Foreign Direct Investment of Japanese Firms: Investment and Disinvestment in Asia, c.1970-1989／Haruo H. Horaguchi
8,800
This book is a translation of: Horaguchi, Haruo. Nihon Kigyo no Kaigai Chokusetsu Toshi: Ajia eno Shinshutsu to Tettai (Foreign Direct Investment of Japanese Firms: Investment and Disinvestment in Asia), Tokyo: Tokyo Daigaku Shuppan Kai (University of Tokyo Press), June 1992. This book, Foreign Direct Investment of Japanese Firms (in Japanese) was awarded NIKKEI Best Book Prize in 1992.
This book has finally been translated into English. It is a monograph studying the withdrawal of multinational corporations in the 1970s and the 1980s. As of 1992, the theory of multinational corporations at that time followed the theory that oligopolistic large corporations would acquire overseas markets. There was little recognition that foreign investment was vulnerable to continued strategic changes, including market changes overseas. Multinational corporations cannot maximize profits in a simple way as economics assumes, such as taking the first derivative and setting it to zero. This book is fully devoted to explore how it is done.
In Chapter 1, I surveyed the theories related to the problem of identifying conditions in which firms can conduct foreign direct investment. The conditions are that the foreign firm is disadvantageous while it cannot obtain the information that local firms in the receiving country can. Foreign firms have to have enough advantages of managerial resources to cover the disadvantage. Establishing a subsidiary should be more favorable than utilizing the advantages of the entry methods like export and licensing where the incompleteness of the market dealing with managerial resources must exist. Managerial resources have characteristics of public goods.
In Chapter 2, I identified the conditions for the selection of alternative entry methods by solving the relevant dynamic optimization problem and discussed the impact of changes in market parameters on this selection. We did so because managerial resources are concepts related to stocks and we have to describe their changes.
In Chapter 3, I surveyed the statistics on foreign direct investment in each country in the 1970s and 1980s, and showed that the growth of huge firms matches the long-term trends of direct investment. As I derived some propositions in Chapter 2, the market parameters did not show any tendency consistent with the trends of direct investment flow. But the share of firms in the Fortune Top 100 list shows a tendency that matches with that of the share of balance of direct investment. Especially, we could observe the decline of the USA and the rise of Japan.
In Chapter 4 and 5, I tried to identify managerial resources, besides corporate size, related to investment and withdrawal through quantitative analysis. The ratio of research and development expenses to sales volume shows low a correlation with corporate size, but affected direct investment positively and withdrawal negatively in a statistically significant way.
In Chapter 6, I explained the regional trends of withdrawals of direct investment. We checked withdrawal data in eight Asian countries and regions and the results are as follows:
(1) The majority of withdrawal decisions occur five to eight years after investment.
(2) The number of withdrawal cases is large in the textile industry and the amount of funds withdrawn is huge in countries where the textile industry is not very developed.
(3) South Korea recorded the largest number of withdrawal cases.
(4) The Philippines recorded the highest withdrawal rate.
(5) Withdrawals are decided earlier in the transportation equipment industry than in other industries.
In Chapter 7, I compared the business performance of two competing firms in order to identify the managerial resources that enable continuous business. I investigated pairs of firms in five markets in four countries. As the ink manufacturers in Indonesia showed clear difference in business performance, I interviewed them about their transfer method of managerial resources. We found that some factors improve the business performance of foreign subsidiaries regardless of the corporate size of their parent companies in Japan. The relevant factors were ad hoc ones (early entry in the market and distribution of suppliers of raw materials under the pressure of the strong yen) and controllable ones (focus on retained earnings, lowering the royalty fee and the improvement of the training system of employees).
In Chapter 1, I surveyed the theories related to the problem of identifying conditions in which firms can conduct foreign direct investment. The conditions are that the foreign firm is disadvantageous while it cannot obtain the information that local firms in the receiving country can. Foreign firms have to have enough advantages of managerial resources to cover the disadvantage. Establishing a subsidiary should be more favorable than utilizing the advantages of the entry methods like export and licensing where the incompleteness of the market dealing with managerial resources must exist. Managerial resources have characteristics of public goods.
In Chapter 2, I identified the conditions for the selection of alternative entry methods by solving the relevant dynamic optimization problem and discussed the impact of changes in market parameters on this selection. We did so because managerial resources are concepts related to stocks and we have to describe their changes.
In Chapter 3, I surveyed the statistics on foreign direct investment in each country in the 1970s and 1980s, and showed that the growth of huge firms matches the long-term trends of direct investment. As I derived some propositions in Chapter 2, the market parameters did not show any tendency consistent with the trends of direct investment flow. But the share of firms in the Fortune Top 100 list shows a tendency that matches with that of the share of balance of direct investment. Especially, we could observe the decline of the USA and the rise of Japan.
In Chapter 4 and 5, I tried to identify managerial resources, besides corporate size, related to investment and withdrawal through quantitative analysis. The ratio of research and development expenses to sales volume shows low a correlation with corporate size, but affected direct investment positively and withdrawal negatively in a statistically significant way.
In Chapter 6, I explained the regional trends of withdrawals of direct investment. We checked withdrawal data in eight Asian countries and regions and the results are as follows:
(1) The majority of withdrawal decisions occur five to eight years after investment.
(2) The number of withdrawal cases is large in the textile industry and the amount of funds withdrawn is huge in countries where the textile industry is not very developed.
(3) South Korea recorded the largest number of withdrawal cases.
(4) The Philippines recorded the highest withdrawal rate.
(5) Withdrawals are decided earlier in the transportation equipment industry than in other industries.
In Chapter 7, I compared the business performance of two competing firms in order to identify the managerial resources that enable continuous business. I investigated pairs of firms in five markets in four countries. As the ink manufacturers in Indonesia showed clear difference in business performance, I interviewed them about their transfer method of managerial resources. We found that some factors improve the business performance of foreign subsidiaries regardless of the corporate size of their parent companies in Japan. The relevant factors were ad hoc ones (early entry in the market and distribution of suppliers of raw materials under the pressure of the strong yen) and controllable ones (focus on retained earnings, lowering the royalty fee and the improvement of the training system of employees).