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

Table 3-4-Selected Financial Data for U.S. Affiliates of Foreign Companies, 1990

Japan United Kingdom Netherlands Germany

Number of affiliates . . . . . . . . . . . . . . . . . . . . . . .Total assets (in $ bil) . . . . . . . . . . . . . . . . . . . . . .

Safes (In $ roil) . . . . . . . . . . . . . . . . . . . . . . . . . . .Net income (in $ roil) . . . . . . . . . . . . . . . . . . . . . . .Number of employees (in thousands) . . . . . . . . .Average compensation (in $, per employee) . . .Exports by affiliates (in $ roil) . . . . . . . . . . . . . . . .Imports to affiliates (in $ roil) . . . . . . . . . . . . . . . .Ratio of imports to sales . . . . . . . . . . . . . . . . . . .Ratio of exports to imports. . . . . . . . . . . . . . . . . .

2,142370

313,138-2,191616.7

37,20339,15587,712

0.280.45

1,161262

188,8522,4061,039.2

32,0367,926

13,2250.070.60

346 91

72,81932

290.234,290

2,8296,588

0.090.43

1,144101

107,521219513.3

34,3077,041

17,8580.170.39

SOURCE: U.S. Department of Commerce, Bureau of Economie Analysis, For@QnDir~t/nv~tientin the UnhdStates: @eratbns otU.S. Affi/htesof Foreign Compan/es, Preliminary 19$M Estimakas, August 1992, table A-2; U.S. Department of Commerce, Bureau of Economic Analysis, Foreign Direct Investment in the United States: An Update, Jurie 1993.

Proponents of FDIUS who emphasize jobcreation often blur the distinction between foreignand domestic firms and, at the extreme, reject thenotion of national firms. Some have argued that aforeign-based MNE with manufacturing facilitiesin the United States contributes more to the U.S.economy than a U.S.-based MNE that transfersthe bulk of its manufacturing to offshore facili-ties. 77 In this view, U.S. prosperity lies in theskills of the labor force, not necessarily in thesuccess of U.S.-owned firms. The implication isclearly that incentives or regulations should beused to encourage forms of FDIUS that use, and

help develop, a skilled labor force for highvalue-added jobs. Such a theoretical dichotomybetween a foreign firm that invests in the UnitedStates and a U.S. firm that invests abroadexcludes discussion of what many argue is thepreferred option-a U.S.-owned firm that investsin plant and labor in America.

| Disadvantages of FDIUSCritics of the national treatment approach to

FDIUS emphasize four major complications:

harm to competitiveness, unfair employment andhiring practices, financia1 subsidies, and eco-nomic and military security issues relating totechnology transfer. All four link multinationalcorporate responsibility to aspects of U.S. eco-nomic and social development.

First, critics stress competitiveness-namely,the potentially adverse economic consequencesof unregulated FDI for U.S. manufacturing firmsand for the U.S. technology base. 78 In contrast tothe argument that direct competition will improvethe productivity of U.S. firms, these analystsstress that foreign competitors can destroy do-mestically based firms because they can competein an unrestricted U.S. economy from the basis of highly restricted international competition intheir own market. As a result, unrestricted compe-tition may benefit consumers in the short term,but both consumers and the national economywill eventually lose.

Along these lines, recent work contrasts the‘‘trade-creating’ nature of Japanese direct invest-ment abroad (DIA) with the ‘‘trade-destroying”

77 see,for ~mple, Ro&~ B. Reich “who is Us?,” Harvard lkrz”ness Review, January-February 1990 PP. 53-64.

78 See, for ex~ple, hfartinl’blchin~d SUSWI Tolchin,Buyinginto America: HowForeign MoneyIs Changing the Face of OurNation (NCWYork NY: Times Books, 1988); Pat Choate, “Political Advantage: Japan’s Campaign for Ameri~” HarvardBum”ness Review, 1990: 87-103;Norman Glickrnanand Douglas Woodward, The New Competitors: How Foreign Investors Are Changing the U.S. Economy (New Yorlq NY:Basic Books, 1989); Daniel Bursteiq Yen!: Japan’s New Financial Empire andlts Threat to America (New York NY: Simon and Schuster,1988); Thomas Ornestad, “Selling Off America,”Foreign Policy, No. 76 (fall 1989), 119-140,

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Figure 3-7—Escalating American State Subsidization to Auto Manufacturers

1982: Honda – Marysville, OH

1983: Nissan – Smyrna, TN

1987: Mazda – Flat Rock, Ml

1988: Diamond-Star – Normal, IL

1988:Toyota – Georgetown, KY

1989: Subaru-lsuzu (SIA) – Lafayette, IN

1- —

2,500

6,4701

14,263

28,724

42,771

98,059! 1 I I —1

0 20,000 40,000 60,000 80,000 100,000 120,000Dollars per employee

SOURCE: Adapted from Martin Kenney and Richatd FlorMa,“HowJapanese Industry Is Rebuilding the Rust Belt,” 7bchno10gyRetiew, Feb.-March

1991, p. 30.

1991, even though many of those companiesgenerated negative earnings. 94

ASYMMETRIES IN NATIONAL POLICYREGIMES

To understand the current state of FDI, it isnecessary to review its history. Their have beenthree distinct periods. The frost, from the 1890s tothe 1930s, was marked by protectionist trade

policies in Europe, Japan, and the United States,complemented by open investment policies. Amer-icans heavily substituted direct investment forportfolio investment in Europe and Japan, partic-ularly in manufacturing production facilities.This preference was reflected in the outwardexpansion of firms like Singer and Ford. 95

Japan and France, although later resistant toforeign investment, were at this time receptive toU.S.-based MNE investment. 96 In discussingcultural and structural impediments that confront

U.S. firms in Japan, many analysts overlook therich history of U.S. trade and investment in Japanin the early twentieth century, and their earlysuccesses producing and selling in Japan. Thisraises the question of why U.S.-based MNEs thatwere successful at providing and selling in Japanin the past should be less able to do so today.

In the second period, from the 1930s to the1970s, the FDI policies of advanced industrial

states diverged systematically. The United Statesand United Kingdom sustained largely unregu-lated, enthusiastic national treatment investmentpolicies. Britain became a major recipient of U.S.MNE investment, largely involving the construc-tion of fully integrated manufacturing facilities.

In contrast, in the 1930s, 1940s, and in somecases through the 1970s, Germany, Italy, Japan,and France either completely blocked foreigninvestment-and sometimes threw U.S. firmsout-or took steps to ensure that foreign firms did

~ Gmham,op. cit., footnote 2, p. 1740. This tendency was sustained in 1992 according to “Japan Keeps Cash at Home,” op. cit., footnote4, p. 4, with Japanese investors sustaining net losses of $2 billion.

w See, for ~amp]e,wilkins et a.I.,op. cit., footnote 5; and MSSO% op .cit., footnote 5.96For a discussion of Japan in this pcriod, w MChlld CWXUIMXIo, The Japanese Autonwbile Industry (Cambn“dge,MA: Council on East

Asian Studies, Harvard University Press, 1985); for France see Pariick Fxidenson,“French Automobile Marketing, 18901970,’ Akio Okochiand Koichi Shimokawa (eds.),The Development of Mass Marketing (’Rdcyo: University of ‘lMryoPress, 1981).

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Chapter 3-Foreign Direct Investment | 71

forced to trade proprietary technology for market Japan as a Special Caseaccess. 103 Many U.S. firms have turned to their In some cases, U.S. firms may not have madegovernment for help in an effort to gain trade or a realistic effort to gain market access in Japan;investment access to Japan’s market l04 or have accordingly, their claims that the Japanese systemsimply given up, frustrated by the high costs of is unfair maybe inappropriate. On the other hand,market entry. charges of Japanese limitations on trade and

investment should not be dismissed merely as

Im For a dis~ssion of tie e~rienc~ of these fm in Japan see ficarnationet d. , Op. d.. fOO@lOk 97,pp. 25-54; -~ Op. cit., foo~ote5; and Tyscq op. cit., footnote 8, pp. 53-75.

IM pe~r y, K~nstein and Yutaka Tsujinaka, ‘‘Bullying vs. Buying: U.S.-Japanese ‘rransnational Relations and Domestic Structures,”paper delivered at the 1992 Annual Meeting of the American Political Science Association, Chicago, Sept. 3-6, 1992. me U.S. Governmenthas initiated several export-promotionmeasures such as the ‘Japan Corporate Program.” For details, seethe AmericimChamber of Corrunenx,The Wu’fedStates-Japan WhitePaper J993 (Tokyo: American Chamber of Commerce in Japam 1993), p. 2.

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Chapter 3-Foreign Direct Investment | 77

funding of Japanese products directly competingwith U.S. products, Imported food products facerigid barriers such as unrealistic short deliverydeadlines and onerous date-labeling requirements,in addition to being required to meet food safetystandards different from those sued in othercountries. Restrictions on premium pricing andsales promotions handicap foreign and new-to-market companies, such as travel and tourismagencies and processed food importers. 142

The definition of a legitimate basis for govern-ment intervention to deny foreign investment istherefore far broader in Japan than in the UnitedStates.

According to a recent report of the UnitedStates Trade Representative (USTR), governmentmeasures that are transparent often remain dis-criminatory. The USTR reported that the Japa-nese Government retains the authority to restrictinvestment in specified sectors, including aircraft,space development, agriculture, fishing and for-estry, oil and gas, mining, leather and leatherproduct manufacturing, nuclear power, weaponsand ordnance manufacturing, and tobacco. 143

U.S. firms often raise five additional issues.These are:

1.2.

3.

4.

5.

intellectual property and patent rights;Japanese Government and private sectorprocurement practices;inadequate funding of programs intended toencourage FDI in Japan;the high withholding rate on dividendsrepatriated to overseas parents;continuing regulation intended to supportprices in the property and financial sectors.

The issue of intellectual property rights in Japanis complex, extending both to advanced high-technology sectors such as biotechnology and tomore established sectors such as automobiles and

textiles. U.S.-based MNEs are concerned thatJapanese patent protection rules and the longerduration of patent registration (compared to othernations) has a deleterious effect on the competi-tiveness of foreign firms. l44 This claim is not new,dating to initial U.S. efforts to re-enter theJapanese market. It has become more acute,however, because of the heightened competitive-ness of Japanese firms, the access of Japanesefirms to America’s best technology, and theimportance attached to patent issues at the contin-uing Uruguay Round of the General Agreementon Tariffs and Trade (GATT). Attempts toaddress U.S. concerns have not been effective. 145

The procurement issue focuses on the claimthat pervasive “ ‘Buy Japanese’ attitudes andpractices persist in such sectors as constructionand engineering, radio communications (wirelesstelecommunications equipment), and semicon-ductors, for which major ‘market-opening’ orpurchasing agreements exist." 146 The same claimhas been advanced about U.S. supercomputers.Despite the clear superiority of U.S.-made super-

computers, the Japanese Government procuredonly five machines from U.S. companies in the1980s, preferring to source an additional 46machines from Japanese firms. This led to agree-ments between the United States and Japan oversupercomputer procurement in 1987 and 1990. 147

In some cases, specifications for JapaneseGovernment procurement are not made public.But even when they are, critics suggest, they ofteneffectively deny foreign vendors the right to

142 ACCJ, o p . c i t . , footnote 104.

143 ~fice of ne UnitedStates Trade Representative, op. cit. oobote6, p. 161.144 ~id,, pp. 18.20. Recent reforms cut the patent em ationperiod from 37 months in 1988 to 30 months in 1991. 2nd SII report+op. cit.,

footnote 100, p. 50.Ids ~is p o ~ t is ~ d e in ibid,, especially pp. 49-50.

lfi ~id., p, 4, For a Ustingof procurement limitations iII Japa~ s= pp. 13-17.147For a de~~ di~cu~sion of ~s isme, see Offlw of T~~ology Assessmen~op. cit., footnote 1, pp. 273-78.

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. .

78 | Multinationals and the National Interest: Playing by Different Rules

participate. The U.S. firms remain unable topenetrate the Japanese market despite transparent,nondiscriminatory procurement standards adoptedunder a 1990 agreement revised in 1992. 148 MITI

officials agree that only limited progress has beenmade and that ‘‘there is a need to do more toimprove transparency and avoid discrimination inprocurement practices. ’’ 149 Progress in reachingan agreement has been made in a number of areas,including software and a variety of chemicaltreatments. 150

In addition to restrictions authorized under theForeign Exchange Control Law, Japan sourcescite specific restrictive industry laws in sectorssuch as air and marine transport, communica-tions, and broadcasting. A 1992 Keidanren reportindicated that these individual industry regula-tions “are actually more responsible for restrict-ing foreign investment than the Foreign ExchangeControl Law. ” Thus ‘‘opaque restriction of entryby policies and administrative guidance based onspecific industry laws virtually discriminate [against]foreign capital and limit the competition. ’’151These laws often complement the industry-,group- or firm-specific private impediments thatoriginated in the 1970s.

U.S. sources support these generalizations withspecific examples. An ACCJ report concludedthat:

While deregulation has proceeded to someextent in recent years, many archaic and arbitraryregulations and guidelines remain in effect, serv-ing as impediments to trade. Many building codespreclude the use of certain wood products, Radiocommunications and telecommunication servicesand equipment continue to be highly regulated

sectors. These regulations keep prices high anddelay access for competitive and high-qualityAmerican goods and services. ., . Air transportservices suffer from regulations which control theprices they charge and the services they offer. Insome cases all that is required is simplificationand clarification of regulations (cosmetics), ormodification of guidelines for existing “liberal-i z i ng laws (telecommunications servicescarriers), 152

Institutions with programs designed to encourageFDI in Japan, such as the Export-Import Bank of Japan’s Product Import Promotion FinancingProgram, lack adequate funding and are conse-quently limited in effectiveness.

The Japanese Government has also establishedartificially low ceilings for the financing of projects by foreign corporations through theJapan Development Bank. 153

Tax policies also discourage FDI. The govern-ment has sustained an artificially high withhold-ing tax rate of 10 percent on dividends paid fromsubsidiaries in Japan, in contravention of the 5percent OECD model convention. Some analystssuggest that this constitutes discrimination; aKeidenran report separately advocates that theJapanese Government lower its rate to 5 percent,

consistent with the multilateral tax convention.l54

A recent congressional report argues that

pervasive government measures continue to regu-late land and financial markets, in effect sustain-ing extremely high prices despite the bursting of the speculative bubble in Japan. 155 Artificiallyhigh land prices discourage the establishment of new facilities and the expansion of existing

la For de~~ see 2nd SII repo~ op. Cit., fOOtflOte IW.

l@ Ibid., p. 28.150 ACCJ, op. cit., footnote 104,pp. 13-17, 71 .

151 Keid~en repo~op. cit., footnote 6, p. 8.152 ACCJ, op. cit., footnote 104, p. 4.

153Ibid., pp. 8-9.154Ibid., p. 10.155 Houw wefi~~y Group, op. cit., footnote 6, p. ii.

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JapaneseMultinational

Enterprises

in theUnited States 4

T

his chapter examines some of the major issues regardingthe activities of large Japanese-based multinationalenterprises (NINEs) in the United States. As the mostconspicuous competitors with leading U.S.-based MNEs

during the 1980s, Japanese fins’ activities here, and the effectsof U.S. Government policy on those activities, offer an opportu-nity to assess how the national policy on foreign-based firmsaffects our interests.

Throughout the business and academic literature on foreigndirect investment (FDI) and U.S. international competitiveness,one theme is constant: the competitive challenge of Japanesecorporations. Major manufacturing corporations such as Toyota,NEC, and Mitsubishi have been central to Japan’s remarkable

postwar economic resurgence. They have also been among theprincipal players in Japan’s late 1980s overseas investmentboom.

U.S. firms were among the first to expand productionsignificantly to foreign locations; European firms have madesignificant international investments, particularly within otherEuropean countries. But it is clear at any level of analysis thatJapanese firms have greatly expanded their presence in the worldeconomic system and especially within the United States duringthe last decade. (See figures 1-4 and 3-3.)

Between 1981 and 1991, the number of Japanese firms in theFortune 500 rose from 78 to 119, with 20 in the top 100 in 1991,twice the number as at the beg inning of the decade. As can beseen in table 4-1, Japanese companies increased FDI faster thanthose from any other nation during the 1980s, accounting for 11

81

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Table 4-l—Foreign Direct Investment Positionin the U. S., Selected Years

(in billions of dollars)

Country 1980 1985 1991

All . . . . . . . . . . . . . . . . . 83.0 184.6 407,8Developed . . . . . . . . . . 72.0 161.2 381.5EC-12 . . . . . . . . . . . . . 47.3 107.4 232.0Japan . . . . . . . . . . . . . 4.7 19.3 86,7Canada . . . . . . . . . . . . 12.2 17.1 30.5

NOTE: Data are based on historical cost and are not adjusted forinflation.

SOURCE: John Rutter, “Recent Trends in Foreign Direot Investment inthe United States: The Boom of the 80’s Vanishes,” U.S. Departmentof Commeree, International Trade Administration, December 1992,appendix table 2.

percent of FDI by major developed countries and21.3 percent of cumulative direct investment inthe United States by the end of the decade. 2

Japanese direct investment in the United Statesincreased at an average annual rate of 32.5 percentfrom 1980 to 1985, and continued at a rate of 28.4percent for the second half of the decade, faroutdistancing similar rates for other developedcountries. 3

Although investment leveled off significantlyafter the 1980s, in 1990 Japanese firms had stakesof 50 percent or more in 1,088 U.S. manufactur-ing and assembly operations, and smaller stakes

in 136 more enterprises. The majority-ownedenterprises together operated more than 1,500factories and employed 284,000 Americans, withanother 86,000 jobs at minority Japanese-owned

establishments.4

Despite the decline in Japaneseinvestment in the first 2 years of the 1990s, manyanalysts suggest that this is only a temporary lull.Indeed, one analyst estimates that by the end of the century, Japan may invest another $700billion overseas, 40 percent of which can beexpected to take the form of direct investment.This would amount to a shift of 15 percent of Japanese production abroad. 5

By the end of the 1980s, the Japanese presencein the United States was well-established. Japa-nese direct investment in manufacturing in theUnited States focused on electric and electronicequipment, primary and fabricated metals, andtransportation equipment. 6 Counting both im-ports into the U.S. and domestic production,Japanese firms accounted for significant marketshares in many key industries, reaching 20percent of the semiconductor market, 7 29.9 per-cent of the automobile market, 8 and significantholdings in the steel market. 9

These changes have stimulated public debateover the competitive challenge from Japanese

1John M. Stopford and Susan Strange, Rival States, Rival Firms: CompetitiortforWorld Market Shares (Cambridge, England: CambridgeUniversity Press, 1991), p. 17.

2 B~~ on book value. J o h n W. Rutter,Department of COmmemP-,‘‘Recent Trends in Foreign Direct Investment in the United States: TheBoom of the ’80s Vanishes,” December 1992, appendix table 1.

3Ibid.4 Japan Economic Institute, “Japan’s Expanding US Manufacturing Presence, 1990 Update,” JEXReport, June 1992, pp. 34. (The U.S.

Government defines a foreign-controlled fm as one with at least 10 pereent of its equity held by one foreign owner.)f’ Kemeth Courtis, Tokyo economist for Deutsche Banlq cited in Robert L. Cutts, “Capitalism in Japan: Cartels and Keiretsu,” Harvard

Business Review, JulylAugust 1992, p. 54,6John W. Rutter,U.S. Department of Commerce, ‘‘Trends and Patterns in Foreign Direet Investment in the United States,’ Foreign Direct

Investment in the United States: Review and Analysis of Current Developments, August 1991, p. 25.7Semiconductor Ir,dustry AssoeiatiouObtaining Access to the Japanese Market: Inten’mReport on the 1991 US-Japan Semiconductor

Agreement (Washington DC: May 1993), p. 7.8 In 1992; U.S. Department of Commerce, “Motor Vehicles and Parts,” US lndustriui Outlook 1993 (Washington, DC: US Government Printing Office, January 1993), p, 35-7.

s The Department of Commerce reported that foreign steel makers held substantial positions in almost 25 percent of domestic integmtedmills by the late 1980s,with Japanese fms the dominant foreign investors. Ibid., p. 13-3.

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Chapter 4-Japanese Multinational Enterprises in the United States | 83

corporations and the Japanese economy. Someanalysts suggest that the impressive performanceof Japanese firms is due primarily to efficientindustrial organization and production techniques.Others stress business relationships among Japa-nese industrial companies along with banks thatallow them to obtain capital more cheaply,compete for market share rather than short-termprofits, and weather hard economic times. Someargue that government protection and aid todeveloping industries, and restrictions on foreignsales and investment, are the keys to Japanesesuccess.

Japanese firms have lagged behind their U.S.and European counterparts in the globalizationprocess. This is at least partly due to their

latecomer status; the industrial infrastructure of the nation suffered greater destruction duringWorld War II than that of most European nations.But while the physical damage was substantial,much of the structure and operating style of Japanese firms survived from the prewar era.Some aspects of the Japanese system go back tothe establishment of the first zaibatsu, or family-based commercial empires, in the 19th century(although parts of the system emerged as early asthe 17th century).

Thus, some of the powerful organization evi-

dent in modern-day Japanese corporations hasdeveloped over time-with influence from gov-ernmental planners-as the f irms have devel-oped. This may explain the companies’ conserva-tism, their strong identification with Japan, andtheir reluctance, in many cases, to adapt to whatmany in the United States consider appropriateforms of corpora te behavior and communi typarticipation.

Japanese managers tend to view relationshipswith foreign firms, customers, and governmentsas opportunities to absorb knowledge and tech-

nology. Just as the aristocrats who steered the newJapanese state after the Meiji Restoration of 1868modeled social and governmental institutions onwhat they saw as the best of the West, so Japanesecorporations have absorbed Western institutions—such as Fordist mass production and the globalcorporation—and adapted them to Japanese sen-sibilities and goals. In this view, it may be usefulto think of the Japanese firms that loom large inmany technology-intensive, high value-addedindustries as possessing a national ideology of technology absorption. l0

This chapter addresses factors that have aidedthe expansion of Japanese firms in the UnitedStates, both through exports and direct invest-ment. It discusses the competitive challenge to

U.S. industries posed by these firms, and theassistance provided by Japanese Governmentpolicies and keiretsu business groupings to theactivities of large Japanese enterprises in theUnited States. The chapter concludes by examin-ing an area of particular concern to Congress:Japan’s significant investments in both small andstart-up companies in high-technology industries,and in domestic university research. Critics havesuggested that such practices result in Japanesefirms profiting disproportionately from U.S.strengths in basic sciences and technology re-search and development (R&D).

CHAPTER FINDINGS1. The Japanese Government has supported and

preserved the competitive position of Japanesefirms doing business in the United States, using‘‘administrative guidance’ of domestic enter-prises and government-to-government activ-ism.

2. Japanese corporate ties, particularly as repre-sented by the keiretsu industrial groupings,

1 0 Fo r ~ & ~ p t i o n of J ~ p ~ ’s i & o l o @ C ~ pred i spos i t i on t o w ~ d t e c ~ o ] o g y a b s o q t i o q S = David B, Friedman ~d WChl!ldJ. s~llek,“How To Succeed Without Really Flying: The Japanese Aircraft Indusq and Japan’s Ideology,” paper presented for National Bureau of Economic Research Conference, SanDiego, CA, Apr. 1-3, 1992.

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.


have helped Japanese firms establish globalsales, distribution, and production networks. Inthe United States, keiretsu-type organizationhas accompanied the establishment of someJapanese-owned production facilities.

3. Many Japanese producers in the United Statesare gradually increasing the U.S. content of their domestic production-although they havenot reached the levels of domestic content of either their U.S. rivals or other foreign investors-as local suppliers become more qualified andmore competitive. This process is in conflict,however, with maintenance of the Japaneseproducers’ keiretsu ties. The issue is furthercomplicated by inconsistent U.S. Governmentdefinitions and methods of determinin g domes-tic content.

4. Japanese firms look to both U.S. universityresearch in basic and applied sciences, andsmall, innovative U.S. firms in high-technology areas, as valuable technology re-sources. They have made extensive efforts todraw on these resources through strategicinvestments, alliances, and other ties.

Japanese Government ActivismOne factor often cited to explain Japan’s

international commercial success is the skillful

intervention of government bureaucrats, particu-larly the Ministry of International Trade andIndustry (MITI). According to numerous exami-nations of the Japanese system, l1 governmentofficials work closely with industry leaders,strongly influencing firms under the guise of “administrative guidance” in order to foster thedevelopment of specific domestic industries andprevent what is often described as “excessive

competit ion. Among the tools at their disposalare government subsidies, loan guarantees, andtechnology consortia, as well as various measuresaimed at restricting the entrance of foreign firmsinto the domestic market.

Recognizing the difficulties that confront for-eign firms, the Japan Export and Trade Organiza-tion (JETRO), an agency of MITI, in recent yearshas encouraged imports to Japan, offering infor-mation and introduction services to foreign firmsinterested in cracking the Japanese market. Simi-larly, in a program called the “Business GlobalPartnership Initiative, ” MITI announced its in-tention to encourage large domestic firms toincrease imports, expand local procurement foroverseas production activities, and help foreign

firms make direct investments in Japan.12

Al-though such plans may invite skeptical responsesfrom foreign observers, they indicate the JapaneseGovernment’s sensitivity to outside pressure.

Although financial and economic develop-ments, such as capital liberalization and the risein value of the yen, were major impetuses duringthe 1980s for increased Japanese investment inthe United States (see ch. 3), the influence of theJapanese Government-in tandem with U.S.actions-was also significant. In the auto indus-try, for example, the Japanese Government ex-

plicitly encouraged firms to invest in the UnitedStates and other nations to avoid protectionistmeasures and threats of further action by the U.S.Government. The intergovernmental relationsthat led to the bilateral Voluntary Export Re-straints of 1981 are a good example of thisphenomenon.

The Japanese Government has a history of disc ruminating against not only foreign firms but

11 Chalmers A. JohnsoxL MITXand the Japanese Miracle: the Growth of Industrial Policy, 1925-1975 (Stanford, CA: Stanford UniversityPress, 1982).Alternativeintupretations that stress the role of big business and the interplay of different interest groups are provided by Richard

Samuels,The Busz”nessof the Japanese State (Ithacq NY: Cornell University Press, 1987); and Karelvan Wolferen, The Enigma of JapanesePower: People and Politics in a Stateless Nation (New York NY: Vintage Booka,1990),

12 - q of ~~mtio~~~e and rIldUStIY, _ @@S* Mbhc Aff* ~lce, ‘‘Business Global Partnership Initiative, Fact Shee~November 1991, p. 3.

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The two types of keiretsu function differently inhelping Japanese MNEs compete in high-technology areas.

Although the term keiretsu has become fash-

ionable in U.S. business journalism, the practiceof companies cooperating to provide capital andspread out risk has its roots in the prewar zaibatsu,the great industrial combines run by aristocraticfamilies. In fact, the oldest of the zaibatsu, theMitsui group, was founded in 1616 by SokubeiTakatoshi, a samurai who abandoned his class’traditional contempt for the world of businesswith the proclamation, “No more shall we haveto live by the sword. I have seen that great profitcan be made honorably. I shall brew sake and soysauce, and we shall prosper. ’

The zaibatsu, organized around holding com-panies controlled by the founding families, ex-panded into many different areas of commerce,although they tended to specialize in certainsegments. 29 Because their manufacturing abilitywas crucial to the Japanese war effort duringWorld War II, they were identified as a majortarget of the Allied program to demilitarize Japanduring the Occupation. The holding companiesand practices such as cross-shareholding wereoutlawed, and the zaibatsu were broken up. 30

However, as part of the 1949 Allied Occupationpolicy change known as the “reverse course,”when Japan was recognized as a vital ally of theWest against Communist expansion, zaibatsudissolution was ended. After regaining autonomyin 1951, the Japanese Government amended theAnti-Monopoly Law imposed by the Allies toallow cross-stockholding and interlocking direc-

torates. Those two practices, along with regularprivate meetings of executives known as “presi-dents’ clubs, ” are the three most conspicuousstructural elements of modern horizontal keiretsu

affiliation.

| The Horizontal KeiretsuThe structure of horizontal keiretsu is roughly

similar to that of the zaibatsu, except that thecoordinating role of the holding company is splitamong the main bank, the general trading com-pany, and the presidents’ council of the group. Infact, three of the current eight major horizontalgroups-Mitsui, Mitsubishi, and Sumitomo-arecontinuations of traditional zaibatsu. 31 Most ana-lyst classify three more “new” groups-Fuyo,DKB (Dai-Ichi Kangyo Bank), and Sanwa––withthe frost three as major horizontal keiretsu. Thereare two more “medium-sized” keiretsu, theTokai Group and the group based on the IndustrialBank of Japan.

Horizontal keiretsu usually include a majorbank, a trust bank, a major insurance company,and a trading company, with members in most if not all major areas of industrial production:electronic equipment, autos, construction, metals,mining, chemicals, textiles, heavy equipment,financial services, real estate, and transportation.The government encouraged this diversity tostimulate competition and to concentrate re-sources in critical industries. 32 The practice isknown as ‘‘one-set-ism,’ (wan setto-shugi) sinceeach group has a complete “set’ of companiesspanning the spectrum of major industries. 33

2 8 Te m t o m o o ~ w ~ “Japan ’s I n d u s t r i a l Groups” IUSU Business Topics, autumn 1980, p. 34.

29Ibid., p. 34.w Ibid., p.35.31

Dodwe~ M~keting Consultants, Industrial Groupings in Japan 1988-89 (Tokyo: DodwellMarketing Consultants, 1988), P. 3. This isthe most commonly cited reference for statistical information on the keiretsu.The cited edition identifies 8 horizontal keiretsuand 39 verticalones. However, these numbers vary not only with time-since companies leave and join keiretsuincreasingly frequently--but among sources.

32 me Anchordoguy, ‘‘A Brief History of Japan’s Keiretsu,” Harvard Business Review, July-August 1990, p. 58.33 ()=wa,op. cit., footnote 28, p. W.

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eral suppliers for each component, to ensurecompetition as well as steady supplies. 52

The vertical keiretsu is an efficient means of sharing information, contributing to efficiency

and vertical integration. It is also an efficientmechanism for exploiting lower tiers, enablingthe top tier firm to extract prices that takeadvantage of lower wage rates and do not includean arms-length equity profit for the supplier. Thisaspect of the keiretsu system helps explain whyJapanese firms operating abroad may be lesslikely to source from domestic suppliers.

The term vertical keiretsu also describes thechain extending from major manufacturersthrough levels of distributors down to the retaillevel, particularly in consumer goods; this is farless a matter of cooperation among firms than of coercion by powerful suppliers to prevent pricereductions and competition from other (especiallyforeign) brands in the same shop. 53 The manufac-turer controls distributors by providing capitaland offering rebates. Many Japanese retailers of electronics goods, for example, sell only onebrand; Matsushita Electric Industrial Co. has24,000 exclusive retailers, Toshiba has 11,000,Hitachi has 9,000, and so on. 54 Even whereallowed by law, this type of distribution system

requires large investments in retail outlets.In the agreement resulting from the bilateral

Structural Impediments Initiative negotiations of 1989-90, the United States noted that “economicrationality of keiretsu relationships notwithstand-ing, there is a view that certain aspects of keiretsurelationships also promote preferential group

trade, negatively affect foreign direct investmentin Japan, and may give rise to anticompetitivebusiness practices.” 55 This ambivalence affectsmuch of the debate on keiretsu, since it appears

that many characteristics of the groupings helpJapanese firms at the same time that they hurtforeign ones. Highly efficient Japanese MNEsderive much of their advantage from superiormanagement and process technology rather thanproduct technology. Much management skill isembedded in their traditional service, component,and equipment supplier base. Introducing newsuppliers to replace existing ones could be highlydisadvantageous. 56 In a similar vein, some de-fenders of keiretsu suggest that the keiretsustructure is simply a natural result of Japanesecultural values. As one journalist notes, ‘‘anattack on [the keiretsu system] runs the risk of being construed as an attack on Japanese cul-ture. ’ 57

| Keiretsu: Influence on Market Accessand Competition

In an analysis of the effect of keiretsu onJapanese imports and exports, one authorityconcluded that vertical keiretsu are more defensi-ble from the Japanese perspective than horizontalkeiretsu, since they appear to improve efficiencyin exports while the horizontal groupings donot. 58 When appraising their effect on activities of Japanese firms in the United States, the verticalkeiretsu are of more immediate concern. Theapparent preservation of keiretsu ties amongmajor Japanese auto producers and component

52 ~hordo~y, ‘ ‘Brief History, ” op. cit., footnote 32, p. 59. Alan S. Blinder notes that the companies can vary the ‘market share’ of eachsupplier for reward and punishment. “A Japanese Buddy System That Could Benefit U.S. Business,” Business Week, Oct. 14, 1991, p, 32.

53 - f . r s A + J o ~ o u “I Q r @m : An Outsider’s View, “ Economic Insights, September/October 1990, p. 16.54 D1~k N~to, ‘{J~~’s ~dus~ Groups: me Keiretsu,” cm Report, N O V. 5, 1990, p. 14 .

55 ~ot~ in ~vvrence,op. cit., footnote 43, p. 311.56 See G.qlachop. cit., foomote 18 ,especially PP . 92-93 .

57 ~ l e s s f i ~ , ‘‘IQirefiu: Reform Runs into Resistance, ’ Far Eastern Economic Review, June 21, 1990, pp. 5&54.58 ~=nce, op. cit., fw~ote 43, p. 322. He notes, however, ti t ~ ~ ~s of ketietsu appw to stifle imports Sl@fhIlfly.

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92 Multinationals and the National Interest: Playing by Different Rules

suppliers with production facilities here couldexclude and harm U.S. parts suppliers.

The horizontal keiretsu in theory benefits allmember companies by guaranteeing stable share-

holding, information-sharing, access to finan-cing, and cooperation in areas where the costs of development of a technology, for example, can bespread out among several members of a group.The keiretsu may provide some security in hardeconomic times. Members of the Sumitomokeiretsu, for example, helped bail out Mazda, itsautomaker, in the early 1970s: “The Sumitomobank extended loans to Mazda; other keiretsumembers agreed to employ Mazda employeestemporarily until the company was out of trouble;and all members of the keiretsu purchased onlyMazda cars.” 59 In addition, Sumitomo bank helped arrange for Ford to purchase a 25 percentshare in Mazda. 60 Some analysts have alsosuggested that horizontal keiretsu ties tend toreduce imports in relevant industries; 61 one rea-son for this might be collusion among the majorplayers in an oligopolistic market, which wouldresult in exclusion of all newcomers, whetherdomestic or foreign.

The vertical groupings, however, principallybenefit the central manufacturer, and often work

against the interests of suppliers in the chain whodepend on keiretsu business, but suffer fromdemands for continuous rationalization and/orprice reductions. Distributors’ freedom to sellother companies’ products or compete on pricewith local rivals is also constrained, but theybenefit through guaranteed high profit margins.

Despite the disadvantages of the keiretsuvoiced by some suppliers, the flexibility of theJapanese system is impressive, especially in theproduction of automobiles, which combines thou-

sands of components that can be produced byoutside suppliers. The two extremes of almosttotal in-house production of components andalmost total market procurement both appearinefficient, observes one U.S. analyst: “TheAmerican approach has been either to do itin-house (GM) or to buy a large fraction of partsin the marketplace (Chrysler). Neither approachseems to work as well as the group system of Japanese competitors such as Toyota. ” 62 As aresult GM, Ford, and Chrysler have begun tomod@ their sourcing and procurement strategies.

U.S. automakers are criticized for creating asystem in which ‘‘costs have been shifted fromhigher to lower levels of the production sys-tern. ’ ’63 Ironically, this is one of the major factorsin the Japanese producers’ ability to weather thesignificant increases in the value of the yen since1985. The system allows the manufacturers toemploy highly skilled workers who perform veryhigh value-added work, pushing the lower valuework down to subcontractors, who are forced tocut prices to ease the pain of economic adjustment

for the parent company.64

Nippondenso, the world’s largest auto-partsmanufacturer, with 11 plants in North America, 4in Europe, and 12 in Asia, 65 is an example of thegrowing complexity of the supplier relationship,especially as supplier companies grow into largecorporations capable of exploiting scale econo-

59 “m e M@~ ICe&~” X n d U S t r y Week, J~. 20, 1992, p. 53.@ ~k mow Amen-can Multi~tionalsand fapan: The Political Economy of Japanese Capital Controls, 1899-1980 (Ctitidge, u :

Harvard University Press, 1992), pp. 239-40.61 ~Wnce, op. cit., footnote 43, p. 328.

62 Jmes p. WCXD.WQ smtem~tbefore the Joint Economic Committee, DCC.10, 1991, P. 3.63Ibid., p. 3.64yamamur%op. cit., footnote 37, p. 32.65 ~ ~ e Do RosM@ “Riding tie Sl ipS-” Far Eastern Econonu”c Review, Dee. 26, 1991, pp. 72-73.

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mies themselves. Although Nippondenso is amember of the Toyota keiretsu, with the manufac-turer holding nearly a quarter of its stock, it alsoproduces components for Honda, Mazda, and

Mitsubishi,66

and has begun supplying parts toU.S. manufacturers. Yet it retains close ties withToyota.

Keiretsu can aid companies in R&D andadvanced manufacturing by coordinating “pre-competitive research in new technologies, andby easing access to capital for high-tech venturesthat are extremely expensive to startup and haveshort production-life spans. An example of thelatter is a semiconductor fabrication facility thatmay cost $500 million and be at the leading edgeof technology for only 4 years or less, 67

Supplier relationships are the most obviousmanifestation of keiretsu activity in the UnitedStates. Along with 11 Japanese auto manufactur-ing facilities in North America have come 66steelworks, 20 rubber/tire facilities, and morethan 270 auto parts suppliers. 68 Japanese firmsinitially defended this practice on the grounds thatlocal producers were not immediately capable of meeting the demanding standards of Japaneseproduction techniques. 69 There may also beelements of cultural preference in the choice: as

one anonymous Japanese auto executive told aU.S. reporter, in selection of suppliers for hiscompany’s transplants, ‘‘First choice is a keiretsucompany, second is a Japanese supplier, third is

a local company. ” 70 This pattern prompted theFederal Trade Commission to investigate Japa-nese transplant sourcing practices. 71

Japanese keiretsu, whether horizontal or verti-

cal, are probably more likely to offer U.S. firmslimited amounts of business in contested areasthan to welcome them as full members of thegroup. Nissan allowed 2 U.S. companies into itsnetwork of 192 primary suppliers, 72 and Toyotahas formed an organization of local supplierscalled the ‘Bluegrass Automotive ManufacturersAssociation. ’ ’ 73 But there are numerous examplesof how Japanese firms favor familiar suppliers.For example, in 1988 less than 30 percent of theelectronics content and 1 percent of the semicon-ductors of Japanese-branded televisions assem-bled in the United States came from U.S. suppli-ers. Similarly, less than 3 percent of the electron-ics content of VCRs assembled in the UnitedStates by Japanese firms came from U.S. suppli-ers. 74 Of products assembled in this country bySony Corp., for example, only about 20 percent of the company’s $8 billion worth of U.S. sales weremanufactured domestically. 75

Rather than retaliation or protection, variousanalysts have urged a U.S. attempt to emulate thesystem in some way. Such emulation could take

two forms: entry by U.S. firms into Japanesekeiretsu, or the formation of U.S. keiretsu-likeorganizations. Other analysts suggest that U.S.companies can and should try to adopt certain

ti Ibid., p. 72.6 7 ~ l e s H. Ftiguso~ “Computers and the Coming of the U.S. Keiretsu,” Harvard Business Review, July-August 1990, p. 57.68 Ke~ey ~d FIori&, op. cit., footnote 19, p. 25.

69 Ibid,, p. 28.70 ~ P p o ~ op, c i t . , f O O m O t e 35, P. 80”

7 1 BilJ p o w e l l, “ J ~ p ~ : Au ~ h e F ~ y , ” ~ e w ~ e e ~ , June 10, 1991, p, 38.

12Ibid,

73 K~ey and Florida, op. cit., foomote 19, p. 32.74John E&house, “How U.S. Could Learn from Europe,” San Francisco Chronicle, Oct. 1, 1990, p. Cl,75 Sheldon W e f ig , v i c e c ~ ~ ~ Sony ~n @e~ g ~ d ~ufac~g~f America, ‘ ‘Globalization’s Impact on Corporate Technological

Competitiveness, ”paper presented to the American Association for the Advancement of Science, AAAS93, Boston, MA, Feb. 14, 1993,p. 4.

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Chapter 4-Japanese Multinational Enterprises in the United States I 101

The recent decline of Japanese investmentsalso demonstrates another salient point aboutJapanese corporate behavior: there is a strongfollow-the-leader tendency. Many of the execu-

tives interviewed by OTA believed the invest-ment in their companies was at least partlymotivated by a perceived need by the Japanesefirm to match the investments of its Japaneserivals.

Interviews with companies l09 and other re-search suggests that the basic reason smallhigh-tech U.S. firms obtain Japanese (or otherforeign) funding is because the money is notavailable from domestic sources. Although virtu-ally all the industry sources interviewed agreedthat technology acquisition was a principal goalof most of the investments by Japanese firms insmall U.S. high-tech start-ups, the relationshipstended to include more aspects than a simple cashinfusion in exchange for technology. Althoughthe total number of high-tech start-ups that havereceived Japanese funding is relatively small, thephenomenon should be viewed as a significantmeans of technology absorption, consistent withsupport of U.S. university research and othertechnology-absorbing activities described in thisreport.110

| Sources of InvestmentSeed money and initial venture funding in the

computer industry comes primarily from venturecapital firms, or, less frequently, from larger firms

in the industry. These investors are concernedwith making a profit on their investment. Industryinterviews indicate that large Japanese companiesthat invest in small U.S. high-tech firms typicallydo not primarily seek a risk-adjusted financialreturn on their investment, but are more interestedeither in obtaining technology, marketing rights,or access to the U.S. market. If this is the case,then the question of whether a given high-techstart-up can succeed with a certain product maybe irrelevant; what matters most to the (Japanese)investor is whether it can obtain what it seeks.

Industry representatives clearly indicated toOTA that there is a lack of incentive for U.S.venture capital investors to develop a long-termperspective and to provide resources beyond alimited time scale. Indeed, many of the interview-ees described a similar scenario: high-technologyfirms generally run out of financial resources at astage when they are on the verge of makingtechnological and commercial breakthroughs. Itis then, when U.S. start-ups are most vulnerable,that Japanese corporations may prove to be the

only viable source of capital--often, although notalways, making contractual demands that involve

IW OTA ~ t e m i e w ~ 1 8 f~ s in 5 techrlology areas:computers and computer equipment, semiconductors, semiconductor nfinUfactig@pmentt @~ced mated, and bio~~ology. ~ese five =-were cho~n as kd~ties that meet generally agreed-on characteristicsof “high technology”: a high proportion of costs goes into research and development; the technology is generally regarded as critical to anindustrialized nation’s technology base; and the technology is constantly developing.

The fw were chosen from lists of Japanese investments in U.S. high-tech fm compiled by the Department of Commerce, the JapanEconomic Institute (a private research organization funded by the Japanese Government), and the Economic Strategy Institute, a private policyresearch org anization,as well as from articles in general interestbusiness, and trade periodicals. Firms were selected from the lists based ontheir locatio%their principal area of business, and their size (less than 500 employees, the threshold used by the Small Business InnovationResearch (SBIR) program).

The fact that all the f - interviewed are in Californ@is indicative of the geographic distribution of high-tech start-ups in the United States.Commerce Department studies, as well as interviews with indus~ sources in Silicon Valley, Boston’s Route 128, and North Carolina’sResearch Triangle Park-three areas commonly cited as high-tech centers in the United States-indicate that a sign.ifhnt majority of smallstart-ups that have received Japanese funding are in California, mostly in the Silicon Valley area, which extends from San Francisco to SanJose.

110 Be@~eof ism~ ~que to tie industry, technology transfer in the biotechnology industry is quite different fromother hi@-tmh ~Wand presents somewhat different policy concerns. It is discussed below.

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the transfer of technology patent rights, and oftenproduction, to Japan.

The firms interviewed frequently complainedthat U.S. venture capitalists’ horizons are tooshort, and that they need more patient capital thanis available from U.S. investors. Venture capital-ists, according to industry sources, typically seek a return on their investment within 3 years. Thisdoes not mean, of course, that the venturecapitalists are short-sighted. Having experiencewith the market and the Silicon Valley environ-ment, such investors are in fact likely to judge acompany’s prospects more accurately than itsfounders. Even if a company has good technol-ogy, the business climate or other factors such aspoor management can cause it to fail. The market

is extremely competitive and moves very quickly.Timing of financing is key to what a Japaneseinvestor can obtain from a business relationship.One company executive observed that it is oftenmore difficult for a company to get “bridgefinancing” after several rounds of venture capitalthan to attract the initial seed money. The lateentrant Japanese investor may thus be able to getsignificant technology/marketing rights if thetarget firm is in sufficiently dire straits.

Many company officials suggested that largeU.S. firms’ reluctance to invest in small domestic

start-ups has important consequences for thenation’s technology base, and claimed that theywould prefer to deal with U.S. firms rather thanwith foreign investors. But in many cases, theselarge corporations either demonstrate little inter-est in the development capacity of start-ups, or are“too interested” and want to acquire them. Thelarge firms are therefore generally not inclined tomake equity investments, and when they do, tendto adopt a more “adversarial’ posture than theirJapanese counterparts. This further encouragessmall U.S. firms to seek Japanese investmentpartners.

Representatives of several large U.S.-basedtechnology firms told OTA that their firms were

interested in obtaining technology from U.S.start-ups, but that they received many morequeries from such firms than they could fired.Clearly, this issue is a matter of point of view; thequestion of whether large U.S. companies aretaking full advantage of the technology resourcesof the start-up community cannot be answeredwithout more empirical research.

Virtually all the industry sources OTA inter-viewed agreed that technology acquisition was aprincipal goal of most of the Japanese invest-ments in small U.S. high-tech start-ups. In only afew of the firms interviewed did the U.S. execu-tives believe that the Japanese investor wasinterested even partially in return on their invest-ment. Most assumed that the firm considered the

investment the price of the technology/marketaccess. Other industry sources confirmed thisview.

When the U.S. firms had a unique technology,they often appeared to have a much greatercontrol over the terms of Japanese investment.Executives of several companies believed theyhad successfully limited their investors’ access totechnology, control over the location of manufac-turing process, or sales rights. Nevertheless, thismight change should additional investment capi-

tal be required.Marketing rights, as opposed to simply apresence in or access to the U.S. market, appearto be a close second to technology acquisition asa motive for investment by large Japanese fins.High technology, and in particular informationtechnology, has become a global market; a firmcan no longer be successful if it sells only in itsown domestic market. Further, in industries suchas semiconductor equipment, both R&D andmarketing (including service) are so expensivethat a firm must be present in all significantmarkets in order to compete. With such noncom-modity products, manufacturing economies of scale are small, so while a small company can

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compete in terms of manufacturing, it must stillmarket its products.

Industry sources also noted that the status’ of being associated with a high-tech company orwith a glamorous Silicon Valley name was oftenan attraction for Japanese investors: Canon’s$100 million investment in Steve Jobs’ NextComputer Corp. may bean example of this. In thesame vein, several companies described examplesof equity purchased at a very generous valuation,with little apparent financial return as of yet.

Japanese companies’ ideology of technologyacquisition resonates with the history of Japaneseindustrial development since the Meiji Restora-

tion (1868), which has included a strong strand of government-encouraged technology absorptionfrom the West. Since World War II in particular,government agencies such as MITI have struc-tured policies to stimulate the influx of technol-ogy, such as requirements that foreign companiesinvesting in Japan make technology licensesavailable to domestic firms. 111 (See ch. 3.)

| Types of RelationshipsIn addition to straightforward cash for equity

exchanges between Japanese investors and U.S.firms, relationships often include marketing agree-ments, joint ventures, funding for R&D, codevel-opment projects, supplier relationships, and per-sonnel exchange. These aspects of the relation-ship are not always clearly in the Japaneseinvestor’s favor; although technology transferfrom Japan to the United States is generallyminimal, Japanese investors can sometimes ex-tend certain kinds of technical support to the U.S.fins. More importantly, several companies re-ported that their Japanese investors had intro-

duced them to Japanese customers, or providedaccess to low-cost capital from Japanese banks. Inone case, a Japanese bank made capital availableto the U.S. firm at 1 1/2 percent below the U.S.prime rate. 112

Cases where the U.S. company supplies acomponent to its Japanese investor appear to havethe most immediate chance for productive inter-action, since any benefits to the U.S. firm’stechnology result in a direct benefit to theinvestor. This does not mean that the U.S.supplier, however, is protected against losing itscustomer later if the Japanese firm gains enoughknow-how to produce the components itself.

Similarly, the extent to which the connection witha Japanese investor opens markets in Japan couldvary. In the case of one semiconductor manufac-turer, for example, there seemed to be littlemarket-opening until the 1986 SemiconductorTrade Agreement (STA) forced Japanese firms tomake an effort to source in the United States.Ironically, one executive suggested, its Japaneseinvestor could conceivably count purchases of chips from its own fabrication facility as U.S.imports for purposes of fulfilling the STAquota.113

Amicable relationships do not automaticallypreclude the Japanese firms from obtainin g tech-nology that they could potentially use to competewith their U.S. partners. In the case of severalcompanies, the terms of the deals-often evolv-ing through repeated requests from the U.S.partner for money—allow the Japanese firm atsome point to use the U.S. fro’s own technologyto compete with it. One company presidentadmitted that this was a strategic error that couldhave significant negative consequences for hisfirm.

111 S e e J o ~ o q op. c i t . , footnote 11; and Marie Anchordoguy, Computers Inc.: Japan’s Challenge to IB M (Cambridge, w : HwmdE@Asian Monographs, 1989).

112 OTA ktel-view, July 1992.

113 H e sugge~t~ ti t ~s ~@t ti e plac.eby sb,ipp~g tie c~ps to tie Ufited Shtes and hen mimportingthem, or even by conducting apaper transfer without moving the product at all. (OTAinterview, July1992.)

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It would be inaccurate to conclude, of course,that Japanese firms are always astute, strategicinvestors. OTA interviews-including some withrepresentatives of the Japanese investors them-

selves-revealed instances of inept Japaneseinvestment decisions and unsuccessful attemptsat integration of U.S. affiliates, as well as of mutual exchange of information. The benefits toa Japanese investor in terms of technologytransfer and generation of profits depend on thecircumstances.

Predatory investment behavior is most appar-ent in cases where Japanese corporations invest inU.S. firms with related technologies. In manycases, however, a firm from a sunset industry suchas steel is looking to diversity, to give itself a“high-tech” image, or simply to make a profita-ble equity investment. Or the investment might befrom a trading company whose only interest is inmarketing a finished product in Japanese orthird-country markets. In such investment rela-tionships, the effect on the development of theindependent U.S. firm is believed to be generallyneutral at worst, at best highly beneficial.

With the exception of the biotechnology indus-try, OTA teams found that the Japanese sunsetindustry firm accounted for the majority of investments in U.S. start-ups from 1988-1992,and often seemed as interested in learning abouta new technology area on a relatively basic levelas in obtaining state-of-the-art technology. Asone scholar put it, “the chances of Kubotaexploiting an area of U.S. technology area lot lessthan of NEC doing it.’ ’ 114

In contrast, predatory investment strategies aredesigned eventually to own the U.S. firm outright,or simply to absorb the technology and/or manu-facturing rights of the start-up’s product, or morelikely to be associated with investors from thesame sector with closely allied products. Suchinvestors can benefit through directly integrating

the technology that the U.S. firm is developinginto their own production process. Respondentsin interviews repeatedly voiced their support forlegislative measures designed to limit technology

transfer in these cases, citing European andJapanese practices that constrain the free flow of technology.

I Japanese Investment in BiotechnologyBecause of country-specific regulatory re-

gimes, technology transfer in the biotechnologypharmaceutical industry is fundamentally differ-ent from other high-tech areas, and presentssomewhat different policy concerns. Since thecosts of getting a drug or medical product

approved in a particular country can be astronom-ical, involving extensive clinical testing anddocumentation, and knowledge of the specificnational regulatory system is essential, it isstandard practice for companies to license prod-ucts across borders. In the case of small start-ups,which not only need large amounts of cash to keeptheir research and approval applications going butalso generally lack sales forces abroad, the logicof licensing products to pharma ceutical compa-nies in other countries prior to regulatory ap-proval is even more obvious.

For this reason, the relationships betweenJapanese and other foreign investors and U.S.biotechnology start-ups seem to follow a simplerpattern, presenting unique challenges and threatsto the U.S. technology base. Although furtherstudy would be valuable, there was little indica-tion from the OTA interviews that Japanesepharmaceutical companies behaved much differ-ently than other foreign or U.S. fins. The uniquephenomenon, rather, is the existence of the U.S.biotechnology start-up environment, which draws

on the availability of venture capital and thestrength of U.S. research institutions, as well as

11 4 I @ c ~ c I B o m s , u f i v e ~ i ~ of Californi&Berkeley, personal Communication Sept. 9, 19W.

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extensive government funding, primarily throughthe National Institutes of Health (NIH).

Efforts to nurture biotechnology in Japan havenot had the impressive success that many other

targeting ventures have, although the JapaneseGovernment has declared biotechnology a ‘ ‘stra-tegic’ industry.

115Japanese companies are im -

proving at biotechnology, but are still clearlybehind U.S. (and some European) companies’technology in most aspects of the business. Amajor possible explanation for this is in theactivities of NIH, which has conducted or spon-sored a broad variety of research initiatives inbiotechnology. The bulk of the outside researchNIH has sponsored has been at U.S. universities.OTA was told in nearly every interview that theJapanese university system has not produced thequality or quantity of biotechnology research orresearchers that the U.S. university system has.This suggests that one reason for the scientificsuccess of U.S. biotechnology companies ispublicly funded research from which foreigncompanies are now beginning to profit.

OTA found no instance in which a U.S.biotechnology company received substantial tech-nica1 assistance from either their Japanese inves-tors or their Japanese contacts. Most of the

Japanese investors are far larger than the U.S.firms, and when they seek a U.S. firm to assistwith clinical trials and FDA approvals, theytypically choose more established U.S. firms thatare better equipped to perform those duties.

The biotechnology industry is young, with itsoldest firms little more than a decade old. It fitsthe model of high-technology industry in that itrequires advanced scientific and technologicalknowledge, and it has lofty barriers to entry. Thesuccess of a firm depends heavily on its human

capital, and there is a great deal of personnelmovement among firms. R&D costs are ex-tremely high, with the added burden of clinicaltrials and FDA approvals. The industry is made

up of many small firms working in radically newareas of technology, all competing for funding.They offer payoff as much as 5 to 10 years downthe road, with the strong possibility that returns oninvestment might disappear at any step in theprocess.

The youth of the industry also means that thestock market, an important source of capital, turnson small events. Not many products invented orproduced with biotechnology have been proposedfor FDA approval; the regulatory fate of the fewthat have been submitted has significantly influ-enced the stock prices of biotech fins. Approvalof one experimental drug, for example, caused aboom in biotechnology stocks, while anotherdrug’s failure to obtain approval caused a sharpdecline in the market. ll6 This volatility, in turn,affects the ability of new firms to issue initialpublic offerings.

OTA interviews gleaned little quantitativeevidence on the extent of foreign investment inthe industry, but it appears to be common. Thereare several reasons for foreign, especially Japa-

nese, interest in the industry. First, alliances withforeign companies are standard practice in thepharmaceutical and medical-devices business be-cause of the difficulties of dealing with the heavyregulation of these products in the various nationsthat account for the biggest markets-the UnitedStates, Japan, and the member states of theEuropean Community (EC). Even big companiestypically form partnerships with foreign compa-nies to get their drugs through clinical trials andregulatory processes overseas. For many small

1 15 K e v ~w . o ~ ~ o m o r , 6 ‘B 1 ~ t ~ ~ o ]o g y : ~ ~ t e ~ t i o~ s ~ ~ y , ’ ‘Biotechnolo~D~elop~nt:.&panding the Capacity toProduceFood,

United Nations Department of Economic and Social Development Advanced TeebnologyAssessment System Issue 9, winter 1992,p. 133.

116 OTA interview,August 1992; GiM Kolata, ‘‘Halted at the Market’s Door: How A $1 Billion Drug Failed, ” The New York Times, Feb.12, 1993, p. Al,

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. ..—


companies, investment from a Japanese companyrepresents the best opportunity to expand themarket for their products to Japan or other EastAsian nations. The necessity of having a Japanese

investor to sell in Japan is especially great sinceJapan’s regulatory process is particularly strin-gent and requires that clinical trials be done onJapanese nationals.

The primary reason the biotechnology compa-nies interviewed wanted Japanese investment,

however, was not only to expand their eventualmarkets (most of them had only one or twoproducts on the market, some had none), but toobtain funding for further research and clinicaldevelopment in the United States. Corporateinvestors were deemed preferable to venturecapitalists, being more likely to be patient andprovide capital on better terms. Venture capital-ists’ only hope of getting a return on investmentlies in the company succeeding financially; if thecompany fails, they get nothing. The other,strategic type of investor would seek differenttypes of benefits, such as learning about technol-ogy, getting marketing rights or licenses, andestablishing relationships with firms for possiblefuture benefits. In short, strategic investors havemany more ways of obtaining a good return oninvestment than appreciation of their stake in thecompany. As a consequence, they are reportedlywilling to accept a smaller equity stake for a giveninvestment than are venture capitalists.

It appears likely that without foreign capital,fewer small biotech start-ups would make it tomarket with an approved product. At the sametime, venture capital, although valuable, is not asubstitute for strategic investment. This impliesnot that there is a failure in the venture capitalmarket, but that venture capital cannot provide

the amount of capital that many technology-intensive start-ups need. Strategic investors, then,can play a vital role in nurturing companies andtechnologies.

The strategic investors are clearly gettingtechnology. Japanese companies that have in-vested in small biotech firms all have been tryingto learn about biotechnology. Although there

have been few instances of Japanese firms send-ing their scientists to do long-term research at theU.S. firms, Japanese investors all have beenexpected to do clinical trials in Japan, whichcould provide a thorough grounding in many of the technologies. The licenses that many of theseinvestors are getting through or in addition totheir investments also transfer technology, sincein many instances the licenses are for process aswell as product patents.

Japanese investment in U.S. biotechnologyfirms may present a greater threat to the U.S.

industry than similar investment in informationtechnology, since the Japanese firms have more tolearn in the biotechnology area. The question tobe answered here regards the linearity of thedevelopment of biotechnology products; that is,would one key technology acquisition then pro-vide a step for a Japanese company on which tobase future product development? A successfuldrug can make a small company’s fortune, but themajor international pharmaceutical companiestend to produce products in many differenttherapeutic and diagnostic areas. Typically, thecompanies OTA visited did have a base technol-ogy on which a product family was produced, buta deeper examination of the biotechnology indus-try might produce further insights as to how thiswould position a company for future growth.

JAPANESE MNEs AND U.S. UNIVERSITYRESEARCH

During the late 1980s, Congress and the mediagave increased attention to the transfer of U.S.technology to foreign MNEs that might have

resulted from their relationships with U.S. univer-sities and research institutions. As the number of such relationships-particularly those involvingJapanese firms-grew, congressional and media

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. - . —---


are of interest as an example of how foreign firmsmay tap into the U.S. technology base, and howJapanese firms in particular have been able to takeadvantage of such resources.

It is important to note that in general, recip-rocity would be difficult to obtain in regard tothese issues. Observers agree that advancedresearch in the sciences is far more likely to bedone within company laboratories in Japan thanin university facilities. Research conducted inJapanese universities does not compare in qualityor scope with the work done at academic institu-tions in the United States; thus neither U.S. firmsnor U.S. graduate students are lining up for accessto Japanese university research laboratories.

| Extent of Corporate Funding of U.S.Academic Research

Academic research comprises a large compo-nent of the total U.S. research effort. Academicinstitutions conducted about $17.2 billion in basicand applied research in 1991, 122 increasing froma 12-percent share of total U.S. research spendingin 1985 to a 15-percent share in 1991. During the1980s, academic R&D expenditures rose at aneven faster pace than total U.S. spending, increas-ing more than 180 percent from 1980 to 1991,

while total national spending increased about 140percent. 123 The top 100 educational institutions

accounted for about 70 percent, or nearly $12billion. From 1980 to 1990, industry’s share of total funding of academic R&D rose from 4 to 7percent, or about $1.16 billion. l24

Estimates of how much money foreign corpo-rations spend at U.S. universities vary widely.Many analysts believe that foreign and especiallyJapanese funding of U.S. universities escalatedrapidly in the late 1980s, but this was an increaseon a very low base, and remains low in compari-son with total funding from domestic fins. In1986, the National Science Foundation (NSF)polled 1,270 Japanese enterprises, and found thata total of 56 firms had funded a total of about $3.6million in U.S. academic research in 1983, that 71had funded a total of $5 million worth in 1984,and that 98 had funded a total of $9 million worthin 1985. In a more complete study, conducted in1988, GAO put total foreign corporate funding of academic R&D at $27.6 million for fiscal year1986, or about one-third of 1 percent of the totalR&D expenditures of the 107 universities report-ing foreign funds (27 reported no foreign funds). l25

This represented about 5 percent of total industryfunding of academic R&D. 126

Meanwhile, foreign governments and othernonbusiness sources spent another $46.8 million

at U.S. universities, with one-third of that totalgoing to an international ocean-drilling program— — —

IE N a t io ~ Science F ~ ~ d a t i o q op . cit., foo~ote1 2 0 , p. 306, table 4-2. This did not include about $5 billiom Or$3.5 billion ~ conshnt 1982

dollars, at federally funded research and development centers FFRDCS),which conduct R&D ahnostexclusively for use by the FederalGovernment. One problem in estimating these numbers is de f~ a “university” or “academic institution. ” The NSF prefers a broaddefiitiou including university-affiliated research centers, experimental stations, and medical centers as well as traditional departments.National Science Foundation Division of Science Resources Studies, The Science and Technology Resources of Japan: A Compan”sonwithrh e United States, NSF 88-318 (Washington DC: 1988), p. 23.

In Ibid.la Natio~ Scien~Fo~&tioW Division of ScienceResources Studies, Academic ScienceandEngineen’ng :RdkDExpenditures, Fiscal Year

1990, NSF 92-321, detailed statistical tables (Washington DC: 1992), table B-1, p. 19.125 ~ese numbers tend to minimize the extent of foreign funding, however, as they ignore industrial liaison program(ILP)membership fees

and endowments and gifts for research programs, GAO did not attempt to estimate how much money university ILPs received from foreignsources, although it stated that the amount of support was ‘‘not extensive’ (GAO, R&D Funding, op. cit., footnote 118, p. 18). Foreign sources(not just corporations) accounted for $27.3 million in gifts and endowments for research programs in FY 1986 (Ibid., p. 21).

IU Ibid,, p. 8.In Ibid., p. 8.

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at Texas A&M University. 127 MIT received $5.3million, or 2 percent, of its research budget fromties with foreign corporations; Japan accountedfor roughly half of that. The GAO found 13foreign corporation-university agreements worth$500,000 or more. 128 These arrangements, whichvaried in length from 3 to 20 years, provided $127million to the universities over time. 129 Finally,GAO found that most foreign corporate fundingwas not in areas identified by the Department of Commerce as critical technologies for future U.S.economic growth. 130

OTA’s research suggests that a conservativeestimate of Japanese corporate funding of U.S.university research (including endowments toresearch programs) would be about $50 million

per year, with total foreign corporate funding atabout $75 million. That would make the foreigncorporate contribution to university research abouttwo-thirds of 1 percent of the top 100 universities’research spending, with Japanese corporations byfar the main foreign corporate funders of U.S.university research.

| Legislative Grounding of Corporate-University Relationships

America’s universities have long served as the

country’s primary centers of basic research activ-ity. U.S. universities’ role in promoting nationaleconomic competitiveness has been largely ‘‘pre-co mp eti tiv e" — building the country’s human cap-ital and knowledge base, rather than producingmarke tab le products . The Federa l Governmenthas thus funded research at U.S. universi t iesprimarily as part of a national commitment tobasic science, rather than as an attempt to achievespecif ic goals . Wi t h t h e m a j o r e x c e p t i o n o f defense-related research, the United States hasnot conditioned its research funding of universi-

ties on the generation of concrete results or acertain return on investment. It has generallysupported the peer review process for Federalgrants to ensure standards of scientific merit as

defined by the research community.However, in the 1970s, amid deepening con-cerns about the trajectory of the U.S. economy,Congress began to examine ways to encourage amore active university role in promoting thecountry’s well-being. One of the outcomes of thisdebate, which continues vigorously, was a focuson Federal patent policy. Congress was concernedthat U.S. patent rules had allowed foreign firms togain ground on domestic ones in global markets.At the time, the Federal Government claimed titleto all wholly or partially federally funded patentsdeveloped by universities. Since the governmentdid not actively promote licensing of thosepatents to the private sector, and since it did notgrant exclusive licenses, Congress feared thatmuch commercializable research was not reach-ing the U.S. private sector. The result was PL96-517, the University and Small Business PatentPolicy Act (also known as the Bayh-Dole Act).Under the Bayh-Dole Act, the universities andother research performers could receive title topatents resulting from federally funded research.Thus they could now profit from granting exclu-sive or nonexclusive licenses to federally fundedinnovations.

For U.S. universities, a majority of whoseresearch funding came from the Federal Govern-ment, the act promised to be a major financialwindfall. Not only would they collect licensingfees on their innovations, but they would also beable to use the licensing “carrot” to convincecorporations to fund projects already partiallyunderwritten by the Federal Government. ForUS. corporations, it promised to be an innovation

12g ibid., p. 5,

‘~y [bid., p, 36.

‘w Ibid., pp . 10-11

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windfall, giving them a clear advantage overcompetitors from foreign countries, whose uni-versity research could not compare with Amer-ica’s in quantity or quality.

From both these points of view, Bayh-Doleappears to have been a qualified success thus far.Universities are always pleased to receive corpo-rate funding, especially as Federal research fundsdecrease or fail to keep pace with rising costs.University officials and researchers have toldOTA that they prefer on the whole to work withdomestic firms, both for reasons of patriotism andpracticality. Indeed, because of linguistic andcultural understanding, they found U.S. firmsmore convenient than foreign sponsors, andwished U.S. corporations were more aggressivein sponsoring research and licensing university-developed technologies.

Representatives of corporations, on the otherhand, expressed more skepticism about the valueof such research. They typically felt that immedi-ate returns on such investments are unlikely, andthat any technology coming out of a university labis likely to be far from commercialization. Corpo-rate interviewees often said that’ the cost of licensing a technology from a university waslikely to amount to only a fraction of the cost of commercializing such research. Rather, they sug-gested, their biggest benefits from relationshipswith universities are likely to be in recruitmentopportunities and in keeping in touch with theadvanced work conducted in university researchfacilities. 131

| Types of Corporate-UniversityRelationships

Foreign corporate tie-ups with U.S. universi-ties take many different forms, none of them

unique to foreign companies. The mostcant

q

q

q

q

q

signifi-include:

sponsored research at universities,licensing university-controlled patents,membership in university industrial liaisonprograms (ILPs),corporate philanthropy, andlocation of facilities in university-relatedresearch parks.

This discussion will focus on the first three of these, which have been the subject of mostcongressional concern and media scrutiny.

| Sponsored Research and Technology

LicensingSponsored research involves the most intimateinteraction and therefore the largest amount of potential knowledge transfer between universitiesand foreign firms. This is especially true when, asis typical, research tie-ups offer the possibility of a technology licensing arrangement at the end of the project. Corporations cannot dictate the spe-cific nature of a project or direct the progress of research; they can only opt to support a researchproject that an investigator proposes. Majorresearch universities, such as MIT, Harvard, andPrinceton, will not negotiate conditions of spon-sored research relating to ownership of intellec-tual property or restrictions on what results of theresearch may be published, although some mayagree to give sponsoring corporations access toresults and article manuscripts a certain numberof days, typically 30, before publication.

Some university officials suggested that smalleror less well-established universities may bewilling to accept more direction on the nature of research, or even to perform what one universityscientist described as ‘‘product-testing,” but no

1 31 o ~ ~ t c w i e w ~ o f f i c m of~vemi~ ~ ~ l o ~ h ~ m ~ offi~s, off&s of spo~or~researc~and industrial liaison programs, s wellas marchers from m Princetou Harvard (including Massachusetts General Hospital, a teaching hospital of the Harvard Medical School),the Univcxsityof California atI.Ivine,and the ScrippsResearch Institute.

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interviewee would cite specific institutions wherethese compromises might take place. It is likely,however, that the larger and more prestigiousresearch institutions have less incentive to accede

to corporate pressures to withhold publication orto cater to specific corporate research purposes.

Contract research is usually limited to a preciseobjective, and the firm often has the right to anexclusive license to research results. In thiscategory, the firm may or may not participate inthe performance of the research, but it usually hasrights to observe the research in progress, whichmay be partially based on proprietary informationprovided by the company. Sponsored researchand contract research can culminate in a license,either exclusive or nonexclusive, for a university-held patent. If the original sponsor chooses not tolicense a particular invention or technology, theresearch institution may also license third partiesnot originally involved.

Industry-university research centers and con-sortia involve firms paying an annual fee toobserve and help direct the center or consortium’sresearch projects, which are generally at a pre-competitive stage. They may also pay an addi-tional fee for projects in which they are activelyinvolved. Patentable research results are often

licensed on a nonexclusive basis to any and allmembers of the consortium. One unique facet of industry-university consortia is that they can spanseveral disciplines, bringing together not onlyemployees from different firms but also univer-sity researchers from different departments. TheMIT Media Lab, which has been cited as receiv-ing a large amount of support from Japanesecorporations, is perhaps the premier example of the university-industry research consortium. 132

While some European companies are active in theMedia Lab, the much larger Japanese presenceoften amounts to a fifth of the Lab’s funding. 133

The director of the Media Lab, noting the

sensitivity of such disclosures, has suggested thatthe Lab should reduce its fundraising efforts fromJapanese corporate sources to avoid unfavorabledomestic opinion. 134

| Industrial Liaison ProgramsForeign corporate membership in university-

sponsored ILPs has drawn considerable mediaand congressional attention in recent years, buttypically offers companies a less intimate rela-tionship with university researchers than spon-sored research projects. These programs, whichblossomed in the 1980s and are now quitecommon at major research universities, generallycharge a fee (rarely more than $100,000) inexchange for providing “facilitated access’ toresearch in fields of interest to the corporatemember. In practice, facilitated access usuallymeans invitations to conferences and subscrip-tions to publications s ummarizing the activities of university researchers, the possibility of review-ing papers and research results before officialpublication dates, and special incentives to fac-

ulty to cooperate with ILP members.Liaison programs take two basic forms: general-purpose (university-wide) liaison programs andfocused liaison programs that specialize in aparticular technology area or academic field.Liaison programs offer more limited access touniversity research than research consortia orresearch centers. A 1992 GAO survey of 35important research universities found that of the30 offering ILPs, 24 had foreign members, with

132 k 1992, tie kibperformed ccmtractresearchwith such Japanese corporations as NHK, Nintendo, lbshih Yanu@ NEC, Hen@ s- ,

Sony, Sony Industrial Products, Hitachi, Mitsubishi Electric, Seiko EpsorLand l’bshiba in different specialized consort@ and had receivedmajor building gifts and endowments from Asahi Broadcasting CorporatioIL Asahi ShimbunPublishing Company, Fukutake Publishing,Hitachi, Matsushita, MCA, NEC, Nintendo, Sony, and Tbshiba.

1 3 3 M T M e ~ ~ b , P r e s s relMse, 1 9 9 2 ; s t w ~ B ~ d , Th e Media ~ b : ~nvenf ing t h e F u t u r e a t ~ (_Nw York NY: Vikhg, 1987).1~ Brad, ibid., p. 167.

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112 Multinationals and the National Interest: Playing by Different Rules

499 foreign companies paticipating. 135 At MIT’sprogram, by far the largest of these, Japanesefirms accounted for more than a fifth of thecorporate membership. 136

MIT officials suggested, however, and U.S.corporate members of MIT’s ILP confirmed, thatwhile membership in a liaison program may bemore beneficial to a foreign firm than to adomestic one, it may not afford the foreign firmprivileged access. The reason for this apparentanomaly is that liaison programs provide entreeinto networks of scientists and researchers withwhich U.S. firms are already likely to be familiar.It may well be of more benefit for a Japanese firmto be updated on current research activities at MIT

than a domestic firm whose scientists may havecome from that university and have more oppor-tunity to obtain information informally.

| Corporate PhilanthropyNot surprisingly, corporate gifts are the pre-

ferred form of sponsorship from the universities’point of view, since they typically have the feweststrings attached. If a corporation wishes to learnabout research activities at a university, philan-thropy is not the most cost-effective means of achieving its goal, compared to sponsorship of research or even membership in an ILP. Overall,corporations gave $2.17 billion to higher educa-tion in the academic year 1989-90, up 11.5percent from the previous year. 137 Although thetotal amount of foreign corporate giving isunclear, of the approximately $260 million listedas “large corporate gifts” for 1990, about $46million (18 percent) came from foreign corpora-

tions. Japanese gifts accounted for about $18million, or about 7 percent of the total. 138

The benefits corporate donors receive for theirgifts vary, ranging from “mix and mingle oppor-

tunities” with faculty (and other corporate do-nors) to low-cost executive training programs thatbusiness schools tailor to the corporation’s needs,among other modest benefits. Endowing a chairfor a researcher at a university of the rank of MITor Harvard typically costs about $1.5 million, forwhich a corporation may receive research reportsor copies of papers published by the holder of thechair, but rarely any closer access to universityresearch. Japanese firms may view philanthropyas a gesture of goodwill that could indirectlyinduce the university to view the firm in a positivelight if opportunities to expand the relationshipwere to arise.

| University-Related Research ParksThe popularity of university-related research

parks has increased rapidly since 1983. As of 1992, there were 128 such parks in the UnitedStates, 80 percent of which had been establishedsince 1983. In addition, a large number of newparks were planned. 139 Research parks are realestate development projects undertaken by auniversity, usually in cooperation with a privatedeveloper. They also often include “businessincubators” for start-up companies; these start-ups may closely involve university faculty in theiroperations. The key difference between university-related and private industrial parks is that compa-nies can draw on the resources of facilities,researchers, and libraries available at the partici-pating universities. The university gets revenue

135 GAO, Iw , op. cit., footnote 118, p. 17.

136 ~~chu~tts Institute of Technology,“The International Relationships of MIT in a Technologically Competitive

WorlGReport by theFaculty Study Group on the International Relations of MIT” ( Cambridge, MA: Massachusetts Institute of Technology, 1991), p. 5.

137 - c Trust for ~n~py, “Giving USA 1991 (TVt@@tO@ DC: -C , 1991), p. 111.

1~ Ibid,, pp. 97-99.139 ~eficm ~sW~tion of University-RelatedResearch Pinks,“Research Park Statistics” lkmpe, AZ: A4URRP, 1991), p. 3.

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and the possibility of performing joint researchwith industry. Industry gets access to universitylibraries and other resources (which often includean office for technology transfer to research park occupants), plus the Unquantifiable advantage of being situated in a highly intellectual, cutting-edge environment.

Foreign firms have usually been welcome inresearch parks. Although figures are not availableon the percentage of foreign corporate occupancyat research parks, there is certainly a sizablepresence. A spokesman for the Association of University-Related Research Parks noted thatthere are:

. . . no nationalistic policies at research parks.They probably like international companies to

locate there. If you’re the type of company doingthe activities parks allow, it doesn’t matter whereyou’re from. 140

Foreign investment in university-related re-

search parks is welcomed by municipal and Stategovernments, because it provides them withhigh-skill, high-wage, high-tech employment,together with potential spillover effects fromresearch, Although companies may see variousadvantages in locating close to universities, thereal benefit may lie more in image and atmos-phere than in direct technology transfer.

la ~s B~tcher, presiden~ ~eric~ Association of University-Related Research Parks, personal Conlmtication, Jl@ 1992.

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InternationalStrategic

u

Alliances 5

L

arge numbers of international strategic alliances (ISAs)among multinational enterprises (NINEs) emerged dur-ing the 1980s in response to the pressures of rapidtechnological change and the increased internationaliza-

ion of capital, production, and knowledge. ISAs constitute asignificant tool for MNEs to meet the challenges of increasedcompetition and globalization. They enable MNEs to spread thecosts and risks of research and new product development, whileproviding greater flexibility and speed for commercialization.

ISAs are introducing a range of new factors into therelationships among nations and multinational enterprises.Because they have increased dramatically in number and scale inrecent years, they are likely to further obscure the nationality of

MNEs. In the future, international competitiveness may bedefined less in terms of competing firms based in differentnations, and more in terms of shifting, competing coalitions of MNEs engaged in international strategic alliances. At the sametime, ISAs are causing profound shifts in the long-termcompetitiveness of U.S. industry; their full impact has yet to beunderstood.

International strategic alliances have created both competitionand interdependence between rival states and multinationalfins, rendering corporate planning and U.S. policymaking moredifficult and uncertain. National economic sovereignty maybecome increasingly illusive as the United States grapples withincreased dependence on key economic and technological assetscontrolled by MNEs involved in ISAs. International strategicalliances are also blurring the national identity of U.S.-basedMNEs, further weakening the link between their activities andthe competitiveness of the U.S. economy as a whole.

115

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Chapter 5-international Strategic Alliances I 119

Figure 5-2—Trends in International StrategicAlliances by Selected Industries, 1970-1989

3w r — ‘-7\ - – 1

250

200

150

100

50

Informationtechnologies

N e w m a t e r i a l sIo +f I I

1970-79 81 83 85 87 89

SOURCE:John Hagedoorn and Jos .Schrakenraad, “inter-firm Partner-

ships and Cooperative Strategies in Core Technologies,” C. Freemanand L. Poete (eds.), New Explorations in the Economics of T&nica/Change (Lcmdon: Pinter Publishers, 1990), p. 5.

to differences in research methodologies, a lack of uniform definitions, and inconsistent data collec-tion methods, various studies reach differingconclusions as to the predominant internationalpattern of strategic alliance partnerships. Never-theless, all studies emphasize the dominance of the so-called Triad—Europe, Japan, and theUnited States.

For example, one study published in 1988found that the majority of strategic alliances areformed between companies within the EuropeanCommunity (EC) (31 percent) or between U.S.and EC firms (26 percent), followed at somedistance by EC-Japan (10 percent), and U. S.-Japan (8 percent). 11 However, a more recent study

indicates that during the same time period (1980s),intra-U.S. cooperation consisted of the largestshare of strategic alliance partnering (25 percent),followed closely by U.S.-EC alliances (22 per-cent), intra-EC (20 percent), and U.S.-Japan (14percent) .12 Technology alliances between Europeand Japan, intra-Japanese cooperation, and non-Triad partnering take an average share of between5 and 10 percent. 13

Most studies conclude that over 90 percent of all agreements are made between companies fromthe United States, Western Europe, and Japan.Intrabloc partnering, e.g., intra-U.S., intra-European Community, intra-Japanese alliances,has continued to increase its portion of allianceformation since the second half of the 1980s. 14

I ISA Formation by Industry and Industry/ Country

Although international strategic alliances havebeen employed with increasing frequency, theyare concentrated in relatively few industries. l5 Asfigure 5-3 illustrates, international strategic alli-ances involving U.S. firms occur in a range of manufacturing industries-from mature indus-tries such as automobiles, to embryonic ones suchas biotechnology, and include technology-intensive sectors in aerospace, information tech-nology, and new materials.

A number of other trends can be decipheredfrom this figure. First, in terms of absolutenumbers and percentages, international strategicalliance formation leads by a vast margin in theinformation technology field (41 percent of ISAs),followed by biotechnology (19 percent), chemi-

11 H~gefi et al., op. cit., footnote 6, p. IW.

12 Hagedoom et al., “Strategic Technology Partnering and International Corporate Strategies,” op. cit., footnote 6, p. 13.13Ibid.14 ~g~~m and sch~em~ in their chapter ‘bter-firm partnerships, op. cit., footnote 6, p. 9, findthat in all three core technologies,

intra-U.S.collaboration takes the largest share of agreements, in particular in biotechnology, where over 35 percent of the agreements referto intra-u.s.alliances.

1 5 H ~ g e f l et ~, op. cit., foo~ote6, p, 105;and ~ ~ w po~ac~ “T~~o]ogy Tm~~nds Borders R t i s b g l b u g h Q u e s t i o n s , ” The NCW

YorkTimes, Jan. 1, 1992, pp. 1, 20-21; as taken from the Maasrncht Economic Research Institute on Innovation and Technology.

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Figure 5-3-New International strategic Alliances Among U.S., European, and Japanese Firmsby Selected Industries (1980-1989)

Biotechnology Automotive

1985-89: 198 1980-84: 26 1985-89: 79

New materials Aviation/military1980-84: 63 1985-89: 115

/ 15 I \ /’ 23 I \

1980-84: 32 1985-89: 103

0 (“’”m

Information technology Chemicals

1980~4: 348 1985-89: 445 1985-89: 103 1980-84:80

O U.S.-Europe _ U.S.-Japan ~ Europe-Japan

NOTE: The total number of new allianms in an industry within the specific period is listed after the range of years,

SOURCE: Adapted from Andrew Poliack, “Technology Transcends Borders Raising Tough Ouestions in the U.S.,” The New York Times, Jan. 1,1992, pp. Al, A20-21; as taken from the Maastricht Economic Research institute on innovation and Technology.

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Chapter 5-International Strategic Alliances | 121

cals (11 percent), new materials (11 percent),automotive (6 percent), and military aerospace (4percent). Second, with respect to U.S.-Europeanmultinational corporate technology alliances, the

areas of growing collaboration are in the biotech-nology, information technology, and chemicalsectors. U.S.-Japan strategic alliances have ex-panded rapidly in recent years in the informationtechnology, automotive, and new materials indus-tries. Far fewer are the number of alliancesformed between European and Japanese multina-tionals. They are concentrated largely in theinformation technology industries, followed atsome distance in new materials, chemicals, andbiotechnology.

TYPE OF COLLABORATION BY REGIONTable 5-1 indicates by region the most fre-

quently cited reasons firms give for entering intostrategic alliances. As can be seen, the purposesfor international collaboration vary across inter-national trading blocs.

Clearly an important determinant in both U.S.and European international strategic alliances isaccess to Japanese manufacturing technology,rather than straightforward market access. Interms of EC-U.S. international collaborative agree-ments, shared research and product developmentare notable reasons for alliance behavior.

WHY INTERNATIONAL STRATEGICALLlANCES ARE ON THE RISE

A number of overlapping economic and tech-nological developments are shaping the environ-ment of MNEs, encouraging and conditioning theformation of international strategic alliances.These developments include: technological level-ing across countries; converging product markets;slow economic growth; excess capacity; shorter

product life cycles; escalating R&D costs; andincreasingly complex product and productionprocess technologies.

U.S.-based MNEs dominated the international

economy of the 1950s and 1960s. Since then, theirmarket share in many industries has declined asforeign MNEs have achieved technological par-ity. The ability of foreign MNEs to absorb,exploit, and develop advanced technologies makesthem attractive partners in ISAs. In some indus-tries, such as automobiles, foreign MNEs “areeither the technological equals of U.S. firms, andtherefore able to contribute managerial or techno-logical expertise . . . or are more advanced. " l6

Demand for many products is becoming more

homogeneous throughout the global market. Firmsthat can exploit this convergence may achieveeconomies of scale and scope, which frequentlyenhance profitability. As a consequence, securingaccess to the United States as well as to foreignmarkets has become crucial to MNEs’ develop-ment, production, and marketing strategies. Whilein many manufacturing industries market accessis becoming increasingly open, in a number of defense and other high-technology industies,market access still remains restricted by U.S. andforeign government nontariff trade barriers andindustrial policies.

A final economic factor is the combined impactof slow growth associated with the recession inthe late 1980s and global surplus capacity inmany manufacturing industries. Key strategicindustries, such as automobiles, semiconductors,and aerospace, face enormous pressures for con-solidation and rationalization. International stra-tegic alliances enable companies to achieve andexploit greater product specialization with thenecessary economies of scale. In mature and

16David C. Mowery, ‘‘Collaborative Ventures Between U.S. and Foreign Manufacturing Firms,’ Research Policy, vol. 18, No. 1, February1989, p. 24.

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Table 5-l-Reasons Firms Give for Establishing international Strategic Alliances, by Regional Partnership

Development Marketing Production Number ofRegion (percent) (percent) (percent) agreements

ECJapan . . . . . . . . . . . . . . . . . . . . . . . 40 26 72 50

EC-U. S. . . . . . . . . . . . . . . . . . . . . . . . . . 57 12 31 117U. S. Japan . . . . . . . . . . . . . . . . . . . . . . 24 30 46 33SOURCE: Adapted from Michael Hergert and Deigan Morris, ’Trends in International Collaboration Agreements,” Farok J. Contractor and PeterLorange (eds.), Cooperative Strategies In /nternationa/Bushss (Lexington, MA: Lexington Books, 1988), p. 108.

consolidating industries, ISAs can reduce excesscapacity, and thus enhance market discipline. 17

Across a wide array of technology-intensivemanufacturing industries, product life cycleshave shortened considerably; indeed, in somecases they barely exceed the length of timerequired to secure U.S. patent protection. Shrink-ing product cycles have made it more difficult forcompanies to just@ the high freed capital costsrequired for each new product generation. In thetelecommunications sector, for example, industryanalysts report:

The pace of technical change in microelectron-ics and computer technology has shortened lifecycles of switching products while increasingtheir costs of development. Electronic switchesfor public carrier central offices can cost from$500 million to $1 billion to develop and becomeobsolete within five years of introduction. l8

Skyrocketing freed development costs, togetherwith reduced recoupment cycles, have increasedthe pressure on firms to market on a global scaleand to achieve product development and marketaccess at lower costs.

Second, as product cycles shorten, many com-panies must increase R&D spending to remain atthe frontier of technology. Referring again to the

telecommunications industry, one industry expertcites that in 1986 the top 10 firms spent $753million (7.5 percent of turnover) on R&D, whichrepresented an increase of 9.3 percent over theprevious year. l9 With margins under pressurefrom excess capacity and slow economic growth,firms are under pressure to deploy R&D spendingmore effectively, reduce capital expenditures andoperating costs, and seek additional cost savingsthrough economies of scale and scope. As thepresident of Texas Instrument’s Japanese subsidi-ary acknowledged, ‘technology advances requirea huge cost, both in human resources and equip-ment to develop semiconductors, so it is becom-ing necessary to share as much as possible. ” 20

While soaring R&D costs have motivatedMNEs to form international strategic alliances,other technological factors play an equally influ-ential role. Many broad-based manufacturingsectors, such as the aerospace and automotiveindustries, must rely on a diverse array of emerging technologies-new materials, opto-electronics, robotics-that are outside their corecompetencies. For example, microprocessors arenow a key component in automobiles, householddurables, and computers; manufacturing and de-signing them requires advanced manufacturingcapabilities and access to the latest developments

17 me s~epoint IXM bmnm~e witiregwd to joint ventures. See Kathryn Rudie Harrigaq A4anagingforJointVenture Success @X-@tOU MA: Lexington Books, 1986), p. 19.

16 G - p. Pimno, MictielV. Russo, and David J. Teece, ‘‘Joint Ventures and Collaborative Arrangements in the TelecommunicationsBquipmentIndustry, ‘‘ in Mowery (cd,), op. cit., footnote 1, p. 38.

1 9 D a ~ p r o v i d ~ by M y t e ~ (Cd.), “ c r i s i s , Teclmologic~Change and the Strategic ~hmce, ” op. cit., f~tnote 1, P. 19 .

m me Cement was made by Sachiaki Nagae, cited by Jacob Schlesinger, ‘‘Texas Instruments and Hitachi: Enter Pact to Expand Alliancein Chip Making,” The Wall Street Journul, Nov. 21, 1991, p. B3.

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in a variety of scientific disciplines. 21 To manyfirms, ISAs represent a cost-effective way toacquire these competencies.

In addition, industries such as telecommunica-

tions, computers, pharmaceuticals, and biotech-nology are being transformed by the convergenceof overlapping and underlying technologies. Com-puter and telecommunications firms, for example,often form strategic alliances to ensure compati-bility between various network systems, such asprivate branch exchanges (PBXs) and local areanetworks (LANs). The merging of technologiesfrom these two industries has also spurred innova-tion in the telecommunications equipment, soft-ware, and integrated circuits industries. 22

The impact of this technological revolution,particularly at the component level, has made itmore difficult and inefficient for many companiesto track all the relevant technological frontsthemselves. Unable to develop new technologieson their own, many NINEs seek ISAs to augmentand complement their existing technological port-folios. In essence, MNEs are harnessing ISAs toreduce the gap between the corporations’ techno-logical competence and the technological com-plexity of their environment caused by continu-ous and rapid technological change. ISAs enablefirms to reduce costs, risks, and uncertainty intheir environment, and enhance simultaneouslytheir internal technological and manufacturingcapabilities.

WHY MNEs ENTER INTO STRATEGICALLlANCES

The previous section outlined the broad eco-nomic and technological developments that con-dition the formation of international strategic

alliances. This section analyzes specific, firm-level factors that motivate MNEs to pursueinternational strategic alliances. MNEs seek stra-tegic

1.2.3.4.5.6.

alliances for at least six principal reasons:

cost and risk sharing,generation of economies of scale and scope,asset pooling,market access,speed, andcompetitive positioning.

I Cost and Risk SharingOne frequently offered motivation behind ISAs

is the ability of firms to spread the costs and risksassociated with R&D activities as well as newproduct development and commercialization. Asdiscussed earlier, technology-related factors haveexerted a broad, compelling influence on theexternal environment of MNEs. In the aerospaceindustry, for example, the costs of developing anew commercial passenger aircraft are estimatedto be well over $4 billion. Such costs, inconjunction with the risks of an uncertain market,are difficult, if not impossible, for one corporationto finance alone. International strategic alliances,such as Airbus and the one recently contemplatedby McDonnell-Douglas and Taiwan Aerospace,are notable examples. In the fall of 1991, McDonnell-Douglas sought $2 billion from Taiwan Aero-space in return for a 40-percent equity stake forthe development and commercialization of theMD-12 passenger aircraft-a key product if McDonnell-Douglas is to survive against Boeingand Airbus. The company chairman assertedthat “without this alliance and internationalrisk-sharing partners, we will be unable to growas a commercial aircraft company. ’ ’ 23

21 Mictiel De~p ie r r e an d J ~ n - Be n o i t Zimmerman develop this tUgUIIICXM in their CbptCr, “Towards a New Europeanism: French Firmsand Strategic Partnerships, ” Mytelka (cd.), op. cit., footnote 1,p. 102.

22 pimo et al., op. cit., footnote 18.

23 Citti ~ MC H W, Stevensom “Gain for McDonnell-Douglas Raises Fears of U.S. ~ss, ’ The New York Times, Nov. 20, 1991, pp. DIand D4.

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The U.S. computer industry has been similarlymotivated to enter into strategic alliances becauseof the need to reduce and spread costs and risksassociated with a company’s strategy of product

diversfication. Apple has formed strategic alli-ances with two Japanese MNEs. It has teamedwith Toshiba to manufacture a CD-ROM player,and with Sharp to manufacture personal digitalassistants (PDAs). According to Apple’s CEO,“We cannot afford to fund these projects byourselves. These alliances give us a chance to beplayers in an important growth area. ”24 Appar-ently Apple is contributing software know-howand product design in exchange for Japanesemanufacturing expertise and key componentssuch as flat panel displays.

I Economies of Scale and ScopeSteadily increasing minimumeconomies of

scale and scope often raise investment costs andlimit the number of firms that can independentlyunderwrite the costs of efficient-sized facilities.Many MNEs are negotiating alliances to mobilizeadditional financial resources. For example, inJuly 1992, U.S.-based Advanced Micro Devices(AMD) and Japan’s Fujitsu began collaboratingon flash memory chip development. To generatethe economies of scale necessary to price thechips competitively, a plant costing an estimated$700 million would be required. AMD had annualsales of $1 billion at the time. As AMD’s chief financial officer admitted, “ . . . it was anenormous nut for us to swallow alone. ’ 25 Interna-tional strategic alliances have long occurred in theaircraft industry, where enormous costs of new

product development, combined with low vol-umes, require a company to sell anywhere from350 to 400 commercial aircraft within the frost 10years and at least 600 overall in order to achieve

profitability. Approximately 30 basic types of aircraft have been introduced during the jet age;about 8 have sold at least 600 units, althoughseveral more may yet do s 0 .26 To date, theindustry as a whole has lost significant amountsof money, which has further intensified interest instrategic alliances to share costs, control risk, andenhance market access.

| Asset PoolingInternational strategic alliances are a means of

pooling other, nonfinancial, firm-specific assetsthat are not easily licensed, such as proprietarytechnology, manufacturing know-how, market-ing, and distribution charnels. For instance,several alliances in the pharmaceutical and bio-technology industries have been formed in orderto pool the complimentary technologies of the partners. In April 1992, 15 U.S. and Euro-pean multinational pharmaceutical companiesannounced collaboration in AIDS drug research .27

The emphasis on asset complementarily andpooling is also evident in the telecommunicationsindustry. In the AT&T-Philips alliance, AT&Tprovided most of the underlying technology andtechnical know-how used in developing the nextgeneration of digital switching equipment. Phil-ips contributed its superior production technol-ogy, European identity, and familiarity with thetightly controlled and regulated European tele-communications markets. 28

24 ~wmd W . r ) ~ ~ n d , “ B y t i n g J a p a q ” Time, Oct. S, 1992,p. 69.

MJohn Burgess, “Ventures Share Cutting Edge with Japu” The Washington Post, Sept. 6, 1992, p. F1.26 See U.S. CoW5s, ~lce of Technology Assessrnen~Competing Econom”es: America, Europe, and the Pa@c Rim, OTA-I.TE498

(Washington DC: U.S. Government Printing Office, October 1991). Personal communication with Wolfgang Dernisc&Managing Director,UBS Securities, July 26, 1993.

27 Peter Coy, “’llvo Cheers for Corporate CollaboratiorL”Business Week, May 3, 1993, p. 34.2 8 h e n J . w d i k , “ R & I ) a n d I n t e r n a t i o n a l J o i n t Ve n t We S , ’ Contractor et al., (eds.),op. cit., footnote 6, pp. 190-191,

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| Market AccessAs indicated, market access is a critical motiva-

tion for firms to establish ISAs, Access to somemarkets, most notably Japan, remains restricted

by government trade and industrial policies aswell as informal barriers to entry and FDI (seeChapter 3). Strategic partnerships with foreigncompanies are central to overcoming this keybarrier to entry. Coalitions based on internationalmarket access can “achieve access to localknow-how, local legitimacy, government bless-ing, and strong local market positions gainedthrough first-mover effects. ’ ’ 29

| Speed

As competition in international markets hasintensfied, product life cycles have been reduced.If profitability is to be maintained, MNEs mustreduce the time necessary for R&D, productdevelopment, commercialization, production, andmarketing. ISAs can offer MNEs opportunities toaccelerate all these activities. This is especiallyimportant, for example, in the biotechnologyindustry, where the recent wave of U.S. strategicalliances with foreign companies is aimed atshortening the time required for commercializa-tion. Indeed, pressure on biotechnology firms to

get their products into global markets faster is onereason why small U.S. biotechnology firms areforming strategic alliances with both domesticand foreign pharmaceutical giants.

| Competitive PositioningAs indicated earlier, MNEs may establish

international strategic alliances to strengthentheir current and future competitive positions.

There are three important competitive uses of ISAs for multinational enterprises. 30

First, ISAs enable companies to monitor (andin some cases acquire) the technological develop-

ments of competitors and potential future rivals.This strategic rationale is especially apparent in anumber of automotive industry ISAs involvingU.S. and Japanese MNEs-example, NUMMI(General Motors and Toyota) and Ford-Mazda.

Second, ISAs can influence the evolution andthe structure of an industry by creating new entrybarriers, such as affecting the industry’s coststructure or ensuring that competitors employ acertain technology. In this respect, ISAs arefrequently initiated at the precompetitive R&Dstages, when enterprises can develop common

technical standards. While forming a barrier toentry, technological standardization can alsoensure a greater degree of product line compati-bility.

The role of ISAs to secure common technicalstandards is critical to the computer and telecom-munications industries. For example, one of themotivating factors for the now dissolved AT&T-Olivetti alliance was to sell AT&T’s UNIXoperating system in Europe. The adoption of UNIX in 1986 by five of Europe’s major com-puter producers, including Philips and Siemens,was perceived as a successful move and achallenge to IBM’s position in Europe. 31 Morerecently, Sun, DEC, and Hewlett-Packard haveformed alliances to increase the likelihood thattheir particular RISC-chip standard will dominatethat segment of the semiconductor market.

Third, international strategic alliances canshape the competition in an industry by attempt-ing to deter and/or preempt rival firms. In the

Z9 poflcxet al., op, cit., footnote 4, p. 334.so On tie competitive uses of intermtioti strate~calliances, see porter et l. (eds.), op. cit., footnote 4; Mgq OP. cit., foomote 17; GU Y

Harnel, Yves L. Doz, and C.K. Pra.halad, “Collaborate with Your Competito~and W@” Harvard Bm”nessReview, January-February1989, pp. 133-139. For a critique of this approach refer to Claudio Ciborra, “Alliances as Learning Experiments,” Mytelka (cd.), op. cit.,foomote1.

31 piWo et al., op. cit., footnote 18, p. 48.

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Chapter 5-international Strategic Alliances | 127

key strategic sectors, such as aircraft and telecom-munications, are obvious cases.

Finally, because government procurement prac-tices often restrict domestic market access, theyencourage ISAs. In Europe and Japan, especially,the prominent and continued role of governmentministries as both purchasers and regulators of their telecommunications industries means thatU.S. firms must establish alliances with foreignpartners, who can then provide them with anational ‘‘cloak’ in order to gain market access.

| Industrial PoliciesThough intended to stimulate the international

competitiveness of national industry, Europeanand Japanese governments’ provisions of R&D

funding, risk capital, and state purchasing havespurred U.S. MNE alliance activity abroad.

In Japan, for example, the government throughits various ministries-Ministry of InternationalTrade and Industry, Ministry of Finance, and theMinistry of Post and Telecommunications-hasplayed a central role in the successful develop-ment of the country’s computer-related indus-tries. Through measures such as the promotion of interfirm collaboration, R&D funding, procure-ment, and leasing programs, Japanese computerand semiconductor MNEs have challenged IBMglobal position. 37 In Europe as well, variousgovernments have pursued na t iona l championstrategies in high-technology industries to com-bat the growing competition and market penetra-tion by U.S. and Japanese MNEs. However, risingR&D costs, shorter product cycles, and econo-

mies of scale are making national championstrategies anachronistic. Accordingly, some Triadgovernments have begun to support ISA forma-tion. For example, the EC has established anumber of strategic alliance programs in theinformation technology-related industries. Theseinclude the European Strategic Program for R&Din Information Technologies (ESPRIT), and theJoint European Submicron Silicon Initiative (JESSI).The U.S. semiconductor industry, in conjunctionwith the U.S. Government, has formed thepre-competitive R&D consortia, SEMATECH.

For U.S.-based MNEs, the combination of industrial policies (particularly those that provideaccess to risk capital) with the high cost of newproduct development has enhanced the appeal of

strategic alliances with European and Japanesefins. For example, IBM and NEC both haveequity stakes in Bull, and IBM has participated inEC-sponsored programs such as JESSI. 38

| Regulatory PoliciesThe regulatory policies of governments have

an underlying though pronounced effect on inter-national strategic alliance formation. Three areasfor review include antitrust policies, deregulation,and technical standards.

With regard to antitrust issues, many analystsargue that because U.S. antitrust laws are fartougher than those in Europe or Japan, U.S.MNEs are at a comparative disadvantage domes-tically, and are thus more likely to form strategicalliances with foreign companies. The debate

STFor ~ exw~ent &wWsion of the role of the Japanese Government in promoting its computer industry see Ketmet.h Fhunm TargeO”ng theCompurer(Washington, DC: TheBrookingsInstitution% 1987); Competing Economies, op. cit., footnote 26, chapter 7, pp. 237-291; and JonahD.La y and Richard J.Samuels,“Institutions and Innovation:Research Collaboration as Technology Strategy inJapam”in Mytelka(cd.),op. cit., footnote 1. For Japanese policies towards high-technology industries in general, refer to Daniel Okimoto,Between MITIand the Market: Japanese Industrial Policy for High Technology (Stanford, CA: Stanford University Press, 1990).

38 competing Economies, o p . cit., f oo~o t e 2?6, p. ZXZ; a n d Richard L. Hudso~ ‘‘BuLI Weighs Exp~ding Ties to Otier Firms, ” ‘he ‘U1lStreet Journul, May 28, 1993, p. AS.

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surrounding the impact of U.S. antitrust laws onISAs, however, is especially contentious. 39

In 1984, in response to pressures from the U.S.semiconductor industry, the U.S. Congresspassed the National Cooperative Research Act(NCRA) on the basis that domestic alliances inprecompetitive research would improve U.S.international competitiveness in high-technologyindustries. The Japanese, by contrast, tend to viewR&D and commercialization as less distinct, andthus have long permitted domestic strategicalliances involving joint product developmentand manufacturing.

Despite the NCRA’s passage, various U.S.corporations have maintained that the threat of U.S. antitrust action still poses a chilling effect ondomestic alliance formation. Citing the antitrustsuit filed against Microsoft, Intel, and OpenSoftware Foundation, many U.S. computer firmmanagers say it is simpler and less risky to teamwith foreign partners. 40

One area where U.S. antitrust and regulatorypolicies have played an indisputable role in ISAformation is the dramatic restructuring of the U.S.telecommunications industry during the late 1970sand early 1980s. Deregulation of the U.S. tele-communications equipment and services markets—the world’s largest-and the 1984 divestiture of

AT&T, arising from U.S. antitrust litigation,stimulated numerous international strategic alli-ances.

Another consequence of U.S. regulatory changesin the telecommunications industry was thatAT&T was freed to compete in new domestic

markets, such as computers, and in previouslyprohibited foreign equipment and services mar-kets. 41 This regulatory change led to the prolifera-tion of strategic alliances initiated by AT&T todiversify and expand its product lines (AT&T-Olivetti) and to gain market access, especially inEurope (AT&T-Philips).

A third area where government regulatorypolicies influence international corporate allianceformation is in the setting and adoption of technical standards. Standards can both open andclose domestic markets to foreign firms. On theone hand, by adopting a different standard for itsdomestic market, a government can create abarrier to entry for foreign competitors. On theother hand, as in the case of Europe, where

national markets are too small and fragmented,the lack of a common standard hurts domesticcompanies because they cannot develop suffi-cient economies of scale. Recognizing the impor-tance of EC-wide standards for global competi-tiveness in high-technology industries, intra-ECalliances have emerged, such as RACE (Researchfor Advanced Communications in Europe), whichwas established to define standards for integratedbroadband communication (voice, text, data, andvisual).

Another example of the importance of standardsetting for ISAs is the international race todevelop and commercialize high-definition tele-vision technology (HDTV). The U.S. FederalCommunications Commission’s 1991 decision toadopt a digital standard shifted various member-

39 ~ o ~ M. J o r d e an d David J , T - e , ‘‘ Innovat ion and Cooperation: Implications for Competition and Antitrust,’ Jour?lul of EconomicPerspectives, vol. 4, No. 3, summer 1990, pp. 75-96; Joseph Brodley, “Antitrust Law & Innovation Cooperation, ” Journal of Econom”cPerspectives, vol. 4, No. 3, summer 1990,pp. 97-1 12; Carl Shapiro and Robert D, Willig, “On the Antitrust Treatment of Production JointVentures,” Journal ofEcortomic Perspectives, vol. 4, No. 3, summer 1990, pp. 113-30; and Gene M. Grossman and Carl Shapiro, “RewmhJoint Ventures: An Antitrust Analysis,” Journal of Law, Econom”cs and Organization, vol. 2, fall 1986, pp. 315-337.

40 ~ e w pol~ck, ‘cTwhIIoIov;Antitrust Actions on the Rise Again, ” The New York Times, Nov. 10, 1991, section 3, p. 12.41For e~pl~ of strategic alliances between U.S. and overseas service providers, see Martin Dicksoq ‘‘MCI G ti MO EFirepower in

Telecoms War, ” Financial Times, June 17, 1993, p. 13; Bart Ziegler, Mark IAwyn, and Paula Dwyer, “Who’s Afraid of AT&T7,” B w i n e s s

We e k , June 14, 1993, pp. 32-33; and “Company News: AT&T in International Services Alliance, ” The New York Times, May 26, 1993, p. D3.

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Chapter -International Strategic Alliances I 129

ships in rival strategic alliances.42 initially in-

volved in European-supported, analog-based 95HDTV project, both Philips and Thompson havenow joined with NBC, the Sarnoff ResearchCenter, and Comparison Labs, Inc. to win the U.S.digital competition. 43 Advances in digital tech-nology provide U.S. partners with an importantcompetitive advantage, while France Thompsonand the Netherlands’ Philips contribute theirexpertise in analog and camera development. InMay 1993, all three consortia agreed to develop asingle digital standard for HDTV.

To summa rize, governments shape interna-tional strategic alliances in a number of ways.First, differences in trade, industrial, and regula-tory policies have created a market for the

exchange of strategic assets among multinationalfins. To compete internationally, U. S., Euro-pean, and Japanese MNEs are using internationalstrategic alliances to transform and alter theirportfolios of strategic competencies and assets.

Second, governments can also alter the para-meters of ISAs by influencing firms’ partneringdecisions. For example, one consequence of thepervasive involvement by governments in variousEC collaborative programs-RACE, ESPRIT,JESSI-has been to transform European firmsfrom competitors to attractive alliance partners. Ininterviews with European high-technology MNEsinvolved in ISAs, one analyst reports that Euro-pean company executives “repeatedly stressedthat they could not hope for balanced corporatealliances unless they were perceived as techno-

logically and industrially attractive partners.” 44

Indeed, European MNEs point to IBM’s partici-pation in JESSI as a noteworthy demonstration of their argument.

In general, such asymmetries between govern-ment policies, particularly in terms of marketaccess, can significantly influence the ability of U.S.-based firms to initiate and control the termsof ISAs.

HOW SUCCESSFUL ARE INTERNATIONALSTRATEGIC ALLlANCES?

The conditions that motivate the creation of these ISAs often contribute to their termination.Indeed, despite the frequency with which they areemployed by MNEs, many ISAs are very short-lived, averaging perhaps only 5 or 6 years. 45 AllMNEs have experienced various difficulties informing as well as continuing their strategicalliances. In many cases, problems arise becausefirm fail to realize and/or anticipate the manycultural, managerial and other obstacles they arelikely to confront. Furthermore, simultaneouscompetition and cooperation between companiesengaged in an international strategic alliancerequires a balancing act that some MNEs areunable to manage. Some analysts are concernedthat ISAs pose considerable risk to U.S.-basedMNEs, because U.S. firm appear less able toabsorb new technologies and skills rather thanmany of their strategic partners. %

This section examines some of the commonobstacles confronting ISAs, drawing on case

42 By 1991, he ~~ Competition ~ v o ] v ~ b e e s . IJ t i t i s : General Instrument CO~, and ~; ~~ and AT&T; ~d philiPs EIcx~nics~Thomson Consumer Electronics, NBC, and the David Sarnoff ResearchCater.

AS H~~~ MIy, “me HDTVAlliance: U.S. and EuropeaiI Industrial Policy Approaches, ” Masters research paper submitted for a classin “International Strategic Alliances, ’ theSchool of Foreign Service,@rgetownUniversity, Washington DC, May 1993.

44 wawc s~~ol~, ~~~h.T~~h E~~O~~:The p~l~~ic$of ]nter~tional Cooperation (Berkeley, CA: universityOf ~OMia ReSS, 1992),p. 314.

45 B ~ c e K o g u ~ 1 ‘J o i n t Ventures: Theoretical and hnperid i%SpeCtiveS,“ Strategic Management Journal, vol. 9, 1988, pp. 319-332; and ‘‘A Study of the Life Cycle of Joint Ventures,’ Contractor et al., op. cit., footnote 6.

M David hi and John W. Slocum, Jr., “Global Strategy, CompetencbBuiMing andStrategicAlliances,” California ManagementReview,Fall 1992, pp. 81-82.

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Chapter 5-International Strategic Alliances I 131

when Motorola tried to transfer semiconductortechnology to Texas from its joint venture plant inSendai, Japan, the transfer was at best a partialsuccess. According to a Motorola executive, ‘‘InTexas, we just could not convince our managersto step aside and let people named Seki orNishihara run their operations for a year. ” 52

Another illustrative example is the failedalliance between TRW and Japan’s Fujitsu be-cause of the creation of a ‘‘double managementsystem. ‘ 53 This system, which required dualmanagerial approval, so encumbered operationaldecisionmaking that both companies terminatedthe alliance in frustration.

| Alliance Goals ChangeDiffering goals between MNEs have causedmajor conflicts regarding the future direction of an international strategic alliance. Demand changes,competitive pressures, or other factors may neces-sitate a shift in the alliance’s original objectives,which can change the relevance of the alliance toits members. This may create dissatisfaction andconflict among the partners, undermining theviability of the original arrangements. Accordingto one observer:

As an owner’s dependence on its venture’sactivity rises or declines, the balance of relativebargaining power between partners shifts, espe-cially if resources one partner contributes to the

joint venture become more or less valuable thanthe resources contributed by other partners. 54

A recent Japanese survey found, for example, thatone of the reasons for the slowdown in allianceformation as well as increased rates of termina-tion between Japanese and foreign MNEs wasthat the foreign partners had gained sufficientknowledge of the Japanese market to go it alone. 55

| Erosion of Competitive PositionPooling strategic assets is a driving motivation

of ISAs. However, such exchanges may haveunintended, detrimental consequences on a part-ner’s long-term competitiveness. 56 Cooperation

between MNEs involved in pre-competitive R&Dalliances tends to be both simpler and morefrequent because the gains from eventual sales aredistant. However, when collaborative venturesnear the marketing stage, ‘‘the incentive to cheaton a partner or to benefit at each other’s expensemay become strong. ‘’57 Lack of trust and fear thatthe continued participation in an alliance will leadto the erosion of an MNE’s global competitiveposition is a critical reason for the short lifespanof some ISAs.

In some cases, while the partners’ overallstrategic goals converge, their competitive posi-tions in an industry do not. In its broad strategicalliance with Japan’s Mitsubishi Kasei, the U. S.-based Monsanto found that the joint venturecompany had diversified into a number of productlines that were in direct competition with those of its U.S. parent. 58 Another example where productcollisions may produce an untenable balancebetween cooperation and competition is AT&T’s

52 David E. Sanger, ‘‘Costs May Be Too High for All-American Chips,’ The Ne w York Times, Jan. 1, 1992, sec. 1, p. 48.53 per~utt~ et al., op. cit., footnote 49, p. 150.

54 H f i g u o p . c i t . , footnote 17! p. ‘i-

5 5 Fo r C-pie , h e G e m n p - c e u t i c ~ ~ q a n y , B a y ~ , r ~ n f l y t ~ k ove r ~ d i s ~ ~ t i o n C?M.II IEk t i t ‘ h k c & (k n l i d kd~hi~had previously provided. See Gregory H. Feldberg, “Joint Ventures in Japan Suffering Wedding Blues,’ The Japan Economic Journul, Aug.25, 1990, pp. 1 and 7.

56For e~ple, see David Lei and JOIUIW. SIOCWXI,Jr., “Global Strategic Alliances: Payoffs and Pitfalls,” Orgam”zationul Dyna”cs,Winter 1991, pp. 44-62.

57 Hmgert et al., op. cit., footnote 6, p. 06.

58 Feld~~, op. cit., fOOmOte55, p. 7.

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alliance with Philips to market AT&T’s digitaltelephone switching system in Europe. Philip’scommitment to the alliance was clearly strainedwhen AT&T teamed up with Italy’s Olivetti, a

major Philips competitor in the office machinerysector.One example of an international strategic

alliance that recognized early on the need todevelop trust and to limit opportunistic behaviorwhile strengthening the competitive position of both partners is Motorola’s partnership withToshiba. At the center of the alliance is anagreement that calls for Motorola to release itsmicroprocessor tecchnology incrementally as Toshibaincreases Motorola’s penetration in the Japanesesemiconductor market.

Thus far, this chapter has examined the trendsin and motivations for the growth in the numberand scope of ISAs. It has also delineated howtrade, investment, industrial, and regulatory poli-cies of governments shape and condition both theformation and the content of these MNE alli-ances. Nevertheless, the discussion above high-lights the inherent fragility of ISAs due to thevarious problems associated with underfinancing,managerial failures, and shifting and competinggoals, among others. The final section addressesthe implications that international strategic alli-ances may have for U.S.-based MNEs as well asfor U.S. Government policy.

| Implications of ISAsfor U.S. Firms andGovernment Policy

International strategic alliances are a relativelynew and multifaceted phenomenon. The rapidexpansion of ISAs since the early 1980s, as wellas their high failure rate, makes any assessment of their implications for U.S.-based MNEs andpolicymaking difficult and tentative. To date,

studies of ISAs have concentrated on the motiva-tional factors influencing alliance formation.

There are few detailed, comparative industry casestudies that focus on the vital question of howISAs affect the competitiveness of U.S. firms inparticular and the economy in general. In the final

report of this assessment, OTA will address thisquestion.The following discussion raises some impor-

tant issues. While there are no clear answers orprescriptions, ISAs have different and perhapscompeting implications for U.S. firms and poli-cymaking. On the one hand, ISAs are part of thetransformation to a global economy. For MNEs,international strategic alliances have led to thefurther integration of the world economy and tothe growing interdependence of nations. Theconsequences, as one MNE manager observed,

are that ‘national borders and corporate national-ity are less significant in the increasingly global-ized economy. ’ 59

On the other hand, ISAs raise many toughissues for U.S. policymakers intent on preservinghigh-wage jobs for Americans and keeping thenation competitive in many high-technology in-dustries. This tension between the interests andneeds of MNEs and national governments isinevitable, but ought not to be irreconcilable.

In some cases ISAs enable formerly U.S.

domestic companies to become multinationalenterprises. Particularly for small U.S. biotech-nology and computer start-up companies, alli-ances with foreign MNEs can provide access tointernational financing, manufacturing technol-ogy, and distribution networks.

International strategic alliances permit MNEsto unbundle their portfolios of various assets andto transfer them to partners. Hence, in decidingwhat their core competencies are, U.S. MNEs arebecoming less vertically integrated. They areallowing portions of their R&D, manufacturing,

marketing, and other capabilities to be managedoutside the firm through foreign alliances.

59 ~yo~ White Paper, op. cit., footnote 2, p. 4

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Chapter 5-international Strategic Alliances I 133

Alliances constitute a new MNE tool formobilizing in response to high product develop-ment costs, reduced time between product genera-tions, and the technological convergence occur-

ring in many industries. As a result, ISAs createshifting, competing coalitions of MNEs, as op-posed to competing firms. They allow MNEs to

join together in specific products or markets,while retaining autonomy in others. One analystobserves that dominant U.S. MNEs, such asAT&T and IBM, ‘‘engage in a network of partnerships, playing a central role that allowsthem to enter/exit alliances according to theircomparative advantages at the moment. " 60 In-deed, it is not unusual for MNEs to be partners inone consortia or alliance and competitors in

others. IBM and Siemens, for example, haveformed their own alliance and cooperate in JESSIin semiconductor development, but compete inmainframe sales. For survival, most MNEs can nolonger afford not to be involved in internationalstrategic alliances. Thus, ISAs may encourage, insome cases even necessitate, a follow-the-leaderstrategy.

The complex network of allied firms andcompeting coalitions of MNEs, engendered byISAs, is restructuring the world economy. Inter-national strategic alliances are leading to furthermarket concentration in high-technology indus-tries, and, in some cases, to mergers and acquisi-tions, raising the potential of global oligopolisticmarkets and the creation of international cartels.Referring to the ability of MNEs involved instrategic alliances to set technical standards andthereby reshape existing industries globally, oneobserver suggests, ‘‘In the future, new frontiers

between industries will thus be the result of rulesof the game defined within the framework of alliances between dominant firms of technology-based oligopolies.’ ’ 61

Finally, there is a concern that ISAs may proveto be a one-way street leading to the transfer of key U.S. technologies to overseas competitors.Some analysts argue that multinational jointventures are disproportionately transferring tech-nology and other key assets from the UnitedStates to Japan. 62 Although there has been littleconcrete evidence to support or disprove thisview, the question nevertheless remains: CanU.S. firms learn to consistently create and manageinternational alliances in ways that guard againsttransferring key assets to ambitious partners,

while enhancing their competitive advantage?In reviewing U.S.-Japanese strategic alliances,

various studies conclude that Japanese MNEs usestrategic alliances more effectively because theymake greater efforts to learn from their U.S.partners. 63 In part, this willingness and ability to

absorb technology and other resources fromalliances may stem from the greater experienceJapanese firms have accumulated via their alli-ances with other companies in their own country.Indeed, some analysts believe that ‘collaborativeresearch has become the defining feature of Japanese research practice and the sine qua nonfor competitiveness in many technology-intensive sectors. 64

By contrast, some U.S. firms take a short-termperspective as a way of avoiding investments andregaining competitiveness with minimum effort.One study found that U.S. companies involved inISAs with Japanese partners were more interested

a Cibtm& ( ‘Alliances as Learning Expcrirnents,” op. cit., footnote 5, p. 53.

61Charles-Albert Michalet, ‘ ‘Strategic Partnerships and the Changing Internatiomlization Process, ” Mytelka (cd.), op. cit., footnote 1,p. 47.

62 Reich et al, op . cit., footnote 36 , p. 79.63 Refer to, for exmple, hv et al., op . ci t . , footnote 37; Hamel et a l . , op. cit., footnote 30, pp. 133-139; h i and SlocW Op. cit., foomote

46.M L3vyet al., op. cit., footnote 37, p, 120.

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in reducing the costs and risks of entering newproduct lines or markets than in acquiring newskills .65

While the view that international strategic

alliances are weakening U.S. companies andthereby eroding national economic competitive-ness has garnered much media attention, thereality may be different. There is evidence tosuggest that more U.S. MNEs are effectivelymastering ISAs, through the internalization andcompetitive deployment of assets transferred byforeign companies. An illustrative example of thebenefits to be gained from a two-way streetapproach is the General Motors-Toyota NUMMIautomotive alliance in the United States.

This collaborative venture between two lead-

ing industry rivals gave General Motors the

opportunity to learn frost-hand about the ToyotaProduction System—a key manufacturing tech-nology that is among Toyota’s foremost competi-tive assets. In exchange, Toyota, via NUMMI,

had the opportunity to learn whether its manufac-turing system, using unionized American workersand U.S. auto parts suppliers, could be trans-planted successfully to the United States. ThisISA is an undisputed success. The acclaim GMhas received with its new Saturn series is a result,in part, of the company’s experience with Toy-ota’s labor, supplier, and just-in-time productionpractices. The confidence Toyota gained throughNUMMI was a deciding factor in encouraginggreater localization and the establishment of amanufacturing plant in Kentucky.

65 ~el et al., op. cit., footnote 30 , p. 134.

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MultinationalEnterprises

and GlobalCapital

Markets

T

his chapter highlights important developments in thefinancial environment of contemporary MNEs. Twointerrelated themes run throughout. The first concernsglobal integration, which is reshaping multinational

finance and thereby complicating the task of national economicmanagement. Domestic market openness, the development of offshore money markets, international capital movements asso-ciated with large macroeconomic imbalances, exchange ratevolatility, technological change, and financial innovation are allworking to erode the long-standing structures of national finance.Such policy instruments as capital controls, constraints on theestablishment of nationwide banking networks, and limitationson ownership linkages between financial and industrial firms

have thus come under enormous pressure.The activities of MNEs both contribute to this pressure andrepresent adaptations to the resulting structural changes. Poli-cymakers seeking either to secure the economic benefitsassociated with MNEs or to address their social and politicalconsequences must therefore take into account the existence of increasingly global capital markets. In such an environment, theeffects of various policies directed at the performance of MNEsare now more difficult to anticipate, and the possibility of unintended consequences is greater.

The inherent tension between the multinational logic of firmsand the national logic of governments is nothing new. As thesecond theme of this chapter brings out, however, the tensionmay not have uniform effects across all industrial nations. Thepace and extent of structural change differ at the national level,and enduring asymmetries can skew both business competitive-

.———

6

135

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ness and the social impact of global financialintegration. National differences in the degree of financial openness and transparency remain. Theycan stem from subtle regulatory barriers or

disparities in tax and accounting systems; theycan also reflect the extent to which relativelyconcentrated national financial networks influ-ence the allocation of capital. Thus, the chapteremphasizes the transitional condition of interna-tional capital markets and the need for furthercomparative research along both national andsectoral lines.

Following a s ummary of chapter findings, thesupporting analysis examines the changing finan-cial structures confronting MNEs. The interna-tional rules of the immediate post-war systemwere clearly aimed at encouraging the free flow of goods and services, and therefore the free flow of short-term trade finance. (Box 6-A providesrelevant historical background.) They were not,however, intended to encourage the unrestrainedflow of all forms of capital. Countries remainedfree to control both speculative short-term flowsand foreign direct investment (FDI). In order topreserve that right, they explicitly built safe-guards into the rules of the Bretton Woodssystem.

Over time, and especially as a result of U.S.pressure, a movement to promote a new norm of international capital mobility gathered steam. Thefinancial policies of the major industrial countriesat the broadest level eventually converged aroundthat norm, a convergence linked throughout thepost-war period with the policy underpinnin gs of expanded direct investment flows and the associ-ated principle of reciprocal national treatment.

It is now evident that, since the end of WorldWar II, a set of explicit and implicit rulesimpeding the free flow of capital across bordershas been replaced by a still-evolving set of rulespermitting and even encouraging that flow.

Many reasons for the shift toward increasinglyglobal financial markets have been suggested.The most prominent include:

1.

2.

3.

4.

the pressures for regulatory convergencegenerated by the expanding activities of MNEs themselves and of financial interme-diaries (banks, securities companies, insur-

ance companies, etc.);perceived needs to supplement nationalsavings pools with external resources, espe-cially in light of persistent trade and fiscalimbalances;imperatives to accommodate technologicalchange; andshifts in political preferences at the nationallevel.

These changes have opened national financialmarkets to one another and created a partly

overlapping set of international financial markets.Rapidly expanding volumes of capital now flowthrough those markets, as figure 6-1 indicates.

The nature and extent of these capital flows arealtering the framework within which multination-als make their strategic investment decisions.Financing issues must be addressed in a contextthat presumes exchange rate volatility and inter-national capital mobility. This dynamic financialcontext adds a further dimension of complexity,as well as new, if risky, opportunities.

Similarly, the tension between the logic of global financial integration and the continuedresponsibility of national governments for na-tional economic performance is becoming in-creasingly apparent. The contrasting expectationsplaced on MNEs exemplify that tension. On theone hand, their performance is increasingly meas-ured relative to other multinationals; they musttherefore take full advantage of any new opportu-nities presented by a changing internationalenvironment. On the other hand, governmentslook to them to provide stable, high value-added

jobs, technological innovation, and other bene-fits. Moreover, nations compete with one anotherto attract these firms and benefits.

Against the backdrop of burgeoning interna-tional capital movements, governments havebeen trying to coordinate rules in order to harness

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Chapter 6-Multinational Enterprises and Global Capital Markets! 139

the efficiencies promised by freer flows of capital may still benefit from regulatory, accounting, andand to stabilize the markets through which those fiscal asymmetries and from privileged relation-flows take place. To some extent, this involves ships with national financial institutions. Al-trying to come to grips with the broader implica- though the trend toward globe-sp anning marketstions of differences that remain in the underlying has been underway for some time, the legacy of structures of major markets. traditional financial structures persists to varying

Recent research suggests that some MNEs, degrees. U.S. MNEs, for example, must contend

particularly those based in Japan and Germany, with a system that insists on complete transpar-

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Figure 6-l-Capital Account Balances of the U.S.,Germany, and Japan in Selected Periods

80

6C”

40-

$~

20-

5 0m

g -20a

-40-

-60

-80-

69.1 — — 1

1.67.6 4.8

—-2.4

n U s .= Germany~ Japan -55.3

1970-72 197981 1989-91

NOTES: These aggregate statistics include short as well as long-term

capital. A negative sign indicates a capital outflow. Data arein nominaldollars.

SOURCE: International Monetary Fund (IMF), /riternationa/ t%anda/Statistics Yearbook, 7992 (Washington, DC: International MonetaryFund, 1992).

ency, consistent earnings, and an arms-lengthrelationship between management and owners-a system conventionally depicted as consumer-oriented. German and Japanese MNEs, con-versely, still ought to benefit from less transpar-ent, producer-oriented systems that either providemore stable, longer term, and more patient

sources of capital or that endow corporate manag-ers with longer investment planning horizons.

The interplay between forces promoting greaterfinancial openness and residual market asymme-tries is reshaping the environment within whichmultinational managers make their decisions onfuture investments. In terms of both scale andcomplexity, financing issues have assumed greaterprominence in corporate strategic planning. Tothe extent that managers are adapting their firmsto this new financial environment, their decisionscomplicate the task of crafting effective new rulesto govern the international economy. The evolu-tion of MNE strategies also raises new challengesfor governments attempting to preserve tradi-tional social values. Nations thus find themselvesin a narrow corner. On the one hand, they seek the

jobs, investment, new technology, and skills thatfinancially adaptable MNEs can provide. on theother hand, they must craft rules that strike anewbalance between competitive efficiency, fairness,

and enduring social priorities in a politicalframework still fundamentally centered on thenation.

CHAPTERFINDINGS1. The major capital markets within which

MNEs make their financing decisions devel-oped in different national policy contexts.Financial regulatory and supervisory policiesstill have the most direct influence on under-lying market structures. But a much broader

range of policies influence those structures, aswell as the amount, cost, and availability of the capital channeled through them. Theseinclude monetary and exchange rate policies,overall fiscal policies, corporate tax rules anddepreciation schedules, antitrust policies, andaccounting standards. Such policies effec-tively constitute the rules of the financialgame within national capital markets.

2. The structure, depth, and operations of na-tional capital markets can provide importantadvantages to MNEs. In the early post-war

period, American capital markets providedU.S. firms with high volumes of relativelylow-cost capital. For some companies, thishelped fuel expansion overseas and, eventu-ally, development into MNEs. Today, themuch different financial market arrangementsof other countries may be well-adapted toprovide capital advantages to their own firms.

3. From the end of World War II until the 1970s,the structures of national capital markets, andthe rules defining them, differed markedlyacross advanced indus t r ia l count r ies . TheU.S. market, for example, was geographicallydecentralized, distinguished clearly betweencommercial banks and securities companies,and discouraged banks from ownin g shares innonfinancial corporations. The Japanese sys-

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Chapter 6–Multinational Enterprises and Global Capital Markets I 141

tern was more centralized and state-directed,albeit with an American-inspired separationof commercial banks and investment banks.In the German system, principal banks were

distinguished by their universal character andtheir ability to own nonfinancial fins.

4. Certain factors enabled structural differencesbetween the most important national capitalmarkets to be maintained in the early post-waryears. Implicit or explicit access rules, forexample, limited the participation of foreignbanks and securities companies in domesticmarkets. Capital flows between those marketswere, in retrospect, relatively manageable.Indeed, in view of the priority assigned tostable exchange rates, all governments con-sidered control and influence of capital flowsnot only acceptable but necessary at varioustimes. MNEs could accommodate themselvesto different capital control regimes, althoughwith attendendant losses in efficiency.

5. Since the early 1970s, structural differencesacross national capital markets have eroded,although they have not disappeared. Capitalcontrols are being dismantled across theadvanced industrial world and beyond. Theforces behind this development include pres-

sures associated with variable exchange rates,changing perceptions of the appropriate bal-ance between risk-taking and market stability,and heightened competition between govern-ments for the jobs, prestige, and other benefitsexpected to flow from a more developedfinancial services industry. Thus, the financialplanning environment for NINEs has changed.

6. The expanding activities of MNEs themselvessignificantly compromised the capacity of governments to maintain capital controls.Leads and lags in invoicing and payments,transfer pricing practices, access to fundingsources in a range of markets, and the abilityto shift some operations to different regula-tory jurisdictions-all helped undercut theefficacy of controls.

7. During the 1980s, national markets for longand short-term capital became more deeplyintegrated as an overlapping set of interna-tional markets grew spectacularly. The gen-

eral deregulatory logic of this movementimplied a trend toward convergence in bothfinancial market structures and the capitalcosts facing MNEs, but the pace and ultimateextent of such convergence remained problem-atic and contentious.

8. Despite the logic of convergence, differencespersist in the structures through which capitalis raised and allocated in the major industrialcountries. At the very least, the legacy of pastdifferences endures. In the 1990s, individualinvestors and borrowers still view the U.S.system of capital investment as comparativelydecentralized, fluid, short-term-oriented, andefficient. By contrast, Japan and Germany stillappear more centralized, oriented towardlonger time horizons for investors, character-ized by closer links between nonfinancialfirms and financial intermediaries, and adaptedto provide potentially higher social returns.

9. Global financial trends since the 1970s havehad mixed consequences for MNEs. On theone hand, the opening of markets and thedevelopment of new techniques has greatlyexpanded their financing options. On theother hand, financial uncertainties have in-creased partly because of fluctuating ex-change rates and shifting interest rate differ-entials (figures 6-2, 6-3, and 6-4) and partlybecause the overall financial environment ismore open and complex. In effect, a relativelyclear set of nationally based rules of thefinancial game has not yet been replaced by anequally clear set of new multilateral rules.

10. For an increasing number of fins, multi-nationalization represents a strategic responseto the rapidly changing financial environ-ment. Diversified operations in a number of

jurisdictions allow firms to take advantage of remaining regulatory, tax, and other differ-ences and to hedge some of the risks associ-

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142 I Multinationals and the National Interest: Playing by DifferentRules

Figure 6-2-Deutsche Mark–U.S. Dollar Monthly Average ExchangeRates, 1970-1988

3.5-

3 -a~ 2.5-

ti5 2-b /

; 1.5-n

1

0.5i

0! I I I 1 T 1 T I T I 1 T 1 1 1 1 I 1

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

SOURCE: IMFdata as dted inPaul %lckarand Toyoo Gyohten, C%m@ng Forfunes: T/w Wdcfs Mcweyand the 77mat to Amedca’s Lead&ush@

(New York, NY: Tiies Elooks, 1992), pp. 370-371.

11.

ated with increased financial uncertainty. Atleast in theory, locating managerial, produc-tion, and support facilities in the market of final sales can mitigate the effects of exces-sive swings in financial variables. Many suchfacilities represent the diversification of anoverall financial portfolio from the point of view of the MNE’s home office (see chap-ter 2).The continuing evolution of global capitalmarkets and the broadening embrace of adap-tive strategies by MNEs pose new challengesfor national governments. Those challengesarise from the fact that many firms, andcitizens generally, hold those governmentsaccountable for ensuring economic growth,shielding particular sectors or particulargroups of workers from excessive or unfaircompetition, and otherwise defending impor-tant social values.

GOVERNMENT POLICIES ANDFINANCIAL MARKETS

Modern financial markets did not spring upspontaneously. Critical to their existence arepublic policies that constitute the rules within

which they operate. All countries subject thesemarkets to a high degree of specific regulation.Because of their centrality in the overall econ-omy, moreover, they have been heavily influ-enced by broader official policies and practices.Table 6-1 illustrates some of the most importantof these policies.

Governments specify, enforce, and adjudicatethe fundamental property rights of market partici-pants. Directly or indirectly, they license interme-diaries (banks, brokers, etc.). They may insuresavers against loss, or protect investors. Throughregulatory, superviso ry, tax, and other financiallyrelated policies, they establish the rules for savers,investors, and intermediaries. Those rules areinfluenced by distinctive cultural, legal, andpolitical traditions and have therefore differedfrom nation to nation. Such differences can createdifficulties for MNEs, but they can also providesignificant opportunities.

In the decades following World War II, therules governing national markets for both short-term finance and long-term capital differed mark-edly across advanced industrial countries. TheUnited States, for example, prohibited commer-cial banks from underwriting corporate bond orstock issues or o wning shares in industrial enter-

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.

Chapter 6–Multinational Enterprises and Global Capital Markets | 143

Figure 6-3-Japanese Yen-U.S. Dollar Monthly Average Exchange Rates, 1970-1988

40 0r 1

3 5 0 f – -—\ I

1 0 0

I

0, 1 I I I I I I [ I I )

7 0 7 1 7 2 7 3 7 4 7 5 7 6 7 7 7 8 7 9 8 0 81 8 2 8 3 8 4 8 5 8 6 8 7 8 8

SOURCE: IMF data as cited in Volcker and Gyohten, Changing Fortunes, pp. 37G371.

prises; the banking market was also segmentedalong State lines. Reflecting this geographic andfunctional segmentat ion, as well as the size,scope, and mainly domestic orientation of theoverall economy, the U.S. stock and bond marketswere decentralized but deep. The British capitalmarket shared some of these characteristics, but,the banking system was less segmented and moreoutward-oriented. The French market was morecentralized and state-directed; the role of bankswas espec ia l ly prominent and the governmentused them to steer industrial development. TheJapanese system had marked similarities to theFrench system, although the links between gov-ernment and banks were more indirect, with aU.S.-style separation of commercial banks andinvestment banks in place after the war. TheGerman system was also characterized by rela-tively underdeveloped stock and bond marketsand by a prominent ro le for banks , bu t theprincipal banks were distinguished by their uni-versal character (that is, they were permitted toe n g a g e i n a w i d e r a n g e o f c o m m e r c i a l a n dinvestment banking activities).

In the period just after World War II, nationalfinancial markets were deliberately insulated bythe architects of the new international monetary

system. Faced with the possibility of extendingthe principles of global liberalism from the arenaof trade to the arena of finance, most countriesrecoiled. At the Bretton Woods Conference in1944, the United States, Great Britain, and othersfinally agreed that countries should be obligedover time only to abolish restrictions on financialflows directly related to trade. They accepted noobligation to open their national financial markets

to foreign participation, to liberalize longer termcapital inflows or outflows, or to avoid usingnational financia1 policies in pursuit of largerpolitical or economic aims.

The reluctance of governments to match tradeliberalization with financial liberalization is un-derstandable. Capital is inherently quite mobile,but labor is not. If a national population issubjected to bracing international competitionthrough trade flows, countervailing financialflows might be necessary to cushion the effects,both economic and political. Especially under asystem designed to minimize movements inexchange rates, governments needed took tofacilitate necessary adjustments to internationalpayments imbalances. The ability to direct na-tional savings toward national investments ap-

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Chapter 6–Multinational Enterprises and Global Capital Markets | 145

Table 6-l-Selected Policies Influencing Financial Market Structures

General Specific

National Monetary policy Licensing rules

Exchange rate arrangements Supervisory practices/rulesTax policies Disclosure rules

(including. depreciation rules) Functional restrictions (investment/commercial banking, insurance,Capital controls etc.)Trade policies Geographic restrictions

Foreign direct investment rules Ownership restrictions (bank/industry, industry/bank etc.)

industrial/technology policies Payments system practices

Price controls (interest rate ceilings, etc.)

Competition policies

Market access policies (right of establishment, national treatment,reciprocity)

Accounting standards (often non-governmental)

International Exchange rate regime Central bank agreements on supervisory practices, capital adequacy,

Economic policy coordination efforts (G-7 1 EC, etc.) etc.

Tax treaties Securities/banking markets regulatory coordination (EC single market

OECD capital and investment instrumentsprogram, NAFTA services rules, OECD capital and GATT servicesnegotiations, IOSCO work programs)

SOURCE: Office of Technology Assessment, 1993.

agement techniques and tools has become agrowth field both for MNE managers and finan-cial intermediaries. But hedging techniques arecostly and fail to eliminate all financial uncertain-ties. Indeed, they may create new ones.

No one fully understands the risks inherent incontemporary global financial markets. Paul Vol-cker, former chairman of the Federal ReserveBoard and no radical critic, saw fit to conclude arecent book with the following observation:

The economic case for an open economic orderrests, after all, largely on the idea that the worldwill be better off if international trade andinvestment follow patterns of comparative advan-tage. ., . But it is hard to see how business caneffectively calculate where lasting comparativeadvantage lies when relative costs and pricesamong countries are subject to exchange rate

swings of 25 to 50 percent or more. There is nosure or costless way of hedging against alluncertainties; the only sure beneficiaries are thosereaming the trading desks and inventing themyriad of new devices to reduce the risks-or to

facilitate speculation . . . . But these risks andcosts seem to be driving more of the industrialinvestment of operating businesses in developedcountries toward producing for local or regionalmarkets. In other words, the decisions in the realworld are often defensive and are designed toescape exchange rate uncertainties and protec-tionist pressures rather than to maximize effi-ciency. That inevitably leads to diluting some of the important benefits of open markets, which ismaintaining tough competition among the world’sdominant producers. 2

Although MNE managers may hope for the daywhen excessive exchange rate and other financial

2 Paul Volcker and Toyoo Gyohteu Changing Fortunes: The World’s Money and the Threat to American Leadership (New Yorlq NY:Times Books, 1992), p. 293. Also see C. Randall Henning, International Monetary Policymaking in the United States, Germany, and Japan(Wash@to% DC: Institute for International Economics, forthcoming).

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pressures subside, few expect it soon. U.S. firmswith significant revenues generated overseas, forexample, must be concerned about potentiallosses caused by an unanticipated fall in the value

of the dollar. If they have significant physical orfinancial assets overseas, they are also concernedabout valuation changes that can translate into netlosses on consolidated balance sheets. In addi-tion, they must take into account the possibilitythat they or their foreign rivals may gain an edgethrough the relative depreciation of nationalcurrencies. 3

Intermediaries have responded with a dizzyingarray of new products. Most involve some varia-tion on the future sale or purchase of financialassets or liabilities, options to engage in such

transactions, or the swapping of future cash flowswith another party. 4 All such techniques, of course, carry a cost that must be borne by the firmor its customers, and few allow firms to coverlonger term uncertainties at an acceptable cost.Excessive caution with respect to longer terminvestment can still be the consequence. More-over, the financial volatility associated with thoseuncertainties can encourage firms to initiate riskyfinancial transactions extraneous to their corebusiness in pursuit of speculative gains. But it isthe prospect of longer term losses that can inclinefirms toward excessive caution in their long-terminvestment plannin g. While firms have beenlearning to deal with the more immediate conse-quences of financial volatility, there remains thepossibility that such volatility can exert a deleteri-ous influence on the long-term investments thatcreate the jobs, incomes, and substantive innova-tions of the future.

Beyond financial engineering, MNEs can con-sider a range of strategic options for dealing withexcessive financial uncertainties. They can try,

for example, to limit their financial exposurethrough deliberate strategies of global diversifica-tion. By spreading plant, equipment, supplynetworks, and costly personnel to their final

markets, MNEs can attempt to hedge their cashflows and their balance sheets. Longer termproductive investments may still be discouragedby the expectation of future monetary and finan-cial turbulence, but the prospect of competitivelosses associated with such turbulence can bereduced by embedding such natural hedges intothe firm’s structure. The actual impact of financialvolatility may therefore vary by industrial sector.

Governments accountable for developmentswithin national economies and national capitalmarkets, of course, might view the consequencesof financially driven strategic decisions by MNEsdifferently. The kinds of market imperfectionsthat contribute to exchange rate volatility andfinancial uncertainty might be the result of deliberate policies; the cross-border arbitrageactivities of MNEs might appear as unwelcomethreats to the integrity of those policies. s Con-versely, if a government presides over broad anddeep national capital markets and sees it asimportant to maximize the resulting benefits forits own citizens, the multinationalization of firmsobviously threatens to transfer at least some of those benefits abroad.

Critics of MNEs have long held that thistransfer of national capital advantages is exactlywhat U.S. firms accomplished in the decades thatfollowed World War II. In effect, they contendthat those companies combined relatively cheapU.S. capital and technology with cheap labor inproduction facilities abroad. It arguably followed,from such a view, that such activities eroded boththe relative capital advantage of the United Statesand the relative international competitiveness of

s See Judy Lewent and A. John KearneY, ‘ { Iden@@ ~ Hc@@ Cmency Risk at hferc~”Journal ofApplied Corporate Finance, vol.2, No. 4, winter 1990, p. 20.

4 For a ~m t @y sis, Se G1-oup OfThirty, Denva”ves: Practices and Principles (_Wdl.@@~ ~: 1993)

5 Arbiwe iIIVOIVeS ~ d e x s imul ta .neoua an d opposite transactions in separate markeCsin the hope that profits m result fromtemportuy price differentials.

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Chapter 6-Multinational Enterprises and Global Capital Markets | 147

firms that stayed home. Implicit in such a view,however, is the assumption that the returns to thenation from the activities of MNEs-for example,through dividend flows not adequately com-

pensate for this erosion.Whether the ultimate returns on multinationalactivity are in fact adequate from a national pointof view is a matter of perception and political

judgment. The advocates of multinational enter-prises have typically argued that the transfer of U.S. capital advantages abroad promised to re-dound to the benefit of the United States. At thepossible cost of shifting some jobs abroad, itpromoted the development of a more open worldeconomy, increased options for American con-sumers and investors, and ultimately addressed

traditional U.S. security concerns. However, ques-tions have arisen concernin g the extent to whichsuch benefits are contingent on the assumptionsthat the policies of leading countries are allconverging toward liberal norms and that firmscompeting in global markets are not playing bydifferent rules.

Such differences in rules can arise from struc-tural distinctions in the markets through whichdomestic and multinational firms raise theircapital. For most of the twentieth century, thosemarkets have been recognizably national in theirfundamental structures. Although such distinc-tions are eroding, partly through the normaloperations of MNEs, they have not yetpeared.

FINANCIAL MARKET STRUCTURES:A PRIMER

disap-

With words like “flow, “ “liquidity,” “deep-ening, ” and “spillover” rampant in the vocabu-lary of bankers and economists, it is no coinci-dence that hydraulic analogies frequently enter

discussions of international finance. Nationalfinancial markets have often been depicted asreservoirs for national savings and investment;

international markets and cross-border sales andpurchases of financial assets and liabilities (finan-cial intermediation) as canals linking those reser-voirs; national financial controls as darns de-

signed to stop flows into those canals; andbroader national policies as locks constructed toregulate flows both within national reservoirs andinto cross-national canals. 6 The contents of na-tional reservoirs may be described as more or 1essfluid; the faster changes in one part of thereservoir cause accommodating changes else-where in the same reservoir, the more fluid arethose contents and the more unified is thatreservoir. The more fluid are the contents of neighboring reservoirs, and the more open thecanals between them, the faster will changes in

the level of one reservoir move to another.Similarly, as long as closure is the rule, turbulencein one reservoir matters little to those dependingon other reservoirs. But when the reservoirs areopen, turbulence can spread quickly.

In the early years of the post-World War II eraonly one national reservoir was reasonably full,that of the United States. Moreover, both in theUnited States and elsewhere, the contents of national reservoirs were quite viscous. Interestrate controls, geographic restrictions on the oper-ations of intermediaries, and fictional barriers-for example, between the operations of commer-cial and investment banks-all increased viscos-ity. In addition, by deliberate policy design, thedarns between national reservoirs were formida-ble; they could be replaced by canals only slowly,and the locks in those canals were carefullyregulated.

Figure 6-5 gives a rough idea of the resultingstructural differences in the most important na-tional banking markets during much of thepost-World War II period. The key differences

highlighted are the degree to which a relativelyfew banks (as opposed to securities companiesand other types of intermediaries) were allowed to

6 Here and elsewhere, the chapter was inspired by Ralph Bryant’s International Financial Zntermed”ation (WashingtorADC: BrookingshlStitUtiOQ1987).

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Figure 6-5-A Typology of Post-World War II Banking Market Structures

I

France Japan

Italy CanadaGreat Britain

“ - ‘ - - -‘ - - -””- - ‘- ‘ - ‘– –

+-

%gmentedSwitzerland

1

Germany

C&3ecenttal@3d

United States

SOURCE: Office of Teehnoiogy Assessment, 1993.

dominate the national financial system, and thedegree to which direct linkages were permittedbetween commercial banking (essentially, takingdeposits and making loans) and investment bank-ing (among other things, underwriting the issu-

ance of stocks and bonds). 7

Today, the picture is much different. Inside thenational reservoirs of advanced industrial coun-tries, fluidity has been greatly increased by thederegulation of interest rates and the breakdownof barriers between financial intermediaries. Es-pecially since the late 1970s, dams have beendismantled at a rapid pace, canals have beenwidened considerably, and locks have progres-sively been left open. Highly regulated bankshave been losing customers, especially MNEs, to

stock, bond, and commercial paper markets. In

some cases, nonfinancial MNEs have even be-come their competitors. In response, banks havesought riskier customers in their domestic mar-kets and pushed aggressively for a loosening of traditional regulatory constraints. As geographic

and functional limits have eroded, there has beena gradual movement across most banking marketstoward more universal-type banking structures.Most dramatically, banks have also expandedtheir involvement in international markets (seefigures 6-6 and 6-7).

Although it would be stretching the facts todepict the dismantling of dams and the opening of canals as having created a truly global reservoir,a disturbance in one reservoir can generatecrashing waves in another. 8 In fact, since the

1970s the turbulence associated with persistent7 Universal banks are able to engage in both sorts of activities; in addition, they may be able to buy and hold for their own accounts the

securities issued by industrial firms.s For an accessible survey of developments and a summary treatment of relevant economic literature on the subjec~see “Survey of the

World Economy,’ The Economist, Sept. 19, 1992, pp. 5-48.

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Table 6-3-Cross-Border Transactions In the Stock and Bond Markets of Selected Countries, 1970-1990(as a percentage of GDP)

1970 1975 1980 1985 1990

United States . . . . . . . . . . . . . . . . . . . . . . . 3 4 9 36 93Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA 2 7 61 119(West) Germany . . . . . . . . . . . . . . . . . . . . . 3 5 8 34 58France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA NA 8 21 53Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA 1 1 4 27United Kingdom . . . . . . . . . . . . . . . . . . . . . NA NA NA 368 690Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 10 27 64

NOTE: NAindicates that data was not available.

SOURCE: Bank for International Settlements, 62r7dAnnua/ RePort(Basle, Switzerland: 61S, 1992), p. 193.

operations, and inherent structures of MNEs areat the center of this balancing effort. By linkingnational markets, they effectively embody theconditions of financial interdependence currently

confronting all governments. In such a context,governments face incentives both to cooperateand to compete with other governments in struc-turing and overseeing the markets within whichMNEs operate.

In principle, mechanisms for advancing theircompetitive impulses are relatively straightfor-ward; governments can regulate or deregulate, taxor subsidize, open or close the markets theyoversee. As those markets become more deeplyintegrated, however, mechanisms for coopera-tion, unavoidably intergovernmental in character,

become more difficult to create, just as the risksthey must address become more complex. Asfinancial markets expanded during the 1970s and1980s and greater numbers of corporations andfinancial intermediaries embarked on multina-tional strategies, a disjunction became increas-ingly evident between the global logic of finan-cial integration and the continuing reality of decentralized political authority over financialmarkets. In 1974, for example, the failure of Herstatt Bank in Germany and the FranklinNational Bank in the United States sent regulatorsaround the world scrambling for ways to insulate

their national markets from the potential fallout inthe worst case or to stabilize their interdependentmarkets in the best case. The dilemma becameeven more acute with the onset of the developing

country debt crisis that followed Mexico’s neardefault in August 1982.In the absence of clear international governing

arrangements, regulators have been concernedabout the widening of potentially dangerousregulatory gaps that can distort competitiveconditions to the detriment of national or globalwelfare. Internationally linked financial marketsand the continued responsibility of nationalpolitical authorities for both market stability andmacroeconomic management have highlighted aneed for more coordinated prudential oversight in

the financial sector.17

The results of intergovernmental efforts in thefinancial regulatory arena have thus far beenuneven. Some successes have been achieved inpromoting the norm of capital mobility, encour-aging higher and more common capital require-ments for international banks, and enhancing thesafety of cross-border payments-clearing sys-tems. More difficult have been efforts to coordi-nate the treatment of other kinds of banking risks,regulations governing securities firms and mar-kets, tax policies influencing financial flows, andapproaches to managing the systemic risks poten-

17 S = F ~ ~ R o Ntis and l-Iu @T. P a t r i c k (da. ) , Regulating InternationalFinancial Markets:lssues andPolicies (Dcmirccht: K h w c r

AcadanicPublishers,1992); Joan Spcro, “Guidiog Global F inance,’’Foreign Policy, No, 73, winter 1988/89, pp. 114-34; and Ethan KapsteiqGoverning the Global Economy: International Finance and the State (Cambridge, MA :Harvard University Press, forthcoming).

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Table 6-4-Selected Financial Derivative Markets, 1986-1991 (In billions of dollars)

Instruments 1986 1987 1988 1989 1980 1991

Interest rate options. . . . . . . . . . . . . . . . . . . . . 516 1,174 1,588 2,054 3,231Currency options and futures . . . . . . . . . . . . . 49 74 60 66 72 77Stock index options and futures . . . . . . . . . . . 18 41 66 108 158 210Interest rate swaps . . . . . . . . . . . . . . . . . . . . . 400 683 1,010 1,503 2,312 2,750Currency and interest/currency swaps . . . . . 100 184 320 449 578 700Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NA NA NA 450 561 630

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,083 1,591 2,630 4,164 5,735 6,900Ratio of total to OECD GDP. . . . . . . . . . . . . . 0.10 0.13 0.19 0.29 0.35 0.40

NOTE: NA indicates a non-applicable category during these years.

SOURCE: Bank for international Settlements, 62nd Annua/ Report, p. 192.

tially created by new financial products. 18 Com-plicating such coordination efforts is the possibil-ity that MNEs and intermediaries will seek to

avoid the higher costs that can be entailed. If allleading states are not included in the coordinationprocess, business activity might drift to those notincluded. Similarly, if less tightly regulated orless heavily taxed markets exist within smaller

jurisdictions (e.g., Luxembourg, Cayman Islands,Netherlands Antilles, Channel Islands), opportu-nities for circumvention can remain.

Global financial markets are thus evolving in acontext defined, on the one hand, by increasedopenness and innovation and, on the other hand,by the efforts of governments and central banks to

find new ways to ensure overall market stabilityand safety. Together with the effects of fluctuat-ing exchange rates, this context confronts MNEswith both incentives and opportunities to engagein hedging strategies.

The MNE structure itself provides the surestand most enduring mechanism both for copingwith financial uncertainties and for taking advan-tage of new financial opportunities. Havingoperations in an expanding number of jurisdic-tions can offset various financial risks. Firms mayalso establish multicurrency credit lines, issuebonds and equity shares in offshore markets,decentralize the funding operations of foreign

subsidiaries, and bypass traditional financial in-termediaries. Firms can accomplish this by issu-ing their own securities in a broadening range of

foreign markets. As figure 6-8 suggests, this hasreduced the direct financing role of banks acrossthe industrial world, although there remain strik-ing differences among particular national cases, amatter examined below. In very practical terms,the pursuit of such activities furthers the processof global financial integration.

FINANCIAL INTEGRATION AND NATIONALSTRUCTURES

While various indicators and the experience of MNE managers attest to the broadening trendtoward financial market integration, significantroom for debate remains on the question of howfar that trend has actually progressed acrossspecific markets and sectors. Economists typi-cally measure integration in terms of the conver-gence of prices. France and Germany, they wouldargue, may be said to have an integrated capitalmarket when the effective cost of capital forinvestments of equivalent risk is the same in Brestas inStuttgart.

In fact, intense theoretical and empirical debatesurrounds the issue of how far financial integra-

1 8 s = ~ t e r m t i o ~ M ~ n e ~ p ~ d , I n t e r n a t i o n a l c a p i t a l J f a r ~ t s : & v e l o p ~ n t s , p r o s p e c t s , a nd P o l i c y I s s u e s (w&#li l lg tO~ ~ : I m ,

September 1992), pp. 10-24.

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154 I Multinationals and the National interest: Playing by Different Rules

Figure 6-8-indicators of the Relative importance of Banks in the Financing of Corporations in the U.S.,Germany, and Japan

A—Bank Deposits as a Percentage of Corporate B-Bank Loans as a Percentage of CorporateFinancial Assets

r 1

Financial Liabilities

[

1990 1990

1985 1985

1980 1980

8 C W 0 8(W0 40?/0 20?40 0?!0 0?/0 20% 400/0 80Y0 800/0

SOURCE: IMF, /ntermW/ona/ C@ta/ Markets: Deve/opmenfs, Prospects, a n d Po/icy kwues (Washington, DC: International Monetary Fund,1992), p. 3.

tion measured in such terms has progressed. l9 Onone side of the debate are those who argue thatdifferences in national capital costs are moreapparent than real. Measurement problems ac-count for much of any obvious difference, theycontend, and the erosion of national barriers tocapital mobility should eventually close anyresidual gaps. On the other side are those whoargue that systematic differences remain in theeffective capital costs facing, for example, simi-larly situated U. S., Japanese, and German corpo-rations. Despite difficult definitional standards,proponents of this position often conclude that atthe heart of the matter are enduring differences inthe time-horizons of the ultimate providers of capital to such corporations.

Beyond the theoretical debates of economists,analysts have tried to gather data on the percep-

tions of corporate executives concerning compar-ative capital costs and investment time horizons.One recent study surveyed senior officials in 15capital-intensive U.S. firms under significantcompetitive pressure from Japanese rivals. Viewsabout the availability or importance of low-costcapital to the Japanese were deeply divided.Executives perceiving themselves to be slightlyahead of their rivals minimized the importance of capital cost differences, while those behind em-phasized the issue. Across the board, however,came the view that their Japanese competitorsbehaved ‘as if’ they had lower capital costs. Theauthors of the study concluded: ‘‘Once leadershipis lost in a particular market, the firm that is ableto behave as if it has a lower cost of capital—whether or not it actually does-has an obviousadvantage. It will be willing to invest at a more

19 S W U . S . C O ~ S S , ~lce of Te c h n o l o g y Assessxnen~ Making Things Better: Competing in Manufactm”ng, Op. cit., fOOtnOte 1, ~ta3. For a co mpreknsiveand timely review of the analytical literature on the issue, see W. Carl Kester and Timothy A. Luehrmam“Cross-CounhyDifferences in the Cost of Capital: A Survey and Evaluation of Recent Empirical Studies,” Michael Porter et al., CapitalChoices (BostorLMA: Harvard Business School Press, forthcoming).

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Figure 6-9-External and Internal Capital Allocation Mechanisms

UNITED STATES JAPAN and GERMANYMaximization of measurable investment returns Secure corporate position

C)wWative Pefformamxcapital b e d

budgeting compensation

\’ h 7 ’/

——.—-

UNITED STATES JAPAN and GERMANYFluid capital Dedicated capital

SOURCE: Adapted from Michael Porter et al., CupJta/ Chokxw, A Report to the Council on -mpetltlveness and co-sponsored by the HarvardSushwss School, Juno 1992, pp. 9-10.

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they provide to firms to be equilibrated eventu-ally. For MNE managers, however, ‘‘eventually’can seem a long time. Even though figure 6-8indicates a broad shift away from banks in thefield of corporate finance, it is noteworthy howbank-centered the Japanese and German systemsremain. 25 It also bear-s underlining that the extentof actual regulatory change varies across coun-tries, a variance that can have protectionisteffects. 26

During periods of heightened financial uncer-tainty, as well as when facing very long-term andlarge-scale investment decisions, an MNE be-longing to a relatively less open, bank-centerednetwork may have a distinct and lasting advan-tage over MNEs more dependent on decentralized

and open capital markets. To the extent that thebank at the center of such a network becomesfully engaged in dynamic international financialmarkets, the associated NINE may have the bestof both worlds: access to leading-edge financialinnovation and information as well as credibleassurance of fall-back capital resources for bothemergencies and new opportunities. 27

MNEs AND MULTILATERAL COOPERATIONMultinational enterprises are inherently adapt-

able. As long as they can establish themselves indifferent national jurisdictions, they are capableof adapting to any feasible international capitalregime. When capital controls and rigid regula-tory structures were in place, they had littledifficulty funding their operations in separatednational markets or in incipient offshore markets.

Table 6-S-Estimated Comparative Pattern ofOwnership and Agency Relationships in

U.S., Japanese, and German Industry(In percent)

Us. Japan Germany

Individuals . . . . . . . . . . . . 30-35 20 4Institutional owners . . . . . 2 40 27Institutional agents . . . . . . 55-60 6 3Corporations. .. . , . . . . . . 2-7 30 41Government . . . . . . . . . . . Negligible Negligible 6Foreign investors . . . . . . . 6 4 19

SOURCE: Michael Porter et al., Cap’tal Chokes, A Report to theCouncil on Competitiveness and co-sponsored by the Harvard Busi-ness School, June 1992, p. 42.

But when capital decontrol became the norm,their financial options expanded and their de-

pendence on banks generally declined, albeit todifferent degrees. Because of this enhanced flexi-bility, and despite the increased risks involved,MNEs appear to prefer an open internationalfinancial system.

Nevertheless, MNEs cannot themselves ensurethe stability of open financial markets. For this,they must rely on governments and central banks.Beyond financial oversight functions, they alsoseek more specific governmental assurances (e.g.,in support of large-scale investment in leading-edge high technologies) and, often, indirect as-

sistance in underwriting health care, pension, andother costs.

The costs of such governmental services mustbe borne by someone. Fully open capital marketsand the availability of multinational optionspotentially work to ensure that the most mobile,creditworthy, and externally oriented fins, sec-

ZS Mjc~el L. G e r ~ c h h m ~ e n ~ y p r e s e n t e d extensive evidence on this score for the Japanese case. See misalliance Capitdim: The Social

Organization of Japanese Businest (Berkeley, CA: University of California Press, 1992); and “Twilight of the Keiretsu? A CriticalAssessment, ” Journal o f l a p a n e s e Studies, vol. 18, No. 1, winter 1992, pp. 79-118. Also see Louis Pauly, Regulatory Politics In .lapan: TheCase of Foreign Bank”ng (IthacA NY: Cornell East Asian Series, No. 45, 1987).

26 m e us. Trad e Represen ta t i ve ’s Office recently challenged Japan on just such ~unds. S* ~lce of tie Ufitd s~t~ ‘r~eRepresentative, 1993 Trade Estimate Report on Foreign Trade Bam”ers (W%shingto% DC: U.S. Government Printing Office, 1993), pp.158-160.

27 See AMed ste~c~ and Christjan Huveneers, “On the Performance of Differently Regulated Financial Institutions: Some EmpiricalEvidence, ’ CEPS (Cenrrefor European Policy Srudies) Research Report, No. 12, December 1992. Universal banking structures, the authorsconclude, may provide better support for the long-term investment strategies of the nonfiicial sector than the segmented structureschamcteristic of the United States and the United Kingdom.

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tors, and factors of production avoid their fullimpact. In other words, taxes imposed directly orindirectly on national firms to help pay for newsocial programs now have more direct effects onthe internati onal competitiveness of those firms;they can also more readily prompt them to pursuemultinational strategies. In the absence of coun-tervailing action, this suggests that the leastmobile firms, sectors, and factors will bear mostof the burdens created when governments re-spond to pressures for expanded business andsocial guarantees.

If consequent political tensions provided animpetus to efforts aimed at reversing the trendtoward capital decontrol, “unilateral wouldhold little promise of success. The erosion of

national political influence implied by the greateropenness of contemporary financial markets andby the jurisdiction-spanning activities of MNEsand financial intermediaries now makes it neces-sary to address such tensions above the nationallevel. This is the logic that has driven policyplanning within the European Community andthat has lately pushed central bankers to collabo-rate more intensively in other settings.

To the extent that global financial develop-ments have distinctive and asymmetrical conse-

quences for individual nations, the implicationsgo beyond issues of financial regulation and firmcompetitiveness. If modern democracy may stillbe said to rest on a social contract between

gov ernment and the governed, the twin andrelated forces of global financial integration andmultinationalcorporate expansion underminem a n y

of the traditional ways in which that contract hasbeen satisfied. They make much more problema-tic, for example, the effective targeting of subsi-dies, and they diminis ‘ h the capacity of govern-ments to control the pace and direction of adjustment to economic change. In short, whilethey can both open new avenues for enhancingeconomic growth and innovation, they make itdifficult to direct financial resources drawn froma national base toward the solution of nationalproblems. Given the costs and uncertain benefitsof attempting to reverse the trend toward globalfinancial integration, and mindful of the enhancedability of firms to circumvent such an effort, thepolitical dilemmas that result from its potentiallyuneven impact imply the need to craft newbargains at the multilateral level.

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Index

Academic research. See University researchACCJ. See American Chamber of Commerce in Japan, Trade

Expansion CommitteeAcquisitions and mergers, Japanese attitude toward, 73-75Administrative guidance by Japanese government, 16,83,

84-86Advanced Micro Devices, Fujitsu alliance, 100, 124Aerospace industry

government support of, 31ISAs and, 121, 123

Aerospatiale/Dassault-Breuget, McDonnell-Douglasalliance, 130

AIDS drug research, 124Airbus, 123, 126AMD. See Advanced Micro DevicesAmerican Chamber of Commerce in Japan, 72,75,76Antitrust laws, 127-128Apple

Sharp alliance, 124Toshiba alliance, 124

Asia. See also specific countriesindustrialization strategies, 33-34

Asset pooling, 124Asymmetries in government policies, ownership, and control

influence on new competitors, 33-36ISAs and, 126-129trade friction and, 38-41U.S.-based MNEs and, 33, 36-38

Asymmetries in national policy regimescompetitiveness and, 7description, 4, 15-16,68-71Japan example, 71-79

AT&Tdivestiture, 128international competition and, 13Olivetti alliance, 125, 128, 130, 132

Philips alliance, 124, 128, 130, 132Automotive industry. See also specific companies

automakers with plants in the United States, 63-64domestic content issue, 84,94-99EC-Japan agreement on Japanese auto imports, 69FDIUS and, 51-52ISAs and, 121Japanese Government encouragement of investment in the

United States, 84keiretsu and, 75-76,86-87,91-93labor costs, 25protectionist policies and, 30Section 301 filing, 85voluntary restrictions on Japanese automobile imports, 33

Bayh-Dole Act, 107, 109-110Biotechnology industy

ISAs and, 118, 119, 121, 123, 124Japanese investment in, 99, 104-106

Bluegrass Automotive Manufacturers Association, 93BMW, 63Boeing, 13, 126Bretton Woods Conference, 8, 137-139, 143, 149Britain. See United KingdomBull, 32, 128Bush administration

FDIUS policies, 62national treatment policy, 48

Business Global Partnership Initiative, 84

CAFE. See Corporate average fuel economyCanadian Free Trade Agreement, 94,98Canon, 103Capital decontrol, 149-153Capital flows, 136, 150Capital mobility, 137-139

159

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CFIUS. See Committee on Foreign Investment in the Unitedstates

CFTA. See Canadian Free Trade AgreementChemical industry, ISAs and, 119, 121China National Aero-Technology Import and Export Corp.,

50Chryslerprotectionist policies and, 30sourcing and procurement strategy modification, 92

Coca Cola Co., 72Committee on Foreign Investment in the United States,

49-50Comparison Labs, Inc., 129Competing Economies, 12-13,44 Computer industry

ISAs and, 123, 124, 126, 127Japanese investment in, 99, 100, 101, 103

Contract research, 111Corning, Samsung alliance, 130Corporate average fuel economy, 94,99Corporate philanthropy, 112Council on Competitiveness, 155 .

Daihatsu, 67Dai-Ichi Kangyo Bank, 88Daimler-Benz, 63

cooperation with Mitsubishi Corp., 90national champion example, 69

DEC, 125Dedicated capital system, 155Depression cartels, 76Distributed MNEs

description, 2,27-28factors influencing formation of, 28-29location influence, 30trade friction and, 40-41

Domestic content issue, 84,94-99Dow chemical, Japanese market and, 72DRAMS. See Dynamic random access memory

semiconductorsDynamic random access memory semiconductors, IBM-

Seimens-Toshiba alliance, 24-26

EC. See European CommunityEconomies of scale and scope

competition and, 3definition, 22-23ISAs and, 124

Environmental Protection Agency, fuel economy standards,

Equity markets, 59ESPRIT. See European Strategic Program for R&Din

Information Technologies

Europe. See also European Community EC-Japan agreement on Japanese auto imports, 69FDIUS expansion, 55,57ownership of MNEs, 35-36protectionist policies, 68

support for national champions, 33, 69European-based M N E a

export-oriented, 32governme nt support for, 31-32protectionist policies and, 30,31regional focus, 31regional type, 29source of FDI in the United States, 32translational type, 29

European communityhigh-tech industry standards, 128import of Japanese autos agreement, 69ISAs and, 119, 127preferential treatment of member countries, 9-10regulation of pharmaceuticals, 105

European Strategic Program for R&D in InformationTechnologies, 127, 129

Exchange ratesdeutsche mark vs. dollar, 142yen vs. dollar, 60-61,74, 143

Exemption cartels, 76Exon-Florio Provision, 49Export-Import Bank of Japan, Product Import Promotion

Financing Program, 78Export-oriented MNEs

description, 2,26-27factors influencing formation of, 28location influence, 30national differences, 29trade friction and, 40

Fanuc, 67FDI. See Foreign direct investmentFDIUS. See Foreign direct investment in the United StatesFederal Trade Commis sion, investigation of Japanese

transplant sourcing practices, 93Fiat, national champion example, 69Financial markets. See Global capital marketsFluid capital system, 155Fokker, McDonnell-Douglas alliance, 130Ford, Gerald, CFIUS creation, 49Ford Motor Co.

Japanese market and, 72Mazda alliance, 92, 125protectionist policies and, 30sourcing and procure ment strategy modification, 92

Foreign direct investmentasymmetries in national policy regimes, 4,7,15-16,68-79

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Index | 161

European-based MNEs and, 32FDI in the United States, 47-68findings, 4447history of, 68-69host country share, 52inward flows, 5, 45ISAs and, 126-127Japan example, 71-79national treatment policy and, 46

Foreign direct investment in the United Statesadvantages for Japanese firms, 86benefits, 44,62-64calculating, 53-54changes in the cost of capital and, 57-60description, 47-51disadvantages, 62,64-68effect on employment, 65-66, 67financial data, 64,82foreign affiliate employment, 56importance of foreign MNEs in the United States, 51-57importance to the U.S. economy, 48incentives from States and municipal authorities, 2, 66-67macroeconomic investment theory and, 57macroeconomic theory, 57portfolio investment and, 47reversal of flow toward, 57-62trends, 81-83U.S. direct investment abroad and, 50-51,79

Foreign Exchange Control Law of 1949,60Fortune 500 International list, 33,36-37France

capital liberalization and, 60capital market, 143discrimination against foreign firms, 68, 69government support of industry, 31inward FDI policies, 46labor costs, 25restrictions on FDI, 7state-owned banks, 59-60

Franklin National Bank failure, 152Fujitsu

Advanced Micro Devices alliance, 100, 124plant closing, 67TRW alliance, 131

Fuyo, 88

General Agreement on Tariffs and Trade, 18,77General Ceramics Ltd., 50General Motors

attempt to purchase Isuzu shares, 73protectionist policies and, 30sourcing and procurement strategy modification, 92Toyota alliance, 125, 134

Valmet joint venture, 25Germany

discrimination toward foreign firms, 68, 69interest rate differentials, 144national banks, 59ownership and agency relationships, 157relative importance of banks, 154

Global capital marketscapital decontrol and financial integration, 149-153cross-border stock and bond transactions, 151, 152external and internal capital allocation mechanisms, 156financial derivative markets, 153financial integration and national structures, 153-157financial uncertainties, 144-146findings, 140-142governme nt policies and, 142-144international financial transactions, 151MNEs and, 144-147, 157-158policies influencing, 145

post-World War II banking market structures, 148structure, 147-149Global MNEs

description, 2, 27factors influencing formation of, 29trade friction and, 40-41

GM. See General MotorsGreen.field site construction or licensing, 73,74

HDTV. See High-definition television technology standardsHerstatt Bank failure, 152Hewlett-Packard, 125High-definition television technology standards, 128-129High-tech industry. See also Computer industry; Information

technology industry; Semiconductor industrybiotechnology investments, 104-106Japanese investment in, 99-106marketing rights goal, 102-103relationship types, 103-104sources of investment, 101-103standards for, 128-129technology acquisition goal, 102, 103

Hitachi, 67Honda

domestic content issue, 98incentives from States and municipal authorities, 67investment in the United States, 85protectionist policies and, 30

sourcing behavior, 96-97USCS audit, 95

IBMinternational competition and, 13ISAs and, 127

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licensing of patents to Japanese firms, 72Siemens alliance, 133strategic alliance example, 24-26successful U.S. investments example, 70-71Toshiba alliance, 100

ILPs. See Industrial liaison programsIMF. See International Monetary FundImport substitution policies, 33-34India, import substitution policies, 33Industrial Bank of Japan, 88Industrial liaison programs, 111-112Information technology industry, ISAs and, 118, 119, 121Intel

antitrust suit, 128Sharp alliance, 100

Intellectual property rights in Japan, 77International Investment and Trade in Services Survey Act,

47International Monetary Fund, Committee of Twenty, 139

International strategic alliancesasset pooling and, 124cartelization issue, 116competition and, 125-126, 131-132cost and risk sharing and, 123-124description, 100, 117distribution of, 118-119economies of scale and scope and, 124example, 24-26findings, 116-117formation by industry and industry/country, 119-121goals differences, 131government role, 116,126-129increase in, 116, 118, 121-123

management style differences, 130-131market access and, 125MNEs and, 123-126overeagerness and, 130reasons for establishing, 122success factors, 129-134time factors, 125type of collaboration by region, 121underfinancing and, 130U.S. Government policy and, 132-134U.S. MNEs and, 132-134

ISAs. See International strategic alliancesIsuzu, 67Italy

capital liberalization, 60discrimination toward foreign firms, 68, 69gove rnment support for MNEs, 31inward FDI policies, 46restrictions on FDI, 7

Itoman Corp., 90

Japan. See also Keiretsu; Ministry of International Trade andIndustry

Anti-Monopoly Law, 76,88asymmetry in national policy example, 71-79attitude toward acquisitions and mergers, 73-75

“Buy Japanese” attitudes, 77capital liberalization and, 60, 84discrimination toward foreign firms, 69EC-Japan agreement on import of Japanese autos, 69expansion of equity market, 58-59export-oriented form, 32FDIUS and, 61-62Foreign Exchange Control Law, 78greenfield establishments, 73,74high land prices, 78-79import substitution policies, 34importance of FDIUS, 52, 55intellectual property rights, 77interest rate differentials, 144inward FDI level, 79Meiji Restoration, 83, 103MNE policies, 34monopolistic practices, 76ownership and agency relationships, 157patent protection, 77procure ment issue, 77-78proscription of investments that threaten national security

or public order, 76-77protectionist policies, 30,68relative importance of banks, 154restrictions on FDI, 7,68-69,72-74successful U.S. investments examples, 70-71

tax policies that discourage FDI, 78U.S. high-tech firms and, 99-106yen value, 60-61,74,84

Japan Development Bank, 78Japan Export and Trade Organization, 84Japanese firms

administrative guidance by government, 16,83,84-86domestic content issue, 84,94-99export-oriented type, 29FDIUS advantages, 86follow-the-leader tendency, 101government support for, 31, 32increase in number of MNEs, 33number of firms in the United States, 81-83

predatory investment behavior, 104U.S. university research and, 84, 106-113zaibatsu, 83, 88

JESSI. See Joint European Submicron Silicon InitiativeJohn Brown, 39Joint European Submicron Silicon Initiative, 127, 129, 133

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Index | 163

Keiretsuautomotive industry example, 75-76description, 73-75,83-84,86-88horizontal, 88-90influence on market access and competition, 91-94

one-set-ism, 88supplier relationships in the United States, 93vertical, 90-91

Keynes, John Maynard, 137Komatsu, 67

Labor costs, rationalizing production and, 25Licensing agreements, 72,74Licensing of patents to Japanese firms, 72

Malaysia MNE policies, 34Mamco Manufacturing g of Seattle, 50Massachusetts Institute of Technology

foreign corporate tiding, 109

industrial liaison programs, 112Media Lab, 111

Matsushita Electric Industrial Co., 90,91Mazda 92, 125McDonnell-Douglas

Aerospatiale/Dassault-Breuget alliance, 130Fokker alliance, 130Taiwan Aerospace alliance, 123

Microsoft, antitrust suit, 128Ministry of International Trade and Industry

Business Global Partnership Initiative, 84FDIUS and, 61ISAs and, 127liberalization policy, 79licensing of IBM patents to Japan, 72stable shareholders and, 73-75Texas Instruments and, 35

MIT. See Massachusetts Institute of TechnologyMITI. See Ministry of International Trade and IndustryMitsubishi Corp.

cooperation with Daimler-Benz, 90keiretsu example, 88,89Monsanto alliance, 131stable shareholding acquisitions, 73

Mitsui, 73, 88Monsanto, Mitsubishi alliance, 131Motorola

ISAs and, 131Japanese market and, 72successful U.S. investments example, 70Toshiba alliance, 132

Multinational enterprisesbackground, 6-11concerns about, 1-6

factors influencing type, 28-29,31financial markets and, 144-147financial uncertainty and, 144-146findings, 13-15multinational cooperation and, 157-158

national differences, 29-32policy issues, 15-19rationalizing production, 25reasons to establish foreign operations, 23-24rise of modem industrial corporations, 21social impact, 10-11strategic alliances, 24-26structure, 1, 22-29types , 2,26-28

NAFTA. See North American Free Trade AgreementNational bank-led systems, 59National champion strategy, 31,32,33,69, 127National Cooperative Resear ch Act, 128

National treatment policy, 17-18,33,35,46,4849, 64-68NBC, HDTV alliance, 129NEC, ISAs and, 127Netherlands, labor costs, 25New materials industry, ISAs and 118, 121, 122Next Computer Corp., Canon investment in 103Nippondenso, 92-93Nissan

investment in the United States, 85national champion example, 69parts supplies from United States, 87plant closings, 67protectionist policies and, 30U.S. companies as suppliers, 93

Nontariff barriers, 126North American Free Trade Agreement, 11,94,98-99NUMMI. See General Motors; Toyota

OECD. See Org anization for Economic Cooperation andDevelopment

Offshore markets, 157Oligopolistic competition, 116, 126Olivetti, AT&T alliance, 128, 130, 132Omnibus Trade and Competitiveness Act, 49

Super 301 provisions, 8-9One-set-ism, 88Open Software Foundation, antitrust suit, 128Optoelectronics industry, ISAs and, 122Org anization for Economic Cooperation and Development

capital liberalization and, 60competition for workers, 21founding of, 138gross domestic product, 151international investment and MNEs and, 70-71

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national treatment policy, 69outflow of investment capital, 46

PatentsFederal policy, 109

in Japan, 77research results, 111Pharmaceutical Strategic Alliances, 118 Philips

AT&T alliance, 124, 128, 130, 132HDTV alliance, 129

Photomask industry, Japanese investment in, 99-100Plaza Agreement, 60Portfolio investment, 47Protectionist policies, 18,30-31,61,68

RACE. See Research for Advanced Communications inEurope

Rationalization cartels, 76

Reagan administration, FDIUS policies, 62Reciprocity, 6, 18-19Regional MNEs

description, 2,27factors influencing formation of, 29trade friction and, 40

Renault, national champion example, 69Research. See Sponsored research; University researchResearch for Advanced Communications in Europe, 128,129Research parks, 112-113Resource-based MNEs

description, 2, 26trade friction and, 39-41

Risk-sharing partnerships, 24-26Robotics, ISAs and, 122Roll-up, 95

Samsung Co., Corning alliance, 130Sanwa 88Sarnoff Research Center, HDTV alliance, 129Seiko, 67SEMATECH, 127Semiconductor industry

IBM-Seimens-Toshiba alliance, 24-26ISAs and, 121, 125marketing rights, 102, 103national champion, 32

Semiconductor Trade Agreement, 103Senate Committee on Banking, Housing, and Urban Affairs,

11Senate Committee on Commerce, Science, and

Transportation, 11Sharp

Apple alliance, 124

Intel alliance, 100Siemens

IBM alliance, 133strategic alliance example, 24-26

Siemens-Nixdorf, government support for, 32

Silicon Valley, 99, 100, 102, 103Singapore, MNE policies, 34Sony Corp., 93South Korea

export-oriented MNEs, 29, 32government support for MNEs, 32import substitution policies, 34increase in number of MNEs, 33labor problems, 10MNE policies, 34

Specific reciprocity, 6, 18-19Sponsored research, 110Stable shareholding, 73-75. See also KeiretsuStrategic alliances. See International strategic alliances

Structural Impediments Initiative, 70,75,87Sumitomo

keiretsu example, 88Mazda bailout, 92stable shareholding acquisitions, 73

Sun, 125

Taiwan Aerospace, McDonnell-Douglas alliance, 123Takatoshi, Sokubei, 88Technology licensing, 111Telecommunications industry

deregulation, 128European-based MNEs and, 31-32ISAs and, 122, 123

Texas A&M University, ocean-drilling program, 108-109Texas Instruments, 34,35, 70Thailand, MNE policies, 34Thompson, HDTV alliance, 129Tokai Group, 88Tokuyama Soda Co., 50Toshiba

Apple alliance, 124IBM alliance, 100keiretsu example, 91Motorola alliance, 132strategic alliance example, 24-26

ToyotaBluegrass Automotive Manufacturers Association, 93foreign participation in company prohibition, 75General Motors alliance, 125, 134incentives from States and municipal authorities, 67investment in the United States, 85national champion example, 69parts defects, 86-87

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Index I 165

protectionist policies and, 30stable shareholding acquisitions, 73suppliers for, 90

Toys “R” Us, 75Trade Act 85

Trade friction, MNEs influence on, 2, 38-41Trafalgar House, 39Translational MNEs

description, 2,27factors influencing formation of, 29trade friction and, 40

Transparency in decisionmaking process, 76-77, 136TRW, Fujitsu alliance, 131

United Auto Workers, protection from Japanese firms, 85United Kingdom

capital market, 143Export Credit Guarantee Department, 39labor costs, 25

United States. See also Foreign direct investment in theUnited States; U.S.-based MNEsaffiliates of foreign companies financial data, 64,65antitrust laws, 127-128capital market, 143national treatment policy, 17-18, 33, 35, 48-49, 64-68ownership and agency relationships, 157ownership of MNEs 34 35

Japanese investment in, 106-113legislative background for funding, 109-110research parks, 112-113sponsored research and technology licensing, 110-111

Uruguay Round of the General Agreement on Tariffs and

Trade, 18,77U, S.-based MNEs

competitiveness issue, 7decline in dominance of, 22,36-38distributed type, 30global type, 29ISAs and, 116, 132-134location influence, 30-31protectionist policies and, 30-31

U.S. Customs Service, 94Honda audit, 95

Us.U s .U.S.U.S.U s .U s .

direct investment abroad, 64-65,79Eximbank, 39Federal Communications Commission, 128-129International Trade Commission, 85Justice Department, 85Trade Representative, 85

USCS. See U.S. Customs ServiceUSDIA. See U.S. direct investment abroad

Valmet, joint venture with GM, 25

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