Foreign direct investment in japan and the united states: A comparative analysis

Abstract

In 1970, the stock of foreign direct investment (FDI) in the U.S. ($65.5 bn) was considerably less than that in Japan in 1990 ($149.0 bn). (Obviously in real terms, the difference is much less.) Yet, at that time, no one asked the question, “Why is FDI in the U.S. so low?” as they do now of FDI in Japan. Since 1970, the United States has become the leading recipient on inbound FDI, and the ratio of her outward / inward direct investment stock has fallen from 4.92 (in 1973) to 1.05 (in 1990). This paper will speculate on whether Japan will follow the United States's investment path in the 1990s. In 1970, the United States was about to lose her economic hegemony, and one result was a fall both in the competitive advantages of her firms and a devaluation of the U.S. dollar. Both factors, together with the growth of strategic asset—acquiring FDI in the 1980s, led to more inbound FDI. Will these same events occur in Japan? Will Japanese firms—particularly in FDI-intensive sectors—lose some of their cutting edge in competitiveness? Will the yen weaken? Will there be an increase in strategic asset-seeking FDI in Japan? Or are there some peculiarly Japanese factors which will limit both the ability and willingness of foreign firms to invest in Japan, and instead, insofar as they will penetrate the Japanese market at all, they will do so by exports and by nonequity collaborative agreements, rather than by FDI. This paper will argue (with supporting evidence) that while it is likely there will be a substantial increase in FDI in Japan in the latter 1990s, the rate of increase is unlikely to be as great as that of FDI in the United States in the 1970s and 1980s.