Trade barriers and japanese foreign direct investment in the colour television industry

MANAGERIAL AND DECISION ECONOMICS, VOL. 8, 285-293 ( 1 987)

Trade Barriers and Japanese Foreign Direct Investment in Television Industry

the Colour

F. N. BURTON and F. H. SAELENS Department of Management Sciences, University of Manchester Institute of Science and Technology, Manchester, UK

This paper examines the penetration by Japanese firms of the US and West European colour television markets, initially by exports and then, predominantly, by local production. It is demonstrated that Japanese foreign direct investment was basically a defensive response to trade barriers erected in these markets to re-locate Japanese plant from Japan and other Asian locations. A strategic oligopolistic imitative behaviour, rather than an orchestrated strategy, is identified, and a comparison is made of the effect of trade barriers in each region on industry structure and plant size.

INTRODUCTION

In comparison with Western firms, Japanese manufacturers have shown a marked reluctance to service their overseas markets other than by exports from home-based production. One exception has been the colour television industry (CTV), which led the rapid and deep penetration of US and West European consumer electronics markets by Japanese firms in the 1970s, initially through exports and then by a multin- ational sourcing strategy. The aims of this paper are to demonstrate:

(1) That Japanese foreign direct investment (fdi) in these markets has largely been a defensive, second- best response to threats and the realization of trade barriers, particularly orderly marketing agreements;

(2) That the location of plant capacity in Pacific Basin countries to escape domestic cost pressures was the preferred, optimum strategy; and

(3) To highlight major distortions to industrial structure and plant size created by protectionism in the US and European CTV industries.

THE GROWTH OF THE ELECTRONICS INDUSTRY

The stimulus to recovery of the Japanese electronics industry after World War I1 came when the occupation powers allowed the production of radios to recom- mence and the N H K (Nihon H6s6 Kyokai), Japan’s official broadcasting station, to begin television trans-

missions in 1953 (Baranson, 1981). The rapid growth in personal incomes, the ready acceptance of Japanese consumer electronics and government stimulation of the industry encouraged a growth in the television industry from the mide-1950s to the mid-1970s at a higher pace than manufacturing in general.

The growth of the industry was strongly influenced by government legislation, particularly:

(1 ) Three successive ‘provisional measure’ laws covec- ing, respectively, the periods 1957-7 1, 197 1-8 and 1978 to the present, which specified items in the electronics industry to qualify for support at the discretion of the Ministry of International Trade and Industry (MITI);

(2) The restriction of imports of Television Sets in November 1953, shortly after NHK began trans- missions, to protect nascent local producers and allow the television industry to lead the growth and development of a sector which was confined to consumer products because Japan remained constitutionally barred from establishing a mili- tary capability (Kishimoto, 1982);

(3) The creation in 1957 of the Japan Metal and Machinery Institute to devise comprehensive quality standards and testing procedures for all exportables. The Institute’s requirements and seal of approval began to dispel the image of poor quality which had come to be associated with Japanese products (Porter, 1983). Other bureaucratic interventions have been less success- ful, such as efforts by MITI in 1977 to discourage CTV plant locations in the USA. In recent years consumer electronics has received little official support.

0 143-657018 7104028 5-09 $05.00 ii3 1987 by John Wiley & Sons, Ltd.

286 F. N. BURTON AND F. H. SAELENS

The flow of Japanese fdi in consumer electronics gradually increased throughout the 1970s, but in relation to domestic investment there has been a steady decline since 1976 and, on aggregate, the industry has become more export- and less fdi-oriented. Over 80% of fdi in the early 1970s was concentrated in Asia. Plant located in Asian Newly Industrialized Countries (NICs). particularly Taiwan, South Korea and Sin- gapore, produced for local and Third World markets including Japan, whereas local production was substituted for imports in slower-growth countries such as Indonesia, Malaysia and Thailand and in Latin Amer- ica (Mori, 1976). The NIC locations (which already hosted subsidiaries of American multinationals), producing mostly black and white television sets, were chosen to counter the decline in competitiveness of Japan relative to the Far East as a consequence of the revaluation of the yen during 1971-3 and increasing labour costs. Throughout the 1970s the regional distribution of Japanese overseas subsidiary sales shifted markedly to the USA, which moved from the lowest to the highest ranked recipient of fdi; and Europe, too, advanced. This change can be attributed to a rapid build-up of manufacturing capacity for CTVs in these regions.

The response of Japanese CTV manufacturers to macroeconomic pressures on domestic costs differed markedly from producers ofblack and white sets. By the early 1970s the product technology of the latter was widely diffused, and domestic cost reductions by techincal means were not feasible, and Japanese exports, which had dominated the US and European markets in the 1960s, had begun to lose market share to other Far East producers. Thus, Japanese firms re- located to Asian NICs, a strategy which was matched by US and European multinationals.

Colour television, in contrast, offered considerable scope for technical differentiation. In 1967 MITI sponsored a multi-company project on the use of transistors in colour television, and by 1969 Hitachi had put the first all-transistor colour set on the market. A further MITI-sponsored project in 1971 led to the replacement of transistors with integrated circuits. These technological changes led to a significant reduction in both power consumption and the number of CTV components, to the adoption of automatic inser- tion machinery and a severe reduction in employment; but output rose from 8.4 million sets in 1972 to 10.5 million in 1976. Drastic reductions in labour costs and enhanced product reliability further strengthened the competitiveness of Japanese exports. A major sub- sequent development was the incorporation of semiconductor elements (in particular, microprocessors) into new models to allow competitors a limited degree of product differentiation (Forester, 1980).

JAPANESE FDI IN THE USA

In 1970, against a background of rapid import penetration by Japanese firms of the US colour television

market, the US Treasury Department ruled that dumping was taking place and imposed a 97; bond requirement against possible import duties. The following year Japan exported 1.2 million CTVs into the US market in which total sales were 7.3 million sets. The US Tariff Commission responded with a ruling that dumping was injurious to US manufacturers and initiated a Treasury assessment of the level of duties to be paid (Porter, 1983). By the time the first Japanese entrant, Sony, began to produce in the USA in 1972 Japanese firms had acquired a 16% share of the US market and the number ofdomestic manufacturers had contracted from sixty-seven in 1955 to less than twenty.

The export strategy of Japanese firms had been easy to execute. The market entry offered by US mass retailers was conducive to cost-based competitive pricing, tariff duties were modest, there were few technical barriers since Japan and the USA broadcast under the same standard, and the first Japanese all- transistorised colour set, introduced to the USA in 1970, was ahead of all but one US producer.

In 1970 Japanese manufacturers produced CTVs only in Japan, where they enjoyed locational advantages such as cheap labour, an extensive network of component suppliers and joint access to a technology developed and diffused under the aegis of MITI. Locational disadvantages included the large geographical distances to the major markets of North America and Europe, foreign exchange rate fluctuations and trade barriers. From 1971 the balance of forces favour- ing exports over fdi changed rapidly. Wages rose sharply during 1971-3, the yen was revalued against the US dollar and American firms initiated legal proceedings to contain import penetration. The combined effect of these forces, as shown in Table 1, significantly reduced the market share of Japanese firms. However, a stable exchange rate in the mid- 1970s and continued product and process innovation enabled Japan to maintain a strong domestic manufacturing base and increase its share of the US market from 15.6:; in 1974 to 47.3% in 1976. This rapid import penetration, nevertheless, was heavily distorted by continuous threats, to materialize in 1977, of US quotas on imports. Japanese firms sought to maximize their exports (thereby speeding up the imposition of trade barriers) in the expectation that individual quotas would be made proportional to market share.

Some Japanese firms began to produce in the USA before quotas were imposed, but local production remained low relative to imports. During 1977 and 1978 the yen/dollar exchange rate again fell markedly. This time there could be no technological response to Japan’s worsening international competitiveness. Under increasing cost pressures to relocate production, the USA influenced the locational choice open to Japanese firms by the threat that unimpeded access to its market would be contingent on local production. This was given substance by an orderly marketing agreement (OMA) which restricted imports of Japa- nese CTVs to 1.75 million sets per year for the period July 1977-June 1980. Several Japanese firms respon-

COLOUR TELEVISION INDUSTRY 287

~ ~~~

Table 1. The Japanese Presence in the US Colour Television Market Japanese Local market' Start of

Real wage' Exchangeb rate market sourcing manufacturing Year index ( Y /US$) share (%) ratio (%) USA Entry moded

1970 100.0 375.6 16.0 0.0 1971 107.4 31 4.8 16.4 0.0 1972 11 8.8 302.0 14.3 0.0 Sony Greenfield 1973 131.4 280.0 11.3 10.6 1974 133.5 300.1 15.6 20.0 Matsushita Acquisition 1975 132.0 305.2 27.1 32.2 1976 136.0 292.8 47.3 20.6 Sanyo Acquisition 1977 137.8 240.0 35.1 35.2 Toshiba Greenfield 1978 138.9 194.6 31.5 53.5 Mitsubishi Greenfield 1979 144.1 239.7 28.9 76.7 Hitachi Greenfield

Sharp Greenfield 1980 144.1 203.0 34.7 84.9 1981 145.9 21 9.9 43.5 80.0

"Cash earnings by regular workers in Japanese manufacturing industry. bExchange rate at end of year. '(Local production)/(Local production plus imports); production and imports in units. dAll subsidiaries in units. Source: Table compiled by the authors.

6 wg 6 6 5

1974 1975 1976 1977 1978 1979 1980 1981 Dec- 31

Figure 1. Imports and local production of Japanese colour television sets in the USA. ("Including chassis.)

ded by investing in the USA and, as shown in Fig. 1, significantly shifted the balance between imports and local production.

The behaviour of the industry reveals important aspects of Japanese fdi in a mature product market. First, there is a strong negative relation between the yen/dollar exchange rate and the local sourcing ratio during the period 1972-81, when local production in the USA increased rapidly. The linear coefficient of correlation is - 0.82, significant at the 0.5% level in a one-sided test (n = 10). Second, imports quickly fell below the level negotiated in the OMA soon after i t came into force. Although the OMA was partially and temporarily circumvented by Japanese exports from affiliates in Asian NICs, the pattern suggests that some production by Japanese firms in the USA would have taken place, regardless of the OMA, provided the choice of other locations was restricted.

However, various restrictions on the relocation of Japanese productive capacity strongly influenced the level of fdi in the USA. In addition to the OMA,

Japanese producers were under the continuous threat of anti-dumping duties throughout the 1970s. In Taiwan, where some Japanese manufacturing had begun in response to the OMA, Japanese firms were advised to cut exports to the USA in 1978. In South Korea, following the OMA agreement between Japan and the USA, a number ofJapanese joint ventures were established. By the end of 1979, with no domestic market, South Korea had reached a manufacturing capacity of 2 million sets per year, but an OMA limiting South Korea exports to the USA to 300000 sets per year led to the withdrawal of most Japanese firms. During the late 1970s the USA also threatened to initiate an OMA with Singapore, a country which relied on Japanese firms for 20% of its annual output of 2.4 million sets in 1980. By legal and political pressures. therefore, the USA severely curtailed the locational options available to Japanese producers and directed the investment flow towards the USA. Thus, whereas Japanese firms, mainly via exports, held 47.37; of the US market in 1976, by 1981, following decline and recovery, their market share, predominantly served by local production, was 43.5%.

Table 2 shows how quickly local production was built up by the Japanese entrants to the USA to achieve the minimum optimum scale of plant (MOS), estimated to be 500000 sets per year (Commission of the European Communities, 198 1). The process was exacerbated by bunched entries, five plants starting operations in the period 1976-9. By 198 1 four of the ten entrants had reached or exceeded the level of sales required to benefit from scale economies.

Bunched entry is commonly associated with oligopolistic reaction and matching investment strategies to maintain competitive equilibrium. Although there is no direct evidence and it is difficult to isolate oligopolistic imitation from other factors leading to simultaneity, from estimates of concentration


Table 2. US Colour Television Production by Japanese Plants (in thousand sets)

Sony-1 250 275 370 400 450 475 700 750 Matsushita 300 400 460 600 700 750 750 Sanyo 300 600 680 800 1000 Tos h I ba 60 175 360 500 Mitsubishi 60 120 150 220 Hitachi-1 20 120 250 Sharp 100 330 360 JVCb 60 Sony-2 240 Hitachi-2 50

Total 250 575 770 1160 1770 2270 3210 3830

Plants 1974 1975 1976 1977 1978 1979 1980 1981 1982'

'Initial capacity of new plants scheduled to come on-stream in 1982 'Semi-autonomous affiliate of Matsushita. Source Table compiled by the authors

ratios derived from worldwide production of CTVs and domestic Japanese manufacturing (C4 = 0.75 on a global scale (Commission of the Europe Communities, 1981, p. 3); C3 = 0.54, C4 = 0.67 on a domestic scale ( T h e Juprrnrsr Economic Journd , 1984). and from the absence of a dominant market leader, i t seems plausible that the industry is conducive to such behaviour. For a test of oligopolistic imitation, market entry patterns of consumer-oriented firms (defined as those with 80- 100% of sales accounted for by consumer durables) are contrasted with industrial firms (defined as those with less than 4006 of consumer durables' sales). It is assumed that oligopolistic reaction would be less pronounced in consumer-oriented firms, which are more adept at differentiating products. The entry pattern of Japanese firms into the US market was as follows:

Time interoal in Sequencr o j j r s t years between

T y p e o f j r m j d i entry successioe entries Consumer Sony, Matsushita, 2,2,3,3,

Sanyo, Sharp, JVC

Mitsubishi, Hitachi

Industrial Toshiba, 1,1,

The hypothesis is tested using Fisher's exact probability test on the median time interval:

(1) The null hypothesis: There is no difference in the entry interval length between consumer-oriented and industrial firms.

(2) The alternative hypothesis: The entry interval for consumer oriented firms is longer.

The median for both groups combined is 2. The entries for the two consumer-oriented firms on the median have been split. The pattern is revealed as follows:

Consumer Industrial Above median 3 0 Below 1 2

The probability that this or a more extreme distribution would be observed under the null hypothesis is 25";. Thus, there is some support for the alternative hypothesis, although the denser entry pattern for industrial firms may have less to do with imitative behaviour than with their greater senstitivity to cost influences (such as the rapid appreciation of the yen during 1976-8).

The analysis leaves unexplained the order in which entries occurred. The most likely variable to explain entry order is company size, measured here by CTV output (Commission of the European Communities, 1981, p. 3: The ranking in 1979 was; Matsushita. Sony, Toshiba, Hitachi, Sanyo, Sharp, Mitsubishi and JVC). A rank correlation between the size variable and the first year of local production produces a high positive correlation. Thus, the Spearman rank correlation coefficient is 0.81. The null hypothesis of no rank correlation between firm size and year of entry can be rejected for the alternative hypothesis of a positive correlation at the 2.5% level of significance (n = 8).

Not unexpectedly, Japanese fdi had an effect on the structure of US industry and on the exit of firms. During the 1960s the industry had been subject to severe attrition. Japanese import penetration ac- celerated this process, but i t was not the fundamental cause. Eventually industry parameters, such as modest growth in demand, large economies of scale relative to market size, offshore production, and the necessity of high R & D expenditure to facilitate the switch to semiconductor technology would have combined to drive out weaker firms. During the 1970s the process of attrition continued, but in this period the exit of US firms ran parallel to the entry of Japanese firms. The sharp rise in market share held by Japanese firms in the USA from 1979 onwards (see Table l), following their entry en masse during the period 1976-9, suggests a direct link between the bunched entry of foreign oligopolists and exit by local companies. Indigenous firms' share of the market fell from 70% in 1972 to 55.5% in 1979, and the number of leading US firms was reduced from eight to six (Porter, 1983; authors' observations). By the early 1980s US firms were reduced to just three firms competing against seven


Japanese companies and the Dutch firm, Philips. Overall, the number of firms producing locally with a minimum of 17; market share increased substantially from seven in 1972 to thirteen in 1982.

Despite the increase in the number of producers in the US market the C4 concentration ratio remained unchanged throughout the 1970s at 0.55. However, at the beginning of the decade the four largest firms were all American. In 1979 they consisted of two US firms, one Japanese and one Dutch firm, the world’s four largest producers of CTVs. On balance, the effect of Japanese fdi on the competitive structure of the US industry was small but positive. Concentration was largely unaffected, but the increase in the number of firms producing locally and the diversification of ownership by nationality lessened the probability of collusive behaviour.

Theoretically the entries during the period 1976-9 should have been dominated by acquisition because of the urgency implied by oligolistic reaction and the need to escape OMA constraints. In the event, only one of five entries during this period was by this method. The most plausible reasons are the lack of suitable acquisition candidates, the speed with which Japanese firms were able to construct and make operational greenfield operations and their preference for Japanese management and production methods.

JAPANESE FDI IN WESTERN EUROPE

In 1973 import penetration by Japanese firms of Europe and the UK market, which had begun in 1971, was 7% and 26% respectively (Seiberras, 1980). In 1972 the EEC had requested that Japanese suppliers should exercise voluntary self-restraint. This was shortly fol- lowed by an agreement to limit exports to 10% of British demand and by the imposition of quotas by France and Italy. In the mid-1970s the Benelux pressed for export moderation, similar demands were made by West Germany in 1980, and an EEC limit on CTV imports began to be advocated in the face of opposition from Italy and the UK, two countries which favoured bilateral agreements. In 1981 Japan accepted an EEC surveillance system to monitor CTVs and other sensitive imports. A further round of concessions, which included a three-year moderation of Japanese shipment of tubes above 52 cm, was extracted by the EEC in 1983. Thus, from the first import of Japanese CTVs into Europe in 1971 the Japanese quickly faced a growing host of trade restrictions.

Access to European markets was also impeded by technical and licensing barriers. European picture transmission was divided between the French SECAM system (sequential couleur a memoire), developed and promoted under a liberal licensing arrangement, and PAL (phase alternation in line), developed by West Germany and used by the other European nations. The PAL system was produced under licence from the innovator, Telefunken, who refused licences to Japa- nese firms until 1970. Thereafter, Japanese exports to

the European market, where demand centred mainly on large sets, were restricted to screen sizes of 12-16 in until 1975 when 20-in units were permitted.

All sets had to carry the exporter’s brand name, which denied private label sales to mass retailers, the major avenue by which Japanese firms had penetrated the US market. Licences allowed producers within a local PAL market to export only up to 50% of production. From the late 1970s licensing barriers began to disappear with the expiry of PAL licences, and more recently the technical barrier created by competing transmission systems has virtually disap- peared because of advances in microelectronics.

Japanese firms also faced distribution and market segmentation barriers. In the UK, the largest Eu- ropean market for CTVs, over 60% of annual demand was channelled through rental companies, often verti- cally integrated with domestic manufacturers. In West Germany regional distributors impeded direct access to retailers, and retailers in other European markets organised chains to increase bargaining power. Two markets, the UK and West Germany, together accounted for more than two-thirds of West European demand in 1973 and for over 40% in 1983. The remaining markets were, and continue to be, relatively unsaturated. Even at this level of aggregation it can been seen that there are several market segments in West European markets and distinct differences in demand characteristics and accessibility.

In the early 1970s when Japanese penetration of European markets began, in contrast to stagnant demand in Japan and the USA, Europe offered fast- growing markets. Licensing restrictions on the export of large PAL sets, trade restrictions and the depreci- ation of sterling relative to the yen favoured fdi over exports. The choice of location within Europe was favoured by a country with a large domestic demand because of the 5074 restriction on the export of local production. This limited the choice to the UK or West Germany. The UK was preferred because it offered lower labour costs, a relatively weak currency and favourable prospects for exports to the more liberal West German market. Thus, the UK became the major recipient of Japanese CTV investment in Europe, as shown in Table 3. As in the USA, the first Japanese firm to manufacture in Europe was Sony, which set up a factory in Wales in 1974. Until the early 1970s the UK domestic industry had a number of independent suppliers, but by the early 1980s only the largest firm, Thorn-EM1, remained independent of Japanese firms, the rest having entered into collaborative arrange- ments with them.

The import penetration which Japanese firms had achieved up to 1974 and the fdi which increasingly replaced imports from that year were the consequence of aggressive market behaviour made possible because:

(1) Japan had more learning experience than Eu- ropean firms in CTV transmission;

(2) The Japanese industry comprised a small number of firms compared with around fifty European


Table 3. Colour Television thousands sets)

Country Company

UK Sony Matsushita Toshiba Hitachi Mitsubishi Sanyo

UK subtotal:

Production by

Start

1974 1974 1978 1978 1979 1982

Japanese

Estimated 1984 output

175 250” 200 280 100” 120

1125

Plants in Western Europe (in

Entry mode output

Greenfield Greenfield Acquisition Acquisition Acquisition Acquisition

Equity owned

(%)

100 100 30-1 OOb 50-1 00’

100 80d

West Germany Sony 1975 150 Acquisition 100 Spain Sanyo” 1978 165 Acquisition 37 Europe total 1440

’Estimates for 1985 bJoint venture with the Rank Organization until October 1980 “Joint venture with the General Electric Company of the UK until March 1984, subsequently continued as a wholly owned subsidiary dRemainder held by Sanyo-Marubeni (UK) and the Marubeni Corporation Although Mitsubishi and Sanyo both acquired factories previously owned by UK companies they did not acquire the companies “Two joint ventures with the same partner Source Table compiled by the authors

Table 4. International Trade, Domestic Demand and Production of Colour Television Sets in the UK (thousands sets)

Production by Share of imports Japanese

Year production subsidiary subsidiary (%) Imports Japan share (%) Domestic Japanese Japanese from import

1978 1715 31 5 18.4 367 195 53.1 1979 1675 390 23.3 521 203 39.0 1980 1771 530 29.9 473 193 40.8 1981 1951 523 26.8 81 5 236 29.0 1982 21 40 61 5 28.7 984 229 23.3 1983 2365 831 35.1 1424 250 17.6

Export Year Exports to EEC

1978 234 145 1979 243 149 1980 31 2 190 1981 259 171 1982 350 268 1983 293 21 4

Export share of EEC (%)

62.0 61.3 60.9 66.0 76.6 73.0

Domestic’ demand

1848 1953 1932 2507 2774 3496

import penetrationb (%)

Japan Singapore

10.6 1.1 10.4 3.0 10.0 2.9 9.4 4.6 8.3 5.8 7.2 8.7

Comparative advantage‘ (%)

- 7.8 - 16.6 - 9.1 - 28.5 - 29.5 - 51.2

”Domestic demand = Domestlc production + Imports - Exports ’(Imports from Japan)/(Domestic demand) ‘(Exports - Imports)/( Domestic production) Source 1 R LevaEiE (1984) Do mercantilist industrial policies work? A comparison of British and

French TV manufacturing National Westminster Bank Quarterly Review May. p 54 2 Department of Trade, Overseas Trade Statistics of the U K , Her Majesty’s Stationery Office,

1978-83 editions 3 Authors’ observations

producers, some with plant capacity of less than loo00 sets per year; and

(3) The PAL licensor may have synchronized the entry of Japanese firms.

Until Japanese sets entered the market the UK had largely been protected from imports, first, by technical barriers (the UK only adopted the PAL system in 1969) and, second, by UK demand for smaller rather than larger sets, two features which made the UK a difficult market for Continental producers. In contrast, among

European markets, the UK became a primary target for exports from Japan (where domestic demand also centred around smaller sets) which provided the plat- form for the fdi to follow. The preference among Japanese firms for a UK location in Europe gave a leverage to the authorities which found expression in output limits (considered necessary because domestic capacity exceeded domestic demand) and a 70% pro- curement ratio.

Table 4 indicates how the structure of UK domestic demand, production and trade in CTVs has evolved in

COLOUR TELEVISION INDUSTRY 29 1

recent years. Over the period 1978-83 Japanese subsidiaries doubled their share of domestic production to one-third, and Japanese imports as a percentage of total imports reduced from around 53% to 19%. In fact, there is a strong negative correlation between imports from Japan and the share in domestic production of Japanese firms. The linear correlation between the two variables is - 0.84. The null hypothesis of no correlation between local production and import shares can be rejected in favour of the alternative hypothesis at the 2.5% level of significance (n = 6). By 1981 the penetration level of imports had even started to fall below the agreed ceiling of 10%. However, there is also a very strong negative linear correlation ( - 0.98) to be observed between the import shares of Japan and Sin- gapore shortly after several Japanese firms began to produce in Singapore, raising the strong possibility that Japanese imports to the UK were not only substituted by local production but also by offshore supplies from Singapore.

There is also a significant positive correlation between the number of Japanese sets produced in the UK and exports to the EEC from the UK. The linear correlation coefficient between the two variables is 0.70, which supports the (alternative) hypothesis of a positive correlation at the 10% level of significance (n = 6). Nevertheless, if the maximum level of exports allowed under PAL licence regulations had been achieved, aggregate exports for the period 1978-84 would have been 400000 units higher than the actual figure of 1.7 million. Overall, as Table 4 shows, Japa- nese local production had a beneficial effect on the UK balance of trade, but was insufficient to avoid a sharp deterioration in the coefficient of comparative ad vantage.

A COMPARISON OF JAPANESE FDI IN WESTERN EUROPE AND THE USA

Both regions are served by the same parent firms. Table 5 shows the time and order of the first entries into each region. The two firms to invest last in the USA (Sharp and JVC) serve the European market, respectively, through licensing and local sub- contracting. Except for Hitachi, the difference in the timing of entry to each region can be explained by the onset of protectionism in each region.

The order in which investments occurred is positively related to the size of the parent. The Spearman rank correlation coefficient is 0.76. The null hypothesis of no rank correlation between firm size and year of entry can be rejected for the alternative hypothesis of a positive correlation at the 10% level of significance (n = 6). Consumer-oriented firms invested before the industrial firms. The probability that this sequence would be observed if there is no relation between the order in which the firms invested and the group to which they belong is 5%. The industrial groups invested in the USA and the UK at the end of a period of rapid yen appreciation, suggesting that at least for

Table 5. First Manufacturing Entry of Japanese Colour Television Producers in the USA and Western Europe

Western Europe Company USA

Sony 1972 1974 Matsushita 1974 1974 Sanyo 1976 1977 Toshiba 1977 1978 Mitsubishi 1978 1979 Hitachi 1979 1978 Sharp 1979 - JVC 1982 -

Table6. Comparison of the Japanese Presence in West European and US Colour Television Markets

Variable USA (1981) Western Europe (1983)

No. of investors 7 6 No. of subsidiaries 7 9 Predominant entry mode Greenfield Acquisition Predominant ownership Wholly owned Wholly owned Share of market held by 43.5 15.2

Local market sourcing 80.0 57.6

Evolution of market Rapid Gradual

Japanese firms (%)

ratio

share and local market sourcing ratio during past decade

produced in year shown (in millions)

individual subsidiaries (in thousand sets)

No. of sets locally 3.83 1.14

Range of output from 220-1 000 60-280

industrial firms fdi would have occurred regardless of orderly marketing agreements.

In each region the first firms to invest did so some two years after protectionist sentiment took tangible legal or political shape. Protectionism was a consequence of aggressive market behaviour by Japanese exporters, the reasons for which are more readily found in the structure of the industry than in conspiracy theories. Consumer-oriented firms tended to invest earlier than industrial ones because, being less diversified, they are more sensitive to trade restrictions, and an important firms-specific advantage which they have, namely product differentiation, is readily transferred abroad. Industrial firms, more diversified and depend- ent on low production costs, are less able to preserve their firm specific advantages in US and European locations.

Significant differences in the regional behaviour of firms are revealed in Table 6. In both regions there were elements ofcoercion. Legal and political power in the USA forced Japanese firms into local production, but having done so they were allowed to compete freely, except for an obligation to source television tubes locally in response to prohibitive import tariffs.


In Western Europe the major producers lobbied successfully for protectionism. and market power was exercised by the PAL licensor. In Europe there was less freedom to compete. PAL licences limited exports from local plant, in the UK there were restrictions on output and high local content ratios, and throughout Europe the Japanese firms were expected to respect minimum prices. These competitive distortions arose primarily from the small-firm structure of European industry and from market fragmentation, factors which pre- cluded an EEC initiative to rationalize the industry.

The comparisons in Table 6 reflect these and other differences between the US and European environment. The number of investors in Europe is lower, probably because the volume available to potential late entrants was insufficient to justify local production. Conversely, the higher number of subsidiaries in Europe reflects the fact that some national markets are closed unless a local production unit is set up. In the USA, in contrast, two parents set up second plants in 198 1 to meet increased demand and save on transport- ation costs.

In Europe seven of the nine subsidiaries active in 1981 were full or partial acquisitions. In the USA only two of the first seven subsidiaries involved acquisition of existing facilities. Pressure from governments in Europe led Japanese firms to link up with struggling local companies of a kind which had abandoned the more competitive US market. Joint ventures have often been forced on the Japanese parents, who have been requested to team up with usually problem-ridden local partners in an attempt to avoid new capacity and to allow local partners to participate in the commercial success enjoyed by Japanese multinationals. Overall, the evidence suggests a strong preference for wholly- owned operations. In the USA all subsidiaries are wholly owned, whereas in Europe, of five original joint ventures, only two Spanish ones survive, U K ventures having been taken over by the Japanese parent.

A greater freedom to compete in the USA has led to an aggregate Japanese market share three times the European level even with a much higher US local content ratio. However, the most conspicuous difference between Japanese subsidiaries in the two regions is size. By 1983 none of the European operations had even approached the MOS of 500000 sets per year. In contrast, by 1981 four of the seven US plants had done so. Clearly, therefore, the output ceilings in Europe have serious implications for the cost effectiveness of Japanese plant.

CONCLUSIONS ~~ ~~~ ~~

Early fdi in electronics (i.e. radios, tape-recorders, black and white television sets) went to Asia, first, in response to trade barriers, and second, in response to Japan’s worsening competitiveness as a manufacturing base for labour-intensive products. lnvestments of the latter type went primarily to Asian NICs, from where Japanese firms supplied the USA and Europe. Reloc-

ation improved the competitiveness of Japanese firms relative to indigenous firms in Japan’s major export markets and matched the emerging competition from Asian NICs.

In the early 1970s economic forces operating on Japan, such as steep rises in the cost of assembly labour and a rapidly appreciating currency, gradually tilted the balance towards foreign rather than domestic production of CTVs, the actual transition being de- layed by a government-sponsored project to improve productivity. The resulting improvements in product technology and process automation temporarily rest- ored Japan as a cost effective manufacturing location for CTVs, but these were negated by the emergence of trade barriers in the USA and Europe which were the consequence of aggressive Japanese export behaviour. The rapid appreciation of the yen during 1976-8 put further cost pressures on Japanese producers to relocate. In the absence of trade barriers the investment flow would have been to Asian and Latin American NICs rather than the relatively inefficient locations for this type of Japanese fdi in the USA and Europe.

I t is difficult to accept that the initial export aggression of Japanese firms calling forth trade barriers which directed plant capacity to less-preferred locations, was part of an orchestrated strategy. If i t was i t severely eroded the freedom to serve major markets from the lowest-cost locations, a key component of mature product strategy. Either Japanese firms’ behaviour was myopic and served to undermine this important source of competitive strength or, alterna- tively. the industry’s oligopolistic structure, conducive to rivalry, imitative actions and little geographical diversity in the location of production, led to aggressive conduct. Such aggression was not only a feature of import penetration. In the USA it reappeared after most firms had switched to local production when the need to reap economies of scale exacerbated the conduct inherent in the industry.

The emphasis on common factors should not obs- cure differences. Size, diversification and product differentiation all led to variations in foreign investment and other elements of strategy. As Japanese firms escape the confines of the Japanese environment the common element in strategic responses might be expected to yield to diversity, but evidence from the past two decades suggests a very gradual process.

Japanese CTV plants in Europe are considerably smaller than those in the USA. The major reasons- restrictive licences, ceilings on output, high local content ratios and minimum price ‘guidelines’-have distorted the strategy and structure of subsidiaries and induced sub-optimal operations.

Import competition from Japan caused and ac- celerated the reorganization of host area industry. The overall effect has undoubtedly been greater global concentration, but the process of industrial reorganization has still some way to go in Europe. Despite the heavy influence of Japanese fdi on the CTV industry, the evidence is clear that Japanese firms are reluctant foreign investors except in low-cost NICs. In the USA


and Europe, Japanese fdi in CTVs is essentially a response to trade barriers and not to the superiority of Japanese process technology, which, for the most part, is more readily transfered to NIC locations.

As a consequence of its domestic requirements for vast quantities of imported materials and fuels, Japan’s national economic policy will continue to be directed towards the promotion of exports in preference to fdi. Experience in the CTV industry demonstrates that Japan’s policy towards outward fdi is to encourage only those sectors in which Japan is losing its comparative advantage. However, before fdi is supported through fiscal or other incentives, a home-based technological response to restore international competitiveness is likely to be the preferred strategy in support of favourable foreign exchange flows and high levels of employment. Sectors in which comparative advantage is being eroded typically no longer allow for suflicient technological progress. Conversely, little fdi can be anticipated in R&D intensive industries, except in response to trade barriers. This does not imply that firms are prohibited from investing overseas, only that national economic policy does not encourage it. Since smaller, non-establishment firms may be less respons- ive to bureaucratic guidelines, host countries with a desire to attract fdi from Japan may wish to examine the opportunities offered by the newer high-technology firms.

What are the benefits of Japanese fdi in advanced host countries, especially from local production in response to trade barriers? Japanese fdi in these circumstances is a poor substitute for imports from Japan because there occurs an enforced use of relatively expensive local resources and a distortion to trade and exchange rates between Japan and host countries; and as a stimulus to the reorganization of host industries, Japanese exports are sufficient in themselves. An erroneous argument in favour of fdi

over imports from Japan is that Japanese subsidiaries can be made subject to controls, such as local procure- ment ratios, export targets and output limits, to contain the potentially destructive impact on host industries of Japan’s competitiveness. However, controls could equally be applied to Japanese exports, alebeit with less flexibility given the constraints imposed by international treaties. Local production in response to trade barriers also engenders few backward linkages in the host economy. For example, local components are reported too costly or of relatively poor quality, two elements of considerable strategic importance to many Japanese firms. The main benefit is undoubtedly the employment provided by fdi, but employment in Japanese plant located in advanced economies can be expected to remain modest.

One aspect of Japanese fdi requiring more research is its effect on future local and global competition. In the CTV industry in the USA, smaller producers were ultimately displaced by Japanese usubsidiaries, whereas the two largest firms maintained their market share. In Europe a similar trend began to emerge, but this was checked by technical and commercial market fragmentation, protectionist measures and anti-trust authorities who, in contrast with their US counter- parts, approved mergers between local companies with a susbtantial market presence. Competition in the CTV industry currently consists of global Japanese firms and Western rivals with a strong regional bias. What are the strategic advantages inherent in each position? What are the implications for the perfor- mance of global industry? What is the relation between products in which Japanese firms excel and the structure of corresponding European and US markets’? These questions suggest that further research on the international operations of Japanese firms would be most beneficially conducted at the level of the industry rather than at that of the firm.

REFERENCES

J. Baranson (1981). The Japanese Challenge to US Industry, Lexington: Lexington Books, D. C. Heath & Co., p. 53.

Commission of the European Communities (1 981 ). Structure andprospects of the Japanese Colour Television Industry, SEC (81 ) 428, Brussels, March, pp. 3,5.

Electronic Industries’ Association of Japan. Electronic Industries’ in Japan, Tokyo (various editions).

T. Forester (ed.) (1 980). The Microelectronics Revolution, Oxford: Basil Blackwell, p. 133.

K. Kishimoto ( 1 982). Politics in Modern Japan, Tokyo: Japan

T. Mori (ed.) (1 976). Japan’s Overseas Investment, Tokyo:

M. E. Porter (1 983). Cases in Competitive Strategy, New York:

E. Sciberras ( 1 980). Japanese Direct Investment in the UK-

Echo Inc., Tokyo, p. 26.

Institute of Developing Economies, March.

The Free Press, pp. 485.509.51 7.

Appendix B, Tokyo: Technova Inc., p. 6.

Documents

Trade barriers and japanese foreign direct investment in the colour television industry