the main recipients. In the case of Thailand, for example, the inflow of Japanese direct investment in 1987 amounted to US$136 million, more than twice the level recorded in the previous year; in 1988, however, this figure in turn was dwarfed, for almost twice as much again (US$255 million) was invested by Japanese companies in the first six months alone (Tsusho Sangyo Sho 1988:219; Smith 1989:59). A few instances will help to illustrate the contrasts between the new wave of investment and the relatively simple import-substituting investment projects of the 1960s. In 1985, Matsushita, Japan’s largest manufacturers of television sets, announced the establishment of a new Malaysian subsidiary, MTV (Malaysia Matsushita Television). In order to counter the effects of the rising yen and of competition from newly industrializing countries, Matsushita planned to make MTV its main producer of colour television sets for markets throughout Asia and the Middle East, while its Japanese factories would concentrate upon producing higher quality sets for special purposes (Asahi Shimbun, 4 June 1988). Matsushita, together with NEC, Japan Precision Industries, and Toshiba, was also engaged in largescale investment projects in Thailand during the late 1980s. Toshiba’s Bangkok subsidiary, established in 1989, was designated as the company’s major centre for the production of refrigerators and airconditioning units for the Asian market, and by 1992 the company expect to be re-importing some 100,000 refrigerators a year from Thailand into Japan itself. At the same time, Toshiba’s Osaka and Shizuoka factories, which had previously produced these items for export to Asia, were to be converted

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to the production of more highly value-aded commodities (Asahi Shimbun, 2 March 1989). In Singapore meanwhile, Fujitsu Microelectronics was producing 256 KD RAM microchips for a variety of overseas markets, while Sony was setting up production facilities to manufacture precision components for its European and North American video recorder factories (Minami 1988:189–90; Kosaka 1988:53). The growth of overseas sourcing by Japanese companies was highlighted by a study of more than 300 large corporations conducted by the Ministry of International Trade and Industry in 1988. This showed that 27.4 per cent of the corporations surveyed were importing components or intermediate products from Asian newly industrializing countries (NICs), and 14.2 per cent from ASEAN nations. Five years earlier the figures had been 11.8 per cent for the Asian NICs and 7.5 per cent for ASEAN (Tsu–sho– Sangyo Sho 1988:206). In the circumstances it was not hard to understand fears that Japan might soon become an exporter of jobs rather than of goods and that, without radical changes in economic policy, the country might ‘experience the contradictions of being at once the world’s largest creditor and a nation in which many people lose their jobs and weep at the hardships of their existence’ (Sato 1988:41). DEFLECTING THE BOOMERANG There can be little doubt that the growth of overseas-sourcing investment will lead, and indeed has already led, to reduced production and increased unemployment in specific industries within Japan. To cite just one instance, in 1986–7 the giant shipbuilder Ishikawajima Harima reduced its Japanese workforce by more than 7,000 (some of these jobs being lost through involuntary redundancies) while at the same time expanding the workforce at its Singapore subsidiary by more than 1,000 (Minami 1988:191). On the other hand, there are several reasons to question the view that Japan’s investment in Asia is likely to result, at least in the near future, in a general loss of Japan’s competitive power, or to stagnation and widespread unemployment in the Japanese economy. In the first place, it is important to bear in mind that the level of overseas production by Japanese companies, although rising rapidly, is still low when compared with many other industrialized countries. In 1984, the output of overseas manufacturing subsidiaries of Japanese firms amounted to only 4.3 per cent of the total manufacturing output within Japan. The comparable figure for West Germany was 19.3 per

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cent, for the EEC as a whole 14.2 per cent, and for the United States about 17 per cent (Tsusho Sangyo Sho 1987:37). Second, and more important, the growth of Japanese overseas investment has been accompanied by a conscious and concerted policy of upgrading the industrial and technological structure of the Japanese economy itself. The Japanese government (and Japanese enterprises) having successfully played the game of catching up with other industrialized countries, are perhaps particularly conscious of their vulnerability to competition from the ‘new Japans’. Since at least the early 1970s, therefore, it has been recognized that the transfer of capital and technology overseas must be integrally connected to a coherent strategy of industrial restructuring at home. In 1974, for example, the Industrial Structure Council (an advisory body to the Ministry of International Trade and Industry), recommended that, industrial branches such as textiles which include a low degree of processing and generate low added value should be moved to developing countries where labour costs are low…so that Japan can concentrate on high technology and knowledge intensive industries. (Sangyo– Ko–zo– Shingikai 1974) To promote this restructuring, the Japanese government introduced a wide range of incentives, including (in 1978) a broadly-based programme of assistance for the computer, robotics, and software industries, and a package of measures to encourage the redeployment of labour from ‘sunset’ industries such as basic steel and shipbuilding. At the same time, encouragement was given to the introduction of new process technologies through government initiatives such as the establishment of JAROL (Japan Robot Lease), a consortium which enabled smaller firms to ‘rent-a-robot’ at relatively low cost. A particularly striking feature of the Japanese economy in recent years, however, has been not so much the ingenuity of government industrial policy but rather the extent to which individual enterprises are conscious of the need for a continual upgrading of their manufacturing activities in Japan. The cases of Matsushita’s and Toshiba’s investment projects in Thailand (cited earlier) are typical in that both companies integrated their plans for overseas production of standardized products with the retooling of their Japanese factories to produce higher value-added specialized products. Consequently, while jobs were lost in older industries (with employment in steel production, for example, falling by almost 20 per cent between 1975 and 1982) new employment was steadily being created, particularly in electronic

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and information related industries. (Between 1977 and 1982, some 93,000 jobs are estimated to have been created in the computer, robotics, and related industries) (So–rifu Tokei Kyoku 1983:34; Morris-Suzuki 1988:95). This process of job destruction and creation, needless to say, brought disruption to the lives of many workers in Japan, but at the same time it enabled the Japanese economy as a whole to maintain an economic environment conducive to continued corporate growth. As Asian industrialization has progressed, moreover, the process of restructuring has been taken one step further. Thus, by 1988 the Ministry of International Trade and Industry was arguing that the existing pattern of the international division of labour between Japan and Asia, whereby our country produced high value-added manufactures and the other Asian nations produced lower valueadded manufactures, seems to be gradually changing. Moreover, in circumstances where the growth of total world demand is sluggish, there are limits to an international division of labour which relies upon the differentiation and diversification of existing products. From this perspective…Japan must seek to push forward the frontiers of world demand by actively promoting the development of new products and new technologies which differ from existing types of commodities (product innovation). (Tsu–sho– Sangyo– Sho– 1988:237–8) This was not mere rhetoric. Expenditure on research and development has been rising more rapidly in Japan than in any other major industrialized country in recent years, and Japan now has a higher proportion of its population engaged in R&D than the United States. This has resulted in Japan’s emergence as an increasingly important exporter of technology, particularly to other Asian countries: receipts for technology exports rose 2.4 fold between 1970 and 1985, and, in the early 1980s, some 40 per cent of these exports were directed to South-East Asia (The Economist, 20 May 1989; Kagaku Gijutsu Cho 1983:120). At the same time, however, Japan remains relatively cautious about transferring advanced technology to nations which have the potential to become its competitors on world markets. The whole structure of Japan’s overseas investment strategy, as we have seen, relies upon the export of ‘second hand’, mature technologies, enabling Japanese corporations to concentrate upon applying the latest industrial know-how at home. In this respect, Japan differs from the United States which, for political and strategic reasons, has often been willing to license quite advanced new technologies to its less-developed allies.

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Figure 7.1 The division of labour in Asia Source: Tsusho Sangyo Sho, Tsûsho Hakusho 1988, p. 237.

The future international division of labour in Asia, as depicted by MITI, therefore, is one in which Japan will increasingly play the role of an exporter of knowledge, both in its pure form (as patents, licensing arrangements etc.), and embodied in advanced industrial goods and processes (see Figure 7.1). Japan’s ability to maintain this position will, needless to say, depend upon its capacity to generate a steady stream of new technological ideas. Two aspects of past experience might seem to cast doubt upon Japan’s potential for achieving this innovative role. In the first place, Japan has traditionally been regarded as a copier rather than an originator of technology, and it has sometimes been argued that the nature of Japanese society and culture itself is unconducive to original scientific thought (see Yukawa 1967:55). Second, it has frequently been suggested that copier nations like Japan (and, more recently, the Asian newly industrializing

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countries) have an advantage over innovating nations, since the former can apply technology ‘ready-made’, and avoid the lengthy delays which are often involved in the development, testing, and application of new ideas. Japan’s recent advances in fields such as superconductivity and new materials, however, have almost entirely dispelled the first of these doubts. As for the second, its force is somewhat weakened by the clear trends towards a rapid shortening of the lead-time between the discovery and commercial application of industrial innovations (see for example Rosenberg and Birdzell 1986). For the present, it seems fair to conclude, as one observer has done, that ‘the techological gap between Japan and its neighbours in the region is widening’ (Johnstone 1989:73). The evolution of economic relations between Japan and SouthEast Asia, in short, is not so much a process in which the Asian ‘new Japans’ are catching up with Japan itself, but rather a process which may be pictured as resembling the movement of an escalator: as South-East Asian economies moved first from agriculture to labourintensive light industry, and later from light industry to more capitaland technology-intensive forms of manufacturing, so the Japanese economy itself has shifted its own industrial and technological frontiers forward, thus maintaining its economic dominance of the region. This dominance is clearly apparent in the figures for regional trade from the mid-1970s onwards. The growing sophistication of the SouthEast Asian industrial structure resulted in stagnant or declining Japanese exports to the region of goods such as chemicals and steel. At the same time, however, Japan’s exports of machinery and equipment to the region have continued to grow at a very rapid rate. This more than offset the rising price of Japan’s raw material imports and the growth of basic manufactured imports from the ASEAN nations. Over all, therefore, Japan’s trade surplus with South-East Asia grew not only in absolute terms but also in relation to the total value of its trade with the region (see Table 7.4). The main consequence of Japanese manufacturing investment in South-East Asia, indeed, has not been a weakening of Japan’s own international competitiveness, but rather a growth of manufactured exports from South-East Asia to other industrialized countries, particularly the United States. Between 1982 and 1987, the US trade deficit with the Asian newly industrializing countries increased 4.6 fold (from US$8.2 billion to US$30.8 billion), while its deficit with the ASEAN nations rose 3.2 fold (from US$2.2 billion to US$7.0 billion) (Tsusho Sangyo Sho 1988:248–9; United Nations 1982; United Nations

Source: Tsusho Sangyo Sho, Tsûshô Hakusho 1988, p. 277.

Table 7.4 Japan’s trade with South-East Asia, 1976 and 1986

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1986). Japanese investment in South-East Asia was, of course, only one of a number of factors contributing to this growth of manufactured exports from Asia to the USA, but it is worth noting, for example, that in the mid-1980s almost 40 per cent of Taiwan’s exports were produced by subsidiaries of foreign multinational companies, and some 13 per cent of Thai exports were produced by subsidiaries of Japanese companies alone (Tsu–sho– Sangyo– Sho– 1988:216). Japanese investment in South-East Asia since the 1960s has, as Kojima observed, encouraged the growth, first of relatively labourintensive import-substituting industries, and recently of more sophisticated export-oriented industries. This process of change, however, has been accompanied by the development of new technologies and new industries within Japan’s own economy. As a result, the ‘boomerang effect’ has not had the devastating impact predicted by some economists in the early 1980s. Rather, the ‘boomerang’ has been deflected to strike other, less adaptive, industrialized economies. As a result, the pattern of trans-Pacific trade has been reversed: whereas in the 1950s it was the United States which exported advanced industrial products to Japan, and Japan which exported simpler industrial products to South-East Asia, now it is more often Japan which exports the advanced manufactures to SouthEast Asia, and South-East Asia which exports simpler manufactures to the US. Simultaneously, the trans-Pacific balance of payments has also been turned on its head: in the late 1980s it was the United States which was running substantial trade deficits, not only with Japan but also with the less-developed South-East Asian nations. Thus Pacific trade frictions, which are often depicted as a straightforward confrontation between Japan and the United States will increasingly need to be understood in terms of a more complex network of inter-regional relationships, of which Japanese investment in SouthEast Asia forms a crucial part. It is the role of Japanese multinationals in promoting such trade conflicts between the newer industrialized countries of Asia and the older countries of Europe and North America, rather than their role in promoting competition between South-East Asia and Japan, which is likely to be the major focus of economic controversy in the final decade of the twentieth century. NOTES 1

The term ‘South-East Asia’ in this chapter is used (unless otherwise specified) to refer to the ASEAN nations and the newly industrializing East Asian nations (S. Korea, Hong Kong, and Taiwan).

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REFERENCES Asahi Shimbun (1988) ‘Mar–shia hi Seisan Kyoten: Sekai ni Buhin o Kyokyu’, 4 June. ——(1989) ‘Reizoko, Eakon—Tai Kara Nihon e’, 2 March. Business International (1975) Indonesia: Business Opportunities in a ResourceRich Economy, Hong Kong: Business International Asia/ Pacific. Economist (1989) ‘Who are the copy cats now?’, 20 May, pp. 91–4. Gilpin, R. (1976) U.S. Power and the Multinational Corporation, London: Macmillan. Johnstone, B. (1989) ‘Gap widens as knowledge stays at home’, Far Eastern Economic Review, 8 June. Kagaku Gijutsu Cho (1983) Kagaku Gijutsu Soran, Tokyo: Okura Sho Insatsu Kyoku. Kennedy, P. (1988) The Rise and Fall of the Great Powers, London: Unwin Hyman. Kitada, Y. (1988) ‘Takokuseki Kigyo–ka no Shin Dankai to Nihon Keizai’, in Keizai Henshu–bu (ed.) Nihon Kigyo– Kaigai Shinshutsu no Jittai, Tokyo: Shin Nihon Shuppansha. Kitamura, H. (1976) Choices for the Japanese Economy, London: Royal Institute of International Affairs. Kobayashi, H. (1983) Sengo Nihon Shihonshugi to ‘Higashi Ajia Keizai Ken’, Tokyo: Ochanomizu Shobo. Kojima, K. (1978) Direct Foreign Investment, London: Croom Helm. Kosaka, T. (1988) ‘Effects of globalisation strategy development on the Japanesestyle subcontracting system’, Studies of Business and Industry (Tokyo), Sept. Minami, J. (1988) ‘ASEAN, Hon Kon: Shinshutsu Rasshu no Jittai’ in Keizai Henshubu (ed.) Nihon Kigyo Kaigai Shinshutsu no Jittai, Tokyo: Shin Nihon Shuppansha. Ministry of International Trade and Industry (1977) Japan’s Overseas Investments, Tokyo: MITI Information Office. Morris-Suzuki, T. (1988) Beyond Computopia: Information, Automation and Democracy in Japan, London: Kegan Paul International. _ no Nihon Keizai: 1980 Nen, Nihon Keizai Kenkyu– Senta (1972) Sekai no Naka _ vol. 1, Tokyo: Nihon Keizai Kenkyu– Senka. Ozawa, T. (1979) Multinationalism, Japanese Style, Princeton: Princeton University Press. Rosenberg, N. and Birdzell, L.E. (1986) How the West Grew Rich, New York: Basic Books. Sangyo– Ko–zo– Shingikai (1974) Sangyo– Ko–zo– no Choki Bijion, Tokyo: Sangyo Kozo Shingikai. Sato, S. (1988) ‘Kyu–zo– Suru Nihon no Taigai Chokusetsu To–shi’, in Keizai Henshubu (ed.) Nihon Kigyo– Kaigai Shinshutsu no Jittai, Tokyo: Shin Nihon Shuppansha. Shibusawa, M. (1984) Japan and the Asia Pacific Region, London: Royal Institute of International Affairs. Shinohara, M. (1981) ‘Emerging industrial adjustment in the Asia-Pacific area’, Asia Pacific Community, winter. Smith, C. (1989) ‘Asia misses out on Japan’s cash’, Far Eastern Economic Review, 8 June.

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So–rifu To–kei Kyoku (1983) Nihon no To–kei 1983, Tokyo: Okura Sho Insatsu Kyoku. Tsu–sho– Sangyo– Sho– (1977) Waga Kuni Kigyo– no Kaigai Jigyo– Katsudo–, no. 6, Tokyo: Okura Sho– Insatsu Kyoku. ——(1987) Waga Kuni Kigyo– no Kaigai Jigyo– Katsudo– no. 15, Tokyo: Okura Sho Insatsu Kyoku. ——(1988) Tsusho– Hakusho, Tokyo: Okura Sho– Insatsu Kyoku. United Nations (1982) Commodity Trade Statistics 1982, New York: UN Printing Office. ——(1986) Commodity Trade Statistics 1986, New York: UN Printing Office. Vernon, R. (1971) Sovereignty at Bay, New York: Basic Books. Yoshihara, K. (1978) Japanese Investment in Southeast Asia, Honolulu: University Press of Hawaii. Yukawa, H. (1967) ‘Modern trend of western civilisation and cultural peculiarities of Japan’, in C.A.Moore (ed.) The Japanese Mind, Honolulu: University of Hawaii Press.

8

Pursuing the new international economic order Overseas investment and trade of Japan, the Asian NIEs and ASEAN Teruzo Muraoka

A NOTABLE NEW PHENOMENON Overseas investment by Taiwan and South Korean firms is only in its infancy, but already it is beginning to have a significant impact both on the two domestic economies and on certain Southeast Asian nations, notably Thailand. The success with which Taiwan and South Korea business can manage their overseas holdings will be critical for these nations’ economies prospects over the next decade as they move from being capital importers to significant capital exporters. (Far Eastern Economic Review, 16 March 1989:88) The phenomenon of overseas investment by the Asian NIEs (newly industrializing economies), and especially by Taiwan and South Korea, is the most notable aspect among the NIEs’ economic development since the so called ‘G5’ Plaza meeting held in autumn 1985. The purpose of this chapter is to review the patterns and trends of such investment, including the framework, and to make a survey of the mechanisms of overseas investment (OI) and the trade of Taiwan and South Korea in the ASEAN region, which is heavily linked to the Japanese economy and a reshaping of the international division of labour. PATTERNS OF TAIWANESE AND SOUTH KOREAN INVESTMENT On an approval basis, the outflow of OI has increased rapidly from both Taiwan and South Korea since 1987, due partly to high currency appreciation but also to rapidly rising wages in both countries in recent years. The total stock of OI was US$593.2 million from Taiwan and 154

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US$1,408.6 million from South Korea in 1988 (see Table 8.1). In Taiwan’s case, about 64 per cent or US$378.4 million was approved during 1986–8 while about 56 per cent or US$782 million came from South Korea in the same period. It should be noted that Taiwan has experienced a more rapid OI outflow than South Korea since the G5 Plaza meeting. Moreover, much of the Taiwanese investment is through the ‘informal channels’ (underground foreign exchange markets) used for Taiwanese investors through overseas Chinese businesses based in Hong Kong. The difference range between official and non-official rates in 1988 is as great as 70.8 fold in Thailand’s case, 52.1 fold in Malaysia, and 44.2 fold in Indonesia. Therefore, it is difficult to say which is the larger capital-exporter. This difference between official and unofficial figures is, by and large, due to the Taiwanese government’s policies toward OI. The government has adopted strict policies to regulate the quality of OI so that only investments that are deemed beneficial to the Taiwanese economy are allowed to outflow (Economic Yearbook of The Republic of China 1988), resulting, in part, in a greater reliance on the informal channels as a tool for capital outflow. DISTRIBUTION BY REGION AND INDUSTRY South-East Asia is the second major destination for Taiwanese OI, with 28 per cent or US$169.5 million, following the United States with 60.1 per cent or US$356.5 million, in the 1959–88 period. The level of SouthEast Asia investment by South Korea is 23.2 per cent or US$326.6 million, compared with 38.2 per cent or US$537.8 million in the United States between 1968–88. Taiwanese OI, therefore, has been more concentrated on the United States than has South Korean investment. However, Taiwan’s investment in South-East Asia has accounted for an increasing proportion since 1980, rising from 22.9 per cent (1980–5 average) to 26.0 per cent (1986–8), while South Korea has also raised its investment in South-East Asia rapidly, from 16.2 per cent to 23.0 per cent in the same period (see Table 8.1). On the other hand, the primary position of South Korea is illustrated by the quantity of its investment. Total stock investment, on approval basis, in the SouthEast Asia region by South Korea reached US$326.6 million in 1988— over twice the US$169.5 million investment of Taiwan. In terms of industrial distribution, the mining sector receives the bulk of OI from South Korea; US$420.0 million or almost 43 per cent in the 1968 to 1988 period, compared to the manufacturing sector with US$331.8 million or 32.6 per cent. Thus, by value the mining sector

Sources: The Bank of Korea, Economic Statistics Yearbook 1989, pp. 232–3. Investment Commission, Republic of China, Statistics on Outward Investment etc., December 1988 Taipei pp. 45–8.

Table 8.1 South Korea and Taiwan statistics on overseas direct investment by region 1968–88 (US$ millions)

Sources: The federation of Korean Industries, Korean Economic Yearbook 1988, Seoul, p. 180. Investment Commission, Republic of China, Statistics on Outward Investment etc., December 1988, Taipei, pp. 49–52. Notes: Actual investment is total investment minus divestment. For Taiwan ‘Mining’ and ‘Real estate’ categories are replaced by ‘Services’ and ‘Banking and Insurance’, respectively.

Table 8.2 South Korea and Taiwan statistics on overseas investment by industries (US$ millions)

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picked up 27 per cent more than the manufacturing sector. Moreover this increased as the period went on; the level of mining investment from South Korea reached 45.7 per cent, with US$247.3 million, between 1986 and 1988 (see Table 8.2). Compared with South Korea, Taiwanese foreign investment tends to be biased towards the manufacturing sector with almost 64 per cent (US$376.7 million) of total investment—double the level of South Korea. This trend might, however, be reversed in the next decade if service sector investment increases as rapidly as has happened in recent years. There are, therefore, considerable differences between new capitalexporters. In this regard, it is unfortunate that there are not more detailed statistics on South Korean OI. It seems likely that detailed study in this field will be hampered by this lack of statistics which is regrettable because the appearance of the Asian NICs as capital-exporters is among the most important of the developments in the international division of labour. TAIWAN AND SOUTH KOREAN OVERSEAS INVESTMENT IN THE ASEAN REGION The Taiwanese pattern The limitations of the data means that we cannot investigate Taiwanese OI in detail, but can make some observations on the major trends. As Table 8.3 illustrates the ASEAN economies, particularly the Philippines, Thailand, and Malaysia, have accounted for an increasing proportion of OI by Taiwan, from 30 per cent in the first half of the 1980s to almost 90 per cent in the second half of the 1980s. As a result, these three countries have accounted for the largest proportion— approximately 75 per cent—of Taiwan’s investment in the ASEAN region. In the second half of the 1980s, one of the major trends of Taiwanese investment was the export of capital towards the Philippines. Taiwanese investment in the Philippines was over 1.16 times that in Thailand in this period (see Table 8.3). The Philippines is not only one of the close countries to Taiwan geographically, but also one of the easiest understood societies for the overseas Chinese who have enjoyed special treatment in Taiwan owing to official permission, dating back to 1961, to operate businesses in the field of banking and financial activities (Twu Jaw-yann, 1988). It should also be noted that there is a major difference between Taiwanese statistics on OI and those of the host countries.

Source: Investment Commission, Republic of China, Statistics on Outward Investment, etc., Taipei, December 1988, pp. 45–6, and June 1989, p. 28.

Table 8.3 Taiwan statistics on approved outward investment in ASEAN countries, 1959-June 1989 (US$ millions)

Source: Council for Economic Planning Development, Republic of China, Taiwan Economic Yearbook 1988, June 1989, Taipei, p. 234. Note: All companies that include Taiwanese shareholders

Table 8.4 Difference range of Taiwan overseas investment with host countries, 1987–8 (US$ thousands)

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By industrial distribution, electronic and electric appliances (EEAs) absorbed around a quarter of Taiwanese OI in ASEAN economies (see Table 8.5). In 1989 this sector overtook the chemicals sector which had occupied the top position in the 1980s. Malaysia and Thailand hold in excess of 80 per cent of investment in the EEA sector, among which about 63 per cent took place in 1989. On the other hand, over one-fifth (22.9 per cent) of Taiwanese investment in the region was in chemicals with virtually all of this directed to the Philippines. Such a concentration of investment also occurs in the pulp and paper industry; Indonesia and Thailand have received above 90 per cent of the investment in this sector. The Philippines and Indonesia have been host to investments in lowtechnology and labour-intensive industries, whilst investment in Malaysia and Thailand is equally divided between the low and hightechnology industries (capital-intensive sector). The Philippines and Indonesia not only have plentiful natural resources, but also have large pools of low-wage labour so that much of the investment from Taiwan has been in primary processing industries such as paint, soap, calcium fertilizer, pulp, and even PVC (polyvinyl chloride) works. Moreover, a further reason for the Philippines being an attractive location for Taiwanese investment is that it offers a conventional channel for exports to the United States due to the preferential trade relationships, based on the long-term traditional relationship between the Philippines and the United States. South Korean pattern In the South Korean case, as Table 8.1 indicates, South-East Asia was the major destination for investment with about 47 per cent in the 1968– 79 period; this fell sharply to about 16 per cent in the 1980–5 period but rose slightly to 23 per cent in the 1986–8 period. This approximate 7-point increase in the proportion of South-East Asia region investment is greater than Taiwan which recovered only 3 per cent. As a result, the proportion of South Korean investment was, by the late 1980s, similar to that of Taiwan (although overall, South Korean investment was almost twice that of Taiwan). There are, in addition, significant differences in the distribution between these two capital-exporters. A recent study indicates that South Korean investment tends to be concentrated mostly in Indonesia (see Table 8.6) and mainland China, while Taiwanese investment was largely centred in the Philippines, Thailand, and Malaysia. Moreover, the industries associated with South Korean investment are comparatively

Source: Investment Commission, Republic of China, Statistics on Outward Investment etc., Taipei, December 1988, pp. 53–4, and June 1989, p. 33. Note: All industrial items listed above exceed US$1 million.

Table 8.5 Taiwan statistics on approved outward investment in ASEAN countries by industries, June 1989 (US$ millions)

Source: JETRO Seminar on Development Problems (ed.), An Age of Asian Industrial Revolution Tokyo, 1989, pp. 137, 140, 143, 147. Notes: 1 Investment amounts less than 2.5 ringgit (Malaysian dollars) are excluded after 1986. 2 Registered capital for which a business license was issued.

Table 8.6 The position of South Korea and Taiwan in ASEAN foreign investments

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more capital-intensive and are on a larger scale of production. Taiwanese investment, however, tends to be concentrated mostly in the small business sector. Thus, on average, investments by South Korean firms tend to be larger (see Table 8.1). The investments made from South Korea are by large corporations. HS Corporation, South Korea’s largest athletic shoes producer, for instance, is setting up its first production lines in Indonesia and Thailand with a capacity of 300,000 pairs of shoes a month, equivalent to 12 per cent of the company’s domestic production. Similarly, one of South Korea’s major business groups, Goldstar, has inaugurated joint-venture production facilities in Bangkok and a facility in Manila which was scheduled to come into operation in March 1989. It is said that offshore production of consumer electronics will quadruple, with 15 per cent of US$5 billion in sales by 1991 from about 7 per cent of Goldstar’s US$2.5 billion sales in 1988 (Far Eastern Economic Review, 16 March 1989:88–9). CHALLENGES TO JAPANESE INVESTMENT The data provided illustrates that the combined investment from the Asian NIEs, especially Taiwan, has caught up with Japan’s investment in the ASEAN region. In fact, in the first six months of 1988, the four ANIEs investors pulled marginally ahead, with US$753 million worth of ASEAN investment against US$733 million from Japan (Far Eastern Economic Review, 8 June 1989:59). In the Philippines and Indonesia, Taiwan is far ahead of Japan with Pesos $2,306.4 million (about US$101.1 million) against Pesos $1,995.9 million (about US$93.6 million), and with US$912 million against US$255 million respectively (JETRO Sensor 1989, 11:52). How has such a situation occurred? It is not easy to answer this question with a degree of certainty but the doubts on the medium-term political stability in the Philippines have made Japanese investors delay their action, whereas Taiwanese businessmen tend to work to a shorter time scale in calculating investment returns and therefore have been willing to invest in the country. In Indonesia, meanwhile, the host government needs to step up exports of manufactured goods as a substitute for declining oil exports and therefore it is anxious to encourage manufacturing investment from Taiwan through the ethnic Chinese in the country. The Liem group, for example, the largest Chinese business interest with massive investments in almost all sectors of the economy, relies heavily on foreign management for the technical side of its operations, such as Nihon

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Cement and Taiwan Cement (Robinson 1988). The first step in the change of its policy in the rules governing foreign joint venture investments has been in the manufacturing sector. From December 1988, foreign investors have been allowed to hold a majority stake—up to 85 per cent—in a joint venture formed with an Indonesian partner, whereas previously the maximum permitted foreign shareholding was only 49 per cent. Pt. Indah Kiat Pulp, for example, has entered into a major joint venture to produce pulp with a Taiwanese company, with a total investment of US$848. It is also to be noted that Taiwan is emerging as a centre for medium to high technology ventures which can come close to matching Japanese quality standards with much lower production costs. Japanese companies, however, have traditionally preferred to transfer only proven or well-used technology to overseas production ventures, being reluctant to put their latest know-how to work overseas. This reluctance has exposed Japan to criticism in the past and could become a problem again as more companies and industries go abroad. THE PACIFIC TRIANGULAR RELATIONSHIP: USAJAPANASIAN NIEs An epochal development is now under way in the history of capitalism. From the time of the industrial revolution until quite recently, the bulk of world trade took place between European countries or between Europe and the United States. But the rapidly mounting flows of trade across the Pacific are now redrawing the contours of the world economy. The salient feature of this Pacific trade is the triangular relationship that has emerged among the ANIEs, Japan, and the United States. The essential contents of the Pacific triangular relationship can be set out as follows: 1 Japan has played a mediatory role as a source of capital goods: 2 The US market has provided the role of absorber of ANIEs’ manufacturing exports; 3 The ANIEs have been placed in a peripheral position as a recipient of capital goods from Japan and as a supplier of exports to the United States. Within this triangle of ties, Japanese exports to the ANIEs and the United States have expanded greatly in the 1980s and the ANIEs’ exports to the US market have also been booming. As a result, the ANIEs have benefited both from the enormous appetite of the US market, which

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increased its consumption of their total exports from 19 per cent in 1965 to 35.1 per cent in 1987, and from the supply capacity of Japan which has provided them with capital goods, intermediate goods, and technology. Thanks to this Pacific triangle, the ANIEs have thrived as trading nations. In the 1980–6 period, when world trade was creeping up at an average of only 0.8 per cent each year, they were experiencing trade growth of 8.2 per cent. Their share of world trade has expanded as a result, jumping from 1.5 per cent in 1965 to 7.8 per cent in 1988 (GATT, 1989). Their biggest success has been the growth of their exports, especially to the United States, while importing the bulk of capital goods, intermediate goods, and soft-technology from neighbouring Japan. CAUSES OF COMPETITIVE STRENGTH What is behind the ANIEs’ competitive strength on the world market? MITI’s 1986 White Paper made an attempt to answer this question, but the results were not entirely persuasive. Three factors, the paper argued, have been working in favour of this group of economies since the 1970s. One is their favourable exchange rates for exports; the second is their openness to inflows of foreign capital and technology; the third is the preferential tariff arrangements they have with Japan and other advanced countries. Trends in the exchange rates [of South Korea and Taiwan] have greatly benefited them, especially in terms of the competitiveness of their exports against those of Japan…. The transfer of technology from Japan has combined with direct investment to contribute to increased exports, particularly of electric and electronic products and cars…. Export-oriented direct investment by foreign companies in the third world has been accelerated by the fact that when foreign firms engage in production and export activities in a developing country, they become eligible for the same preferential tariff treatment accorded to local firms…. The systems of general preferential duties of Japan and other advanced countries are thought to have contributed substantially to the expansion of the Asian NICs’ exports. (Tsusho Sangyo Sho, White Paper 1986:275–81) These points are interesting as far as they go, but we should bear in mind that other countries were unable to duplicate the ANIEs’ performance even though the same favourable conditions that MITI

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cited should theoretically have been at work throughout the Third World. In addition to the points made by MITI, we need to consider the setting in which it has taken place. The first point is that South Korea and Taiwan both carried out agricultural reform programmes in the late 1940s and the early 1950s, setting the stage for industrialization by drawing workers from the farm sector (the city economies of Hong Kong and Singapore had only minuscule farm sectors to start out with). Second, from the late 1950s to the mid-1960s, the ANIEs managed to stabilize their currencies to a fair extent and to apply a single exchange rate system to all external transactions. This enabled them to link their markets firmly to the world economy and paved the way for the export-oriented growth policies they subsequently adopted. These policies put them in a position to mesh successfully with the United States and Japan, as those two countries restructured their global economic ties in the 1970s. Hence their emergence as NICs and then ANIEs (since the Toronto Summit meeting held in June, 1988). It can be understood, therefore, that several key internal and external conditions combined to make the ANIEs’ progress possible. Few other developing countries were in a similar position. Furthermore, there are three other general features that some, or all of, the ANIEs have in common. The first is their position sandwiched between the power blocs of the East and the West. With mainland China and North Korea nearby, Taiwan and South Korea in particular have constantly had to deal with political and military tensions. To ensure their survival, their citizens were forced to forego political democracy in favour of economic development. The proximity of communist rivals also encouraged them to embrace farm reform and welcome foreign capital. Second, is their closeness to Japan, which has been a main supplier of second-hand production machinery at a low cost, especially after the first oil crisis of 1973–4 when Japanese businesses had to shift abruptly to energy-saving technologies. As one of the world’s most dynamic economies, Japan’s presence in the region has also benefited ANIEs with the rise of the yen since 1985 resulting in many Japanese companies investing in the ANIEs and relying on them as supply sources. Without Japan’s own evolution toward a more sophisticated economy it is doubtful that the ANIEs could have made so much progress. Third is the peripheral position of the ANIEs in the capitalist world. Relatively small countries, they will not be true superpowers even in the ‘age of the Pacific’, said to be dawning. Their secondary status, however, may actually make it

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easier for them to serve as role models for the non-ANIEs around them, encouraging countries in South-East Asia and even communist neighbours like China, North Korea, and Vietnam to set their own sights on achieving ANIEs status. Whatever the outcome, the broad Asian side of the Pacific region seems undoubtedly set to become a central world actor in the coming century. FACILITATING CAPITAL-EXPORTING As their exports grow, the ANIEs are encountering friction in their trade relations, especially with the United States. In this field, it is notable that thus far South Korea and Taiwan have taken contrasting approaches in responding to the pressure from the US government. South Korea has been reluctant to see its currency, the won, float freely upward, preferring instead to open its domestic market by cutting tariff rates and removing import restrictions. Taiwan, however, has been more inclined to let the New Taiwan dollar appreciate, but it has shied away from radical market-opening steps. This difference in response reflects contrasting domestic interests. The first point to note is that the Taiwanese government is more dependent on tariffs than is the South Korean government. In the 1985– 6 period Taiwan’s central government financed some 16–19 per cent of its general account with revenue from customs duties, compared with only 11–12 per cent for South Korea. At a general level, Taiwan’s tariffs were 10 points higher than those applied by South Korea in 1984 (Federation of Korean Industries, 1985). A further factor is the prominence of big Korean businesses which account for some 70 per cent of Korean exports while the biggest state-controlled and private businesses in Taiwan, by contrast, manufacture only about 35 per cent of Taiwanese exports (see Table 8.7). Heavily dependent on foreign sales for their profits, Korean companies have been throwing their weight behind moves to delay the won’s climb, while their Taiwanese counterparts are more inclined to support continued protection of their domestic markets. Other contrasts in industrial structure separate these two countries. The Korean economy is built around capital-intensive heavy industry and features a number of major conglomerates, the top twelve of which account for almost 25 per cent of GNP; the Taiwanese economy is oriented to labour-intensive light industry and has a vast profusion of small-medium businesses. Whereas small Korean businesses employ 57 per cent of the country’s workers and account for 39 per cent of Korean GNP, their Taiwanese counterparts employ

Sources: The federation of Korean Industries, Korean Economic Yearbook 1987, Seoul, p. 127. Small and Medium Administration, ROC, Taiwan District Small and Medium Business Statistics, December 1986, Taipei, p. 234. Department of Statistics, Report on The Census of Industrial Production 1983, Singapore, December 1984, p. 4. Census and Statistics Department, 1985 Survey of Industrial Production, Hong Kong, 1986.

Table 8.7 Small and medium business’ position in their export markets, by ANIE (1983/1985/1986)

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67 per cent of the work-force and contribute 42 per cent of GNP (1986 figures). Given these structural contrasts, thus far Taiwan and South Korea have taken contrasting approaches in facilitating overseas investment. In response to the sharp rise of the New Taiwan dollar, small and medium businesses have turned to overseas investment in search of cheaper supplies in Thailand and other South-East Asian countries, as well as to China, often through Hong Kong intermediaries. In comparison to this Taiwanese reaction, the Korean conglomerates are tending to invest overseas in the US and other developed countries in order to lessen the impact of any protectionist moves in those areas, as well as in China which is a huge possible market for them. Consequently the growth of overseas investment by ANIEs companies in recent years is a direct result of their currencies appreciating which in turn has been a direct result of US—Japan currency conflict arising from trade frictions. FUTURE PROBLEMS AND PROSPECTS As new capital-exporters, as well as large export-base powers, the ANIEs, and in particular Taiwan and South Korea, have much to do. South Korea, for instance, must foster healthy small businesses and stabilize its farm sector to cope with market-opening pressures; Taiwan needs to deregulate some of its state-run businesses and reform its tax system, partly to lessen dependence on revenue from tariffs. Both countries must change their economic management to downplay export-led growth and contribute more to the international community in areas like the provision of foreign aid as their economies rapidly approach maturity. Excessive dependence on the United States and Japan is another problem for the ANIEs, the other side of which is the comparatively small volume of their trade with each other. Bilateral trade between South Korea and Taiwan has not recorded even 2 per cent of either country’s total exports since 1976. While aiming for greater cooperation among themselves, the ANIEs must make their economies more open. Internal rigidities and corruption must be dealt with as part of the opening process, as must the antidemocratic tendencies of authoritarian systems and pro-business policies. For both Hong Kong and Singapore, currency revaluation is an issue that cannot be avoided. Facing reversion to China in 1997, Hong Kong will also need to implement policies to promote the confidence of its citizens and effectively to persuade more foreign businesses to put down

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roots. Singapore’s concerns should include liberalizing its government, fostering small businesses, and developing co-operative ties with member countries of ASEAN (Associate of South-East Asian Nations). Naturaly Japan cannot afford to stand by passively while the ANIEs grapple with these issues as these countries already buy approximately 19 per cent of all Japan’s exports (1988 figure), a share second only to that of the United States. The appreciation of the ANIEs’ currencies will tend to diminish these exports, but at the same time it may slow the rapid growth of Japan’s imports from the ANIEs and retard the advance of Japanese companies into the ANIEs region. For the sake of smooth development of intraregional ties, Japan should duly strive to stabilize the exchange rates between its currency and those of the ANIEs. Other issues that Japan should tackle include liberalizing its financial markets, internationalizing the yen, and offering free access to the products of the ANIEs. Looking further forward, it should set its sights on the development of a new economic ordering of co-operative regional relations, one in which the people of all countries deal fairly with each other as equals.

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REFERENCES Economic Daily News (1988) Economic Yearbook of the Republic of China, Tapei, Taiwan. Far Eastern Economic Review, various issues, Hong Kong. Federation of Korean Industries (1985) Korean Economic Yearbook, 1985, FKI: Seoul. GATT (General Agreement on Tariffs and Trade) (1989) International Trade, 1988–1989, GATT: Geneva. Hill, H. (1988) Foreign Investment and Industrialization of Indonesia, New York: Oxford University Press. JETRO (1989) JETRO Sensor, vol’s 10 & 11, Tokyo: Nihon Boeki Shinkokai. JETRO, Kaihatsu Mondai Kenkyukai (JETRO Seminar on Development Problems) (ed.) (1989) An Age of Asian Industrial Revolution, Tokyo: JETRO. National Bureau of Statistics (1989) Major Statistics of Korean Economy, Seoul: Economic Planning Board, Republic of Korea. Robinson, R. (1988) Indonesia: The Rise of Capital, North Sydney: Allen & Unwin. Tsusho Sangyo Sho (MITI) (1986) Tsusho Hakusho (White Paper on International Trade), Tokyo: Okuro Sho Insatsu Kyoku. Twu Jaw-Yann (1988) NICs—Kogyoka Ajia o Yomu (The NICs: Examining Industrialized Asia), Tokyo: Kodan Sha Gendai Shinsho.

9

Japanese direct investment and Australian economic development1 David W.Edgington

INTRODUCTION The theme of this chapter concerns the role played by Japanese companies in Australian industry. Specifically, it focuses on the small group of Japanese corporations which have established manufacturing subsidiaries and resource processing plants in Australia during the last twenty years or so. An attempt is made to scrutinize their operations and to assess the implications for Australian economic development. Following on from an overview of current patterns of Australia-Japan trade and investment, two case studies are given. These aim at illustrating certain characteristics of Japanese corporate behaviour in Australia in the 1980s, together with the problems involved in obtaining adequate technology transfer and local economic spin-offs. The chapter finishes with an evaluation of recent proposals from Japan to build a ‘multifunction polis’ in Australia—a technology-based satellite city with resort, leisure, and cultural components. The emphasis here is on examining Japanese direct foreign investment. However, it should be noted at the outset that the importance of Japan to Australia has traditionally been through its role as an export market for Australian agricultural, industrial, and energybased raw materials (for example, wool, iron ore and other mineral ores, coal and, more recently, natural gas). In 1986, Japan’s two-way trade with Australia stood at over 2,000,000 million yen, and this was the third largest trade link for Japan in the industrialized world (Australian Embassy, Japan, 1987). 2 Japan’s interest in developing and exporting Australian resources began in earnest during the early 1960s, consequent upon the rise of Japan’s steel industry, and grew in the energy sector after the oil price increases of the 1970s (Edgington 1984). While Japanese firms have not been significant direct investors in these resource ventures the so–go– sho–sha 173

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and their local offices in Australia played a dominant role in their development—primarily as vehicles for marketing the raw materials to their affiliated steel mills and other end users in Japan (Edgington 1990). As an export market for Japanese manufacturers, Australia ranks sixth. After 1983 Japan comprised the largest importer into Australia (Australian Embassy, Japan, 1987) before falling behind the USA once more following the yen’s revaluation in 1985 (Australian Overseas Information Service 1988). The post-war export successes of Japanese firms in Australia followed soon after their penetration of East and South-East Asian nations in the 1950s. By 1965 Australia rose to be Japan’s third ranking export destination before slipping behind larger or more rapidly growing European and Asian markets in the 1970s (Edgington 1990). Those Japanese manufacturers who captured substantial shares of the Australian market tended over time to establish their own sales distribution channels rather than rely upon either the networks of the so–go– sho–sha or local Australian distributors. Since the 1960s, the Australia-Japan trading relationship has been augmented by a wide range of investments from Japan. Thus while Australia is Japan’s fourth largest trading partner overall, it also ranks fifth among host nations to Japanese overseas investment (Australian Embassy, Japan, 1987). In 1987 Australia attracted US$1.2 billion or 3.7 per cent of all Japanese direct investment overseas. Although this appears small, it ranked equal third place after excluding three large tax-haven countries—Panama, Bahamas, and the Cayman Islands (Ministry for International Trade and Industry 1988). For Australia, Japan became the single largest international investor in 1988, although the majority of its interests lay in portfolio and not in direct investments (Button 1988). In terms of direct capital involved, the major concentration has traditionally been in resource developments—largely coal and iron ore mining. Yet in this sector, apart from the coal liquefaction case study dealt with below, there has been a surprising lack of vertical integration; for example, between Japanese steel mills and energy utilities on the one hand and Australian mines on the other—especially considering Japan’s high level of dependency upon Australian supplies (McKern 1976). Rather, loans and small amounts of equity in the projects by the sogo shosha, together with long-term contracts by end users, have effectively substituted for vertical integration as a means of safeguarding access to Australian supplies and Japanese markets. Japanese manufacturers, by contrast, were faced with Australian

Figure 9.1 Japanese direct investment in Australia by industry type—cumulative totals from 1951/2 to 1982/3 and 1987/8 (US$ value, percentage of total) Source: Derived from data contained in Australia-Japan Economic Institute (1983, 1988). Note: Cumulative total investment in 1982/3 amounted to US$ 2,867 million and in 1987/8 amounted to US$ 5,724 million.

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government industry protection policy, leading certain firms to eventually establish local production operations behind an Australian ‘tariff wall’. For instance, in the case of the car industry the Australian federal government’s automobile plan—which included tariff protection of over 50 per cent and a 85 per cent minimum local component regulation—stimulated both Toyota and Nissan to move beyond simple assembly operations and invest substantial amounts of capital into new engine plants during the 1970s, predating similar investments in the USA by a whole decade. Federal government policies towards the electronics industry also led to some investment at this time by Japanese manufacturers of telecommunications and consumer products (for example, NEC and Sanyo) (Edgington 1990). Following deregulation in the banking and finance sector in 1984, Japanese financial services corporations made major investments and have now built up a significant platform in Australia (Edgington 1990). Since 1985, when there was both a sharp revaluation of the yen (endaka) and a devaluation of the Australian dollar, Japanese business activity shifted into a new phase. The type of Japanese companies investing in Australia has now changed and the bulk of direct Japanese capital is currently (early 1989) going into the financial services sector, as well as the real estate and construction, resort development, and tourism industries (Australia-Japan Economic Institute 1988). Figure 9.1 indicates the major shifts by category of investment between 1982/ 3 and 1987/8. At a broad-scale level, the share of raw materials and manufacturing in total Japanese investment slipped from 43.7 per cent and 25.9 per cent in 1982/3, down to 28.9 per cent and 20.6 per cent, respectively, by 1987/8. For Australia this represents a major reorientation of Japanese interests away from mining and manufacturing into the services sector—which in turn reflects the recent global change in emphasis for Japanese investment away from manufacturing and trade-related activities towards finance, insurance, and real estate. These trends stand, however, in sharp contrast to official Australian government policy regarding the areas seen as desirable for new trade and investment with Japan, mainly in high technology sectors. In 1986 the federal government established the Australian Committee for Industrial and Technical Cooperation (AUSCITEC) with a charter to facilitate co-operation between Australian and Japanese firms in areas such as joint production ventures, technology agreements, and joint marketing operations. Target industries included biotechnology, computer software, processing of wool, food and minerals,

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telecommunications, textiles and automobile components (Japan Secretariat 1986). This was in line with a greater priority placed by the government on achieving industrial restructuring and a diversification of the economy away from low value-added commodity exports. While both sides have exchanged investment missions, progress in the three years up to 1989 has been slow. To date, Australia has largely missed out on the upsurge of Japanese investment abroad in manufacturing, made necessary by the high value of the yen. In 1987, for example, Australia could only attract about US$30 million in this sector, or about 1 per cent of total annual Japanese overseas manufacturing investment (The Age [Melbourne], 15 June 1988). Current government-to-government negotiations regarding manufacturing investment and technology transfer are dominated by discussions over the proposed ‘multifunction polis’ project. As explained more fully below, there is a need to ensure that Japanese overtures for establishing an international research and cultural complex in Australia are compatible with the country’s overall plan to foster economic development. Whether this can be achieved or not depends in part on the local activities of incoming Japanese firms and how their Australian operations fit within their wider global planning. The following sections of this chapter develop this theme by using case studies which reveal characteristics of Japanese investment in the Australian resources and manufacturing sectors during the 1980s. The emphasis is on exploring Japanese corporate strategies, their interactions with local companies and labour force, and whether or not this has brought benefits to the host country. THE MORWELL BROWN COAL LIQUEFACTION PILOT PROJECT The first case study concerns investment by a Japanese consortium, Nippon Brown Coal Liquefaction Ltd (NBCL), in a coal-to-oil liquefaction pilot plant in Victoria in 1981. A serious matter of contention regarding this and other Japanese investments in Australian resources is the degree to which government policy has been able to ensure long-term sustainable benefits from the participation of Japanese interests. To begin with, it should be noted that federal government controls exist in the resources sector, both over minimum Australian equity requirements and export pricing mechanisms. Together, they could be expected to have assisted Australian economic development through, for example, encouraging the local processing

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of resources—a strategy which would increase the added value of exports, and hence taxation income and local economic spin-offs. Yet while both Japan and Australia have initiated joint studies into this issue (Australia/Japan Joint Study Group on Raw Materials Processing 1980a, 1980b) the fact remains that, apart from nickel and aluminium, a large proportion of raw materials leave Australia for Japan completely unprocessed. This includes about 80 per cent of wool, as well as the bulk of Australia’s timber and mineral products (Edgington 1987a:351). Japanese companies appear little interested in value-added production in the Australian resources industries, mainly because the use of raw materials has been decied in Japan to meet specifically Japanese development requirements. Another major issue in this sector emerged in 1983, concerning the nation-wide need to ensure adequate participation by Australian consulting engineering firms and component-suppliers in resourcerelated projects. In the early 1980s it was estimated that A$7,500 million of resource projects were being constructed, of which some 85 per cent were managed by overseas firms, including Japanese (see comments by D.A.Sprigge, Director, Association of Consulting Engineers, Australia, in Australian Financial Review, 24 November 1983). A danger was seen to lie in foreign-controlled prime contractors directing the majority of sub-contracts for plant equipment to associated companies overseas rather than to Australian industry. Consequently, Australian engineers’ and metal workers’ unions campaigned to ensure that large foreign-dominated development projects used local technology and manufactured goods. Pressure was then put on the federal government to ensure maximum local content in major resource projects, such as large-scale electric power generators and off-shore gas ventures (Australian Financial Review, 16 April 1985). The issues concerned are illustrated clearly by the Morwell coal-tooil liquefaction plant project. This was initiated in 1979 at the height of the so-called ‘second oil shock’ in Japan and led the governments of Japan, Australia, and the State of Victoria to agree to construct a pilot plant for testing coal liquefaction technology using the brown coal deposits at Morwell, Victoria. At the time it was widely lauded as an important step towards developing value-added industries based on Australian energy resources (see Edgington 1987b). From the Japanese side a decision to invest A$400 million in this alternative energy project was made by the NBCL consortium (which included the trading company Nissho Iwai, Mitsubishi Chemicals, and Kobe Steel), using funds provided in part by Japan’s Ministry for

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International Trade and Industry (MITI). The prime contractor and construction manager was American-based Davy McKee Pty. Ltd. Although work demarcation rules forbade much direct work being carried out by non-union labour on the site, the Australian Metal Workers Union (then known as the AMFSU) raised objections in 1982 to the very small amount of Australian design and manufacturing content in Stage 1 of the construction phase. It was originally envisaged that A$53 million of the estimated A$110 million construction costs would be spent in Australia and A$32 million in the Morwell area (located in the La Trobe Valley, Victoria), albeit mainly involving low value site works. However, of the technology-intensive specialized machinery and equipment for Stage 1 about 70 per cent was sourced from Japan, and US technology and equipment figured largely in the remaining 30 per cent (Australian Financial Review, 14 July 1982). Not surprisingly, a review of Stage 1 led local industry and the metal workers’ union to believe they had not been provided with reasonable opportunities to participate in the project (Metal Trades Unions 1984:138–40). From its side, however, Davy McKee claimed that 60 per cent of plant investments were in Australian dollars, 50 per cent of which were devoted to metal trades work. Davy McKee also claimed that over 800 Australian designers and engineers and some 3,000 construction workers were employed during the project period (see comments by P.C.Coates, Managing Director of Davy McKee, The Age, 1 June 1985). Nevertheless, more local work for Australian industry was promised by the American construction manager for Stage 2 of the project. But, contrary to the undertakings given, it was discovered by the union that the operating units produced for the Morwell plant (mainly large pressure vessels) would be assembled in Japan at Kobe and shipped to Victoria in modular form—that is, involving maximum prefabrication outside of Australia. A key supplier of plant equipment was Kobe Steel, one of the NBCL consortium members and tied to Nissho Iwai due to common membership of the Dai-ichi Kangyo Bank (DKB) industrial group (keiretsu) (interview with Mr H.Yamamura, Kobe Steel, Melbourne, June 1985; Japan Economic Journal, 11 June 1985). It was reported that ‘even the paint on the hand rails was imported’ (The Age, 5 March 1985). There was naturally a concern that this method would mean that local designers and metal workers would obtain less work on Stage 2 than was the case on Stage 1. The AMFSU first discovered this situation at a joint Australian study mission to Japan in May, 1984, undertaken to investigate the

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allocation of metal trades work on Stage 2 of the Morwell plant (information obtained at an interview with Jim O’Neill, Victorian State Organizer, AMFSU, Melbourne, June 1985). On the study tour the Japanese position was explained as follows: because the pilot plant was still at a research and development stage, and because of time constraints, the large portion of the metal fabrication had to be done in Japan and shipped to Australia in modular form for erection on site. In opposition to this view, the union argued that Australian companies had an equal capacity and expertise to fabricate most of the required components at Morwell, including the welding of pressure vessels, structural steel, and pipework. Moreover, the proposed modular system would needlessly centralize design, fabrication, subassembly, and expertise in Japan. Greater flexibility over manufacturing, it was argued, could satisfy both the Japanese scheduling concerns as well as achieving higher local content and a more substantial and meaningful local labour component than was originally foreseen by NBCL. Stage 2 of the construction phase was consequently suspended by work bans, due to intervention by the AMFSU, in order to achieve higher local manufacturing content. Of particular significance was a union commitment made in negotiations to have all stainless steel and chrome alloy pipes for the project fabricated in Australia. The union work bans on Stage 2 were finally lifted by the union in May 1985 after an extra A$6 million work was negotiated with Davy McKee for local firms (involving the fabrication of pumps etc). The AMFSU also successfully negotiated for a 16-person team of metal and electrical tradesmen and engineers to be sent to Japan at NBCL’s expense so that new technology involved in coal liquefaction would be transferred to Australia (The Age, 21 December 1984). The experience of the metal workers’ union at the Japanese-controlled NBCL project provides important insights into the corporate strategies of the companies involved: namely, that the design and production decisions were concentrated as far as possible in Japan and were geared to meet Japanese development requirements. In the absence of any specific agreements ensuring Australian participation, local manufacturers were left to compete for the project’s low value-added site works rather than any major design or technology elements. This case study also brings to the fore the inter-firm obligations of Japan’s large industrial groups (keiretsu). Should the technical and commercial feasibility of this pilot process be later proven, federal government provision has been made, by agreement, to allow for local Australian equity in any further stages

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of production. However, MITI and the Japanese consortium have argued that as they had provided the full A$400 million for the pilot plant then they should also have full rights to any new technology emerging from it. The only concession to the Australian government has been that Australian companies could have access to the technology developed, but by licence and on full commercial terms (Treasurer 1981)—in other words the same conditions as for firms in other nations who had contributed nothing. Essentially then, even if the project were to develop commercially, without further guarantees there is still a danger that Australian companies may be locked out of the technology necessary for creating new and allied industries based on synthetic fuels. It has also been argued that the Japanese consortium began their pilot plant with no more basic knowledge of coal conversion technology than could be found in the combined research skills of Australian universities, government research institutes, and major resource companies (The Age, 26 November 1985). In other words, it was a plant that with sufficient government support might just as easily have been built with Australian funds as a national venture to establish world leadership in the technology of converting brown coal to liquid fuels. On its part, however, NBCL has argued that local Australian coal liquefaction research is not strictly compatible with the equivalent Japanese technology. Moreover, the Japanese side strongly doubted the commitment of Australian companies to invest in the production stage should this prove feasible (interview with Nissho Iwai Director, Jack Owen-Smith, Melbourne, September 1987). Nevertheless, the implication exists that an upgraded Australian R&D programme is necessary—involving local universities and colleges, industry and government—to identify the best prospects for an Australian synthetic fuels industry, based on Morwell brown coal, and its development in a way which maximizes local economic spin-offs. JAPANESE MANUFACTURING SUBSIDIARIES AND THEIR CORPORATE STRATEGIES This second case study reports on a survey, carried out by the author during 1983–4, of Japanese-controlled subsidiaries involved in secondary production (reported in full in Edgington 1990). The Japanese firms in question had all established in Australia in order to manufacture, initially, for the local market. In theory, this type of import substitution investment is supposed to benefit the host country

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by manufacturing locally what was previously imported, thereby saving foreign exchange and creating jobs. There is also the expectation, at least from the host country side, that the local subsidiary will engage in technology transfer and may, over time, develop local products which are suitable for export markets. Evidence to test these propositions were collected from twenty-one firms, representing about 95 per cent of total employment in Japanese-controlled subsidiaries in 1983. The investigation focused on each company’s levels of imports, exports, R&D, and innovations. Imports Firms surveyed were asked to present data concerning their patterns of purchases from both domestic and overseas sources. The responses indicated that Japanese companies had high levels of imports of both components and also finished products for resale. For example, thirteen firms (61.9 per cent) reported that a quarter or more of their required components or materials (that is, value of inputs to production less labour and overheads) were supplied directly from their parent company in Japan, and nine firms (42.9 per cent) replied that one-half or more came from the Japanese parent corporation. In fact, thirteen out of the twenty-one firms nominated their parent company as their number one supplier of components. The nonlocal economic multipliers from such a high rate of imports are considerable and resulted in a leakage of ‘growth impulses’ from Australia back to Japan. Even more important was the very high percentage of imported finished goods reported as a proportion of local sales. Two-thirds of respondents imported more than 25 per cent of their turnover and, conversely, they manufactured less than 75 per cent of their total sales within Australia. Most importing for resale was undertaken to maintain a full line of equipment and to maximize world sales in order to reduce marginal costs in the Japanese parent company’s plant. Not only did the firms import from their parent company back in Japan, but final products and components also come from affiliated companies in other countries of the Western Pacific. One electronics firm involved in local Australian production (Matsushita Electronics) exhibited an unusually high degree of integrated production; besides sourcing 60 per cent of its components from Japan it was involved in cross hauling 20 per cent of its component requirements and 8 per cent of its final sales volumes from subsidiaries in Malaysia, Singapore, and Taiwan.

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A limited comparison between the behaviour of the Japanese firms and those from different countries was available in two major industries where Japanese manufacturing had concentrated. In the car industry an Australian Council of Trade Unions (ACTU) report drew attention to the fact that in 1982 the local subsidiaries of Ford and General Motors produced over 90 per cent of their total sales in Australia (including light and heavy commercial vehicles), while the three Japanese companies (Toyota, Nissan, and Mitsubishi Motors) produced an average of only 52 per cent of their sales locally (Australian Council of Trade Unions 1983). Toyota in particular imported more than half of its total sales in Australia, and a large proportion of Toyota’s total local investment was directed to its three automobile import and distribution operations, rather than its manufacturing subsidiaries. The ACTU report also indicated a much higher investment per vehicle by General Motors Holden (GMH) and Ford than any of the three Japanese producers, especially in local tool design and building, and local product design and testing. Taken together the above figures indicate that the Japanese car makers in general, and Nissan and Toyota in particular, have been importers and assemblers in Australia rather than full manufacturers. In many ways this reflects a corporate policy common to many Japanese companies—at least up until endaka in 1985—of keeping manufacturing at home wherever possible. It also illustrates the reluctance of Japanese corporations to invest in areas such as Australian motor vehicle components, which in general are not strongly competitive on an international level. Both Ford and General Motors, on the other hand, have undertaken extremely high levels of local manufacturing and, according to the ACTU report, accounted for 72 per cent of the industry’s employment in 1982 with only 45 per cent of the industry’s sales during that year. In the case of another major industry, colour TV production, five out of six local producers in the mid-1980s were wholly or partially owned by Japanese corporations. Prior to the entry of Japanese firms into the Australian market in the early 1970s, local production of TV receivers involved fully integrated manufacturing. Most components were supplied from local sources and the firms with the least Japanese involvement—Australian Wireless Associated (AWA) and Philips Industries—were at that time the largest producers of components. After the introduction of colour TV transmission in 1974 and the arrival of four Japanese producers (Matsushita, Sanyo, Sharp, and NEC), the bulk of components were imported for local assembly. Due to the lack of any local content regulations in this industry, the TV cabinet was the

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only major item locally produced by the Japanese subsidiaries. It is significant that, at the time of the survey, the only manufacturer using local electronic components at all was the subsidiary of Philips Industries, which had no Japanese equity. Exports The Japanese subsidiaries included in the survey generally operated as extensions of their parent firm. As may be expected, their target was the local Australian market and they were found overall to be poor exporters. Thus over 20 per cent stated that they did not engage in any exports at all, and a further 40 per cent exported less than 1 per cent of total sales. Only two firms reported exports greater than 5 per cent of total sales. Furthermore, 6 out of the 16 firms which did record some level of exports were tied to exporting their products back to their parent company in Japan or to a subsidiary elsewhere; two cases in point concern Mitsubishi Motors’ exports of cars to an affiliate in England, and Nissan’s export of aluminium castings to its parent firm in Japan. That left just ten firms which could be said to be legitimately attempting to penetrate export markets. Out of the 21 firms 9 also responded that they were subject to export restrictions imposed by the parent company, usually restricting their ‘territory’ to New Zealand, Papua New Guinea, and the Pacific Islands, rather than the lucrative and dynamic economies of the Western Pacific. Due to lack of comparative data, it is not possible to systematically compare these Japanese firms either with subsidiaries of other countries or with the behaviour of similar domestic companies. However, the overall lacklustre performance of all firms operating in Australia with regard to the export of manufactured goods has been noted by the Australian Department of Trade, which found that of 2,643 companies with financial or other links with overseas corporations, 408 (15.4 per cent) were subject to some kind of export restraint (Trade Development Council 1983). It would appear, therefore, that a significant lack of exports reflects, in part, the domination of Australian manufacturing by overseas corporate strategies in a general sense, rather than any characteristics of Japanese corporations per se. One significant exception, which compared favourably with Japanese firms in the colour TV industry, was the Dutch-controlled firm Philips. Not only did they export colour TV receivers from Australia during this period, but they also won a contract with the global parent corporation to develop a TV

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receiver chassis. This was to produced for international distribution using Australian experience gained from producing for the Australian and overseas markets (personal communication with Mr L.Atkinson, Divisional Manager, Philips Industries Australia, Clayton). In the car industry, Japanese firms (Toyota and Nissan) responded to the federal government’s export facilitation scheme by building aluminium casting plants in the early 1980s to produce automobile parts for exports. But unlike the export of car engines (as carried out from Australia by General Motors Holden) this was considered unlikely to contribute much towards any national strategy for exporting design and skill-intensive products to the growing Pacific economies. Toyota, for example, had actually duplicated its local aluminium casting plant in Canada, another Pacific country to which it exports many vehicles (The Age, 17 February 1983). Apart from restrictions imposed by their parent corporations, Japanese manufacturers often mentioned the high costs of production and lack of economies of scale as reasons why exports were not promoted from their Australian base. Brash found similar responses in his Australian survey of US-based subsidiaries (Brash 1966). At the time of his survey, however (the early 1960s), both GMH and Chrysler were exporting significant numbers of completely built-up car units from Australia, although these declined in the 1970s. R&D and innovation Many reports have shown that Australia’s private expenditure on R&D for manufacturing applications is extremely modest (Industries Assistance Commission 1982). Not surprisingly this was reflected in the results from the survey of Japanese companies, who were asked to state what percentage of sales and staff were accounted for by R&D work designed to produce new or improved products or processes. Of the 21 firms, 15 (71.4 per cent) stated that nil expenditure was set aside for this purpose, and 10 firms (47.6 per cent) said no employees were currently engaged on R&D work, even in the area of adapting imported technology to the requirements of the local environment. The general picture that emerged from the survey suggested that hardly any basic research was being conducted in Australia by the Japanese firms up until the mid-1980s. On the other hand, there was a small effort recorded in the field of product development (for example Toyota’s aluminium casting foundry) and local adaptation (for example at NEC’s local telecommunication production facility, which was

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closely tied to the special purchasing requirements of Telecom Australia). While there was no clear indication that the Japanese firms conducted any less research locally than either the US- or Britishcontrolled subsidiaries, Brash found that in the 1960s some wholly owned American firms received specific encouragement from their parent companies to engage in original product development (Brash 1966:151). Thus GMH and Ford for example, have been recognized in Australia for the quality of their localized design and development work in the car industry, although the Ford Falcon was the only fully designed car left in this country by the mid-1980s (Dix 1985). In the colour TV industry, the long-established local manufacturers (Philips and AWA-Thorn) were reported to have larger R&D and engineering facilities than the newly arrived Japanese firms (Industries Assistance Commission 1984:41). The existing level of general autonomy of the local subsidiary which would allow it to innovate, that is develop new products and new markets, was also ascertained by the survey. In brief, the responses indicated that whilst there was a relatively high level of local autonomy for routine operational decision making (for example, in shipping, personnel, and certain management services), this stood in stark contrast to the controls imposed by the Japanese head office over new products, markets, and technical services. Only about one-third of the firms surveyed were able to act without direction from Japan in these areas. These results, in their entirety, suggest that a serious level of industrial ‘truncation’ exists in the Japanese operations. This occurs when a subsidiary does not carry out all the functions—from original research to marketing—necessary for developing products and selling its goods in world markets, as one or more of these important functions is carried out by the foreign parent firm (see Britton and Gilmour 1978). The analysis indicated that in the case of Japanese manufacturing subsidiaries, not only was R&D in the hands of the parent company, but in the majority of cases decision making about new products, new markets, and the provision of technical services was undertaken by or with the Japanese parent, rather than independently by the local subsidiary. Of course, Japanese firms have not been alone in this regard; truncation in the Australian economy occurs in a more general way due to the behaviour of all foreignbased companies in allocating roles to their Australian subsidiaries in the light of the world-wide strategies of their parent corporations. This has serious implications not only for the innovativeness of the local Australian subsidiary, but it also reduces the number of jobs the

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firm can offer locally and restricts the range of skills required (see Britton and Gilmour 1978). This case study of Japanese manufacturing subsidiaries indicates that the primary reason for Japanese manufacturing investment in Australia—at least up to the mid-1980s—was defensive: the preservation or extension of their market share in particular sectors (for example in automobiles and colour TVs) in the face of actual or potential trade barriers. In the absence of such barriers—especially non-tariff barriers such as local content plans—most Japanese firms were perfectly able to compete in the Australian market by exporting from Japan. Moreover, where local content regulations did not apply, Japanese firms brought with them a distinctive technology which led to a very high level of imports from their parent-company. While it is true that Japanese car producers have acted as intermediaries for transplanting industrial technology from Japan to Australia, most Japanese-controlled firms were found to have a low interaction with the Australian economy. The ‘growth impulses’ theoretically associated with the import substitution type of production were here found to be relatively weak. The local subsidiary was in effect acting as an extension of the parent company’s export drive. As the Australian subsidiaries surveyed by the author had to import large amounts of parts, equipment, research, design, and technical services, then, as production grew, it was Japan that tended to benefit most. Although a rigorous comparison between different home countries of multinational corporation (MNC) performance in this regard is still lacking, this study suggested that Japanese subsidiaries appear overall to have little or no mandate to either innovate, or market their products in a way that might reduce the concentration of strategic design functions and decision making in their parent company. In this sense, although the presence of Japanese companies has been limited to only certain areas, their behaviour has almost certainly contributed to Australian industrial dependence. It is possible that with the particularly heavy fall in the value of the Australian dollar against the yen after 1985, Japanese firms may find it to their advantage to increase the manufacture of components and products in Australia. This is already occurring in the case of the export of aluminium cylinder heads and vehicles by Mitsubishi Motors (Australia) to its Japanese parent company (Australian Financial Review, 14 April 1987; Japan Economic Journal, 23 May 1987). Likewise, Japanese companies which export electrical goods and machinery to Australia, such as NEC and Fujitsu, have found it preferable to move to increased local production in view of recent

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currency realignments (Japan Economic Journal, 21 December 1985; The Age, 17 November 1987). Nevertheless, there appears to be a continuing implicit Japanese corporate strategy to keep the higher paying, higher value-added jobs in Japan. A further example concerns Nissan, which currently shares its technology in Australia with General Motors Holden through the medium of cross-production arrangements for a new four cylinder car, the Holden Astra. Here, the high value-added design work, is carried out in Japan, while GMH’s participation is confined to the production of panel components (Australian Financial Review, 21 December 1983). MULTIFUNCTION POLIS IN AUSTRALIA The two case studies described above illustrated certain characteristics of Japanese investments carried out or planned during the 1970s and early 1980s. Since 1982, Japan’s interest in Australian resources has waned following the decline in world oil prices. In the manufacturing sector, much of Japan’s overseas investment has been channelled to either the United States, East and South-East Asia, or to Western Europe. The decade has seen stagnant or declining Japanese investment in Australian industry, suggesting that Japanese companies could see limited opportunities, either for further growth in the relatively small Australian domestic market or for using Australia as a manufacturing base for the wider Pacific region. Moreover, in more recent years, and certainly since endaka in 1985, Japanese companies have been willing to invest parts of their research activities overseas to certain advanced western countries; however, in Australia’s case, while there are considered to be pockets of local research excellence (such as medical biotechnology and software development) its overall industrial base has, to date, been perceived by many Japanese companies to be ‘too thin’ for large-scale investment of this type (Japan Overseas Enterprises Association 1987). There has also been little evidence to suggest that Australia’s particular interests and concerns over the need to broaden its economic base figure prominently in Japan’s priorities and perceptions. With this background it was somewhat surprising to most commentators when a proposal for building a ‘multifunction polis’ (MFP) was announced by the Japanese Minister for International Trade and Industry (MITI) at a Japan-Australia Ministerial Committee meeting in January 1987 (see comments by Senator John Button, Australian Minister for Industry, Technology and Commerce, in Button 1988:1).

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The MFP concept involves the establishment of a ‘21st century’ complex in Australia as a focus for international, scientific, technological, and cultural activities. In Australia this proposal is seen as ‘the most significant development in Australia-Japan relations for four decades’ (Button 1988:2). A full feasibility study is currently (early-1989) underway by both governments to establish the technical and commercial conditions necessary for the project’s success. Nothing of its kind has hitherto been attempted, and if it proceeds it is likely to be the single most significant overseas Japanese investment in the research and technology sector. More specifically, MFP (or ‘polis’ as it is also known in Australia) is envisaged by the Japanese as a ‘city of the future’; one which serves as a forum for international interchange of technology, leisure, and culture within the Pacific area (see Australian Planner 1989). The genesis of this initiative can be traced to a 1986 MITI report entitled An Outlook for Japan’s Industrial Society towards the 21st Century (Ministry for International Trade and Industry 1986). This document foreshadowed the promotion of an international flow of people, cultural exchange, and industrial collaboration from Japan: the ‘polis’ proposal is seen by MITI as one option in effecting these plans. Besides being a centre for science and technology there would also be in ‘polis’ a focus on the newer ‘hi-touch’ or human service based industries such as education, medicine, conventions, and resort development. The city itself would serve as a model for new industries, infrastructure, and life-styles for the future. The aim of ‘polis’ therefore is to blend high technology research and product development into a comfortable living environment having an emphasis on cultural and leisure pursuits (Ministry for International Trade and Industry 1987). Upon closer examination it appears that, from a Japanese perspective, the ‘international’ focus envisaged for the MFP is the key to its success (interview with H.Tezuka, Industrial Policy Bureau, MITI, Tokyo, April 1988). MITI has taken the view that Japan is now at the forefront of many technologies and must therefore shift its emphasis from adoption and imitation to a focus on cutting-edge research. Accordingly, it will increasingly need to develop original, creative technologies in knowledge-intensive high value-added industries if it is going to compete in the future with the United States, Europe, and the Asian NIEs. Faced with this need to develop new innovative technologies for products and processes, MITI has decided that western original research—particularly from the United States—could be integrated with Japanese skills in product development (Tatsuno 1986:45), and that both functions could ideally

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occur at an attractive but ‘neutral’ location in a third country. The MFP in Australia is a mechanism in that process as MITI considers that the recent spate of ‘Japan-bashing’ in America precludes a MFP there; it has consequently looked to Australia as a secure offshore location for working with other scientifically advanced nations. Australia is also seen as an ideal test environment for exposing its nationals to western culture and life-style (Button 1988:4). Both countries have accepted that the viability of the MFP must be determined by private sector investment and support, and that it must be consciously cosmopolitan in flavour, rather than bi-national. The project, should it go ahead, is to be developed therefore with a broad international focus, preferably involving large corporations from the US and Western Europe. In Australia, most commentators have welcomed the potential of the MFP for positive spin-offs to the local business community, mainly through technology transfer opportunities via joint ventures and other co-operative arrangements (see, for example, Bailey 1988). However, critics of the MFP have pointed out that the impact of increased levels of foreign ownership in Australia, through the ‘polis’ proposal, must also be considered (Mandeville and Lamberton 1988a:4). Thus it has been noted that while MITI often encourages pre-competitive collaborative research on national strategic grounds, most R&D in Japan takes place inside individual private companies (Yencken 1989:27). This is important, as to date there has been little commercial incentive for Japanese companies to share their product development work or research findings with other national enterprises—let alone Australian firms—except on their own terms. Moreover, it has been shown that Japanese joint ventures in America in the 1980s have led to unequal arrangements, in which the Japanese side has been unwilling to let go any of the higher paying, higher value-added activities from Japan (Reich and Mankin 1986)—a finding which mirrors that of the Australian case studies described earlier. It is quite feasible then, that without special safeguards Japanese investors may move into ‘polis’-associated technology ventures in which key components are excluded from the Australian economy generally. Given the fact that Australia is backward in the entrepreneurial, legal, and management skills needed for joint R&D ventures—from scientific discovery to full commercial application— there is a realistic fear that ‘polis’ joint research ventures could lead to a loss of Australian intellectual property for little commercial advantage (Yencken 1989:33). In this regard, Mandeville and Lamberton (1988b:44) have suggested the concept of government-

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approved ‘special technology ventures’ which combine Japanese, Australian, and other western partners, as a precondition for ‘polis’ membership, access to facilities, and other ‘polis’ incentives. This could possibly be done by code of conduct and by rigorous monitoring (Yencken 1989:35). CONCLUSIONS The future envisaged for the Australian manufacturing sector by the federal government is one leading towards highly efficient and exportoriented secondary and raw materials processing industries (Australian Manufacturing Council 1986). In this context, Australia must look in part for increased access to technologically advanced products and processes from overseas. Japan and its corporations have the potential to be a significant source of such technology. However, as the case studies included in this chapter show, Japan’s performance in the transfer of technology and economic spin-offs for local firms has, to date, been disappointing. From the early 1970s Australia received a wave of Japanese investment based on import substituting manufacturing (mainly automobiles and some electronics). Then, following the ‘oil shock’ of that decade, investment from Japan switched to energy resource developments and raw materials processing. Currently, it is the service sector—finance, real estate, and tourist projects—which forms the focus of Japanese corporate activity in Australia.3 The next round of investment from Japan, possibly associated with ‘multifunction polis’, may provide the Australian economy with the high technology base necessary to help its integration into the dynamic Asian-Pacific economy. It is clear that Australia must not be left behind in the move towards greater international co-operation, given increasing worldwide trends in this direction. Potentially, MFP has value in internationalizing Australian research, stimulating the restructuring of Australian industry away from an excessive reliance on commodities, and better positioning the country in the Pacific Rim to create a competitive advantage across a range of knowledgeintensive activities. Australia’s best response to the ‘polis’ initiative may therefore be one of publicly accepting Japan’s offer in good faith and taking advantage of whatever benefits it might offer, but, at the same time, being extremely vigilant in protecting its industrial and research interests. What is required is a broad strategy for technological co-operation with Japan and other countries, focusing

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on those industries that complement Australia’s comparative or geographic advantages. The Australian government must then explicitly negotiate mechanisms to ensure protection of Australian intellectual property and to ensure full participation by local firms— not only in the science and technology functions of ‘polis’, but also in its design and construction stages. NOTES 1 2 3

Certain parts of this chapter have previously appeared in Pacific Affairs, Spring, 1991. Australia has consistently achieved small trade surpluses with Japan in the 1980s. In 1987–8 this trade surplus amounted to A$2.1 billion (Australian Overseas Information Service 1988). Of the A$25,000 million of proposals by the federal government’s Foreign Investment Review Board in 1987–8, A$5,400 million was from Japanese investors. Of the total amount (that is, from all countries), the services and tourism sectors totalled A$l,800 million and the largest component— A$3,100 million was real estate (Jacobs 1989).

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REFERENCES Australia-Japan Economic Institute (1983) Japanese Business Activity in Australia, Sydney: AJEI. ——(1988) Newsletter 9 (3), July/August. Australia/Japan Joint Study Group on Raw Materials Processing (1980a) Australian and Japanese Aluminium Smelting Industries, Future Development and Relationship, Canberra: Australian Government Publishing Service. ——(1980b) Australian and Japanese Woodpulp Industries, Canberra: Australian Government Publishing Service. Australian Council of Trade Unions (1983) Submission Concerning the Car Industry to Members of the Parliamentary Labour Party, Melbourne (mimeo). Australian Embassy, Japan (1987) Statistical Pad, Tokyo (mimeo). Australian Manufacturing Council (1986) Future Directions for Australian Manufacturing Industry, Canberra: Australian Government Publishing Service. Australian Overseas Information Service (1988) Japanese Fact Sheet, no. 25, Canberra: A015. Australian Planner (1989) Special edition: ‘The multi-function polis, Australia’s newest new city proposal’, 27 (2), July. Bailey, W. (1988) Speech, Multifunction Polis Forum, Melbourne (mimeo). Brash, D.T. (1966) American Investment in Australian Industry, Canberra: Australian National University Press. Britton, J.N.W. and Gilmour J.M. (1978) The Weakest Link: A Technological Perspective on Canadian Industrial Development, Ottawa: Science Council of Canada. Button, J. (1988) Speech, Multifunction Polis Forum, Melbourne (mimeo). Dix, W.L. (1985) The Australian Car and its Future, Centre of Policy Studies, Monash University, Clayton, Victoria (mimeo). Edgington, D.W. (1984) Australia-Japan Bilateral Trade and Investment: Retrospect and Prospect, WP1, Clayton, Victoria: Japanese Studies Centre. ——(1987a) ‘Influences on the location and behavior of transnational corporations: some examples taken from Japanese investment in Australia’, Geoforum 18, 343–59. ——(1987b) A Short History of the Brown Coal Liquefaction Plant at Morwell, Victoria, WP10, Clayton, Victoria: Japanese Studies Centre. ——(1990) Japanese Business Down Under: Patterns of Japanese Investment in Australia, London: Routledge. Industries Assistance Commission (1982) Certain Budgetary Assistance to Industry, Canberra: Australian Government Publishing Service. ——(1984) Report on Certain Consumer Electronic Equipment and Components, Canberra: Australia Government Publishing Service. Jacobs, D.H. (1989) Japan’s Direct Investment in Australia, Sydney: AustraliaJapan Economic Institute (mimeo). Japan Overseas Enterprises Association (1987) The Australian Investment Environment, Tokyo: JOEA. Japan Secretariat (1986) Technological Cooperation Between Australia and Japan: Institutional Aspects, Canberra: Department of Foreign Affairs.

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McKern, R.B. (1976) Multinational Enterprise and Natural Resources, Sydney: McGraw-Hill. Mandeville, T. and Lamberton, D.M. (1988a) The Multifunction Polis, Inventing an Institution, Supporting Material, Information Research Unit, Department of Economics, University of Queensland (mimeo). ——(1988b) The Multifunction Polis, Inventing an Institution, Basic Concept, Information Research Unit, Department of Economics, University of Queensland (mimeo). Metal Trades Unions (1984) Policy for Industrial Development and More Jobs, Melbourne: Metal Trades Unions. Ministry for International Trade and Industry (1986) An Outlook for Japan’s Industrial Society towards the 21st Century, Tokyo: Industrial StructureCouncil, MITI . ——(1987) A Multifunction Polis Scheme for the 21st Century, MFP Planning Committee, MITI (mimeo). ——(1988) ‘Japan’s foreign direct investment in FY 1987, foreign direct investment in Japan in FY 1987’, News from MITI, NR-356 (88–04), Tokyo: MITI. Reich, R.B. and Mankin, E.D. (1986) ‘Joint ventures with Japan give away our future’, Harvard Business Review, March–April, 79–86. Tatsuno, S. (1986) The Technopolis Strategy, New York: Prentice-Hall. Trade Development Council (1983) Export Franchise Restrictions, Report of Panel 66, Canberra (mimeo). Treasurer (1981) Press Release No. 210, 25 November, Department of the Treasury, Canberra (mimeo). Yencken, D. (1989) Social Issues Study, Multifunction Polis, Canberrra: Department of Industry, Trade and Commerce.

10 Japanese foreign manufacturing investment in the EC An overview Jonathan Morris

INTRODUCTION As Peter Dicken illustrates in Chapter 2, Japanese foreign manufacturing investment (FMI) in Western Europe was, until a decade ago, generally overshadowed by similar investment in North America and Asia, by Japanese investment in the European non-manufacturing sector, and indeed by the question of Japanese imports into the EC, particularly in motor vehicles. In the late 1980s this situation has changed somewhat as Japanese FMI has increased rapidly, with the number of projects doubling between 1986 and 1989, and as goods produced by Japanese companies within the EC—particularly motor vehicles and electronics— have become as important an issue as imports. This is manifested in a series of trade rows between Britain and France and Italy over the exports to these countries of UK-made Nissan cars. Indeed the local content issue has been the main focus of debate in the late 1980s and in the years preceding the unified market in 1992. The context and theoretical framework for this chapter is that outlined in Chapter 1 and in a number of subsequent chapters in the book: that is, Japanese multinationals are undergoing a process of globalization and then global localization. First, Japanese FMI is spreading to the world’s two major markets, North America and Europe, and then it is ‘deepening’ its activities within those markets by moving from assembly to manufacture, increasing local content levels etc. The chapter is divided into six further sections. The next section will offer an explanation for the growth of Japanese FMI in the EC. The third section will describe and explain what firms are investing and where they are investing within the EC. The fourth section will analyse the types of investments being made. The fifth and sixth sections will 195

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review current and future trends of Japanese FMI in Europe, with conclusions being outlined in the seventh section.1 The basis of the chapter will be a study carried out by the author in 1986 and 1987 for the EC on Japanese manufacturing investment (Morris 1987; see also, Morris 1988). The study involved forty-five of the larger Japanese manufacturing operations in the four main recipient countries, the UK, Spain, France, and West Germany, which at that time represented nearly a quarter of all investments in the EC. In addition the material will be supplemented by a series of subsequent rolling research projects including an analysis of buyer-supplier relations at Sony and Nissan (Morris and Imrie 1991) plus ad hoc interviews, impact studies of individual investment projects, and general monitoring of Japanese investment trends at the Japanese Management Research Unit at UWCC, and various secondary sources such as reports published by the Japanese External Trade Organization (JETRO). EXPLAINING JAPANESE FMI IN THE EC The outstanding feature of Japanese FMI in the EC is its growth patterns. In 1970 there were only 18 production units in operation, by 1980 this had increased to 123, and by the beginning of 1989 there were 414 with a further 100 subsequent and planned investments. The EC is still far behind the USA in the number of plants; some 900plus had located there by the start of 1989. Moreover, Japanese manufacturers in the EC still only employ about 100,000 people in Europe—a figure only slightly larger than that of the European workforce of IBM. Nevertheless, the fast growth trajectory, the dominance by Japanese companies of certain industrial sectors such as consumer electronics, and the innovative managerial style associated with this investment merits attention. The 1987 study pinpointed five main reasons to explain the rapid growth of Japanese FMI in the EC in the 1980s. First, the high yen crisis has clearly eroded the traditional cost advantage of Japan over the west, even though Japanese manufacturing capital has withstood the pressures far better than many analysts expected due to high productivity increases, the squeezing of suppliers, and extremely buoyant domestic demand. This ‘crisis’ developed over a number of years but was essentially a product of the 1985 Plaza agreement on currencies which led to a massive revaluation of the yen (Steven 1988). This precipitated a considerable ‘hollowing out’ of the Japanese economy, with Japanese firms speeding up the process of shifting labour-intensive productive capacity offshore.

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While the ‘yen crisis’ explains the partial ‘hollowing’ of Japanese industry (particularly in standardized ‘mature’ products such as consumer electronics), currency fluctuations are not adequate in explaining the destination of this investment. To this end several causal contributions can be forwarded. The first, and most obvious, is the range of protectionist measures which has been introduced, or threatened, in the past decade. Exemplars would be the import quotas on motor vehicles in individual EC member states. However, a range of more subtle measures have also been introduced, including categorizing goods produced by Japanese companies within the EC in the same way as imports if they do not reach certain local content levels. In other cases local content levels have been agreed as a quid pro quo for financial inducements; the Nissan car plant in England is perhaps the best known case, in which the company agreed to an eventual 80 per cent local (EC) content level in return for financial incentives from the UK government. A second reason for the surge in investment in the EC from Japan is more subtle and market oriented. As Chapter 1 illustrated, in order to adequately serve markets on a large scale, Japanese companies have found it necessary to produce within those markets for reasons of market responsiveness. In this, one of the key findings of the 1987 study, Japanese companies are, of course, pursuing strategies similar to those of US multinationals in Europe such as IBM, General Motors, and Ford. A third, and closely related point to the second, is that certain of the Japanese companies have used overseas investment as a competitive strategy vis-à-vis their Japanese competitors. As Chapter 1 illustrated, Sony and Honda, for example, have both implemented such a strategy, as have, to a lesser extent, Nissan when faced with competition from Toyota (Cusumano 1985; Morris and Imrie 1991). JAPANESE FMI IN EUROPE: THE LOCATIONAL AND SECTORAL CHARACTERISTICS There are clear sectoral trends for Japanese FMI in the EC. The latest survey of JETRO (1989) on Japanese FMI, for example, reports that 79 per cent of plants are distributed between 5 main sectors, with 120 in electronics and electrical equipment, 73 in chemicals, 51 in general machinery, 27 in transport machinery, and 17 in precision machinery. While these figures illustrate the predominance of electronics in Japanese FMI, they probably underestimate its importance for two reasons. First, investments in the electronics industry tend to be much larger than those

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in other sectors, with the exception of automotives and tyres. Of the 25 largest Japanese manufacturing employers by plant in the UK in 1989, for example, 19 were in the electronics sector. Second, there have been a number of ‘second wave’ investments in component manufacture for the electronics industry, which are not directly classified as electronics investments. Of the 15 Japanese component suppliers to the electronics industry identified by Morris and Imrie (1991), for example, at least 8 would not be classified as electronics investments. These investments include wire harness producers and a number of plastics producers which supply most, if not all, of their investment to electronics original equipment manufacturers. Table 10.1 Distribution of Japanese manufacturing plants in the EC, by country, 1989

Source: JETRO.

Given the decision to produce within the EC there are clear geographical patterns to the destination of this investment within the EC. Table 10.1 illustrates that four countries dominate Japanese FMI in Europe—the UK, France, West Germany, and Spain—although on a per capita basis Belgium, Holland, and Ireland have also secured a significant number of projects. These figures, however, underestimate the pre-eminent position of the UK for a number of reasons. First, investments in the UK tend to be larger: Sony’s South Wales plant, for example, employs three-quarters the number of their six other EC plants combined. Second, the scale of current plant investments will ensure that the UK dominates Japanese FMI for the foreseeable future. The Toyota motor vehicle investment, for example, is worth £840 million and will employ 3,400; Honda’s motor vehicle investment is worth £300 million, and 1,500 will be employed at Fujitsu’s £400 million semi-conductor plant. The 1987 survey pointed to a number of reasons for the UK’s domination. First, government policy towards such investment has

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been extremely favourable for nearly twenty years in comparison to ambivalence or hostility from other governments. This has been expressed in substantial financial inducements to invest. Second, the UK has relatively cheap labour costs, particularly in comparison with West Germany. One major Japanese consumer electronics producer, for example, reported in the 1987 survey that it was paying double the wage rates to its West German shop-floor workers compared to its Welsh employees. Similarly, wage rates at a major new Bosch investment in South Wales are likely to be only 55 per cent of those in its West German plants. Moreover, the UK was attractive not only for its cheap labour, but because in the 1970s and 1980s at least it had an abundant source of cheap labour, which is still true in parts of the UK in the 1990s, despite a lowering of unemployment rates and a growth of employment. Other important factors have been the language, with English the second language of Japanese businessmen, and a favourable industrial climate, at least in the 1980s. Indeed unions such as the EEPTU (the electricians’ union) and the AEU (the engineers’ union) have made important contributions towards attracting Japanese investment; also, at a regional level, the Welsh TUC have been working with The Welsh Office and the Welsh Development Agency—as a growth coalition, as ‘brokers’ in the attraction of Japanese investment. Finally, although not specified by companies in the survey, it is arguable that the wider industrial strategies of the individual EC countries have played an important secondary role in the destination of Japanese FMI. In the UK, for example, neo liberal laissez-faire economic policies have been pursued in the 1980s and earlier. Such a strategy has largely eschewed ‘national champion’ policies in electronics and motor vehicles and thus Japanese investment has been able to enter into production in sectors characterized by relatively weak competition. While the UK has had considerable advantages as a recipient for Japanese FMI, it is clear from Table 10.1 that France, West Germany, and Spain have also been successful. West Germany emerged from the survey as a favoured location for many of the projects. Advantageous factors included extremely positive views of the German industrial relations system, a favourable response to the levels of skills and education of its workers, and its central geographical position within Europe. The main negative feature associated with locating in West Germany cited by the respondents is the extremely high cost of labour and, in the southern German states of Bavaria and Baden Württemberg in particular, labour shortages.

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Given the ambivalence of the French government towards Japanese investment it is perhaps surprising that so many firms should have located production facilities there. However, France has a central position geographically within the EC and has average labour costs. It is also a major market in its own right and the firms in the 1987 survey were less export-oriented than the UK and West Germany samples. The level of investment is also partially explained by merger and acquisition activity and Japanese investors, such as Sony, ‘spreading’ plants throughout the community. Moreover, the French plants tend to be considerably smaller than those in the UK, West Germany, or Spain; Sony’s three French plants, for example, employ only two-thirds of the work-force of its South Wales plant. The fourth nation to be a major recipient of Japanese investment has been Spain. The rationale for Japanese FMI in Spain might have been thought to have been as a low labour cost export platform to the rest of Europe, but the 1987 study offered a far different explanation. Up to that time Japanese FMI in Spain was largely governed by domestic, that is Spanish, factors, rather than factors concerned with Spain’s relationship with the EC. The majority of investments had been made to get a foothold in the highly-protected Spanish market. Moreover, Spanish inward investment regulations ensured that most of the Spanish investments were in the form of joint ventures. Thus Spanish investments tended to be larger than their European counterparts on average, with investments in large existing operations such as Nissan Motor Iberica in Barcelona and Land Rover Santana. Despite Japanese FMI in Spain being initially primarily concerned with the domestic Spanish market, it is clear that a number of the plants are now being developed and re-oriented towards an EC-wide focus. Nissan’s plant at Barcelona, for example, has now been integrated into Nissan’s EC production and market strategy, and to a lesser extent into its world product strategy. It is at present going through a rapid expansion of capacity to increase the volume of its four-wheel drive vehicles from 76,000 units in 1988 to 160,000 by 1992, it will produce a new four-wheel drive vehicle in a joint venture with Ford, and will supply press materials and trim parts for the Vanette model which is being produced by Nissan in Mexico (Morris and Imrie 1991). Fujitsu are also restructuring their plant at Malaga in southern Spain to produce volume output for the EC market rather than purely the Spanish one as was previously the case. At a subnational level, there are also clear locational patterns for Japanese FMI. In the UK, for example, the peripheral regions dominate— in particular Wales, Scotland, and the North-east of England, plus the

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West Midlands (see Table 10.2). The 1987 survey echoed Dunning’s (1986) findings that the availability of cheap labour, government incentives, plus government ‘guidance’ were the major locational factors. There has also been a ‘follow the leader’ approach to investment in these regions with one successful investment leading to an influx. In this regard, Sony were the catalyst in South Wales while Nissan provided a similar role in the North-east of England. Investment is also concentrated in other centres, such as the new towns of southern England and the West Midlands, and has also spread to other regions and areas without a Japanese presence. However, the four main regions dominate Japanese investment in the UK due to the inertia factor caused by Japanese suppliers following and locating generally in the same region as the Japanese OEMs. Moreover, the largest investments are generally concentrated in these regions.2

Table 10.2 Location of Japanese manufacturing plants by UK region, 1988

Source: The Observer, 26 February 1989.

Distinct locational patterns also emerged from the study of Japanese FMI in Spain. However, the trends are in many ways the opposite of what has occurred in the UK, with the bulk of investment going to the most prosperous regions. In 1987, for example, nearly 69 per cent (16) of the Japanese plants were in Catalonia, with a concentration in greater Barcelona, plus two in the neighbouring province of Navarre. The remainder of the plants were located throughout Spain, although there

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were none in the heavily industrialized Basque country (which has an industrial structure very similar to Wales, Scotland, and the North-east of England). There are several reasons for this locational pattern. First, the majority of plants are, or were initially, joint ventures with Japanese firms often buying into existing operations. Nissan’s Motor Iberica plant in Barcelona is the best case of such a take-over. Second, and an extension of the first point, Japanese FMI in Spain is concentrated in three main sectors—electronics, vehicles, and chemicals—the first two of which are concentrated in Catalonia. Moreover, although Japanese FMI in Spain was initially domestic market oriented, with a number of the larger concerns being integrated into EC-wide production and market complexes, Catalonia’s location is the best in Spain for an export platform. The locational patterns of Japanese FMI in West Germany are again distinct. In 1987, for example, over 40 per cent of the plants were in the Länder of Nordrheinwest-falen, the major heavy industrial region of the country. The other major concentration was in the north-east in an area bounded by Hamburg and Hanover and stretching to the East German border, which had a further 30 per cent of plants. The rest of the plants were spread throughout the country, although the Stuttgart city-region was another focus with six plants including a large Sony production unit plus Sony’s European colour television headquarters. Labour availability was the major determining factor in location in West Germany, although this did not apply to Stuttgart where Sony took over an existing German firm, Wega. The spread of Japanese FMI in France is far less concentrated than in the other three countries, although there are small concentrations in the south-west of France and Brittany. The major influences cited in the 1987 study were labour availability and government influence to locate in areas of high unemployment. Interestingly there was a marked preference for locations in agricultural areas and towns, much as Florida and Kenney describe in the case of Japanese transplants in North America (see Chapter 5). This is very different from the prevailing pattern in the UK, although in Scotland and in the south and midlands of England there has been a preference for new town locations.

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THE FORM AND TYPES OF JAPANESE FMI IN THE EC While the recent scale of Japanese FMI has been the focus of considerable political and academic interest, of equal debate has been the type of investment being made. James (1989), for example, is typical of the critics of Japanese FMI, arguing that it is primarily concerned with setting up branch plant facilities in the EC with low levels of local content, no research and development, low wages, and little local management autonomy. Eight key features stand out in the 1987 survey: ownership, labour employed, plant functions, product range, local content, manufacturing practices, industrial relations, and productivity. Ownership There was a distinct preference for 100 per cent greenfield locations, although Spain was the exception to this with a large number of joint ventures. Labour employed This varied from sector to sector but plants were characterized by a large proportion of direct workers and in the major sector— electronics—by females. The plants employed few skilled workers in the traditional sense, and showed a marked propensity for young recruits—a reflection of the type of plants being developed by Japanese companies in the EC at this time. Although there were a number of notable exceptions, such as Sony and Nissan’s UK plants, many Japanese investments at this time displayed the typical ‘branch plant’ characteristics. That is, they were essentially assembly operations employing high percentages of unskilled direct labour; in the dominant electronics sector, for example, workers tended to be young female school-leavers. There was little R&D, few high management functions in plants of this type. Employing young workers was part of a policy of inducing workers into the corporate philosophy of Japanese management systems. To this end firms also spent a considerable amount of time and effort in recruiting and training shop-floor workers. The Nissan plant in England typified this: 15,000 applications were received for 500 initial jobs and workers were first faced with a six-page application form— longer than many for graduate job applications. Potential workers were then put through a series of rigorous tests. Even temporary

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workers, employed for four months to cover the summer production peak in the UK car industry, had to undergo one month of training (see also, Wickens 1987). Plant functions As the previous point noted, plants tended to have one vertical stratum of the production process. That is, they were largely assembly operations. There was, for example, a lack in most cases of full-scale manufacture at these plants. This is perhaps best illustrated by semiconductor plants, which were essentially assembly and testing facilities but lacked the manufacturing stage of wafer fabrication which is both complex and capital intensive. Similarly, there was no evidence of fundamental R&D work, although in some cases there was extensive development work being carried out. The vast majority of respondents also reported a lack of local autonomy and thus a high degree of control from the parent organization in Japan. All of these factors are, of course, at least in part, a function of the age of the operations. Certain firms, Nissan and Sony, were undergoing staged development towards full-scale manufacture, local R&D and greater autonomy for European managers. Whether these firms are exceptions remains to be seen, but other firms such as Toshiba, Hitachi, and Matsushita Electric expressed the intention of similar moves. Product range There were already strong moves towards product diversification away from one product model to different product models and different products. By 1987, Sony, for example, had moved from being a mass producer of one or two models of colour television into producing a greater variety of models. In addition, they produced video tape recorders, audio equipment, compact disc players, and audio and video cassette tapes. Matsushita have followed a similar strategy; in their seven West German plants they produce video recorders, photocopiers, and car radios, in addition to a variety of components (Morris 1989). Local content In general, local content levels at the survey plants were low—over 40 per cent of the sample having levels below 50 per cent. This reflects the

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assembly rather than manufacturing orientation of many of the plants, plus a low use of indigenous component suppliers. The studies of Trevor and Christie (1988), and Morris and Imrie (1991) are illustrative of the extremely poor levels of performance (quality, delivery, etc.) in indigenous suppliers, particularly in the electronics industry. This is, of course, a product of decades of adversarial relationships between OEMs and suppliers in the UK. Within this context it is perhaps unsurprising that local content levels were low as firms which are committed to local sourcing, such as Sony, struggle with the inadequacies of the supplier base (Morris and Imrie 1990). This is echoed in the latest JETRO study of Japanese manufacturing industry in Western Europe which reports problems with suppliers as the single most important issue of concern to management (JETRO 1989). Despite this, in the 1987 survey there were indications of rising levels in certain of the firms, predicated by a number of factors including the age of plants, the rising value of the yen, protectionism relating to local content, and tentative moves towards just-in-time production. Manufacturing practices The majority of plants were attempting some form of total quality control, and a number had implemented either just-in-time systems or quality circles. To gauge the extent of the introduction of such manufacturing practices, the survey results can be combined with work of colleagues at the Cardiff Business School. Oliver and Wilkinson (1988), for example, had responses from 14 of the 49 Japanese manufacturing companies in the UK listed in 1986, and, Oliver, first with Pang and then Gleave conducted smaller surveys (Pang and Oliver 1988; Gleave and Oliver 1990). All of the sample of 49, for example, used total quality control, 95 per cent used flexible working, 93 per cent (of a sample of 14) used group working, 73 per cent (of 30) used quality circles, and 64 per cent (of 22) used just-intime production. As a word of caution, however, the author’s 1987 survey indicated that none of his sample were using a true just-in-time system—that is, multiple deliveries by suppliers per day. Indeed only a few companies had introduced multiple deliveries by suppliers per day on a small number of bulky supplies sourced locally (that is, near the plant).

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Industrial relations The majority of plants in the survey were unionized, although there were variations across a number of dimensions. First, larger plants tended to be unionized whereas some of the smaller ones were not. Second, unionization levels were the highest in West Germany and the UK. However, even within the UK, whereas plants in Wales, Scotland, the North of England, and the West Midlands were unionized, plants in southern England were less likely to have union recognition, although these plants were also smaller in the main. It is worth noting that Honda’s new Swindon (England) car assemply plant does not propose to have union recognition, a trend—as Florida and Kenney pointed out in Chapter 5—prevalent in Japanese car transplants in North America but unique in the EC. In the UK in particular, Japanese firms have been at the forefront of changes in industrial relations practices including single union deals per plant, ‘no strike’ clauses, and pendulum arbitration (see also, Oliver and Wilkinson 1988, Chapter 5). Productivity The majority of respondents reported that productivity at their plants was 80 to 100 per cent comparable to that of Japanese plants. The difference was said to be due to smaller volumes of production and a learning curve effect. Significantly, the major piece of research which has compared plant level productivity reports that Japanese autotransplants in North America have been recording productivity levels close to plants in Japan and significantly ahead of indigenous producers (Womak et al. 1990). JAPANESE FMI IN THE EC: RECENT TRENDS Although the EC survey only reported in 1987, such has been the pace of development in Japanese FMI that there have been significant developments in the three years since the study. The most obvious change is the scale of investment: at the time of the 1987 survey there were 201 Japanese-owned production units in the EC, by 1989 there were 391. The change in investment strategy does not only apply to the pace of investment but to the nature of this investment. One obvious change is in sectoral composition; in the car industry, for example, Honda and Toyota have followed Nissan, Mitsubishi Motor is

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actively seeking a joint-venture partner and a number of component producers have also invested. At a broad level, developments follow two major strands, both of which are concerned with diversification strategies. The first type is what might be termed ‘horizontal’ diversification, which includes four main forms:(a) In-company, with firms increasing their product ranges. Nissan, for example, now produces two model ranges from its UK plant. Similarly, consumer electronics producers have increased their range. Individual firms are also becoming self-sufficient in their products. Sony, for example, now virtually satisfy European demand for their colour televisions by means of manufacture within the EC (de Jonquieres and Dixon 1989). (b) In group—with the divisions of companies of large conglomerates setting up plants. Hitachi, for example, have companies producing a variety of products in the EC, including consumer electronics, semiconductors, and earth moving equipment. (c) Across industries—with a broad new range of industries being added to the staples such as electronics. Examples are Mitsubishi buying food brands, and textiles production by Toray Industries. (d) Across national boundaries—with firms having integrated production complexes across national boundaries. The case study of Sony in Chapter 1 is one such illustration, as is that of Matsushita Electric, which has twenty plants across Europe (Morris 1989). The second type of diversification is vertical. That is, Japanese firms are transferring increased parts of the production process from Japan to the EC in the form of FMI. This takes three forms, each of which are closely related to one another: (a) The shift from assembly to manufacture. The case of Nissan’s UK plant is a good illustration. A significant proportion of the full manufacture of cars has now been transferred from Japan to the UK, including body assembly, paint shop, plastic injection moulding, and engine assembly. Of the main in-house activities only automatic transmission manufacture remains in Japan. Similarly, in the semiconductor industry, both NEC and Fujitsu have, or are going through the process of, transferring the very complex and capital intensive wafer fabrication process to their operations in the EC to complement assembly and testing.

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(b) A greater use of EC-sourced components, either produced incompany, by indigenous suppliers, or by EC-based Japanese suppliers, many of whom are owned or part-owned by the large Japanese OEMs. In the UK for example, there are now 19 Japanese owned suppliers to the car industry (Delbridge 1990), at least 6 of which are known to supply to Nissan in a geographical cluster around the Sunderland plant (Morris and Imrie 1991). In the UK electronics industry, meanwhile, there are at least 15 Japanese-owned components suppliers (Morris and Imrie 1991). In certain cases we are witnessing the emergence of minor ‘production complexes’, such as Matsushita’s in-house network of component suppliers in northern Germany and South Wales, or the ‘out-house’ variety around the Nissan plant at Sunderland or in the electronics industry in South Wales (Morris 1989; Morris and Imrie 1990). At the level of the individual firm local content levels would also seem to be increasing; this is true, for example, of both Sony and Nissan in the UK and of Japanese electronics producers generally in Wales (Morris and Imrie 1990; Munday 1990). (c) Tentative moves towards developing an EC R&D capacity. A major criticism of Japanese manufacturing multinationals has been their reluctance to transfer any R&D capacity overseas (The Economist 1988; James 1989). Indeed, this was one of the central findings of the 1987 survey which emphasized the almost complete lack of fundamental R&D carried out by Japanese companies while at the same time pointing out that some of the investors carried out significant day-to-day developmental work. Since 1987 a number of prominent Japanese companies have announced the opening of R&D facilities including Sony and Nissan. Other companies to follow suit are Hitachi, Canon, and Sharp. As yet, the precise nature of the R&D work to be undertaken is unclear, but the numbers of researchers employed and the location of these R&D facilities at academic centres of excellence such as Oxford, Cambridge, and Cranfield in the UK would suggest significantly more than mere developmental work. This post-1987 review is, of course, far less systematic than the one of 1987 in that it covers fewer firms. However, it is clear that there are a number of interesting developments arising from the strategies of companies such as Nissan and Sony, which are at the leading edge of investment in the EC arena.

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THE FUTURE OF JAPANESE MANUFACTURING INVESTMENT IN THE EC The immediate future patterns and trends of Japanese manufacturing investment in the EC are likely to extend the two diversification strategies outlined in the previous section. The major growth sector will almost certainly be the automobile industry for a number of reasons. First, the Toyota and Honda investments will come onstream in a staged manner over the next five years and, if the experience of such transplants in North America (see Florida and Kenney Chapter 5) or the Nissan plant in England are pointers (Morris and Imrie 1991), these are likely to be revised upwards in scale over that period. Second, the automotive components sector is likely to be a major growth area. It would be dangerous to simply ‘read-off’ the North American experience in this case, as the indigenous North American component industry is considerably weaker than its EC counterpart. However, it is worth noting that Florida and Kenney estimate that at the time of their study there were 229 Japanese transplant suppliers in North America which, in other estimates, will rise to over 350 in the early 1990s (Done 1990). In the UK—which has the bulk of these investments due to the Toyota, Nissan, and Honda locations—there are only nineteen such firms plus a small number in continental Europe. It would be reasonable to assume, therefore, that even if the investment levels do not reach those in North America, then they will considerably increase as the Nissan plant expands and the Toyota and Honda developments come on-stream. A substantial minority are likely to be in the form of joint ventures as relatively small Japanese firms use the expertise of European firms to secure a production base. In North America, for example, somewhere between one-quarter and one-half of Japanese autocomponent transplants are in the form of joint ventures. Lucas Automotive in the UK have followed this route with ventures with Yuasa Battery and Sumitomo Wiring Systems, as have Valeo with Nippondensu and Ikeda Bussan with Hoover. This, of course, is part of the vertical diversification strategy outlined earlier. Similar, further vertical diversification is likely to occur within the Japanese consumer electronics industry companies. It is also reasonable to assume that there will be further moves towards vertical diversification via moves towards greater manufacture rather than assembly. With regard to horizontal diversification, present planned investments

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and future intended investments would point to considerable in-company and in-group diversification strategies. As Chapter 1 illustrated, Sony have planned production of semiconductors and telecommunication equipment in Europe plus computer workstations, which they already produce in their US plant at San Diego, California. In addition, a magnetic tape coating factory investment has already been announced and the company anticipates producing other major components such as video heads and drums, and optical pick-ups for CD players. The major growth sectors, apart from the automotive and electronic componentry already mentioned, are likely to be semiconductor manufacture (as opposed to assembly), office automation and computers, machine tools, ‘white’ goods, and industrial ceramics (see James 1989). Other future developments are likely to be a further broadening of the industrial base and more small companies investing, aided by the large OEMs and the so–go– sho–sha (see Chapter 2). The UK is likely to remain the major destination, particularly given that the two growth areas—automotive and electronic components—will follow the OEMs which are largely in the UK. Finally, it is anticipated that there will be high growth rates of Japanese FMI in the EC, at least until the end of the century. CONCLUSIONS Up until the mid-1980s Japanese FMI in the EC represented the globalization phase, as outlined in Chapter 1. There had been steady growth since the early 1970s and a substantial build-up of investment. However, as the 1987 survey indicated, Japanese manufacturing investors had done little more than create a toe-hold within the EC. Overwhelmingly, the investments made at this time were little more than assembly operations. While this went considerably further than ‘knock-down kit’ operations, and while there were exceptions, there was little evidence of full-scale manufacture. Since 1985, however, certain of the Japanese manufacturing companies have started to embark on a second phase, that of global localization. This is expressed in a number of ways: shifts to full-scale manufacture, greater use of local suppliers, and tentative moves towards establishing European R&D centres. The evidence for this is, of course, less systematic than the extensive 1987 survey and is to a certain extent based on the two case study firms chosen by Morris and Imrie for their survey (Morris and Imrie 1991). Moreover, these firms were explicitly chosen because they were untypical or at least because they were at the leading edge of developments in

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their respective industries. However, there is substantial supporting secondary evidence to suggest that other Japanese companies are pursuing similar strategies, as the plans of Toyota and Honda for their UK car manufacturing operations indicate. As Florida and Kenney outline in Chapter 5, Japanese car producers in the US are doing likewise. There is some evidence, therefore, that Japanese FMI in the EC will become increasingly like that of US investment in which foreign-owned companies such as IBM, GM, 3M, and Ford have to a certain degree assumed ‘insider’ stakes. NOTES 1 2

Funding was received from a variety of sources. The main ones which I would like to acknowledge are the EC, the Welsh Development Agency, and those of my department, Cardiff Business School. In the UK the major exceptions to this are SP Tyres at Birmingham, which was a take-over, Toyota in Derbyshire and Honda at Swindon, in the prosperous south-west of England. Honda’s choice of this town, which has extremely low unemployment is rather unusual.

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REFERENCES Cusumano, M. (1985) The Japanese Automobile Industry: Technology and Management at Nissan and Toyota, Cambridge, Mass.: Harvard University Press. Delbridge, R. (1990) ‘Japanese investment in the U.K. autocomponentssectors’ , Japanese Management Research Unit Special Paper, Cardiff Business School, UWCC, Cardiff. Done, K. (1990) ‘A build up of pressures’, Financial Times, World Automotive Components Survey, 16 May, 1. Dunning, J. (1986) Japanese Participation in British Industry, Beckenham: Croom Helm. Economist, (1988) ‘Japanese foreign direct investment: Walkman factories don’t walk’, 12 March, 76. Gleave, S. and Oliver, N. (1990) The management of human resources in Japanese manufacturing companies in the U.K., Japanese Management Research Unit Working Paper No. 9, Cardiff Business School, UWCC, Cardiff. James, B. (1989) Trojan Horse: The Ultimate Challenge to Western Industry, London: Mercury. JETRO (1989) Current Management Situations of Japanese Manufacturing Enterprises in Europe: The Fifth Survey Report, Tokyo: JETRO. de Jonquieres, G. and Dixon, H. (1989) ‘Sony plans to increase European investment in preparation for 1992’, Financial Times, 31 July, 16. Morris, J. (1987) Japanese Manufacturing Investments in the European Economic Community: The Effects of Integration, Report to DG1, EC, Brussels. ——(1988) ‘The who, why and where of Japanese manufacturing investment in the U.K.’, Industrial Relations Journal 19 (1), 31–40. ——(1989) ‘Japanese inward investment and the “importation” of subcontracting complexes: three case studies’, Area 21, 269–77. ——and Imrie, R. (1991) Transforming the Buyer-Supplier Relationship: The Adaptation of Japanese Style Buyer-Supplier Relations in a Western Context, London: Macmillan. Munday, M. (1990) Japanese Manufacturing Investment in Wales, Cardiff: University of Wales Press. Oliver, N. and Wilkinson, B. (1988) The Japanisation of British Industry, Oxford: Basil Blackwell. Pang, K.K. and Oliver, N. (1988) ‘Personnel strategy in eleven Japanese manufacturing companies in the U.K.’, Personnel Review 17 (3). Steven, R. (1988) ‘The high yen crisis in Japan’, Capital and Class 34, 76–118. Trevor, M. and Christie, I. (1988) Manufacturers and Suppliers in Britain and Japan, London: PSI. Wickens, P. (1987) The Road to Nissan, Macmillan: London. Womak, J., Jones, D., and Roos, D. (1900) The Machine that Changed the World: The Triumph of Lean Production, Macmillan, New York.

11 Japanese direct investments in West Germany Trends, strategies, and management problems B.Nino Kumar

INTRODUCTION As the European Economic Community’s (EC) trade deficit with Japan continues to rise ($20.1 billion in 1987 against $10.2 billion in 1983) (JETRO 1988a:1), trade relationships between the two become more and more strained. Recently there has been intensified trade friction, for instance, over automobiles, machine tools, video-recorders, televisions, etc. Under this impression, and in anticipation of the EC integration in 1992 which will create a giant common market encompassing 350 million consumers with high purchasing power, Japanese companies are increasingly considering, and pushing forward, direct investments in the EC member countries. Although Japanese direct investments in Western Europe, with a cumulative $14.47 billion (1986), still lag way behind other regions,1 the attractiveness of the single EC market is expected to influence more and more Japanese firms to change their overall (export) strategies to an emphasis on taking up local production in Europe in the future. For instance, in the electrical equipment field, the main manufacturers of video-recorders and televisions have already invested in their own production facilities in Western Europe as have other industries such as forklift and automobile producers. Nissan and Honda in the UK are perhaps two of the most notable cases in the manufacturing industries. And of course, in recent years more and more Japanese firms from the service sector (banks, transportation companies, etc.) have also invested and established subsidiaries in Europe. Out of all the EC member nations, West Germany is Japan’s largest market. Total trade volume between the two reached a high of over $43 billion in 1986 with Japanese exports accounting for $29.6 billion. 213

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These figures might lead to the expectation that West Germany would be the most important host-country in Europe for Japanese direct investments. However, it ranks only fourth after the UK, Netherlands, and Luxemburg (JETRO, 1987:3). Leaving Luxemburg aside, (for as a purely financial centre it is a special case), the attractiveness of the other two countries over West Germany seems to lie in the perceived favourable investment climate and better conditions offered to Japanese investors. In other words, Japanese companies face problems in West Germany in connection with direct investment and establishing and running their own sales and manufacturing subsidiaries which are not present in the other two countries. These expected difficulties in West Germany presumably pertain primarily to non-tariff barriers, since tariff and levies imposed by the EC on third nations are the same in all member countries. In this chapter an attempt is made to analyse Japanese direct investments in West Germany. The survey focuses mainly on trends in direct investment flows and on some patterns and problems in the operation of West German affiliates. In the latter case we will be looking at, in particular, the investment strategies of Japanese companies in West Germany and at some management issues of the West German subsidiaries. STRUCTURE AND CHARACTERISTICS OF JAPANESE DIRECT INVESTMENT

The beginning Japanese direct investments in West Germany in the post-war era go back to the mid-1950s as Japan’s leading trading houses (sogo shosha) started establishing their own sales subsidiaries in the country. As Burton and Saelens (1980) illustrated, the Mitsubishi Corporation set up a subsidiary in Dusseldorf in early 1955 which was soon followed by Mitsui and Co. By 1960, almost all of the other well-known trading companies2 had followed suit and in 1978 their early investments in West Germany were represented by nine subsidiaries incorporating an equity capital of DM105 million. There were few early direct investments by Japanese manufacturing companies in West Germany. These began much later and even then the trading companies were initially involved as joint venture partners with Japanese manufacturers. In almost all these cases established subsidiaries handled only sales while manufacturing units were an

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exception to the rule. One of the four leading Japanese bearing producers and the international zipper firm YKK were among the first to set up production plants in West Germany. Most of the early West German operations of Japanese manufacturing companies were restricted to four branches of industry (see Table 11.1). The electrical and electronic firms headed the list of sales and service operations with a total of 45 subsidiaries incorporating Japanese investments of DM51 million. The machinery companies had the largest number of manufacturing units in West Germany with Japanese equity amounting to DM11 million. Among the firms in the precision equipment industry, the optical and copying equipment ones led the way. In fact Canon Inc. was the first to start production of plain paper copiers in West Germany. Most of the other companies, however, were handling only sales and service in their West German subsidiaries. Although the Japanese trading firms were initially the ones to start direct investment activity in West Germany, the manufacturing companies soon overtook them in number (see Table 11.2). However, their total investment volume lagged behind, indicating the relative small average size of the individual production subsidiaries. On the whole, Japanese direct investments in West Germany remained quite small until the mid-1970s, especially when compared with other host countries such as the United States where Japanese firms had already invested around $2 billion. But activity was picking up due to increasing pressure on Japanese exports. By 1976 their direct investment had surpassed DM1 billion. RECENT TRENDS Flows Since 1980 the activities of Japanese firms in West Germany have increased markedly. According to JETRO (1988a:20), over 50 per cent of all known subsidiaries of Japanese firms in West Germany in 1987 were established after 1980, and the total volume of direct investment reached a total of DM 6.4 billion in 1987 (see Table 11.3). This made up approximately 5 per cent of total Japanese direct investment abroad and around 6 per cent of all foreign direct investments in West Germany. In that year Japan was ranked fifth in foreign direct investment volume in West Germany behind the United States, Switzerland, Netherlands, and Great Britain. Since the mid-1970s the balance of total West German domestic direct investments abroad and foreign direct investments in West Germany

Source: Burton and Saelens (1980). Notes: M=manufacturing/assembly operations. S=sales/service subsidiaries.

Table 11.1 Japanese manufacturing investment in West Germany, 1973 (estimated)

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Table 11.3 Recent trends in Japanese direct investment in West Germany (DM billions)

Source: Burton and Saelens (1980). Note: Total adjusted with joint venture companies (estimated).

Table 11.2 Japanese direct investment in West Germany, 1973

Source: Deutsche Bundesbank (1989:24). Note: Change over preceding year in parentheses.

has steadily shifted in favour of the former. In 1987 the balance showed DM 142 billion as against DM101.7 billion. In comparison to this total trend the West German-Japanese balance, however, has been the opposite. As Table 11.4 shows, West German investments in Japan have been lagging far behind those of Japanese firms in West Germany, although the growth rates of the former have also been quite respectable. These figures alone indicate the offensive long-term strategy of Japanese firms in setting up a lasting foothold in West Germany as compared with the relative slow pace with which West German firms are establishing themselves in Japan. Table 11.4 West German direct investment in Japan (DM billions)

Source: Deutsche Bundesbank (1989:6) Note: Change over preceding year in parentheses.

Direct investment by industry The initial leading role of the Japanese trading houses in direct investments in West Germany has not changed. In fact their importance has risen to the extent that they now represent over 60 per cent of the total volume (see Table 11.5). On the other hand the proportion of

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manufacturing industries has fallen to about 10 per cent. In comparison to the early phase, Japanese direct investment in this sector has not kept up pace with the total expansion. Of course, according to the mode of Japanese business, one can assume that many manufacturing companies are connected with, and represented by, the trading houses. None the less, the relatively small direct share of the former in West Germany gives indication that Japanese industry, although making efforts to develop long-term business, may not be so interested in establishing manufacturing units in this country. Even in the long run, exporting via their own sales subsidiaries and Japanese trading houses will most probably continue to be the preferred strategy over local manufacturing. Table 11.5 Industry-wise distribution of Japanese direct investments in West Germany (DM millions)

Source: Deutsche Bundesbank (1989:30). Note: *Sum is rounded up.

Among the manufacturing industries the electrical and electronic firms continue to lead the list with 37 per cent of the direct investments in this sector followed by synthetics and rubber and general machinery. As indicated earlier, not all investments necessarily need be in production units. As of mid-June 1988 a total of 658 subsidiaries of Japanese companies were in operation in West Germany. Out of these only 70 (approximately 10 per cent) were production units.3 In comparison to the early phase this relationship has slightly deteriorated (see Table 11.1), which supports the hypothesis of a Japanese preference for direct exports rather than local manufacturing. According to JETRO (1988a:20), most of the

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production affiliates are in the electrical and electronic sector (see Table 11.6), which corresponds to its leading share in the total volume of Japanese direct investments. With 70 Japanese production affiliates in 1988 West Germany was ranked third in the EC after Great Britain (92) and France (85). Table 11.6 Japanese manufacturing units in West Germany by industry, 1987

Source: JETRO 1988a:20. Note: Total number of manufacturing subsidiaries at end of 1987.

Geographical distribution Japanese firms in West Germany have traditionally preferred the Dusseldorf and Frankfurt areas for locating their subsidiaries (see Table 11.7). The financial business is concentrated mainly in the Frankfurt region which is the banking centre of West Germany. An important factor underlying the Japanese locational pattern is economies of agglomeration. This phenomenon, in conjunction with the locational theory of direct investment, is seen as a driving force for the decisionprocess (Dunning 1988). Even more so, it helps to explain the locationbehaviour of Japanese firms regarding choice of subsidiary sites within West Germany in the post-decision phase.4 The regional concentration of Japanese companies in a few centres in West Germany has created a specific (Japanese) economic and social infrastructure in the particular regions (for example, Japanese controlled local suppliers, German personnel consultants geared to Japanese requirements, Japanese financial institutions, restaurants, Japanese schools, etc.) which is highly congenial and attractive for the settlement of new Japanese companies. Considering the strong element of ‘groupism’ in Japanese culture

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(Marsland and Beer 1983), the importance of economies of agglomeration for locating Japanese direct investment within West Germany cannot be exaggerated. Table 11.7 Geographic distribution of West German subsidiaries of Japanese companies, 1988

Source: Japanische Industrie- und Handelskammer (Dusseldorf).

The investment motives Turning now to the main motives of Japanese enterprises to start operations in West Germany, we find a pattern that is consistent with the characteristics of the early phase of internationalization as predicted by direct investment theory. According to the JETRO surveys conducted in 1983 and 1987 (JETRO 1984, JETRO 1988a), the most important motive for Japanese enterprises to invest in West Germany was connected with import substitution. For most firms defending the West German export market, which was henceforth threatened by restrictive trade measures and frictions, was the paramount factor for starting operations. In the later survey the development of new markets was also mentioned as an important consideration for investing in West Germany. According to direct investment theory such issues play a dominating role for companies mainly in their initial stages of internationalization. As mentioned earlier, more than half of the Japanese companies in West Germany started operations only after 1980 and more than 90 per cent are under 14 years old (JETRO 1988a:20). Furthermore, as ascertained by Kumar and Beschorner (1988), most Japanese firms with production units in West Germany consider themselves to be unique in their branch and superior to their German competitors with regard to their specific product and technology. Among these respondents the electrical and electronic firms headed the list. This can be seen as an indication that the possession of firm-specific

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oligopolistic advantages by Japanese firms is also an important element of their rationale to invest in West Germany. According to direct investment theory these assets are especially necessary in the early stages of internationalization in order to compensate for a lack of experience and to meet country specific advantages of local competition. On the other hand, the transaction costs-minimizing considerations which are an important motive in the international expansion of more experienced European and American multinational corporations (Dunning 1988), play a small part among Japanese companies in West Germany. Apparently, greater experience of the West German market and environment has yet to be gathered by the Japanese companies, especially among the smaller ones, before the prospects of availing of such intangible assets can become an initiating factor for direct investment in this country. The larger Japanese multinational companies like Toshiba, Matsushita, and others are beginning to take action towards achieving these advantages in the context of globalization strategies (JETRO 1988b: 78). This observation of Japanese investment motives in West Germany contradicts to some extent the Kojima proposal that Japanese multinationalism is primarily to be found among industries with standardized products and has consequently to put up with quite a broad competition base (Kojima 1978). At least those firms that have decided to invest in West Germany have done so on the basis of firm-specific oligopolistic advantages. Taking into account that firms with such oligopolistic assets are, by definition, relatively few, and that the fundamental objective of Japanese firms is to defend their export markets in West Germany, we can draw the conclusion that Japanese manufacturing direct investments in this country are likely to remain limited in the future. This inference corresponds to the trend reported earlier that the volume of investments in manufacturing units has not kept up with total investments in West Germany in past years.5 DIRECT INVESTMENT STRATEGIES Pattern of entry strategy In this section we now turn to the strategies which Japanese companies adopt in entering West Germany via direct investment. The main issues under consideration are: joint venture with a domestic partner and acquiring or forming wholly-owned subsidiaries. Looking at the Japanese manufacturing affiliates in West Germany

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we find that about 70 per cent were organized in the form of whollyowned subsidiaries and only 30 per cent were joint ventures with German partners (see Table 11.8). Compared to previous years, where only a little more than half of the West German affiliates were fully-owned (JETRO 1984:55), the latest results show that preference for this form of ownership has risen. The highest percentages of fully-owned subsidiaries were in the electrical and precision machine industries. Even among the joint ventures a majority ownership by Japanese companies is the prevailing form in most cases (see Table 11.9). Table 11.8 Ownership pattern of manufacturing affiliates of Japanese companies in West Germany, 1987

Source: Compiled from JETRO 1988a and 1988b. Note: *N=total number of firms (see Table 11.6).

Table 11.9 Equity structure of Japanese-German joint ventures in West Germany (N=16)

Source: Compiled from JETRO 1988a and 1988b.

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The motives The strategy pattern which Japanese companies in West Germany have opted is not unique, being rather similar to those which they and other international enterprises have generally followed in the developing countries (JETRO 1984:55). It is known that where host-country laws do not limit ownership choice—as is generally the case in the industrialized countries—international companies generally prefer fullyowned foreign subsidiaries or at least majority joint ventures. The main motive behind this strategy choice is the need of the parent-company for unambiguous control of the subsidiary unhampered by the joint venture partner (Negandhi 1987:151). Japanese firms in West Germany are no different in this respect. As Kumar and Beschorner (1988) have shown, control interest was the dominating argument for Japanese companies to establish fullyowned subsidiaries. This was documented in the responses of the Japanese Chief Executive Officers in West German subsidiaries who considered full control necessary for the purpose of ‘integrating subsidiary activities into central company policy’ or because of ‘better handling of transferred technology’. A further indication of this is given by the fact that the largest proportion of fully-owned West German subsidiaries is to be found in the electrical and electronic industry (see Table 11.8) which also topped the list concerning the possession of superior know-how and technology vis-à-vis local German competitors. It is well known that requirements for controlling foreign subsidiaries rise with the ownership of firmspecific skills which need central co-ordination for optimizing intrafirm internalization advantages (Kumar 1987:120). Moreover, the possession of oligopolistic corporate skills bring problems of managerial accountability connected with their optimal use and benefits; these presumed difficulties can be avoided with outright rather than shared ownership of affiliates (Buckley and Casson 1988:41). According to the findings of Kumar and Beschorner (1988) most West German (wholly-owned) subsidiaries of Japanese firms are established as de novo ventures. Acquisitions are infrequent and in most cases undertaken in connection with establishing joint ventures. The preference of Japanese firms for the first type of strategy is in accordance with their endeavour for unhindered control. As has been shown in many studies, new greenfield subsidiaries are more open to parent-company influence than acquisitions, where management is historically prejudiced and reserved towards change (Kumar 1987:

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70). But apart from this paramount motive, this preference also reflects Japanese firms’ general reluctance for company take-overs because of their culture-bound perception of social obligation and affiliation towards existing employees (Kumar and Steinmann 1987; Batzer and Laumer 1986:72). The most common motive for going into joint ventures, and also for choosing West German partners, is the continuation of previous business relationships. As reported in several studies, Japanese firms prefer to establish manufacturing collaborations with West German companies who already have been agents and importers for their products (JETRO 1984:56). Therefore, vertical rather than horizontal arrangements are more common among Japanese-German alliances in West Germany. This strategy is compatible with the motivation of Japanese firms to defend and expand into the West German market on the basis of specific oligopolistic advantages, which leads them to seek partners having complementary capabilities in the forward and backward value-chain. Besides these economic considerations, joining hands in joint ventures with previous West German importers is also prompted by mutual trust and confidence which is so important in Japanese business and social relationships (Marsland and Beer 1983). SOME MANAGEMENT ISSUES The general pattern of subsidiary management Foreign-subsidiary management generally involves adapting functional strategies to the host-country environment on the one hand (‘local responsiveness’) and standardizing and integrating them into parentcompany patterns on the other (‘globalization’). The rationale behind this paradox has been discussed in the international management literature, and the thrust of the strategy is that the balance between the two modes should be towards the availing advantages of globalization. In the following pages management in West German subsidiaries of Japanese companies is discussed along these lines. Due to the limited scope of this chapter, however, only selected issues are dealt with. According to the findings of Kumar and Beschorner (1988), Japanese companies in West Germany tend on the whole to adhere to management patterns that are adapted to the local environment. However, taking all the management functions together the degree of ‘local responsiveness’ is not very high. Looking at the management

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functions individually Kumar and Beschorner (1988) found variations. For instance, personnel management had more elements of local responsiveness, while purchasing was practised more according to Japanese (parent-company) norms. In the following discussion these two issues will be elaborated somewhat in order to exemplify the management problems that Japanese companies face in West Germany. Some problems in personnel management The Japanese management system has been discussed in general literature with particular reference to personnel and human resource practices. Above all in this area specific culture-bound aspects are seen as the success factors of Japanese companies. In this connection the question of transferability to international settings has also often been raised (Marsland and Beer 1983; McMillan 1984). The most obvious foreign locality where Japanese personnel management techniques are practised are, of course, the subsidiaries of Japanese companies abroad. In 1987 each West German affiliate of Japanese manufacturing companies employed on average 370 people. The average number of Japanese expatriate staff in each subsidiary was 5 managers with a maximum of 19 (5 per cent of total employees) (JETRO 1988a:16; 1988b:50). Generally, the absolute number, as well as the proportion of Japanese expatriates, was higher in the trading houses than in the manufacturing firms. Recent developments show, in fact, that this trend has increased; the latter seem to be more concerned about nationalization of certain positions than the former (Kitscha et al. 1988:24). Established personnel practices in the West German affiliates vary according to the nationality of employees. Primarily this variation is related to the different status of employment. The Japanese expatriates belong to the ‘core-staff’ with lifelong company affiliation; local German non-managerial and managerial staff have normal employment contracts. We have an indication that the latter also have no particular desire to belong to the ‘core-group’, but rather prefer to keep the option of job flexibility open (Kumar and Steinmann 1988:61).

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German staff With respect to local German staff the basic functions of personnel management are performed according to local practices (Kitscha et al. 1988:22). For instance, the recruitment of managerial staff directly from universities, as practised in Japan, is hardly ever followed. Generally, management trainees are recruited in adherence with the local practice of advertisements placed by the West German subsidiaries themselves in leading national newspapers. Recruitment for middle and top echelon positions is not only through promotion from within, but in most cases from external sources such as independent sourcing and personnel consultants, again in contrast to the practices in the parent companies in Japan. Selection is done via methods like questionnaires and interviews, and candidates are chosen more on the basis of criteria such as formal qualifications and education, past experience and proven success than purely on personality traits like group behaviour, leadership, etc., as is the case in the Japanese parent-companies. On the other hand, we have an indication that such personality criteria play a greater role in personnel selection in the West German affiliates of Japanese companies, than in ‘pure’ West German firms, which illustrates that personnel management in the former also incorporates elements of ‘globalization’. By and large, therefore, recruitment and selection of West German personnel follows local patterns. However, there is evidence that Japanese expatriate bosses in West Germany have some problems in implementing these practices. According to a survey conducted by Heise (1989:215), 65 per cent of the West German managers questioned criticized Japanese managers’ ability to run employment interviews. For instance, many West German managers complained in retrospect about the wrong information given to them about various issues in the subsidiary (for example, managerial style). Moreover, in most cases West German managers rated their Japanese bosses’ capability to assess the personal characteristics or job-related qualifications of local staff very poorly. Considering such difficulties one might suggest that Japanese companies would rather leave personnel matters where ‘local responsiveness’ is more appropriate, that is, to qualified West German staff. Certain findings show that Japanese manufacturing companies are realizing this and therefore implementing a localization policy in West Germany more willingly than Japanese trading companies. Apparently, the latter consider their personnel management to be very specific, although, paradoxically, they are operating on a world-wide scale (Park 1989:209).

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The industrial relations in the Japanese companies in West Germany are even more dominated by ‘local responsiveness’ strategies. Of course, in this area there is little scope for choice of action, since the very intricate West Germany labour legislation regulates major issues. For instance, wages, annual leave, and daily working hours are fixed by the so-called tariff contracts (Tarifverträge). Usually, only middle and upper level managers can bargain on terms on their own outside the contracts which are signed annually between the unions and the employers’ associations. According to some studies, Japanese companies find many West German rules and regulations a barrier to effective human resource management. For instance, Japanese managers find enforcing overtime work difficult in West German subsidiaries due to rigid restrictions. In their opinion this issue could be solved effectively, and the West German staff motivated to work overtime by adopting Japanese methods of employee participation, but legal restrictions prohibit this (Kumar and Beschorner 1988). Some Japanese companies also complained about other West German traditional systems, such as the apprentice system, the Meister system, and the piece wage system which in their opinion posed hindrances to increasing the overall efficiency of West German workers. As a Japanese manager commented, ‘it is hard to deal with these old systems since they are based on tradition and deep-rooted ways of thinking’ (JETRO 1984:135). In spite of pressures to adapt industrial relations to local conditions, some Japanese firms are also attempting to introduce Japanese methods where and when feasible. For instance, the introduction of bottom-up decision-making and strong but supportive leadership are means which are considered decisive for lowering absenteeism and turnover rates and improving labour productivity in West German subsidiaries. But most Japanese firms have yet to implement Japanese methods in personnel management (JETRO 1984:129). It appears that they are not confident as to how they will function in West Germany. The consequence is that there is an absence of clearly defined personnel policies in the West German subsidiaries, especially regarding local personnel (Kitscha et al. 1988:44). Furthermore, when Japanese patterns have been introduced, they are often not properly adjusted and handled. In certain aspects they have then achieved the opposite of what they were supposed to. For example, in his study of twenty-three West German affiliates which had introduced Japanese decision-making processes, Heise (1989:219) found that in most cases there were negative effects on the motivation of German managers and their

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staff. Such blunders have led to there being a dearth of well-qualified German managers for Japanese firms in West Germany. Expatriate personnel The image of Japanese firms in West Germany as employers has also suffered somewhat by their reputation of giving preference to Japanese expatriate personnel in the upper-level echelons and leaving less development scope for German executives. As several studies have shown, the chief executive office (president, vice-president) in most German subsidiaries of Japanese firms is a Japanese national (Kumar and Beschorner 1988:18; JETRO 1984:121; Kumar and Steinmann 1986:493). Many other top positions and functions are also assigned to expatriate personnel. For instance, in most financial institutions like banks at least the first two positions in the foreign exchange or credit department are invariably in Japanese hands (Kumar and Steinmann 1986:493). The main motives for assigning Japanese staff instead of German managers to managerial positions in West German subsidiaries are the effective transfer of know-how from, and the co-ordination of activities within, global policies of the parent-company (Kumar and Steinmann 1986:495). Apparently, expatriates are expected to be more effective in performing this job than local nationals. However, such considerations are not unique to Japanese companies and have been reported elsewhere (Steinmann and Kumar 1984:402). What is specific, perhaps, is the communication pattern for this job that expatriates are required to build up between the subsidiary and the Japanese parent-company. This is very much Japanese in nature, for instance regarding language, status, hierarchy, interaction modes, etc. Thus most of the German managers feel left out from the mainstream of information flows and decision-making. This has led to a lot of problems, not only in West German subsidiaries. Yoshira (1989:23), for instance, reports the criticism from French employees of Japanese companies in France that Japanese expatriates keep exclusive information for themselves and constitute a closed group. The possession of important information builds up status differences comparable to those between ‘core’ and ‘temporary’ employees in Japan. It is unsurprising, then, that in a study by Kumar and Steinmann (1988:71), 50 per cent of Japanese and German managers in West German subsidiaries reported conflict and tension between the two nationalities in their respective companies. Whereas the expatriates had complaints mainly about ‘incompatible attitudes and behaviour’,

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the German executives felt that insufficient rapport in connection with major decisions made together with the Japanese parent-company was the chief reason for unsatisfactory relations between the two groups. As mentioned earlier, Japanese expatriate staff in West Germany belong to the category of ‘core employees’. Consequently, they (as opposed to German employees) are treated according to, and integrated into, the personnel policies of the Japanese parent-company. Although Japanese human resource management is generally supposed to be well planned and developed, expatriate assignment to West Germany seems to be very unsystematic and rudimentary, as a study by Kumar and Steinmann (1986) shows. For instance, the recruitment of Japanese parent-company assignees to West Germany in most cases is ad hoc and not a part of the individual’s previous career plan. Preassignment training is not usual, and specific host-country orientation such as knowledge of West German customs and language is not considered to be an essential selection criterion. However, the average duration of a West German assignment among Japanese expatriates is over four years, which is more than western companies generally plan for their expatriates abroad. Japanese expatriates, being ‘core employees’ and having certain fixed career paths at home, do not have to fear reintegration problems as their western counterparts have to, and can therefore extend their stay in West German subsidiaries longer in order to benefit from the acculturation needed for good ‘local responsive’ management. SOME ASPECTS OF PURCHASING POLICY A further management issue which has a very specific Japanese facet and which undoubtedly plays an important part in the overall efficiency of Japanese firms is purchasing or procurement. Accordingly, Japanese companies are concerned about transferring the Japanese system to their overseas subsidiaries. As reported by JETRO (1988a: 10) procurement is also considered to be one of the main problems facing Japanese affiliates in Europe today. In view of this situation it seems quite plausible that, as reported earlier, Japanese companies strive to handle procurement in their West German subsidiaries as far as possible within global purchasing policies and with elements of the Japanese system. Compared to human resource management, where West German labour laws enforce ‘local responsiveness’ patterns to some extent, procurement is unhampered by such influences and can be moulded freely. A substantial amount of central influence on purchasing policy of the West German subsidiaries is exerted via dictating the

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proportion of procurement which must be imported from the Japanese parent-company and its traditional Japanese suppliers. According to a study by JETRO (1984:91), about 39 per cent of all required raw materials in West German manufacturing affiliates is imported from Japan. With respect to semi-finished parts the proportion is in fact 54 per cent. These figures alone indicate a substantial amount of globalization in the purchasing policy of West German subsidiaries. The main reason given for procurement from Japan is ensuring world-wide quality standards which cannot be met by West German suppliers (JETRO 1984:94). As such, the globalization of purchasing in West German affiliates can also be seen as an important instrument for implementing global strategies in products and product quality. With regard to local suppliers, Japanese affiliates in West Germany attempt to introduce Japanese procurement practices. The main thrust of such measures is directed towards fostering Japanese-style guidance to West German suppliers in order to get more control over quality and deliveries which are considered to be the biggest problems in local procurement. However, as interviews with Japanese managers in West Germany illustrate, Japanese companies experience limitations due to the structure of the West German supply industry, which for the major part consists of independent small and mediumsized firms which in West Germany are notorious for their attitude to shun any sort of external influence or affiliation which might hamper their free status (Kumar and Beschorner 1988). It is not surprising, then, that many Japanese firms consider ‘drastic measures’ necessary in order to improve local West German supplies (JETRO 1984:100). In most cases, however, maintaining and improving good relationships to West German suppliers is considered the appropriate strategy to gradually introduce Japanese procurement ideas in West Germany. SUMMARY AND CONCLUSION Although Japanese direct investments in West Germany have shown substantial growth rates and have also attained a considerable volume, they do not appear to be mainly directed towards export substitution strategies. The biggest portion is accounted by the traditional trading companies and financial institutions. Building up and securing outlets for exports from Japan and establishing securities business in West Germany seems, for the time being at least, to be the important objective.

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Large and prestigious Japanese manufacturing investments like Nissan in the UK have not yet taken place in West Germany. Out of all the branches, the Japanese electrical and electronic firms have the largest number of manufacturing units in West Germany. In the initial phases of investment this can be explained by the possession of oligopolistic advantages which traditionally give them enough superiority to encounter the risk of local competition. Gradually Japanese firms are also beginning to realize and take advantage of internationalization advantages as they gather management experience in West Germany and Europe. Japanese firms prefer to implement investments in West Germany in the form of fully-owned subsidiaries. This preference is greatest among the electrical and electronic companies and can be seen as an outcome of their firms’ specific advantages which give them enough competence and confidence to start ventures in West Germany on their own without German partners. Joint ventures are mainly vertical alliances established with partners in the forward and backward value chain. Japanese firms still face various problems in managing their West German subsidiaries. Compared to other Japanese overseas affiliates, for example in the USA, where Japanese management systems have been transferred with some success, West German subsidiaries have not yet quite found the right balance between Japanese and German patterns. A fundamental difficulty in achieving this arises out of different approaches to problem solving: Japanese management relies basically on social interaction whereas West German management is also heavily based on institutional patterns. In spite of such problems, most of the Japanese companies in West Germany are satisfied with their operations and report success (Kumar and Beschorner 1988). There is little doubt that Japanese business in West Germany has long-term ambitions. However, it may need further jolting and pushing to realize that eventually full-scale manufacturing operations will be economically and socially feasible. NOTES 1

2

Total cumulated Japanese direct investments in the world amounted to $106 billion in 1986. Out of this 34 per cent was in the USA, 21 per cent in Asia, 19 per cent in Latin America, and 14 per cent in Europe (JETRO 1987:13). The leading Japanese trading firms (sogo shosha) are: Mitsui & Co., Mitsubishi Corp., Marubeni Corp., C.Itoh & Co., Sumitomo Shogi Kaisha, Nissho-Iswai Co., Toyo Menke Kaisha, Kanematsu-Gosho, Nichimen Co. (Burton and Saelens 1980).

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3 4 5

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According to the census of Japanische Industrie- und Handelskammer Dusseldorf, 1989 (Japanese Chamber of Industry and Commerce). Of course, this does not reject the idea that the prospects of being able to locate a subsidiary within West Germany near other Japanese firms can influence the basic decision to invest in West Germany. Similar considerations based on the motivation pattern of Japanese direct investments in Europe are proposed by Franko (1984:106).

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REFERENCES Batzer, E. and Laumer, H. (1986) Deutsche Unternehmen im JapangeschäftMarkterschließungsstrategien und Distributionswege, München: IFO. Buckley, P. and Casson, M. (1988) ‘A theory of cooperation in international business’, in F.Contractor and P.Lorange (eds) Cooperative Strategies in International Business, Lexington, Mass.: Lexington Books. Burton, F. and Saelens, F. (1980) ‘The structure and characteristics of Japanese foreign direct investment in West Germany’, Management International Review 20, (4), 7–16. Deutsche Bundesbank (1989) Die Kapitalverflechtung der Unternehmen mit dem Ausland nach Ländern und Wirtschaftszweigen 1981–1987, 7 April, Frankfurt. Dunning, J. (1988) ‘The eclectic paradigm of international production: arestatement and some possible extensions’ , Journal of International Business Studies, spring, 1–31. Franko, L. (1984) Die Japanische Multinationalen Konzerne, Frankfurt: Campus. Heise, H.J. (1989) ‘How Japanese work out as bosses in Germany’, in K.Shibagaki, M.Trevor, and T.Abo (eds) Japanese and European Management—Their International Adaptability, Tokyo: University of Tokyo Press. JETRO, (1984) Japanese Enterprises in Europe, Tokyo: JETRO. ——(1987) Investitionen in Japan: Tatsachen und Zahlen, Tokyo: JETRO. ——(1988a) Current Management Situation of Japanese Manufacturing Enterprises in Europe, Tokyo: JETRO. ——(1988b) Japan’s Changing Overseas Direct Investment, Tokyo: JETRO. Kitscha, S., Kuchle, M., and Merz, H.P. (1988) Personalmanagement Japanischer Niederlassungen in der Bundesrepublik, Frankfurt and New York: Campus. Kojima, K. (1978) Direct Foreign Investment: A Japanese Model of Multinational Business Operations, London: Croom Helm. Kumar, B. (1987) Deutsche Unternehmen in den USA, Wiesbaden: Gabler. Kumar, B. and Beschorner, D. (1988) ‘A comparison of international management strategies: German companies in Japan versus Japanese companies in Germany—some empirical findings’, Paper presented at the 1988 Annual Conference of Asian-European Management Studies Association at Beer Sheva, Israel. Kumar, B. and Steinmann, H. (1986) Japanische Führungskräfte in Deutschland—Entsendung, Einsatz und Arbeitszufriedenheit, in ZfbF 38 (6), 493–515. ——(1987) ‘Markteintritts—und Führungsstrategien in Niederlassungen deutscher Unternehmen in Japan’, Blick durch die Wirtschaft, 19 July. ——(1988) ‘Führungskonflikte im deutsch-japanischen management’, Journal of Labor Problems 26 (1), 59–76. McMillan, C. (1984) The Japanese Industrial System, Berlin and New York: de Gruyter. Marsland, S. and Beer, M. (1983) ‘The evolution of Japanese management: lessons for U.S. managers’, Organizational Dynamics, winter, 49–64. Negandhi, A. (1987) International Management, Boston: Allyn & Bacon.

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Park, S. (1989) ‘Personnel management of Japanese subsidiaries in West Germany’, in K.Shibagaki, M.Trevor, and T.Abo, (eds) Japanese and European Management: Their International Adaptability, Tokyo: University of Tokyo Press. Steinmann, H. and Kumar, B. (1984) ‘Personalpolitische Aspekte von im Ausland tätigen Unternehmen’, in E.Dichtl and O.Issing (eds) Export als Herausforderung für die Deutsche Wirtschaft, Köhn: Westdeutscher Verlag. Yoshira, H. (1989) ‘The bright and dark sides of Japanese management overseas’, in K.Shibagaki, M.Trevor, and T.Abo, (eds) Japanese and European Management: Their International Adaptability, Tokyo: University of Tokyo Press.

Index

Abegglen, J.C. and Stalk, G.Jr. 24 Age, the 177, 179, 180, 181, 185, 188 Aglietta, M. 97 Akai 53 Allen, G.C. 26, 61, 62, 63 Altshuler, A., Anderson, A., Jones, D.T., Roos, D. and Womak, J. 97, 106, 131 AMFSU see Australian Metal Workers Union Anderson, A. (in Altshuler, A. et al) 97 Anderson, M. and Holmes, J. 127 ANIEs see Newly Industrializing Economies, Asian anti-dumping legislation, EC 37 Aoki, M. 97 ARTEP 25 Asahi Shimbun 144–5 Asanuma, B. 106 Association of South-East Asian Nations (ASEAN) 4–5, 7, 10, 57–8, 135–51, 154– 71 Australia, Japanese FDI in 33, 173–93; the Morwell Brown Coal Liquefication pilot project 177–81; Multifunction Polis (MFP) 188–91; subsidiaries and corporate strategies 181–8 Australia-Japan Economic Institute 175, 176 Australia-Japan Joint Study Group on Raw Materials Processing 178 Australian Committee for Industrial and Technical Cooperation (AUSCITEC) 176 Australian Council of Trade Unions (ACTU) 183 Australian Embassy, Japan 173, 174 Australian Financial Review 178, 179, 187, 188 Australian Manufacturing Council 191 Australian Metal Workers Union 179, 180 Australian Overseas Information Service 174 Australian Planner 189 Australian Wireless Association (AWA) 183 automotive transplants in the USA 91–111; ‘

Just-In-Time’ supplier complexes 104–9; research design 92; unionization and industrial relations 101–4; work and production organization 97–101 Autopact (Canada/Japan) (1965) 121 Bailey, W. 190 Bank of Korea 156 basic materials industries, the rise of 48–9 Batzer, E. and Laumer, H. 224 Beer, M. (in Marsland, S. et al) 220, 224, 225 Bellemar Parts 107 Berry, B. 107 Beschorner, D. (in Kumar, B.Nino et al) 220, 223, 224–5, 227, 228, 230, 231 Birdzell, L.E. (in Rosenberg, N. et al) 149 Blain, R. and Norcliffe, G. 115 Brash, D.T. 185, 186 Britton, J.N.H. and Gilmour, J.M. 39, 85, 186–7 Buckley, P. and Casson, M. 223 Burton, F.M. and Saelens, F.H. 25, 214, 216–17 Business International 139 Business Week 104 Button, J. 174, 188–9, 190 buyer-supplier relations 6, 24, 38–9, 91; in Canada 124–9; in the EC 196; in the USA 98, 104–9 CAMI see General Motors, GM-Suzuki Canada, JMI in 115–32; the empirical evidence 118–20; historical trends 115–18; local content 124–9; plant types, markets and integration 120–3; production and work organization 129–31; the relocation and location process 123–4 Canon 53, 208 CAPTIN see Toyota in Canada Casson, M. (in Buckley, P. et al) 223 Cavanagh, J.H. (in Clairmonte, F.F. et al) 25 Cawson, A. 36 Center for Business and Economic Research 131

235

236

Index

Child-Hill, R., Indergaard, M. and Fujika, K. 128 Christie, I. (in Trevor, M. et al) 205 Chrysler 93, 185 Clairmonte, F.F. and Cavanagh, J.H. 25 Clifford, E. 124 Cole, R. and Deskins, D. 103–4 Colman, D. and Nixson, F. 33 component sourcing 6, 24, 38–9, 91, 98, 104– 9, 128 Cooke, P. and Wells, P. 3 ‘core employees’ see expatriate staff in West Germany Cornelius, A. 11 cost-down, domestic 49, 53, 55–7 Council for Economic Planning Development, Republic of China 160 Cusumano, M.A. 4, 197 Dai-ichi Kangyo Bank (DKB) 179 databases, FDI in the USA 61, 87n Davy McKee Pty. Ltd. 179 Daw, J. 120 Delbridge, R. 208 Deskins, D. (in Cole, R. et al) 103–4 Deutsche Bundesbank 217, 218 Diamond Star Motors 93, 98, 101, 107 Dicken, Peter 14–41, 61, 78, 79, 82, 85 discrimination, worker 103–4 Dix, W.L. 186 Dixon, H. (in de Jonquières, G. et al) 6, 207 Dodwell Marketing Consultants 106 Dohse, K., Jurgens, U. and Malsch, T. 100 Done, K. 118, 209 Donees, J.B. 33 Dore, R.F. 26, 27, 108 Drache, D. and Gertler, M. 121 Dualtec 127 Dunning, J.H. 14, 15, 36, 39, 201, 219, 221 Economic Yearbook of the Republic of China 155 Economist 30, 34, 35, 123, 147, 208 Economist Intelligence Unit (EIU) 7, 8, 9 Economisuto 54 Edgington, David W. 173–93 Embrey, G. 104 Emmott, W. 1 endaka see yen, the high Equal Employment Opportunity Commission (EEOC) (USA) 103–4 Europe see European Community; Western Europe European Community (EC), JMI in the 4, 5–6, 36, 124–5, 195–211; explaining 196–7; the form and types of 203–6; the future of 209– 10; the locational and sectoral characteristics 197–202; recent trends 206–8 expatriate staff in West Germany 228–9 Far Eastern Economic Review 32, 38, 154, 164

Federation of Korean Industries 157, 168, 169 Feigenbaum, A. 119 ‘flat organization’ 4 ‘flexible transnationals’ 3 Florida, Richard 91–111; (in Mair, A. et al) 93, 103, 105 FMI see Japanese Manufacturing Investment Foreign Direct Investment (FDI) 14–41; in Australia 173–93; automotive transplants 91–111; a global perspective of 14–41; its role in the Japanese economy 29–32; structural origins of 45–59; in the United States 61–88; in West Germany 213–32; see also Japanese Manufacturing Investment France 200, 202, 228 Franko, L.G. 24 Frobel, F., Heinrichs, J. and Kreye, O. 10, 93 Fuji 53 Fujika, K. (in Child-Hill, R. et al) 128 Fujima International 127 Fujitsu Microelectronics 145, 187–8, 198, 207 Fuso 96 General Agreement on Tariffs and Trade (GATT) 30, 166 General Motors (GM) 101–2; General Motors Holden (GMH) 183, 185, 186; GM-Suzuki (CAMI) 118, 120, 128–9, 130 geography of Japanese FDI, the changing 14– 41; explanation of general trends and patterns 23–32; global trends and patterns 15–23; JMI in the USA 71–8, 91–111; variations in the mode of investment 32–9; in West Germany 213–32 Gertler, M. (in Drache, D. et al) 121 Gilmour, J.M. (in Britton, J.N.H. et al) 39 Gilpin, R. 136 Glasmeier, A. and McCluskey, R. 106 Gleave, S. and Oliver, N. 205 global localization 1–12, 210; case studies 4–9; and ‘regional’ differentiation 9–11 globalization 1–12 government-business relationships in Japan 26–8 ‘greenfield entry’ 82, 103 Hata, N. 115 Hayter, R. 39 Heinrichs, J. (in Frobel et al) 10, 93 Heise, H.J. 226, 227 Heller, R.H. and Heller, E.E. 61 Hill, R.C, Indergaard, M. and Kuniko, T. 93, 101, 102 Hino 96 Hitachi 49, 204, 208 Holmes, J. 108, 121; (in Anderson, M. et al) 127 Honda 7–9, 70, 75, 92, 93, 94, 96; in Canada

Index

118, 122, 130; in the EC 197, 198, 209, 213; US transplants 98–9, 101, 103, 104, 107, 108 Hoover 209 Hosomi, T. and Okumura, A. 26 Hout, T.M. (in Magaziner, I.C. et al) 26 Ikeda Bussan 209 Imai, K.I., Nonaka, I. and Takeuchi, H. 97 Imrie, R. (in Morris, Jonathan L. et al) 4, 6, 11, 127, 196, 197, 198, 200, 205, 208, 209, 210–11 Indergaard, M.: (in Child-Hill, R. et al) 128; (in Hill, R.C. et al) 93, 101, 102 indicative national economic planning 26–8 Indonesia 7, 10, 33, 49 industrial relations 101–4, 206; JMI in the EC 206; in US automotive transplants 101–4 industrial restructuring 53–5 industrial structure, characteristics of Japanese 24–6 Industries Assistance Commission (Australia) 185, 186 INOAC Group 127–8 integration strategies in Canada 115–32 international division of labour see labour, reshaping the international division of international product cycle see product cycle, the international Invest in Britain Bureau 15 Investment Commission, Republic of China 159, 162 investment motives and JMI in West Germany 220–1 Ishiro, K. 107 Isuzu see Subaru-Isuzo JAMA in Canada 116–17, 118, 127 James, B. 203, 208, 210 Japan Economic Institute 95; in Washington 61, 87n Japan Economic Journal 179, 188 Japan Overseas Enterprises Association 188 Japan Precision Industries 144 Japan Robot Lease (JAROL) 146 Japan Secretariat 177 Japan Storage Battery 96 Japanese External Trade Organisation (JETRO) 22, 61, 163, 164, 197, 198, 205, 213–30 passim Japanese Management Research Unit 196 Japanese Manufacturing Investment (JMI) 1– 12, 16–22; in Canada 115–32; in the EC 195–211; in South-East Asia 7, 10, 135–51; in the USA 61–88; see also Foreign Direct Investment Japanese Trade and Industry, Journal of 55 Japanische Industrie- und Handelskammer 220 Japan’s Expanding US Manufacturing Presence (1986 Benchmark Survey and 1987 Update) 61, 87n

237

Japan’s Industrial Society towards the 21st Century, An Outlook for (MITI) 189 JAROL see Japan Robot Lease JETRO see Japanese External Trade Organisation JIT see ‘Just-In-Time’ component sourcing JMI see Japanese Manufacturing Investment Johnson, C. 26, 27 Johnstone, B. 149 Jones, D.T. 36; (in Altshuler, A. et al) 97, 106; (in Womak, J. et al) 3, 206; and Womak, J. 131 Jonquieres, G.de and Dixon, H. 6, 207 Julius, D.A. 1 Jurgens, U. (in Dohse, K. et al) 100 ‘Just-In-Time’ component sourcing 6, 24, 91; in Canada 128; US supplier complexes 98, 104–9 JVC 53 Kagaku Gijutsu Cho 147 Kamur, B.Nino 213–32 kanban see ‘Just-In-Time’ component sourcing Katz, H. 97, 102; (in Kochan, T. et al) 102 Kennedy, P. 136 Kenney, Martin 91–111; (in Mair, A. et al) 93, 103, 105 Kim, K.I., Kim, K.H. and Lesage, J.P. 35 Kirkpatrick, C.H., Lee, N. and Nixson, F. 33 Kitada, Y. 143 Kitamura, H. 137 Kitscha, S., Kuchle, M. and Merz, H.P. 225, 226, 227 Kobayashi, H. 137 Kobe Steel 125, 178, 179 Kochan, T. Katz, H. and McKersie, R. 102 Koike, K. 97 Kojima, Kiyoshi 136, 221 Kono, T. 24 Korea 96 Kosaka, T. 145 Krafcik, J. 93, 101, 102, 108 Kreye, O. (in Frobel et al) 10, 93 KTH Parts 107 Kuchle, M. (in Kitscha, S. et al) 225, 226, 227 Kumar, B.Nino 213–32; and Beschorner, D. 220, 223, 224–5, 227, 228, 230, 231; (in Steinmann, H. et al); and Steinmann, H. 224, 225, 228–9 Kuniko, T. (in Hill, R.C. et al) 93, 101, 102 labour, reshaping the international division of 135–51; deflecting the boomerang 145–51; the international product cycle 136–45 Lamberton, D.M. (in Mandeville, T. et al) 190 land prices 52–3 Langley, J.A. 115–16

238

Index

Latin America 33 Laumer, H. (in Batzer, E. et al) 224 Lee, N. (in Kirkpatrick, C.H. et al) 33 Lesage, J.P. (in Kim, K.I. et al) 35 Liem Group 164 Lifson, T.B. (in Yoshino, M.Y. et al) 25 local content, JMI and 2, 124–9, 204–5; in Canada 124–9; in the EC 204–5 location, JMI, in Canada, the 123–4 Long-Term Arrangement (Textiles) (1962) 30 low-cost production 46–8 Lucas Automotive 209 McCluskey, R. (in Glasmeier, A. et al) 106 McKern, R.B. 174 McKersie, R. (in Kochan, T. et al) 102 McKnight, S. 66, 68–9, 73, 76–7, 79–80, 83 McMillan, C.J. 115, 225 MAFEZ see Masan export processing zone Magaziner, I.C. and Hout, T.M. 26 Magna Corporation 127 Magna International Inc. 127; Magna-Daikyo 128 Mair, A., Florida, Richard and Kenney, Martin 93, 103, 105 Malaysia 7, 10, 49 Malaysia Matsushita Television (MTV) 144 Malsch, T. (in Dohse, K. et al) 100 management issues and JMI in West Germany 224–9; general patterns 224–5; problems in personnel management 225–9 Mandeville, T. and Lamberton, D.M. 190 Mankin, E.D. (in Reich, R.B. et al) 190 manufacturing practices in the EC, JMI and 205 marketing in Canada 120–3 Marsh, F. 61, 62, 63 Marsland, S. and Beer, M. 220, 224, 225 Masan export processing zone (MAFEZ) 140 Matsushita Electric 11, 35, 37, 49, 204, 207, 221; Matsushita Electronics 182, 183; Matsushita Industrial, Canada 121, 122; MTV 144 Mazda 92, 98, 101, 102, 107 Merz, H.P. (in Kitscha, S. et al) 225, 226, 277 Metal Trades Unions (Australia) 179 Mexico 4, 200 Milner, B. 124 Minami, J. 145 Ministry for International Trade and Industry (Australia) 174 Ministry of International Trade and Industry (MITI) (Japan) 26–8, 31–2, 140, 141, 178– 9, 181, 188–90; FDI statistics 16–21, 34; _ Tsusho– Sangyo– Sho– 140–51 passim 166–7 MITI see Ministry of International Trade and Industry (Japan) Mitsubishi Corporation 24, 47, 92, 93, 214;

Mitsubishi Chemicals 178–9; Mitsubishi Motors 183, 184, 187, 206–7; Research Institute 106 Mitsui 47 Morgan, K. and Sayer, A. 14 Morris, Jonathan L. 1–12, 14, 61, 115–32, 195–211; and Imrie, R. 4, 6, 11, 127, 196, 197, 198, 200, 205, 208, 209, 210–11 Morris-Suzuki, Tessa 35, 135–51 Morwell Brown Coal Liquefication pilot project, the 177–81 motives for JMI in West Germany 2, 223–4 Multi-Fibre Arrangement (Textiles) (1974) 31 multifunction polis (MFP) 173, 177, 188–91 Munday, M. 208 Muraoka, Teruzo 154–71 Nakajo, S. 35 Nakane, Y. 93 Nakase, T. 25 National Bureau of Statistics (Republic of Korea) NEC 144, 176, 183, 185, 187–8, 207 Negandhi, A. 223 New Zealand 7 Newly Industrializing Economies (NIEs), Asian 10, 35, 145, 148–9, 154–71; in the ASEAN region 158–64; causes of competition strength 166–8; challenges to Japanese FDI 164–5; distribution by region and industry 155–8; facilitating capital-exporting 168– 70; future problems and prospects 170–1; the Pacific triangular relationship 165–6; Taiwanese and South Korean OI 154–5 NIEs, Asian see Newly Industrializing Economies, Asian Nihon Keizai Kenkyu Senta 139 Nippon Brown Coal Liquefaction Ltd. (NBCL) 177–81 Nippon Steel 56 Nippondensu 209 Nisoguchi, T. 106, 107 Nissan 11, 37, 53, 56; in Australia 176, 183, 184, 185; in the EC 195–211 passim, 213; Nissan Diesel 96; US transplants 93, 96, 98, 101, 103, 104, 107 Nissan-Ford 101 Nissho Iwai 178–9 Nixson, F.: (in Colman, D. et al) 33; (in Kirkpatrick, C.H. et al) 33 Nobuto, O. 93, 102 Nonaka, I. (in Imai, K.I. et al) 97 North America see Canada; Mexico; United States of America NUMMI 93, 98, 101–2, 107, 108 O hUallachain, B. 71, 85 Observer, the 201 Oceania see Pacific triangular relationship Ogihara America Corporation 70 oil crisis, the 48–9

Index

Okumura, A. (in Hosomi, T. et al) 26 Okurasho 45 Oliver, N.: (in Gleave, S. et al) 205; (in Pang, K.K. et al) 205; and Wilkinson, B. 127, 205, 206 Organization of Petroleum Exporting Countries (OPEC) 30 Oriental Economist 25 ownership in the EC, JMI and 203 Ozawa, T. 23, 25, 30, 61, 62, 140 Pacific triangular relationship, the 4, 10, 165–6 Packard Electric 107 Pang, K.K. and Oliver, N. 205 Park, S. 226 Parker, M. and Slaughter J. 100 parts supplier alley (Ohio, USA) 9 Patterson, G. 104 personnel management in West Germany 225– 9; and expatriate staff 228–9; and German staff 226–8 Philippines 49 Piore, M. and Sabel, C. 110 plant types in Canada 120–3 Plaza Agreement, the (1985) 2, 31, 123, 154, 196 polycentrism see Honda; IBM; Sony product cycle, the international 136–45; the import-substituting phase (1965–75) 139– 43; the overseas sourcing phase (since 1975) 143–5; the product phase (1950–65) 137–8 production organization 97–101, 129–31; in automotive transplants 97–101; in Canada 129–31 protectionism 30–1, 37, 40, 93, 96, 121, 179, 180–1, 227 Pt. Indah Kiat Pulp 165 R&D see research and development real estate 52–3 ‘regional’ differentiation 9–11 regional presence in Canada 115–32 Reich, R.B. and Mankin, E.D. 190 Reid, Neil 61–88 relocation and location process in Canada, the 123–4 research and development 2, 11, 39; in Australia 181, 185–8, 190; in Canada 119, 122, 131; in the EC 124–5, 202, 203, 204, 210; in the USA 8, 94, 108 ‘reverse engineering’ 28, 96 Revised Labour Standards Act (1989) 56–7 Robins, K. 3–4 Robinson, R. 164 Rodger, I. 125 Rodosho 56 Roemer, J.E. 26, 61 Roos, D.: (in Altshuler, A. et al) 97, 106; (in Womak, J. et al) 3, 206 Rosenberg, N. and Birdzell, L.E. 149

239

Rubenstein, J.M. 75 Runyon, M. 93 Sabel, C. 110; (in Piore, M. et al) 110 Saelens, F.H. (in Burton, F.M. et al) 25, 214, 216–17 Sakiya, T. 93 Sako, M. 127 Sangyo– Ko–zo– Shingikai 146 Sansui 53 Sanyo 53, 176, 183 Sayer, A. 24, 106; (in Morgan, K. et al) 14 Schoenberger, E. 38 Schonberger, J. 24 sectoral distribution of FDI 18–22, 67–70; in the EC 197–202; in the USA 67–70 Sekiguchi, S. 35, 61 Sharp 183, 208 Sheard, P. 24, 106 Shibusawa, M. 143 Shimada, H. 97; and MacDuffie, J. 97 Shinohara, Miyohei 143 Slaughter J. (in Parker, M. et al) 100 Smith, C. 144 so–go– sho–sha 25, 210, 214, 231n Sony 4–6, 37, 53, 145; in the EC 195–211 passim So–rifu To–kei Kyoku 147 South America 16, 33 South Korean overseas investment 154–71; in the ASEAN region 161–4; causes of competition strength 166–8; challenges to Japanese FDI 164–5; distribution by region and industry 155–8; facilitating capitalexporting 168–70; future problems and prospects 170–1; and JMI 10, 49, 139–40; the Pacific triangular relationship 165–6; pattern of 154–5 South-East Asia, JMI in 4–5, 7, 10, 16–17, 19, 33, 35, 40, 135–51; and the ANIEs 154– 71; deflecting the boomerang 145–51; the international product cycle 136–45 Spain 200, 201–2, 203 Stalk, G.Jr (in Abegglen, J.C. et al) 24 Standard Industrial Classification (SIC) codes 67–70 Steinmann, H.: (in Kumar, B.Nino et al) 224, 225, 228–9; and Kumar, B.Nino 228 Steven, Rob 2, 45–59, 196 Stewart-Patterson, D. 124 structural origins of Japanese FDI 45–59; the high yen 49–59; low-cost production 46–8; rise of basic materials industries 48–9 sub-contracting in Canada 124–9 Subaru-Isuzu 93, 96, 101, 107 subsidiaries in Australia, Japanese 181–8; and exports 184–5; and imports 182–4; R&D and innovation 185–8 Sumitomo 47; Sumitomo Denso 107; Sumitomo Wiring Systems 209 Suzuki 53

240

Index

Taiwanese overseas investment 154–71; in the ASEAN region 158–61, 162; causes of competition strength 166–8; challenges to Japanese FDI 164–5; distribution by region and industry 155–8; facilitating capitalexporting 168–70; future problems and prospects 170–1; and JMI 7; the Pacific triangular relationship 165–6; pattern of 154–5 Takeuchi, H. (in Imai, K.I. et al) 97 Tatsuno, S. 190 Thailand 7, 144, 155 Toray Industries 207 Toshiba 56, 144, 204, 221 Toyoda Automatic Loom 94 Toyota 57; ASEAN expansion 10; in Australia 176, 183, 185; in Canada 118, 119, 120, 130; in the EC 197, 198, 206, 209; US transplants 93, 94, 96, 98, 101–2, 103 Trade Development Council (Australia) 184 trade and FDI in the Japanese economy, the role of 29–32 trade friction 30–1, 37, 40, 93, 96, 121, 179, 180–1, 227 trades unions 124, 206; and US automotive transplants 101–4 training 119–20 Treasurer (Australia) 181 Trevor, M. and Christie, I. 205 Tsukazaki, S. 61 Tsurumi E.Patricia 24, 25, 26, 27, 29, 46, 47 Tsusho Sangyo Sho 140–51 passim, 166–7 Turnbull, P. 127 Turner, L. 37 Twu Jaw-Yann 158 underground foreign exchange markets 155 unionization 101–4, 206; in automotive transplants 101–4 unions see trades unions United Auto Workers union (UAW) 86, 101–2, 103, 124 United Nations 138, 149–50 United States of America, Japanese FDI in the 2, 16–17, 40, 61–88, 91–111; the caseof the automotive transplants 91–111; the growth of 63–7; the historical context 62–3; the penetration of the manufacturing sector 78–82; the potential impact of JMI on job

creation 82–6; the sectoral distribution of 67–70; the spatial distribution of 71–8 United States Department of Commerce 64–5, 67 United States General Accounting Office 97 US International Trade Commission (1987) 98, 106 US Steel 125 Utting, J. 120 Valeo 209 Vernon, Raymond 136 Voluntary Restraint Agreement (Japan/ USA) (1981) 93 Wagstyl, S. and Buchan, J. Wall Street Journal 96, 97 Ward’s Auto World 94, 96, 106 Wells, P. and Cooke, P. 3 West Germany, Japanese FDI in 145, 199, 202, 204, 213–32; direct investment strategies 221–4; management issues 224–9; purchasing policy 229–30; recent trends 215–21; structure and characteristics of 214–15 Western Europe, FDI in 4, 5–6, 16, 19, 36, 40; the European Community (EC) 195–211; see also West Germany Wickens, P. 204 Wilkinson, B. (in Oliver, N. et al) 127, 205, 206 withheld wages 46 Wolf, M. 10 Womak, J.: (in Altshuler, A. et al) 97, 106; (in Jones, D.T. et al) 131; Jones, D.T. and Roos, D. 3, 206 Woodbridge Group 127–8 Yamamoto, T. 93–4 yen, the high 2, 31, 34, 41, 45, 49–59, 196–7; the costs of 53–9; the crisis 51–3; origins of the crisis 49–51 Yencken, D. 190–1 YKK 214–15 Yoshihara, K. 140 Yoshino, M.Y. 61, 62; and Lifson, T.B. 25 Yoshira, H. 228 Young, A.K. 25 Yuasa Battery 209 Yukawa, H. 148