Jean-François Hennart and Georgine M. Kryda
Why do traders invest in manufacturing? In this chapter we argue that the manufacturing investments of traders result from their efforts to secure the custom of manufacturers. As markets mature and information diffuses, trading companies risk being bypassed by their customers. One defence is to take an equity stake in them to guarantee their trading rights. Because the goal of these investments is to tie customers, not to exploit advantages, such stakes are likely to be minority ones.
A second defence for trading companies faced with the decreasing value of their contribution as industries mature is to orchestrate the development of new value chains whose trade they will handle. The superior intelligence of trading companies gives them a comparative advantage in this task. Their broader viewpoint and their ability to structure the whole chain reduce the risk they face in financing new businesses. Setting up the chain will lead them to invest strategically in selected stages of the chain. All of these investments will serve to support trading.
As markets in these value chains mature, trading companies will sell their minority stakes to their manufacturing partners, either because they are in danger of losing the trade of their affiliates, or because they can cash in on their investment while still safeguarding their trading rights. The resulting pattern of trading company investments in manufacturing should be one of short-lived minority investments that are eventually sold back to their majority joint venture partners.
This chapter checks this story against the pattern of stakes taken by Japanese trading companies in all manufacturing affiliates that were active in the United States in 1980. We find that, compared to the stakes taken by non-trading Japanese investors, trading companies had a preference for minority stakes. The manufacturing stakes of Japanese trading companies were also shorter lived and more likely to be sold to their majority partners than was the case for non-trading investors.
We start this chapter by considering the fundamental logic of trading companies, and how this logic leads them to invest in manufacturing. The second section describes the investments made by 1980 by Japanese trading companies in US manufacturing subsidiaries and finds support for our