Technical change in a bubble economy: Japanese manufacturing firms in the 1990s

An important economic policy issue is to ascertain when and if technical change (TC) is driving measured growth in productivity. Was this the case for Japan during the late 1980s when a massive financial bubble was being formed? This paper addresses this question, after first further developing methods needed for this purpose. The movement of firms’ TC is of particular policy interest to Japan whose economy has been suffering from a prolonged recession for more than a decade since the burst of the bubble in 1990. In the period of time immediately prior to the burst of the bubble, our estimation results show a significant drop in technical progress. What we believe these results reflect is that Japanese manufacturing firms made excessive investments in production inputs in the years when the bubble was being formed. This excessive investment in inputs did not contribute positively to TC and hence the measured productivity and economic growth of the bubble period in the late 1980s was unsustainable.     

Patterns and strategies of Foreign Direct Investment: the case of Japanese firms

This paper is to study globalization motives and strategies of Japanese manufacturing industries by analyzing the causes and patterns of foreign direct investment (FDI) of Japanese manufacturing firms. We use regression analysis to determine internally driving-out factors and externally-inducing factors. Japanese FDI strategy has gone through three different stages; from natural resource-seeking investment in the 1950s and 1960s to market-expansion investment in the 1970s and 1980s and to a combination of cost-reducing (low-cost labor-seeking) investment and market-penetrating investment in the 1990s. Our findings show that Japanese FDI in Asia and other developing countries tends to be in labor-intensive sectors where Japanese firms are losing their comparative advantages at home. The main motive for FDI into these regions is low-cost resource seeking. On the other hand, Japanese FDI in the US and Europe tends to be knowledge-intensive sectors where Japanese firms attempt to internalize transaction and information costs by globalizing its production. The main motive for FDI into these regions is market-seeking.     

Japanese Foreign Investment and the “Land Bubble”*

The aim of this paper is to examine the determinants of Japanese net long-term capital flows in the 1980s and early 1990s. A basic framework is proposed which takes account of Japan's so-called land bubble by incorporating the interaction of land with the banking sector in a macroeconomic portfolio model of capital flows. Empirical evidence is supportive of the hypothesis that land-related bank loans have been a major determinant of Japanese net long-term foreign investment. the hypothesis of substitution between direct and indirect foreign investment also receives support, and areas of future research are mentioned.     

What is Driving the Manufacturing FDI Wave in Asia?

This paper analyzes the dynamic pattern of Japanese manufacturing foreign direct investment (FDI) in Asia. Japanese electronics firms shifted manufacturing operations abroad in the 1990s. We focus on the timing of the surge in FDI: why in this period did Japanese electronics firms increase manufacturing FDI in Asia? The empirical findings indicate that, in addition to productivity improvements, learning experiences from FDI were the primary determinants of the FDI wave. Firms' own past FDI experiences, the experiences of other firms (spillovers), and the presence of own distribution services encourage manufacturing FDI.     

DECISION TO INVEST ABROAD: THE CASE OF SOUTH KOREAN MULTINATIONALS

Recent firm‐based empirical studies examine whether firms serving foreign markets either through exports or foreign direct investment (FDI) are more efficient than their domestically‐oriented counterparts. The purpose of the present paper is to study the link between performance of multinational firms and the choice to participate in foreign investment. In so doing, this paper explicitly differentiates exports and FDI decisions. Using firm‐level data for large South Korean manufacturing firms, I provide evidence that the premium for FDI is huge compared to exports, and that good firms undertake FDI. Studying performance across firms, I find that firms that engage in FDI outperform other firms in the future in all possible dimensions; they are larger, pay higher wages, and are also more productive. These results are consistent with the hypothesis that good firms self‐select to engage in FDI. I also find clear evidence that past FDI experience has a strong positive effect on the probability of current investment abroad. This implies that the sunk cost involved in FDI plays a role in current decisions to undertake FDI.     

An alternative approach to the monitoring of technological diffusion via foreign direct investment: evidence from the Greek manufacturing sector

The existing studies of foreign direct investment and the corresponding technological diffusion process that they generate, focus either on specific parameters of the production process in isolation, or they combine certain parameters to construct indices that are not consistent across studies. The present analysis proposes an alternative approach that captures the entire production process and multinational firms are viewed as the platform that transfers more advanced technologies to the host countries. As multinational firms are able to utilise more efficiently the available production process, an efficiency gap ensues between the domestically owned firms of a country and the multinational firms that operate in it. We capture and provide a measure and a monitoring mechanism of the technological diffusion process via foreign direct investment through the evolution of the efficiency gap between the two groups of firms whilst controlling for other variables that might contribute to such a gap. We apply our approach to the manufacturing sector of the Greek economy that experiences a consistent presence of foreign direct investment inflows over the time period 2001–2007.     

Overseas Investment and Firm Exports

A firm can serve overseas customers by exporting or by producing in the foreign market. Thus, ceteris paribus , one might expect increases in overseas investment to displace exports. However, most empirical work has found a positive relation between the two variables. The authors use a panel dataset containing 25 years' of data on 932 Japanese manufacturing firms to investigate the effect direct investment abroad has on exports. For the full sample of firms, complementarity is found. The relationship, however, varies across firms. Those that are unlikely to ship intermediates to overseas production affiliates exhibit substitution.     

Characterising Japanese Direct Investment in Central and Eastern Europe: A Firm Level Investigation of Stylised Facts and Investment Characteristics

This article analyses the activities of Japanese investors in Central and Eastern Europe since the beginning of the region's transition. The use of firm level data on Japanese foreign direct investment (FDI) in the region allows us to focus on the industry, location and timing of affiliate establishment at a level of detail previously unexamined. This enables us to compare Japanese investment with overall regional inward investment as well as investigate country specialisation patterns within the region. We also characterise the type of investing parent, and determine how investments in CEE fit into the European-wide investment patterns for these firms. Finally, we investigate the entry mode choices of investing firms, finding a shift from minority-owned joint ventures and limited participation in the region in favour of wholly-owned subsidiaries and larger involvement in the region.     

ASSESSING THE IMPACT OF CHINA'S WTO ACCESSION ON INVESTMENT

Abstract.  After a boom in foreign direct investment (FDI) in China in the early 1990s, FDI slowed in the late 1990s. More recently, with China's accession to the World Trade Organization (WTO) a reality, FDI has once again picked up. This paper explores the linkage between WTO accession and investment in China. We find that investment and capital stocks increase substantially. Moreover, foreign ownership of Chinese assets doubles by 2020. Central to this increase is the expected catch-up in the productivity of the services sectors driven by reforms. These estimates are far larger than those predicted by earlier studies, which ignored the reforms affecting Chinese services sectors, and abstracted from international capital mobility.     

The exceptional performance of Chinese outward direct investment firms

This paper finds that Chinese manufacturing firms that engage in outward foreign direct investment (ODI) have better economic performance than non-ODI manufacturing firms. Overall, ODI firms are more productive and have higher profitability than non-ODI firms. The sector analysis shows that the exceptional performance is significant for labor-intensive industries. Finally, the ODI activity can raise the productivity of other firms in an industry. The larger the ODI within an industry, the higher the productivity of all firms in that industry. The paper suggests that domestic firms set up their firm’s global strategy and reallocate the firm’s resources according to the changing investment environment, taking advantages of profit opportunities outside of domestic markets and invest abroad to get new markets and new technology.     

The Confidence Trap: Japan’s Past Bubble and China’s Recent Bubble

This paper explores the origin of China’s recent credit and asset boom by comparing it with the Japanese bubble economy in the late 1980s by focusing on the asymmetric pattern of financial liberalisation under high savings. It argues that (1) both cases show a ‘confidence trap’ in that policy-makers of the government shared a complacent mindset that they can achieve the optimal mix of market liberalisation and repression, while believing that their political economic system is fundamentally different from others; (2) Such complacent confidence precipitated the supply-side driven financial reforms, in which both governments tried to diversify the credit channels of bank deposits by promoting non-bank financial intermediaries; (3) Exogenous shocks played a pivotal role in enforcing the government to take aggressive monetary easing and fiscal expansionary measures. But the Chinese case is different from the Japanese case in that (1) local politics has promoted a ‘too secure to fail’ situation in which rent-seeking activities are difficult to be detected, thus aggravating the hidden systemic risks; (2) China needs to liberalise its capital account with the more strengthened macroprudential regulatory governance, as the global foreign exchange markets have drastically changed from the period of the 1980s.     

The potential impact of China–US BIT on China’s manufacturing sectors

This article finds that the overall effect of the foreign direct investment (FDI) and thereby the China–US bilateral investment treaties (BIT) on Chinese manufacturing sector is positive, which raises the productivity and profitability of the firms, using various econometric models and other evidence. The manufacturing sector as a whole has already opened up to the world economy and needs to continue this process. The industries in the manufacturing sector do not need to be protected, except for in limited fields related to national security, scarce natural resources and well-defined strategic sectors. Gradual lifting of the protection may be needed in the short-run for a small number of vulnerable sectors. A moderate relaxing of the current restrictions will increase FDI in manufacturing from all countries by 4–8% under different assumptions. This effect will be small when only considering FDI from the USA. Domestic firms need to update their technology, reduce costs and learn management skills from their foreign competitors, while using the national treatment terms in BIT to enter the fields that are not open to domestic firms under current regulations. Domestic firms also need to set up firm-level global strategies and reallocate firms’ resources according to the changing investment environment, taking advantage of profit opportunities outside the domestic markets.     

Foreign direct investment in services and manufacturing productivity: Evidence for Chile

This paper examines the impact of substantial foreign direct investment (FDI) inflows in producer service sectors on the total factor productivity (TFP) of Chilean manufacturing firms. Positive effects are obtained in firm fixed effects instrumental variables regressions and show that forward linkages from FDI in services explain 7% of the observed increase in Chile's manufacturing users' TFP. Our findings also suggest that service FDI fosters innovation activities in manufacturing. Moreover, we show that service FDI offers opportunities for laggard firms to catch up with industry leaders.     

Industrial reform in Jamaica in the 1980s: an export promotion strategy

Jamaica has shifted gradually from an import substitution strategy of industrialization in the 1960s and early 1970s to a much more export-orientated approach. Policy in the 1980s has been based around changes to the real exchange rate, foreign trade liberalization, fiscal incentives to new investment, particularly foreign investment, and selective support through various subsidies. Performance has been mixed, however, with only the garment sub-sector of manufacturing achieving significant export growth. Furthermore, the heavy involvement of transnational firms in the new industrial investment raises questions about the long-run viability of the form of export promotion currently being pursued     

EU accession and foreign-owned firms in Bulgaria

Bulgaria signed the European Union accession treaty in 2005. Accession caused an increase in the volume of inward foreign direct investment flows (IFDI). We analyse World Bank BEEPS firm-level data for 2007 to understand the characteristics and performance of foreign firms in Bulgaria. Regression analysis reveals that foreign firms are larger, have lower capital-to-labour ratios, are more likely to export and are more likely to locate in Sofia. However, foreign firms have had limited success in Bulgaria. They do not exhibit higher sales growth and, in manufacturing, carried out lower capital investment in machinery than domestic firms. The numbers of visits from tax officials is the same for domestic and foreign firms in manufacturing, and lower for foreign firms in the service sector. However, firms with higher exports-to-sales ratios and higher absolute sales were subjected to a higher number of visits from tax officials. These findings suggest that a range of institutional challenges remain for foreign firms in Bulgaria.     

The Motives for Joint Ventures: A Transaction Costs Analysis of Japanese MNES in the UK

What factors determine the choice of Japanese companies between part and full ownership of their UK subsidiaries? In seeking to answer this question, this study employs data of Japanese foreign direct investment (FDI), through joint ventures, in the UK, not previously used. The main findings of the econometric work presented is that transaction costs are the principal consideration when Japanese firms choose between part and full ownership of their UK subsidiaries{softhyphen}. Variables that have featured prominently in studies relating to either US parents or for subsidiaries in the US do not appear to play a significant role. The European Union (EU) market appears to be the target of Japanese foreign direct investment in the UK.     

Foreign direct investment and its impact on real wages: evidence from Turkish micro-level data

This paper analyzes the role of foreign direct investment (FDI) on wages, using Turkish firm-level data from 2003 to 2010, a period which coincides with significant FDI inflows both in manufacturing and service sector firms in the region. We explore the possibility of increased foreign presence translating into shifts in either labor demand or supply curves thereby resulting in changing the total wage bill or wage per worker in the host country. To empirically test this relationship we employ a dynamic specification of the wage equation. After addressing endogeneity concerns, the results reveal that foreign presence measured in terms of intra- and inter-sectoral linkages is related to higher wage bills in the host economy, hence strengthening the argument for attracting greater foreign investment to enhance labor welfare.     

Multinationals, Technology Upgrading, and Wages in Urban and Rural Indonesia

The author examines whether foreign direct investment has an effect on regional disparities in a developing country. For this purpose, the author compares the magnitude of productivity and wage spillovers derived from foreign presence to local firms in different locations. Using plant-level panel data for Indonesian manufacturing in 1990–95, the study finds supporting evidence for the hypothesis that the effects of foreign presence on the level and growth of productivity and wages in locally owned plants are greater in regions where multinational corporation affiliates tend to have a higher concentration as compared to other regions in the same province. The findings indicate that spillovers occur locally and diffuse to neighboring regions in part, and thus that the concentration of foreign direct investment in a certain region imparts a greater positive externality on one hand, and negatively affects regional disparities on the other.     

Australia’s foreign investment review board and the regulation of Chinese investment

Foreign investment has played an important role in the Australian economy since the country’s foundation. Part of the latest wave of foreign direct investment (FDI) in Australia has been by Chinese firms, and largely by state-owned enterprises with connections to the Chinese state. Despite the value it has generated for the Australian economy, Chinese FDI has been controversial and has exposed some of the shortcomings in Australia’s foreign investment review process. This article evaluates Australia’s foreign investment regime, and pays particular attention to the Foreign Investment Review Board (FIRB). Questions are asked about how closely the FIRB’s role and processes resemble regulatory best practice. The article also considers whether greater fidelity by the FIRB to principles of good governance could better serve Australia’s broad policy interests and reduce Chinese perceptions of an opaque and discriminatory foreign investment regime.     

The impact of foreign direct investment on UK manufacturing: is there a profit squeeze in domestic firms?

This paper examines the extent to which foreign direct investment (FDI) in selected UK manufacturing sectors has an impact on reported profits in domestic firms. Foreign manufacturing firms are characterized by relatively high labour productivity and low wage shares. Entry by foreign firms not only impacts on domestic market shares, but also on domestic cost conditions. As a result, profitability in the indigenous sector may be reduced. There are a number of policy implications of this analysis which are explored.