The Trojan Horses: Japanese and U.S. Presence in Europe
Beer, Francisca M., Cory, Suzanne N., Review of Business
Currently, it is almost impossible to open a newspaper without encountering an item referring to the European Community (EC). This is hardly surprising. 1992 and the European Monetary Union gives the twelve countries(1) constituting the EC immense financial and economic power from which Japanese and American manufacturers should consider denial of access perilous.
Japanese and U.S. foreign direct investment (FDI) in the EC is the subject of this research. More specifically, we studied a number of European subsidiaries controlled by the largest Japanese and U.S. industrial corporations. The Japanese companies were selected from Fortune's 1990 list of the 150 largest Asian companies in 1989. The U.S. companies were drawn from Fortune's 1990 list of the 500 largest U.S. companies. We then achieved two ends: we assessed the actual position of the largest Japanese and American companies in the EC, and we compared the approaches used by these firms to enter the EC.
The rest of this paper is organized into four sections. Section one presents a brief overview of the theory of FDI and discusses Japanese and U.S. FDI strategy. Section two discusses the samples and the methodology used. Section three presents the results obtained. Section four summarizes our findings.
Japanese and American Foreign Strategy
It was approximately twenty years ago that Hymer (1970) wrote his seminal article on FDI and multinational enterprises (MNEs). Since then, the literature has expanded substantially.
One important explanation for the presence of FDI and MNEs is based on the theory of industrial organization. According to Caves (1971), MNEs are oligopolists having intangible capital in the form of trademarks, patents, special skills, and/or other organizational abilities. When this intangible capital is inseparable from the firm, corporations may attempt to acquire control directly via the establishment of foreign affiliates. The firm advantages must also be monopolistically held. According to Giddy (1987), without this type of market imperfection FDI would not occur, as national firms would perform better by staying in their home market. Consequently, the presence of FDI and MNEs is the result of the existence of market imperfections.
These market imperfections can be related to product and factor markets or to financial markets. They also include government regulations and control (tariffs and capital control) that impose barriers to free trade. Yet market failure, i.e. market imperfection, is not sufficient in justifying FDI. Local firms have inherent cost advantages over foreign firms, so accordingly, MNEs can survive abroad only if their advantages cannot be purchased or duplicated by local competitors.
Multinational enterprises have different strategies to protect themselves from competitive threats: some rely on product innovation, others on product differentiation. Still others use cartels and collusion to protect themselves. Japanese and U.S. companies' foreign strategy has traditionally been quite different, perhaps as different as the two countries. However, these differences have tended to diminish since the 1970s.
Since the mid-1930s, U.S. foreign economic policy has generally been to perpetuate freedom of FDI. After World War II, U.S. companies were strongly encouraged to aid in European reconstruction. This encouragement continued throughout the 1950s as a method of reducing the "dollar shortage" of foreign countries. Accordingly, the U.S. accounted for much of the explosion of FDI in the world. The growth rate of U.S. FDI worldwide averaged slightly less than 10 percent annually during the 20-year period of 1960 to 1981. According to Weekly and Aggarwal (1987), this rate of increase was greater than the average annual growth of investment in the U.S. economy by American firms for the same time period. Further, since 1950, FDI has become the primary form of international business activity for many U. …