Japanese Inward Investment in UK Car Manufacturing

Young-Chan Kim

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9781138730083
• eBook ISBN:
  9781351742849
• Topic: Business
• Subtopic: Business General
• Index: Business

This title was first published in 2002. This compelling text provides fresh insight into an area that is often touched upon, but rarely examined in any great detail - the relationship between Multinational Enterprises (MNEs) and their host governments. Taking Japanese Foreign Direct Investment (FDI) strategy, arguably the model of FDI, Young-Chan Kim takes a revealing look at why the United Kingdom (UK) has dominated among the EU member states for FDI destination, while ironically losing its nationalized car manufacturers. Scholars of business history, international business and business economics will find this work invaluable.

Chapter 1

Introduction

For thirty years after the Second World War, multinational enterprises (MNEs) have been recognised as one of the most effective agents for economic development. By the early 1980s, 200 MNEs accounted for a third of global GDP, or one and a half times the production of the world’s less developed economies including Latin America, Africa, India and China.

MNEs have in this way profoundly changed the global framework in which policies are pursued by governments and international organisations. Yet most governments which are members of the big international organisations, such as the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), have failed to grasp the international implications of a world economy dominated by MNEs, whether in agribusiness, manufacturing industry, services or finance. Virtually no international agency other than the United Nations Conference on Trade and Development (UNCTAD) makes any sustained effort to account for the share of MNEs in the output, pricing, trade or payments of the global macro-economy.

’The MNE is an enterprise that engages in foreign direct investment (FDI) and owns or controls value-adding activities in more than one country.’¹ FDI is typically the overseas manifestation of the activities of MNEs, so consideration of FDI must start with why companies become multinational. Japanese MNEs, compared to those of other developed countries, have been distinctive since the mid-1980s. Their policy differentiates between developing countries² and developed countries.

The difference between developing and developed countries is mainly based on the business system in Japan. The pattern of Japanese FDI is an outcome of a political economy crisis whose roots were deep in the structure of Japanese capitalism. Hence, compared to investment in the developing countries, Japanese MNEs in the developed countries have relied on the invisible support of government.³

The biggest emerging consumer market during the 1980s in Western Europe was one of the major targets of Japanese MNEs. As Alfred Dienst, chairman of the Council of the European Business Community observed:

Looking at the Triangle of Europe, the US, and Japan, it is clear that the Japan-Europe side is the weakest link. I think people in Japan need to reassess this situation once more. There seems to be a feeling in Japan that Europe is over the hill.⁴

The emerging single market presented a different challenge to that of the United States, where Japanese FDI had been underway since the 1960s. European institutions were relatively weak, and member states’ national policies dominated by national economic strategies required specific tailored approaches by investing MNEs. Hence the role of the Japanese government was vital to support her MNEs’ FDI policy.

During the 1970s, on the other hand, the European economies had been vulnerable to competition at both macro and micro levels. At the macroeconomic level, protectionism, consumption at the expense of investment, and narrow nationalism, were symptoms of ‘Eurosclerosis’ or ‘Eikokubyo’ (English disease).⁵ At the level of manufacturing companies, low productivity, technological backwardness and the decline of the ‘industrial spirit’ in the managerial classes made things worse. The emerging Single European Market (SEM) was intended to provide an opportunity to regenerate the competitiveness of European manufacturing sectors with a real and a psychological impetus to governments and companies.

As compared with earlier decades, the position of MNEs in the Single Market had an even more important role to play in economic development. The increasing importance of MNEs coincided with the importance of foreign direct investment. Japanese business was a latecomer to direct investment in Europe. In the Single Market, Japanese MNEs tried to catch up with American MNEs in market share. There were two dominant methods among Japanese MNEs: one was to concentrate their products within one or two main sectors; the other was to use government channels to promote the globalisation of their business.

The main object of this thesis is to describe and analyse the relationship between government and MNEs in the ‘host country’ receiving foreign direct investment. The emerging Single Market during the 1980s showed two different sides of the MNEs’ FDI policy toward the European Community. There were ‘pull factors’ within the host countries; on the other hand there were ‘push factors’ within Japan. In these circumstances, without government intervention Japanese MNEs would have faced enormous difficulties in maintaining their business in developed countries, which were hostile to Japanese penetration, especially in Europe.

I have used three different perspectives in the analysis of one manufacturing sector, the car industry. Within EU member countries, opinions differ sharply about the merits of inward Japanese FDI in the Single Market. Within favourable countries (such as Britain), I have sought to discover whether FDI worked in the interest of national government or in the interest of industry. In conditions of severe competition among member countries to attract inward FDI, what did politicians do? I have tried to answer the following questions with respect to Japanese FDI in the British car industry:

• Why did Japanese car MNEs choose the UK as their manufacturing base?
• What was the working relationship between the British government and Japanese MNEs?
• What are the differences between joint venture (JV) and greenfield investments?
• Did FDI work to improve the host country’s manufacturing competitiveness?

This introductory chapter reviews some leading FDI theories, with particular reference to the Japanese car MNEs in the European Community. The main question is whether the existing theories of FDI are likely to be adequate in explaining the FDI strategies of Japanese car MNEs. To do this, this chapter is divided into two parts. One, there is a general review of the major theories of FDI in explaining mutual investment between developed countries. The other, an alternative model is suggested, which can help us to understand the phenomenon of FDI on the part of Japanese car MNEs in the European Union.

Some Leading Theories of Foreign Direct Investment

The economic prosperity of each nation has always been influenced by the terms on which it has exchanged goods and services with others. Historically, since the early nineteenth century, an active international capital market has existed, while the international flow of knowledge has an even longer pedigree, which dates back to the exodus of the Huguenots from France in the seventeenth century. It was said that world trade in goods and factors inputs has always affected the economic welfare of participating nations, and that several countries owe the timing of their take-off in development directly to the inflow of foreign capital and expertise. From then on, there have been many foreign direct investments world wide originating from Britain and later from the United States.

Generally speaking, a foreign direct investment (FDI) involves an investor in one country purchasing and/or acquiring controlling interests in assets in another country. Direct investment is usually undertaken to establish overseas branch operations by multinational enterprises (MNEs). The value of direct investment may increase not only through the investment of new funds, which may be remitted from abroad or borrowed locally by the foreign investors, but also through reinvestment of earnings, or the sale to a foreign affiliate of nonfmancial assets, such as a license or management services. According to Stewart: ‘FDI generally takes one of three forms: an infusion of new equity capital such as a new plant or JV, reinvested corporate earnings, and net borrowing through the parent company or affiliates.’⁶ FDI is usually distinguished from indirect investment, which consists of international portfolio investment. While portfolio investment abroad is made to a large extent by individual investors, FDI is made essentially by corporations. Also, ‘direct investment is motivated by the desire to control a foreign company, while portfolio investment seeks a higher return or risk diversification’.⁷

Although the definitions of direct investment and indirect investment are commonly accepted, it is quite difficult to distinguish FDI from indirect investment because of the ambiguous terms used in the definition of FDI.

According to Kindleberger and others,

FDI is determined essentially by advantages that allow a firm to operate a subsidiary abroad more profitably than local competitors. These advantages may be classified in two broad categories: superior ‘knowledge’ and economies of scale. The term ‘knowledge’ includes production technologies skills, industrial organisation, knowledge of product, and factor markets. … Superior knowledge as such, however, is not enough to justify direct investment: the latter must also provide to the firm the highest return among all alternative ways of exploiting the superior knowledge in the foreign market. These alternatives are, essentially, (a) exporting products that embody the knowledge; (b) selling the knowledge to local producers in the foreign market; and (c) producing abroad (through direct investment) products that embody the knowledge. … Besides superior knowledge, a determinant of direct investment may be the opportunity of achieving economies of scale. Economies of scale may be internal or external to the firm: the former normally lead to horizontal investment, and the latter to vertical investment. Foreign investment in vertically related stages of production is common mainly in industries producing and processing minerals and other raw materials. The main advantage of direct investment here consists in reducing the costs and uncertainties that exist when subsequent stages of production are handled by different producers by coordinating decisions at various stages within one firm.⁸

Another survey by the IMF in 1977 described FDI as ‘an investment which is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an active voice in the management of the enterprise’.⁹

Most existing theories of FDI were developed on the basis of FDI from the developed countries to the developing countries. However, there has recently been much FDI from the developing countries to the developed countries. Moreover, mutual FDI between the developed countries, to take advantage of the managerial skills of MNEs, is nowadays commonplace.

Agarwal gives an overview on how the theories of FDI have developed since the 1930s:

FDI did not enter the domain of the writings of the classical economists. They were mainly concerned with the causes of trade between nations. The resulting theory of comparative costs assumed that factors of production like capital did not move internationally …

The inter-war period after the economic crisis of 1931 was marked by exchange controls, international financial crisis and the loss of mutual political confidence by banks in the countries leading almost to a cessation of international capital movements (UN, 1949). As Nurkse (1966, p.121)¹⁰ puts it, by the time Ohlin’s book (International Economic Reconstruction) came in 1933, the classical assumption of international immobility of productive factors had become a reality. Then came the Keynesian revolution, concerning economist’s attention on the ‘short run’ rather than on the ‘long run’ with which FDI are really associated.

The immediate post-World War II period, no doubt, experienced an acceleration of international transfers of capital, but they were primarily composed of portfolio lending and governmental aid coming mostly from the America for the reconstruction of Europe. It was in the fifties and sixties that FDI registered an enormous growth, which attracted the interest of economists in research on the causes of these investments.¹¹

Economists started to take an interest in the causes of direct investment and to develop various theories of FDI in the early 1960s. Thus the following theories will be reviewed in this chapter: the Kojima-Ozawa theory (1978, 1979), the Dunning’s Eclectic Theory (1977), the Currency Area Theory of Aliber (1970), and the Internalisation Theory of Buckley and Casson (1976).

The Kojima-Ozawa Theory

Kiyoshi Kojima and Terutomo Ozawa and other Japanese economists were strongly opposed to existing theories, which were largely derived from the US experience, and were in their view inadequate in explaining the pattern of Japanese FDI. In order to explain the Japanese model of FDI, Kojima attempted to identify the characteristics of two different types of FDI: trade-oriented foreign investment which was exemplified by the Japanese model and antitrade-oriented foreign investment exemplified by the US. The Kojima theory was quite different from that of conventional theory such as the Eclectic theory, the Currency Area theory and the Internalisation theory. According to Giddy and Young,...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface and Acknowledgements
• List of Abbreviations
• 1 Introduction
• 2 Japanese Industrial Policy and Foreign Direct Investment in Europe
• 3 EU-Japanese Economic Relations and Car Manufacturing in Europe
• 4 A Comparative Analysis of Industrial Policy and Inward Investment in Four European Countries
• 5 Car Manufacturing in the UK, 1945–77
• 6 Government, Industrial Decline and Japanese Involvement in the UK Domestic Car Industry
• 7 Nissan in the UK: A Case Study in the Politics of FDI Decision-making and Regional Economic Development
• 8 What is to be Done?
• Epilogue
• Bibliography