Integration and Adjustment of Global Economies: Direct Investment, Financial Institutions, and International Business Policies [1 ed.] 9783428487721, 9783428087723

Citation preview

T. MATSUGI I A. OBERHAUSER I F. SCHOBER (Eds.)

Integration and Adjustment of Global Economies

Schriften zu Regional- und Verkehrsproblemen in Industrie- und Entwicklungsländern Herausgegeben von Theodor Dams und Joachim Klaus

Band 62

Integration and Adjustment of Global Economies Direct Investment, Financial Institutions, and International Business Policies

Edited by Takashi Matsugi, Alois Oberhauser and Franz Schober

DUßcker & Humblot • Berliß

Die Deutsche Bibliothek - CIP-Einheitsaufnahme Integration and Adjustment of Global Economies. / Direct Investment, Financial Institutions, and International Business Policies / ed. by Takashi Matsugi ; Alois Oberhauser ; Franz Schober. Berlin : Duncker und Humblot, 1996 (Schriften zu Regional- und Verkehrsproblemen in Industrie- und Entwicklungsländern; Bd. 62) ISBN 3-428-08772-0 NE: Matsugi, Takashi [Hrsg.]; GT

Alle Rechte, auch die des auszugsweisen Nachdrucks, der fotomechanischen Wiedergabe und der Übersetzung, für sämtliche Beiträge vorbehalten © 1996 Duncker & Humblot GmbH, Berlin Fotoprint: Berliner Buchdruckerei Union GmbH, Berlin Printed in Germany ISSN 0582-0170 ISBN 3-428-08772-0 Gedruckt auf alterungsbeständigem (säurefreiem) Papier entsprechend ISO 9706 9

In Remembrance of Professor Dr. Hans-Josef Brink

Preface of the Series Editors This publication contains the revised versions of the papers presented at the 15th Joint Seminar of the Faculties of Economics at the Universities of Freiburg and Nagoya. The seminar was held on September 15-18, 1994 in Nagoya, Japan. The FreiburgINagoya cooperation started in 1972 and has been a major activity of exchange for both faculties since. The editors appreciate very much that the results of the 15th seminar are published again in their series, as were most of the previous seminars. The papers in this volume cover a broad range of issues along with the globalization of economies. Three areas of concern, however, are in the center of this publication, narnely the determinants and trends in foreign direct investment, the required adjustments to the financial institutions and the various forms of international business policies that currently characterize the world economy. All three areas are tightly linked together and jointly contribute to the success of global trade and competition. The Faculty of Economics at the Albert-Ludwigs-University of Freiburg wishes to thank the Ministry of Science and Research of Baden-Württemberg and the corresponding institutions in Japan as weIl as several Japanese companies for the generous support of the seminar. The faculty also thanks the Scientific Foundation of the Albert-Ludwigs-University for the grant which made this publication possible. Many thanks, finally, to Thies Lehmann, who substantially helped in the editorial work. Freiburg, April 1996 Theodor Dams

Joachim Klaus

Table of Contents Part I: Determinants and Trends for Foreign Direct Investment Theodor Dams Foreign Direct Investment in Developing Countries in aChanging World Economy: Theoretical Foundations and Empirical Results .............. 11 Takashi Matsugi Recent Trends in Foreign Direct Investments ........................ 27 lose M a . Castro-L6pez Regional Distribution and Patterns of Japanese Foreign Direct Investment in the European Union and Spain. An Econometric Analysis of the Determinants of Japanese FDI into Spain . . . . . . . . . . . . . . . . . . . . . . . . . . .. 33 Md. Qudrat-e-Khoda Foreign Direct Investment in Bangladesh: Policies and Problems. . . . . . . .. 65

Part 11: Requirements for Adjustment of Financial Institutions Alois Oberhauser The Problems of the Debt Criteria in the Treaty of the European Union (Treaty of Maastricht) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 87 Hans-Hermann Francke The European Currency Area and the European Financial Equalization System ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 97 lun-ichi Senda Non-Performing Bank Loans and Banking Policy in Recent Japan . . . . . .. 117 Tsuyoshi Kanegae On the Reform of the Central Banking System in Japan ............... 129 Hiroyuki Okuno The Reform of the Japanese Financial System and Finance for Smalland Medium-Size Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 159

10

Table of Contents

Part ill: International Business Policies

Siegfried Hauser International Competition, Inter-finn-trade and the Money Side of the Eeonomy in Gennany, USA and Japan ......................... 173 Wolfgang Scheif Additional Labour Cost and its Problem in International Competition .... 189 Hans-lose! Brink t Designing Environmental Proteetion within Organizations in the Federal Republie of Germany: Coneepts and Perspeetives . . . . . . . . . . . . . . . . . . .. 205 Franz Schober The Strategie Role of Infonnation and Communieation Teehnology for International Business Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . .. 213 Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 229

Foreign Direct Investment in Developing Countries in aChanging World Economy: Theoretical Foundations and Empirical Results Theodor Dams

A. Introduction In the 1990s, we are challenged with new economic terms of the international division of labor: "The Globalization of Business" (Dunning 1993) or "Globalization of the World's Production" (Chen 1992) and "Integrated International Production" (UN-World Investment Report, 1993 and 1994). In order to understand the long-run development until todays economic wording it seems necessary to analyse the different stages in the last half century (the political declarations, the theoretical foundations, the empirical basis and the implementation of relevant measures). On January 10th 1949, US-President H. C. Truman has declared the "PointFour-Program": To help the developing countries with adequate measures based on the principles of a market economy which are including foreign direct investments (PDI): "I believe ... we should foster capital investment in areas needing development ... and we should make available the benefits of our store of technological knowledge." All these proposals have to be centered on a representative democracy and a pluralistic society! Generally speaking, this philosophy did not change over the following fifty years (1949-1994). Nevertheless, we have to consider that in this period the highhanded concept of a market economy has been heavily criticized as the negative impact and the disintegrating effects of Foreign Direct Investment (PDI) in developing countries are concerned. In this frame of divergent theoretical concepts the "Institut für Entwicklungspolitik" at the University of Freiburg (IFEP) has undertaken empirical research in this field (see: Ahn (1980), Dams (1980), Liem (1981), Friese (1982), Elkmann (1983), Vieser (19S1)); and the results of these investigations-undertaken in different developing countries-will be integrated in this paper.

12

Theodor Dams

The different "historical" stages of this half century will be described in the first part. FDI are one element of the transfer of private capital as a whole. Therefore we have to consider the changing relationship "Official Development Aid (ODA)the total private capital transfer-FDI". Furthermore, the analysis has to present a geographical differentiation: the main "out-flow-countries" of FDI as weil as the special question of FDI-country presence in Asia and South-East-Asia with special reference to Japan, USA and Germany. These problems will be covered in the second part. In the following chapter a general overview will be presented for the topics: Definitions; economic theories related to FDI; the different forms of FDI; the relationship between international trade and private capital transfers. In the fourth part some frame of references-on the micro- and macro-economic level-will be elaborated. They are the basis for empirical research investigating the repercussions of FDI on economy and society. The results of this applied research can be used for the conceptualization of an adequate economic policy of the "recipient-" and "donor"-countries as weil as for economic measures on the international level (EU; UN-Agencies etc.). In the last chapter some proposals or recommendations will be formulated. This conclusion has to take into consideration the specific situation of developing countries in the near future. B. Historical Stages of FDI-Considerations and FDI-Orientations The OECD-Report (1989) explains the divergent FDI-opinions as folIows: "There has been a swing in developing-country attitudes towards foreign direct investment"; with other words: In some cases we do have a positive attitude, in others we have to consider a negative (hostile) behavior in relation to the FDI. First of a11, the industrialized western economies have experienced positive effects of FDI in their history . Germany is a very good example, including the positive relationship between international trade and FDIIcapital transfers. In the beginning of this century Germany had a trade surplus with the European neighbors and a deficit vis-a-vis to the overseas territories. But, the European countries, mainly Great Britain, had incomes arising from FDI in overseas countries/colonies which could be used for paying the imports coming from Germany. The leading role of FDI in the British Balance of Payment has led to the concept of international trade liberalization (the "Open Door"-Policy). This structure of

Foreign Direct Investment in Developing Countries

13

international trade and capital movements has been carefully described long time aga (Niehaus, Gerl and Dams 1952). In the last decade Japan has been in an economic situation comparable to Great Britain before World War 11. But Japan was following another approach to handle the external economic affairs. Immediately after the breakdown of the European economy in World War 11 (1948) the multilateral equilibrium ofthe balances ofpayment has been regained (in a time of non-convertibility of currencies) step by step. The interlinkages (exportofproducts by Germany; payment by capital incomes ofEuropean neighbors etc.) have been restored, and the FDI from abroad-sponsored by the MarshallPlan-have fostered this positive development. Some decades later, this relationship "FDI and structure/development of foreign trade" has been experienced in Asia-with the dominant position of Japan. This situation has been very weil described by Riedel (1991) in his contribution "Intra-Asian Trade and Foreign Direct Investment"~ For Germany, the expropriation of foreign capital stocks after World War 11, the high demand for capital needed for the reconstruction of the destroyed economy and, in particular, the intensification of the foreign trade with European countries and USA had the result that German FDI were a small entity in the world wide capital transfer and a marginal quantity for the developing countries. German FDI were orientated towards countries with which an intensive foreign trade has been developed (European countries and USA). L. Emmerij, a Dutch economist, has presented an impressive statistical analysis (1990). His investigation covers the period 1970-1987; he has included in his analysis of capital out- and inflow the industrialized countries. For the period before 1970-the time span 1956-1968-we can quote the socalled Pearson Report (1969). Once more, the FDI of Germany which have been transferred to developing countries in the 50s and 60s have been of minor importance. Nevertheless, the ideological position that FDI do have a negative impact for developing countries (based on areal capital re-transfer in favor of the developed nations) has caused for years the severest theoretical-political struggle in Germany: The "Theory of Dependency" has been elaborated in Latin America ("Dependencia") as a new variation of the "Neo Imperialism". This "philosophy" argues that FDI are an effective instrument to exploit the Third World Countries (Monopolistic Capitalism in the centers earns diminishing economic returns; therefore FDI has to usurp the surplus value of labor that the capitalistic system can survive by transferring these economic results in favor to the western industrialized countries). The neg-

14

Theodor Dams

ative results of FDI: the deterioration and marginalization of the developing countries, the so-called economic periphery (Sunkel 1972; Senghaas 1977 and others). In the meantime, the existing conflict between the representatives of the market economy and of the "Dependencia" came to an end-Iong time before the real socialism of Eastern and Central Europe broke down! The ideologists of the "Dependencia" did not have any chances to find political partners with the power to motivate people to join a revolutionary movement for a radical change of the economy and society. During this stage of theoretical reflections-maybe earlier-another theoretical approach has been conceptualized: The "pure" market economic theory which rejects all official development aid (ODA) and governmental interventions; in this view, both are causing market forces distortion, fostering corruption and discouraging the self-help will of people. The only way to escape from the "underdevelopment": To accept the concept of Neo-Liberalism (P. T. Bauer, B. Yamey, M. Friedman, F. A. von Hayek and others; see Dams (1974)). The economic development is based exclusively on the free market forces, entrepreneurial knowledge, consumers sovereignity and-Iast but not least-the free decision making in the field of internal and extern al (FDI) direct investments. But, in the 1970s, we have to recognize that a special type of "Dependencia", based on market forces, has been visible (in the economic world of "Interdependency"): The so-called "Triad Members", the three regional centers (of gravitation, in the wording of A. Predöhl): USA, EU and Japan which are the engine of growth for the world economy. And these three growth poles do have-each of them-a special area of economic influence in which high flows of private capital, in particular FDI, are working. Already in 1972, a research group (coming from North America, Japan and the European Community (see: Dams et al 1972) has analyzed these facts ofregional capital/FDI movement and the zones of economic influence (USA-Central and Latin America; Japan-Asia and the Pacific; EU-Africa and the other ACPCountries). This situation with regard to the regionalization and capital/FDI flows has been more accentuated in the beginning of the 1990s, but geographically more differentiated than before. In the second half of the 1970s the crude oil prices have sharply increased (1973 and 1978) with the following results: On the one hand the OPEC had a structural surplus of the balance of payments, and on the other hand most of the developing countries had a structural deficit. The DAC-Countries, mainly USA, refused to increase ODA in order to overcome their crucial balance of payment

Foreign Direct Investment in Developing Countries

15

situation. The OPEC did not agree to recycle directly the surplus capital in favor of the developing countries concerned. In such a situation the commercial banks have been challenged to overcome the difficulties by borrowing the money needed coming from OPEC. So, the period of "Privatization of International Capital Flows" has started; and FDI-flows decreased in this time. The very weIl known debt crisis has been the result of this kind of adjustment process from 1973 to 1981! The following period is characterized by areduction of OOA, FDI and commercial bank lending. Based on the Baker-and-BradlyPlan in 1987, this negative tendency has been converted with the effect that FDI have increased, too. This new situation has been caused by some changed determinants: The climate for investments has been ameliorated in the Newly Industrialized Economies (NIEs); the structural unbalance of payment of Japan has led to a recycling process of capital; in some countries the "Debt-Equity-SwapSchemes" have been introduced (Chen 1992). Furthermore, we have to be aware that the low equity of low development countries (LOC) and their high indebtedness have influenced their economic decision to open the border for FOI. Why? FDI are an efficient measure to ameliorate the difficult situation of the balance of payment without any fixed obligation of capital repayment and transfer of interest by the government; the private business has to do it. Furthermore, there are still other advantages linked with FDI: The foreign capital transfer is combined with technical progress in production, management effectiveness and marketing knowledge (See: IFEP-Studies). Such a "FDI-Package" of the four elements mentioned above is very attractive for LOCs development strategy which is goaled towards economic growth. The Non-Governmental Organizations (NGOs) have-more or less-accepted this new governmental strategy. But, their participation in joined projects (as complementary measures accompanying FDI in order to eliminate potential negative impacts) has not been realized. NGOs will not be used as "instruments to repair the deficiencies of the present capitalistic system"-an expression of their philosophy in this period! In the meantime, this position has been changed; they are fostering labor unions, self-help groups etc. that target groups could take their own responsibility to ameliorate the situation where necessary. An additional new pushing power in favor ofFDI is closely linked with the tendency of privatization of public and collective enterprises in developing countries; recently in earlier socialist countries, too. In the decade mid 60s to 70s the western investors had been confronted with the nationalization or expropriation of their property in some of the developing countries-not at all an incentive to do more in the field of FDI!

16

Theodor Dams

Then, at the end of the 80s the opposite strategy has been adopted: The privatization; and there are increasing annual growth rates ofprivatizations by inviting FDI to participate in this process. The transnational corporations are playing a very important part in this process, including the arrangements of joint ventures. "For a number of cost-cutting, market opportunity and network reasons, trans national corporations (TNCs) have actively sought to participate in the privatization process" (Odle 1993a,b); and he pointed out that the financial engagement of TNCs will increase in the near future: Their strategies and the economic polieies will converge more and more. This process is an integral part of the world wide trade and finance liberalization; and, therefore, this is a contribution to a higher degree of international competition, too. We are aware that FDI are closely connected with a "package offour elements" (see: above): capital transfer; technical knowledge; efficient marketing and effective management. This "package" has produced the powerful position of FDI in the past. But, more and more, during the last years this "package" has been untied for a lot of rational reasons: New forms of cooperations between national and foreign investors and enterprises; increasing product differentiation with an impact to a higher degreeof international competition; new strategies of cost-cutting procedures etc. These facts will challenge the entrepreneurs to reflect carefully the "old fashioned" FDI strategies wh ich have been successful in earlier times. We have reconsidered that the intensification of international trade and the international movement of private capital, in particular FDI, are two sides of the same coin. But we have to recognize a third dimension: The change of the international financial system wh ich is influencing the international trade as weil as the transfer of private capital. This "Magie Triangle" has carefully been studied by Dufey (1993). The author put forward the questions: What kind of change of the international financial system do we have? Do we have some instability linked and caused by this development, and what does the instability mean? First of all , we have to review some of the "systematic" changes. Dufey (1993) has mentioned three of them: "First, there is the continuing advance in the technology of information and data processing, leading ultimately to liberalization of cross border financial transactions and the globalization of markets. Second, there is the nature of inter-governmental coordination of regulatory structures and macroeconomic policies. Third, there is a distinctly discernible trend of regionalization, involving economic and monetary cooperation among countries, substituting for the hegemonic role of the United States in the past." Regarding FDI, firms can minimize "existing or threatened trade baITiers by moving some of their activities abroad" (Dufey 1993); but, there is a need for an international diversification in financial assets (FDI) to overcome instability in international

Foreign Direct Investment in Developing Countries

17

financial markets. An operation al flexibility in this field is "a managerial decision-variable" (Dufey 1993) in order to reduce uncertainties and to be more insulated from monetary instability which can sometimes more than compensate the cost reduction results of an enterprise. No doubts, this complexity can be better managed by TNCs with their strategy of globalization of international production. Once more: This "Triangle" mentioned in the beginning is covering a highly complex phenomenon, not very weIl investigated. Therefore, Dufey (1993) concluded: "There are important and as yet unanswered issues behind the behavior of finns and financial institutions". To conclude, more questions are raised than could be answered! Up to now, we have investigated the capital (PDI) outflow from DCs and the inflow to LDCs. But, in the meantime some of the earlier "PDI-Host-Countries", the so called Newly Industrialized Economies (NIEs), have reached a relative high level of economic activities; and nowadays they have started with private capital (PDI) export as "Young Creditors". Taking into account earlier investigations of Kindleberger and Herrick (1983) there is an operational classification available, very helpful for the description of the historical economic development of Asian developing countries. We can present the distinctive marks: Young Debtor-Mature Debtor-Debt ReducerYoung Creditor-Mature Creditor-Asset Liquidator. Such a classification can be used for a description of the economic development and adjustment process of a country and of its changing position related to PDI. In this context, the Republic of Korea is a very good example: At the end of the civil war Korea was one of the poorest countries in the world. In the early economic stage of the 60s PDI have been concentrated in the "Free Processing Zones" (e. g. second hand textile machines of Japan combined with very low paid Korean labor force). But, step by step, PDI have been geographically reached a wider spread with a higher content of qualified technology (investments in central places). In the same period the national economic policy has been shifted from a strategy of import substitution to a concept of export diversification; or a combination of both entailed by the times (Ahn 1980, Bae 1990). In the following years some production units of Korea have lost their international competitiveness, in particular by increased wages. Following the theory of comparative cost advantages (D. Ricardo) Korean enterprises have transferred

2 MalSugi I Oberhauser I Schober

Theodor Dams

18

some productions to East-Asian neighbor countries; that has led to the phenomenon of the "Second Wave of Industrialization" (Sri Lanka, Thailand); in the meantime, based on the same economic reasons, FDI of the so called "Four Tigers" of East-Asia have induced a "Third Wave" (in favor of Vietnam, Bangladesh etc.). The following figures quantify this FDI-development process of Korea: 1990 more than one third ofFDI has been directed to five countries: Indonesia, Malaysia, Thailand, the Philippines and Singapore-and, in all of these countries with an increasing tendency! Furthermore, recently NIEs of Far East have increasing FDI in western industrialized countries, in particular in the USA (e.g. 50% of the Korean FDI). With capital transfers ofthis type these countries do have a direct access to "highly sophisticated technology in advanced economies". There is still another economic reason for this new FDI- direction: They can escape from trade barriers in these countries (e. g. in the case of the "Fortress of Europe"). The conc1usion of this chapter: For future strategies related to FDI we have to consider the experiences of the historical development and of the changed economical and political frame on the international level. Therefore, we have analyzed the causing determinants which are influencing the FDI-flows; and we can conc1ude that more applied research in this field is needed. The description is not at all a complete one; we only can conc1ude that we are confronted with a complex phenomenon. In the last years TNCs have strongly influenced the flow of FDI and have produced a new type of FDI-activities: The "Globalization and integration of international production and services"; this evolution has been supported-in some cases with greater uncertainties-by the deregulation and decentralization of world wide financial markets.

c.

Volume and Direction of FDI

In this chapter we will analyze the FDI-flows at the present time. Taking into account the facts and figures quoted in the literature this overview can be formulated in a very short way. As explained earlier, FDI are apart of the total capital transfer which inc1udes the official (e. g. ODA) and private capital flows (inc1uding NGOs). During the last decades the relationship between these different sources has been changed, more or less caused by different world wide economic situations.

Foreign Direct Investment in Developing Countries

19

In 1980, the total volume of capital transferred in favor of the LDCs has amounted to 77 Bill. US$ (Source: World Bank). One third has been covered by private capital flows and four fifth of this amount by PDI. For the period 1990-1995, the World Bank estimates an annual nominal increase of 8.9% of the total capital flow to LDCs; for PDI 10.3%. Commercial Bank lending has the highest growth rate. No doubts, for the near future PDI will have an increasing importance for covering the capital demand of LDCs; the ODA will have a lower annual growth rate (5.0%). In South and East Asia there are different relations between ODA and private capital flows compared with other continents. In the last twenty years the ODA has been reduced and foreign private capital flows have increased due to the fact of positive economic development. What are the conelusions in using this statistical material? a) The interdependencies (Trade and PDI) amongst highly developed countries are visible. As mentioned earlier the volume of inflows and outflows amongst the "Triad" reached the highest values (Intra-Triad Foreign Direct Investment, 1990) as the result of the intensive labor division of international trade (products and services). To this aspect of the dynamic theory of international economic relations the term "development advantages" has been introduced (Lorenz 1967)-in comparison with the static theoretical approach of "cost advantages" (D. Ricardo). b) The PDI-transfer directed to LDCs is quite divergent with regard to the different countries (Emmerij 1990): 30% of the Japanese total PDI are flowing to LDCs (1975: 57%); for Germany only 10%: the Netherlands 3% and the USA more approximately 25% (1975: 46%). c) For the European Union (EU) very intensive "Intra-EU-PDI-Relations" can be observed; that is the result of the high degree of trade interdependencies amongst member states. The second largest amount of PDI is going to the USA. The PDI moving to South-East-Asia are lower than those directed to Latin America. d) Japanese FDI do have a quite different geographical direction. e) As explained before, the national level of economic activities is the most important determinant for attracting FDI. Based on the same economic fact the PDI are distributed inside of the national market (e. g. in Germany the states Baden-Württemberg and Bavaria are the top areas for PDI). One main question should not be overlooked. Taking into account the elose relationship between "Trade Flows and PDI-Directions" we have to put forward the following problem: Why is foreign direct investment in Japan so low (UN,

2*

20

Theodor Dams

1993)? The Japanese internal stock offoreign direct investment accounts for only 1/15 of its FDI-stock abroad! What are the reasons and the consequences ofthis situation? Japan is spending 2-3 times higher expenditures for foreign patents and licenses as comparable countries which do have a greater volume of FDI. Furthennore, for a longer period in the past Japan did not liberalize the conditions for the inflow of FDI; the Japanese law concerning FDI-passed in 1967-did not change radically the preconditions. Until 1990 the take-over of Japanese finns by foreign investors were very difficult in practice. The Keiretsu-relations arnongst Japanese firms has been a severe barrier for the free entrance of FDI. Nevertheless, recently there were some indications for a modest increase of FDI in Japan. The restrictions of the Japanese FDI-policy (for the internal market) have produced higher structural surpluses of the balance of payments; therefore the pressure for Japanese capital recycling transfer (ODA included) and for private capital "export" (including FDI) has been augmented. To summarize: Until the end ofthe last decade (1990) the "Fortress Japan" had a powerful economic influence as FDI are concerned. Starting in 1989 the USA have sharply increased their FDI, directed to Asia. From 1989-1991 there is a divergent development ofFDI: from Japan (decreasing) to USA (increasing). In the years 1991 and 1992 we can observe a parallel upward trend for both countries. Gennan investors do have only a very small FDI-stock in Asia compared with the two countries mentioned above (a half billion US$). This situation is a surprise taking into consideration the increasing FDI-stock of Gennany in the last years. The Deutsche Bundesbank reported an increase of FDI from 84.5 to 206.6 bill. DM (1980-1992). Asia has been more or less neglected by Gennan investors. That is a surprising fact vis-a-vis the trade relations with East-Asia: Germany had (1992) a trade and service deficit in the balance of payments with Japan 20.2; PR China 3.5; Taiwan 1.8; Malaysia 1.3; Singapore 0.4; the Philippines 0.2;Korea 0.1 billion DM. In these countries Gennan FDI are not only very low (1992: 3.8% oftotal German FDI), but there is a considerable decline of FDI-stocks in 1993 (Schwarzer 1994). Gennan representatives of the economy as weil as politicians have sharply criticized this tendency reasoning that the Pacific Rim has taken over-in comparison with the Atlantic Area-the dynarnic leading role for the expansion of the world economy as a whole (Anderson and Burenstarn Linder 1991).

Foreign Direct Investment in Developing Countries

21

The leading role of Japanese FDI has been recently described by Anderson (1993). With regard to this dominant position we should quote the German "Manager Magazin" (Schwarzer 1994): "Japan buys Asia"; Japanese FDI in USA and Europe do have a sharp declining tendency since 1989/90; Japanese FDI are arising strongly in Asia and the ODA is preparing this more intensive private investment policy (Schwarzer 1994). "Japan has the leading role in the flight of geese in the Asian region ... and MITI is planning this progress country by country-in a close relationship with the governments concerned-adequate strategies for the national development and the place of Japanese ODAlFDI". The TNCs of Japan have developed an effective division of labor amongst their affiliates in the different Asian countries based on highly sophisticated strategies. The "World Investment Report 1993" is presenting very illustrating examples. Taking into account that a very high percentage of the TNCs production will be exported the international trade has more or less the character of intra-firm- exchange; last but not least, this type of division of labor crossing national borders has or can have a positive effect for the labor market in Asian developing countries and for Japan. In the literature there is some information on the motivations of Japans entrepreneurs to invest abroad: a) At the beginning the access to raw material has been the main pushing power (Indonesia, Malaysia); b) In the 70s and the 80s the areas with low technology, costs advantages of the labor market and in the field of environment protection had a great attractivity for Japanese FDI; c) In the mid of the 80s the recycling pressure caused by structural balance of payment surpluses was a pushing power in favor of FDI; d) In a later stage, the internationalization of capital markets and their deregulation (international financial system) has played an important role for extending the FDI, mainly in Asia. 1 The result: There is a domination of Japan's FDI in Asia! Furthermore, we can observe a strong position of Japan in USA and Europe; the reorientation and redirection of Japanese FDI-mentioned above-in favor of Asian countries is not a contradiction to this statement.

I See T. Matsugi's contribution in this book. Additional facts and figures, see also: Economic Research Center of Nagoya University, discussion papers presented by Rahman (1993), Minagawa (1993) and Lii (1994).

22

Theodor Dams

We have mentioned earlier the motivation of entrepreneurs to invest abroad. Some additional information has been presented by MITI (Riedel 1991): low wages, expanding markets in the "host"-countries, exports in third countries by reaching a higher degree in international competitiveness. The German IFO-Institute (Munich) has presented some research results which are giving indications of the motivations of German entrepreneurs to invest in LDCs: To overcome national trade barriers; to make use oflow wages and of professional skills of workers; to escape national measures for environmental protection was a minor economic reason. Wegen er (1994) has evaluated ten thousand interviews of German entrepreneurs (12% of them could be used for the investigation); the author has explained that the results are not representative. In particular, three factors are causing FDIflows of German enterprise: The size of the enterprises; the experiences in the export business with the countries of FDI-destination and the intensity of research and development. But, the author deelared that more systematic research is needed.

D. Theoretical Approaches for Explaining the Implementation and Direction of FDI The presented results of the analysis (See: Chapter Band C) have illustrated the elose relationship between international trade and the flow ofFDI. That is the reason to bring together both theoretical foundations: "It is convenient to consider the theory of trade and the theory of foreign direct investment separately. However, the relationship between these flows (whether they are complements or substitutes) will be addressed" (Riedel 1991). We do not have the ambitious objective to present in this context a "State of the Art" covering the research field of FD!. There is a huge volume of theoretical publications indicating the heterogeneity of research approaches. Therefore, we will enumerate only some recently presented publications. Furthermore, sometimes we have indicated in Chapter land 11 the relevant theoretical foundations. Oxelheim (1993) has-with other authors-published a book containing a great number of different theoretical approaches in relation to partial problems of FDI, entitled "The Global Race for Foreign Direct Investments-Prospects for the Future" (1993). Dunning (1993) has presented a theory of international integrated production and he has underlined the increasing importance of TNCs. Furthermore, he has put forward the problem of "Technology-Based Cross-Border Alliances".

Foreign Direct Investment in Developing Countries

23

The most important contribution has been elaborated by R. Vernon more than twenty years ago; later on, this approach has been enlarged and intensified, see Vernon (1980). Nevertheless we should question the impact of this theoretical foundations on the decision making process of entrepreneurs at the present time. Other factors can playamore important role: The central point is to reach or to regain a very high degree of international competitiveness; and we have analyzed that other determinants have a greater impact for the direction of FDI. The "UN-Worid Investment Reports, 1993 and 1994" are giving very good practical examples. In this context, a very crucial question is the foIIowing: What kind of measures do we need that smaII and medium sized enterprises can join this international business ofFDI (UNCTAD-BuIIetin, 1994). To solve this question will be a very important contribution for the intensification of a functional international competition. FDI and technological transfer are cIosely linked; technology is fostering the development of national economies. Therefore, we do need more insight knowledge as the price formation process of technology transfers and the bargaining procedures amongst the partners (of DCs and LDCs) are concerned (Hoffmann 1985).

E. Some Frames of References for Empirical Research In chapter D we have indicated some challenges for future research, e. g. investigations on the micro- and macroeconomic level. In the past, in the frame of IFEP-Research we have presented some terms of references: They are illustrating the different elements of an evaluation scheme with the central point of the "FDI-Package" which has been mentioned earlier. Furthermore, we should investigate the entrepreneurial motivation to invest abroad (FDI). This micro-economic starting point will be a critical reflection of the effectiveness of macroeconomic parameters and of the political preconditions in DCs and LDSs. The presentation of tbis material is more or less an incentive to reflect critically: What are the unfinished questions? What do we need as theoretical foundations? What are the chaIlenges and the opportunities for interdisciplinary research? What are the advantages and disadvantages for implementing an ecIectic research approach?

24

Theodor Dams

F. Some Concluding Remarks-Challenge for the Development Poliey Burley (1993) has expressed the opinion that "taxpayers will find it much more difficult to support aid for long tenn development" in comparison to aid for humanitarian and emergency purposes. In the case that this position is politically justified FDI and TNCs have to playamore important role in future and have to take a higher responsibility in future towards the economic development of LDCs. No doubts, FDI will flow to these countries only in a situation of mutuality of interests (Mendez 1992). There is still another unfinished problem: We do not have enough information on the positive or negative impact ofFDI in LDCs; this question is closely linked with the macro-economic and -political preconditions in the "Host-Countries". Research ofthis type is urgently needed! Another "open question": Do we need multilateral rules on foreign direct investments (Nicolaides 1993)? "The best way of eliminating the distortion effects (connected with national origin of enterprises) is through multilateral rules that remove restrictions on investments and curtail anti-competitive practices." All these proposals should be reconsidered as challenges for the professional society of Social and Economic Sciences to elaborate a consistent research program.

Referenees Ahn, S. K. (1980): Ausländische Privatinvestitionen in Südkorea, Mainz. Anderson, T. and S. Burenstam Linder (1991): Europe and the East Asian Agenda. European Policy Unit at EU Institute, Florence. Anderson, T. (1993): The Role of Japanese Foreign Direct Investment. In: Oxelheim, L., Berlin. Bae, J. Y. (1990): Importsubstitution im weltmarktorientierten Entwicklungsland, Berlin. BeYfuß, J. and B. H. -J. Kitterer (1990): Deutsche Direktinvestitionen im Ausland. Bestandsaufnahme und Ergebnisse einer Unternehmensbefragung, Köln. Burley, J. (1993): International Finance for Development: What Future? See: Unctad Review Nr. 4, Geneva. ehen, E. K. Y. (1992): Changing Pattern of Financial Flows in the Asian-Pacific Regions and Policy Responses. In: Asian Development Review, Vol. 10 Nr.2, Manila. Dams, Th. (1978): Weltwirtschaft im Umbruch, Freiburg.

Foreign Direct Investment in Developing Countries

25

(1985): Entwicklungsländer - Auslandsinvestitionen und Technologietransfer. In: Zielsetzung und Partnerschaft, Bonn. (Hrsg.) (1980): Auswirkungen ausländischer Privatinvestitionen in Entwicklungsländern, Bonn. (1974): Entwicklungspolitik des Westens in der Krise? In: Th. Dams (Hrsg.), Entwicklungshilfe - Hilfe zur Unterentwicklung? Eine Auseinandersetzung mit den Thesen der radikalen Kritik, Mainz. Dams, Th., Golt, S., Okita, S., Fried, E. R. and P. H. Trezise (1972): Reassessing NorthSouth-Economic Relations. The Brookings Institution, Washington D. C. Dufey, G. (1993): The Instability of the International Financial System and Its Implication for Trade and Investment. See: Oxelheimer, L. Dunning, J. H. (1993): The Globalization of Business. The Challenge of the I 990s, London. Elkmann, M.-U. (1983): Ausländische Direktinvestitionen in Nigeria, Freiburg. Emmerij, L. (1990): International Investments and Rising Protectionism. In: Asian Development Review Vol. 8 Nr. 2, Manila. Friese, Th. (1982): Industriepolitik und ausländische Direktinvestitionen in Ecuador, Freiburg. Hansen, P. (1989): Transnational Corporations in World Development. See: Economic Impact Nr. 4, Washington D. C. Hoffmann, L. (1985): Technologietransfer in Entwicklungsländer Analytische Konzepte und wirtschaftspolitische Aspekte. In: Zielsetzung Partnerschaft, Bonn. Kindleberger, C. P. und B. Herrick (1983): Economic Development, Tokyo. Liem, N. H. (1981): Ausländische Direktinvestitionen in den Philippinen, Mainz. Lii, S. Y. (1994): Japanese Direct Foreign Investment and Trade Flows in the Asia-Pacific Region. Economic Research Center, Nagoya University. Lorenz, D. (1967): Dynamische Theorie der internationalen Arbeitsteilung, Berlin. Mendez, R. P. (1992): A New Perspective on Global Relations, New York. Minagawa, Y. (1993): Taxation and Reinvestment by MNCs. Economic Research Center, Nagoya University. Nicolaides, P. (1993): Multilateral Rules on Foreign Private Investments. In: Intereconomics Vol. 28, Hamburg. Niehaus, H., Gerl, F. and Th. Dams (1952): Probleme der Agrarunion auf dem Hintergrunde der landwirtschaftlich-industriellen Verflechtung des deutschen Außenhandels. In: Auswärtiges Amt (Ed.), Probleme einer Europäischen Agrarunion, Bonn. OECD (1989): Development Co-Operation in the 1990s, Paris. Odle, M. (1993a): Foreign Direct Investment as Part of the Privatization Process. In: Transnational Corporations No. 2, Geneva. - (I 993b): Towards a Stage Theory Approach to Privatization. In: Public Administration and Development No. 13, Geneva. Oxelheim, L. (1993): The Global Race for Foreign Direct Investments. Prospects for the Future, Berlin. Pearson, L. B. (1969): Partners in Development, London.

26

Theodor Dams

Rahman, K. M. (1993): Japanese Foreign Direct Investment and Malaysia's Economic Development. Economic Research Center, Nagoya University. Riedei, J. (1991): Intra-Asian Trade and Foreign Direct Investment. In: Asian Development Review Vol. 9 Nr. I, Manila. Schwarzer, U. (1994): Show-Business. In: Manager Magazin, September, Hamburg. Senghaas, D. (1977): Weltwirtschaftsordnung und Entwicklungspolitik. Plädoyer für Dissoziation, Frankfurt. Sunkel, O. (1972): Transnationale kapitalistische Integration und nationale Desintegration. In: Senghaas, D. (Ed.) Imperialismus und strukturelle Gewalt. Analyse über abhängige Reproduktion, Frankfurt. UN (1993): World Investment Report, New York-Geneva. - (1994): World Investment Report, New York-Geneva. UNCTAD (1994): Small and Medium-Sized Enterprises as Foreign Investors. UNCTAD Bulletin Nr. 24, Geneva. Vernon, R. (Hrsg.) (1980): The Technology Factor in International Trade, New York. Vieser, D. (1981): Ausländische Privatinvestionen im Senegal, Berlin. Wegener, J. (1994): Determinants ofGerman Foreign Direct Investment: Evidence from Micro-Data. See: Zeitschrift für Wirtschafts- und Sozialwissenschaften, Berlin.

Recent Trends in Foreign Direct Investments Takashi Matsugi

A. Introduction

In the process of economic development, the trade balance of a country tends to be negative in the first stage, then to be positive in the second and to be negative once again in the last. This cycle can also be statistically observed by using as an indicator the competitiveness coefficient which is defined to be the ratio of the difference between exports and imports to the sum of exports and imports in value by commodity (see Matsugi 1989). In the case of clothing, for example, the coefficient for the United States was negative already before 1960, that for Japan became negative in 1973, and Korea has attained the level ofunity (no imports) since 1974. As for automobiles, the coefficient for the USA has been negative since 1968, while Japanese car makers enjoy the value of near unity today and Korean car exports exceeded imports in 1984. On the other hand, trade surpluses are balanced with capital outflows in the international balance accounts. The American current balance recorded surpluses in the period from the 1880s to 1970s (for around 90 years), and the USA played the role of a long-term capital creditor from 1914 to 1985, being a net capital creditor for 71 years. Looking at the Japanese international balance statistics, positive current balance has been recorded from 1965 till today (already for 30 years), and in 1970 Japan became a net capital creditor in the world market. Korea and Taiwan today are following this tendency as latecomers in the process of economic development. One type of long-term capital outflows isforeign direct investments. Investors are mostly multinational companies, whose objectives in their international operations are different from country to coutry. This paper is concerned with the comparison of economic behaviors of multinationals in their foreign direct investments. Attention will be paid not only to donor countries but also to host countries.

28

Takashi Matsugi

B. Determinants of Foreign Direct Investments I. The United States

The study on multinationals first dealt with American companies which invested abroad on a large scale in the post World War 11 period. Their firrn-specific advantages such as advanced production technologies and management knowhow were utilized with the enlargement of the market to seil their products as a goal. At thattime American direct investments abroad were welcomed in those countries, especially in Western Europe, where economic reconstruction was urgent but capital ran short. They built large scale plants equipped with capital intensive technologies. Their products were sold in local markets. The ownership was almost 100% in the hand of investors. These are characteristics pointed out to foreign direct investments made by American companies. It is stated that the main feature is a market enlargement type. 11. Japan Foreign direct investments (PDI) of Japan after World War 11 started in the 1950s. We observe seven stages of Japanese FDI with different volumes and aims. • 1st stage: 1951-62. PDI per year amounted to an average US$ 44 million. The main objective was to secure natural resources such as crude oil in the Middle East and timber in South-East Asia. • 2nd stage: 1963-67. The average amount of PDI per year was US$ 170 million, about 4 times more than in the first stage. The main objective was to promote exports by establishing marketing bases in North America. • 3rd stage: 1968-71. The amount of FDI increased to US$ 740 million on annual average, again nearly 4 times more than in the previous stage. Main features were seen in sales promotion in North America and Europe and also in investments in manufacturing industries in such Asian countries as Korea and Taiwan. • 4th stage: 1972-77. US$ 2.8 billion was recorded for the average PDI in this stage, as was a 4-fold increase compared with the third stage. Investors were more conscious of the international division of labor, and manufactured goods in Asian countries were exported to the United States and the European Community. • 5th stage: 1978-85. Average PDI reached the amount ofUS$ 8.7 billion, more than tripIe the amount in the previous stage. In this stage the solution of trade

Recent Trends in Foreign Direct Investments

29

conflicts was considered by decision-makers of FDI, such that investments in manufacturing sectors abroad took on the largest burden of the industry. • 6th stage: 1986-90. The increase in FDI since 1986 was very remarkable and the annual average amounted to US$ 40 billion. This soaring amount resulted from J apanese Yen appreciation since September 1985 because J apanese industries should be restructured to adjust themselves to the new situation of international currency. It is important to note that at the same time the European integration for 1993 contributed to invite FDI from Japan in this stage. • 7th stage: since 1991. The Japanese economy went through a depression in this stage and most companies were losing interest in FDI, because the profit rate declined significantly both in parent companies and affiliate companies. Coupled with the depression a negative effect came out of the fact that the rushing FDI in the previous stage almost exhausted investment opportunities. The result was that FDI towards North America in 1992 dropped to about 60% as of 1989. An empirical analysis was attempted in the Annual Report of Japanese Economy by the Economic Planning Agency (EPA 1993 and 1994). They pointed out three explanatory variables as folIows, which were relevant to FDI estimation in the last two decades. GDP: Real GDP of the destination area (North America, Europe and Asia).

RATE: Real effective exchange rate, using Yen/host country's currency. PROFIT: Current account profit of Japan in real terms.

The dependent variable FDI is defined as the direct investment amount, based on reported figures in terms of the currency of the host country, devided by the GDP deflator. All variables are transformed into natural logarithms. Estimated results for manufacturing are shown below by the destination area with t-values given in parentheses. 1) North America (FY 1977-1992) FDI

= - 49.3 + 5.6· GDP- 0.5· RATE + 1.1 . PROFIT (-5.3)

(4.6)

(-0.9)

R2

= 0.91

R2

= 0.94

(2.7)

2) Europe (FY 1977-1992) FDI = -56.2+6.8·GDP-0.8·RATE+1.1·PROFIT (-9.1 )

(7.8)

(-1.2)

(3.4 )

30

Takashi Matsugi

3) Asia (FY 1977-1991) FDI

= 3.4 + 0.4· GDP-1.6· RATE + 0.5· PROFIT (0.4)

(0.5)

(-3.0)

(0.9)

According to these results, GDP as a market factor in the destination area is significant in North America and Europe but not in Asia. The next variable, RATE, used to test effects of Yen appreciation on FDI is significant only in Asia. The coefficient which means elasticity indicates that Yen appreciation by 1% induces FDI in Asia to increase by 1.6%. This shows that Japanese firms making FDI in Asia are specified in labor intensive production and rather cost sensitive, typical examples being electric machinery manufacturers. The third variable PROFIT is again significant both in North America and in Europe, but not in Asia. It better explains the decline in FDI after FY 1990. In earlier studies on determinants of Japanese FDI, they found that a defensive character was typical in the sense that Japanese companies rather looked for cheap labor in Asian countries so as to reduce production costs, compared with American FDI, which has an offensive character.

III. Taiwan Though Taiwan was a host country of FDI until recently. today it belongs to donor countries, after it succeeded in export-promoting industrialization and accumulated trade surpluses. While it was a host country. Taiwan made the most of Japanese FDI to foster export-oriented manufacturing. This was statistically tested by Kojima (1985) as follows. 10gEXPTJ = 3.615 + 0.906 ·logJFDl_ 1 (4.91)

(4.05)

10glMPTJ = 4.687 + 0.860· logJFDI_ 1 (7.97)

R2 = 0.506

R2 = 0.596

(4.81)

In these estimations. both EXPTJ (exports from Taiwan to Japan) and IMPTJ (imports of Taiwan from Japan) are explained by Japanese FDI into Taiwan, and we see that the coefficient in the export function is larger than that in the import

Recent Trends in Foreign Direct Investments

31

function, so that Japanese PDI gave rise to trade surpluses in Taiwan in the period 1967-1982. Similar results were also obtained for Korea and Thailand. Taiwanese PDI are made not only in developing countries, but also in developed countries, though their motives are different. According to a survey, PDI in the United States are motivated to develop a new market in host countries (36.1 %), to acquire new technologies (14.8%) and to get new market information (13.1 %), while FDI in ASEAN countries are motivated to employ local workers (35.4%), to develop a new market in host countries (23.7%) and to avert risk inciuding exchange rate risk (14.2%). Concerning the determinants of Taiwanese FDI, it is empirically verified (Chen 1992) that large firms are interested in procuring raw materials and in marketing, and that small firms are interested in growing sales and in marketing. The common marketing factor is measured by exports/sales ratio, which means that the experiences in exporting in the past would make it easier to sell new products in host countries. In addition, some firms are going to adjust themselves to the recent appreciation ofTaiwanese currency. It seems that the Taiwanese economy is following the Japanese way of economic development with some time lag.

C. Concluding Remarks As far as investment behavior is concerned, FDI determinants have common factors which are considered in decision-making of investments in the horne country. In addition to this, FDI investors take into consideration those factors which are specific to respective host countries, the latter being named pull-factors, while apart of the former constitute push-factors in the donor country, when they are unfavorable to investors, like high wage rates. In international economic relations, FDI decision-makers further consider such factors as exchange rate and trade restrictions to be relevant to their foreign operations. At the same time it is also important to know how to avoid the risk that could arise in activities in host countries (Matsugi 1990). Considerations following ordinary economic theory would be modified to some extent. In the process of econornic developrnent, we often see forerunners, late corners and late late corners. In the case of FDI after 1945, the United States was a forerunner, Japan was one of late corners and today Taiwan follows them as one of late late corners. Each category has its own factors of FDI on the one hand, but there are specific factors to each on the other. Japanese PDI today have cornmon factors with Arnericans in the 1950s and 1960s. Investors in Taiwan aiming at

32

Takashi Matsugi

foreign operations pay attention to similar determinants once considered by Japanese firms in the 1960s and 70s. One of our next studies on FD! will be to consider a general theory of PDI determinants with the life cycle pattern of international trade and the capital transfer of a nation in perspective. The other will be to estimate effects of PDI on economic development in host countries. The two contributions to this volume made by Jose Castro-Lopez and Quadrat M. Khoda concerning Japanese PDI in Spain and Bangladesh respectively will shed new light on these aspects of PDI studies.

References Agarwal, J. P. (1980): Determinants of Foreign Direct Investment: A Survey, Weltwirtschaftliches Archiv, 116(4), pp. 739-773. ehen, Tain-Jy (1992): Determinants of Taiwan' s Direct Foreign Investment, Journal of Development Economics, 39, pp. 397-407. Dunning, J. H. (1988): The Eclectic Paradigm of International Production: ARestatement and Some Possible Extensions, Journal of International Business Studies, 19, pp. 1-3l. Economic Planning Agency 0/ Japanese Government (1993): Economic Survey of Japan (1992-1993), Printing Bureau, Ministry of Finance. - (1994): Economic Survey of Japan (1993-1994), Printing Bureau, Ministry of Finance. lkemoto, K. et al. (1981): Multinational Expansion of Japanese Enterprises (in Japanese), Yuhikaku. Kojima, K. (1985): Japanese and American Direct Investment in Asia: A Comparative Analysis, Hitotsubashi Journal ofEconomics, 26(1), pp. 1-35. Matsugi, T. (1989): The Foreign Trade Structure of Japan. In: Dams, Th. and T. Matsugi (eds.): Adjustment Problems in Advanced Open Economies: Japan and Germany, Duncker & Humblot, Berlin, pp. 149-171. (1990): Foreign Direct Investment and Related Problems. In: Executive Committee of Forum (Chairman: Ogawa, E.), Proceedings of International Forum for Studies on the Pacific Rim Region, The University of Nagoya Press, pp. 53-62. Miyagi, K. (1995): A Note on FOI Determinants-Cases of Taiwanese Multinationals (in Japanese). In: Kyushu Kyouritu University: Kyu-kyou Economic Papers, pp. 127156. Sekiya, K. (1980): Japanische private Auslandsinvestitionen in ausgewählten Ländern Ostasiens. In: Dams, Th. und K. Jojima (eds.): Ausgewählte Probleme internationaler Wirtschafts beziehungen, Duncker & Humblot, Berlin, pp. 59-91.

Regional Distribution and Patterns of Japanese Foreign Direct Investment in the European Union and Spain An Econometric Analysis of the Determinants of Japanese FDI into Spain Jose MO. Castro-L6pez

A. Introduction 1 During the 1980s annual Japanese FDI flows into the European Union-Iong term cross border capital investment in hard assets such as new factories and equipment and research laboratories-grew rapidly. In the early 1990s, however, flows to the EU declined, mostly as a consequence of poor economic performance resulting from a cyclical downswing in economic activity in the EU and Japan. Stocks of Japanese foreign direct investment into the EU reached approximately US$ 78 billion in 1993. In the same year, Japanese direct investment flows into the EU totaled US$ 7 billion representing a 7 per cent year-to-year increase, on the heels of a 34 and 24 per cent decline in 1991 and 1992, respectively. With Japanese FDI flows to the EU estimated to increase in 1994 and the economic recovery taking pi ace in a wide spectrum of the member countries' economies, govemments and multinationals are fiercely vying more than ever for an increased share of the benefits. When the evolution of the Spanish market for capital flow, particularly direct foreign investment, is exarnined, it can be seen that Spain has been a net importer of FDI without interruption since its economic opening-up to the outside world in the 1960s, up to the present moment, making Spain one of the largest recipients IA preliminary version of this paper was presented at the 15th Joint Seminar of the Faculties of Economics of Nagoya and Freiburg University. The author would like to thank Professor T. Matsugi of Nagoya University for his constructive comments on this paper. Gratitude is also extended to the Professors A. Oberhauser and Th. Dams of Freiburg University for their helpful suggestions during the seminar. 3 Matsugi I Oberhauser I Schober

34

Jose MO. Castro-L6pez

of FDI in the EU. The role of FDI in the balance of payments and in the Spanish economy as a whole has been a considerable and determining factor in production specialization and in international trade. With the steady improvement of Spain's country profile, the presence ofFDI has been noticeably reinforced. One ofthe prominent aspects ofthe pattern ofFDI in Spain, which has received scarce attention in literature from Spanish academicians, is that of Japanese FD!. Therefore, the aim of this study is twofold: firstly, to examine Japanese FDI in Spain within the context of the EU, and secondly, to identify and analyze the determinants of Japanese direct investment in Spain. Naturally enough, to lay down the foundations for our analysis, the starting point of this articIe will be the investment theories of corporate behavior, which have been used to analyze and describe the conduct of multinational firms, especially with regards to the locational decision. Section C will shed some light on the flows of Japanese FDI into Spain within the context ofthe EU. Section D will undertake an econometric analysis of the determinants of Japanese FDI flows into Spain. Section E will offer some concIuding comments and recommendations. An Appendix is incIuded in order to examine whether the determinants of Japanese FDI flows into Spain are also applicable in the case of FDI flows from its largest investors in the EU.

B. Detenninants of Foreign Direct Investment A Theoretical Background The main factors affecting the foreign investment decision can be conveniently cIassified into economic strength determinants, market openness determinants and resources determinants. The economic strength determinants, wh ich cIosely follow the theories of corporate investment, emphasize the importance of the size of the host market, the growth of the host market, factor prices, interest rates, investment financing availability, and consumption. The market openness determinants refer to those factors which directly reflect the capacity of the host country to act as a recipient ofFDI flows. The third category of determinants refers to various other strategic and long term factors, which directly effect the decision to invest abroad and are relevant to the profitability of the venture. Ultimately, the profitability of foreign direct investment will depend on the way the economic strength, market openness and resource factors interact. The foregoing analysis tends to suggest that when considering the economic strength and resources determinants, one of the most likely factors to play an important role in the foreign investment decision is that of size of the host country' s market. This approach is also consistent with the conventional theory of invest-

Japanese Foreign Direct Investment in the EU and Spain

35

ment behavior. In the present context the size-of-market hypothesis contends that as soon as the size of the market of a particular country has grown to a level warranting the exploitation of economies of scale, then this country can become the target for the inflow of foreign direct investment. A sufficiently large market will allow for the specialization of factors of production, thus achieving cost minimization and allowing the introduction of advanced technology owned by MNCs (Balassa 1966). The growth-of-market hypothesis postulates a positive relation between changes in the host country's gross domestic product and the flow of foreign investment. This follows from the relation between the level of aggregate demand and stock of capital required to satisfy this demand, which, when looked at in flow terms, is similar to the relation expressed by the incremental capital-output ratio. The growth of the market is measured by either the percentage change or the change in levels of the gross domestic product and these changes are expected to be directly related to the flow of foreign direct investment (Scaperlanda 1969). Regarding the price determinants of foreign investment, the main emphasis is on factor prices, such as wage rates and cost of capital. Following the neoclassical theory of corporate investment behavior, it is postulated that direct foreign investment is inversely related to the rate of interest, a hypothesis found to be consistent with empirical evidence (Kwak 1972). Similarly, low-wage countries should expect a higher inflow of foreign investment than high-wage ones. However, differences in labor productivity and purchasing power among countries are significant so that consideration as to the differences in labor productivity and purchasing power help to explain, together with other factors, why the destination of much foreign direct investment has been the high-wage industrially developed countries rather than the low-wage LDCs. This conclusion is in line with that reached by Culem (Culern 1988), on observing the increase in unit labor costs when examining PDI flows between the USA and the EC, along with intraCommunity PDI. Accordingly, PDI increases may be explained by an overall improvement in the workforce qualifications and attitudes, an improvement in the supply of human capital, and in addition, pay raises imply increased purchasing power for the population, which in turn expand the market.

I. The Impact of the Single Market on the Determinants of Foreign Direct Investment

Within the context of the European common market, the approval of the Single Act in 1987 and the subsequent boost given to the creation of a true European single market in 1993 have affected inward investment into the EU. The major impact on inward investment comes from the increase in the locational advantages 3'

36

Jose Ma • Castro-L6pez

of the internal market. Indeed, the measures of the single market program will bring about a significant global redistribution of the locational advantages of alternative host regions to foreign direct investment. The positive effects to be gained from European integration into a single market were perceived to be real (Cecchini 1988 and Baldwin 1989). The exchange rate is a factor which may influence FDI to a certain extent (Aliber 1972), since the value of exposed assets and liabilities, as weIl as cash-flow amounts, will be conditioned by variations in the exchange rate. The degree of exposure to exchange risk, together with coverage and hedge policies, will determine the effect of exchange rates on FDI. In general, the reduction in trading and other costs from the elimination of nontariff barriers in intra-Community trade will be, on balance, larger for members than for non-members. Companies serving the internal market through exports from production facilities located outside the EU will find that their relative competitive position is eroded. Import substituting, defensive direct investment to serve the market from within is one option open to restore the relative competitive position of the third-country trader. In addition, with the disappearance of aIl barriers to integration and the prioritizing of the market mechanism, FDI will only be adopted according to efficient criteria and its location will be based on comparative 'natural' advantages. Another factor contributing to changes in the distribution of locational advantages between the EU and alternative host regions for foreign direct investment is the uncertainty about the future course of the common extern al commercial policy of the integration region. This uncertainty effect from the fluidity of the common external commercial policy will stimulate defensive, import-substituting foreign direct investment. A major consequence of the removal of non-tariff barriers to intra-EU trade is the stimulus to growth to be provided by the dynamic gains of integration. The one-off output expansion effects from the completion of the internal market will raise the output-capital ratio ofthe economy which in turn will generate a permanent increase in its sustainable growth rate. This growth in market size adds further to the locational advantages of the EU as a host region with the potential effect of stimulating offensive import-substituting investment aimed at the servicing of market growth from production locations inside the EU. The single market program is expected in addition to generate aredistribution of locational advantages inside the common market. The removal of a number of market-entry barriers will enhance the locational attraction of those member states whose firms are best at providing specific services or supplying specific goods. Reorganization of investment is expected to take place in such cases with the regrouping of production in the most profitable locations and the servicing of the rest of the market from these locations.

992 (4.4)

22,320 (100.0)

139 (3.0)

448 (9.5)

4,693 (100.0)

Africa

Oceania

World Total

-------

--

309 (1.4)

44 (0.2)

158 (3.4)

Near & Middle East

4,816 (14.4)

4,737 (21.2)

588 (12.5)

4,868 (14.6)

2,327 (10.4)

Latin America

of which: USA

1,186 (25.3)

15,357 (46.0) 14,704 (44.1)

10,441 (46.8) 10,165 (45.5)

Asia

9,117 (19.4) 8,329 (17.7)

6,576 (19.7) 6,281 (18.8)

3,469 (15.5) 3,324 (14.9)

67.540 (100.0)

2,668 (5.7) 47,022 (100.0)

1,413 (4.2) 33,364 (100.0)

4,618 (6 .. 8)

653 (1.4)

273 (0.8)

671 (1.0)

259 (0.6)

66 (0.1)

5,238 (7.8)

8,238 (12.2)

33,902 (50.2) 32,540 (48.2)

14,808 (21.9) 14,071 (20.8)

1989

63 (0.2)

6,428 (13.7)

5,569 (11.8)

22,238 (47.5) 21,701 (46.2)

1988

1987

1986

1,596 (34.0) 1,484 (31.6)

578 (12.3) 521 (11.1 )

Year 1980

North America

ofwhich: EU

Europe

Region

(US$ Million, %)

- - - -

56,911 (100.0)

-

41,584 (100.0)

3,278 (7.9)

4,166 (7.3)

34,138 (100.0)

2,406 (7.0)

238 (0.7)

748 (1.8) 551 (1.0)

2,726 (8.0)

6,425 (18.8)

14,572 (42.7) 13,819 (40.5)

7,061 (20.7) 6,644 (19.5)

1992

709 (2.1)

3,337 (8.0)

5,936 (14.3)

18,823 (45.3) 18,026 (43.3)

9,371 (22.5) 8,787 (21.1 )

1991

90 (0.2) 27 (0.0)

3,628 (6.4)

7,054 (12.4)

27,192 (47.8) 26,128 (45.9)

14,294 (25.1 ) 13,307 (23.4)

1990

Table 1 Trends in Japanese FDI by Region

36,025 (100.0)

2,035 (5.6)

539 (1.5)

217 (0.6)

3,370 (9.4)

6,637 (18.4)

15,287 (42.4) 14,725 (40.9)

7,940 (22.0) 7,111 (19.7)

1993

422,555 (100.0)

25,817 (6.1)

7,351 (1.7)

4,447 (1.1)

49,917 (12.0)

66,517 (15.7)

184,868 (43.8) 177,098 (41.9)

83,637 (19.8) 77,849 (18.4)

1951-93 Total

!

!

I

I

w

-..J

::l

21.

Vl '0

8.

m c:::

ir

5'

~

g