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Japanese multinational enterprises and their role in technological self-reliance in Asia

Multinational enterprises (MNE) are generally considered to be the most important agents for the international transfer of technology, because they were and are the major creators of new technology, and also because they monopolize the main intellectual properties relating to industrial technology. The principal channels for transfer of technology used by these enterprises are licensing and direct investment. The developing countries, however, often lack the capability to use this manufacturing technology without the transfer of management skills associated with foreign investment. Japan is a rare case of a success story in which a country made effective use of foreign licensed technology without direct foreign investment.

The owner of the industrial technology may choose to invest with a wholly owned subsidiary or a controllable joint venture in which the technology provider holds more than 50 per cent of the voting stock. A choice of technology that is appropriate to receiving countries, the organization of management, the technology licensing fee' and even the sales area for products made by local plants are decided by the headquarters of MNEs. For the directors of any MNE, profit comes before the interests of the local community, technology transfer, and the self-reliance in technology of host countries.

The technology supplied by MNEs and the impact of transfer modes upon host countries' long-term technological growth and development have been criticized by them. United Nations organs such as UNCTAD (United Nations Conference on Trade and Development) have attacked the MNEs' attitude on technology transfer. UNCTAD has proposed an "International Code of Conduct on the Transfer of Technology" aimed at restricting the monopolistic power held by MNEs in the developing countries. The code of conduct aims at obtaining effective assistance for developing countries in the selection, acquisition, and effective use of technologies appropriate to their needs.

However, the focus of technology transfer problems is shifting from coping with the monopolization of technology by MNEs to the development of indigenous technology in developing countries. How to enhance local technology with the help of MNEs is an important question. In the following section, we will analyse the Japanese MNEs' behaviour and their impact on technological development in host countries.

Japan's direct foreign investment in Asia

The direct foreign investment activities of the Japanese enterprises can be divided into the following five stages.

The first period: 1951-1962

During the first half of the 1950s, Japan's foreign investment averaged annually less than $10 million, largely as a result of the limitations imposed by the precarious position of her own foreign exchange reserves. The amount of investment in Asian countries was meagre throughout the 1950s, in comparison with that in the Middle East and Latin America, because of the anti-Japan feeling that still prevailed in Asia. But the reparations paid by the Japanese government to some Asian countries offered Japanese private enterprises an opportunity to resume or to initiate open business activities in those countries (table 8).

Table 8. Value of Japan's direct foreign investment approved by the Japanese government (US$ millions)

Fiscal year Direct foreign investment Cumulative value Growth rate %
1951-61 447 447  
1962 98 545 21.8
1963 126 671 23.1
1964 119 790 17.7
1965 159 949 20.1
1966 227 1,176 23.9
1967 275 1,451 23.4
1968 557 2,008 38.4
1969 665 2,673 33.1
1970 904 3,577 33.8
1971 858 4,435 24.0
1972 2,338 6,773 52.7
1973 3,494 10,267 51.6
1974 2,396 12,663 23.3
1975 3,280 15,943 25.9
1976 3,462 19,405 21.7
1977 2,806 22,211 14.5
1978 4,598 26,809 20.7
1979 4,995 31,804 18.6
1980 4,693 36,497 14.8
1981 8,932 45,429 24.5
1982 7,703 53,132 17.0
1983 8,145 61,277 15.3
1984 10,155 71,432 16.6
1985 12,217 83,649 17.1

Source: Up to 1977: Terutomo Ozawa, Multinationalism: Japanese Style, Princeton, N.J.: Princeton University Press, 1979, p. 12. 1978-1985: MITI, Kaigai toshi tokei souran: dai 2-kai kaigai jigyou katsudou kihon chousa, Tokyo: MITI, 1986.

The second period: 1963-1967

This period coincided with Japan's entry into OECD and the change of her status to an IMF Clause 8 country. During the early 1960s, Taiwan, Thailand, Hong Kong, and Singapore began to emerge as the host countries for Japan's offshore ventures in both commercial and manufacturing operations. The change of development policies in most Asian countries from import substitution to an export-oriented policy offered favourable conditions to Japanese investors. A typical example was the establishment of the Kaohsiung Export Processing Zone in Taiwan in 1966. The amount of direct foreign investment exceeded the $200-million level by 1966. This increase was caused mainly by the growing investment in Asian countries, in particular Taiwan' Hong Kong, Thailand, and Singapore.

The third period: 1968-1971

This period saw the increasing liberalization of direct foreign investment on the basis of the accumulated trade surplus. The largest amount was invested in North America and the second place was now taken by Asia. Japan's normalization of diplomatic relations with the Republic of Korea took place in 1965. Korea opened the Masan Free Export Processing Zone in 1970, and offered very attractive conditions to foreign investors. Thus, Taiwan and the Republic of Korea came to occupy important places in Japanese enterprises' offshore production for export to other countries, especially in textiles and electricals.

The fourth period: 1972-1977

In June 1972, all foreign investment was completely liberalized and this, together with the appreciation of the yen, gave momentum to the phenomenal increase in the amount of investment. Even the Middle East war of October 1973 (Yom Kippur War) did not stop the increased investment flow and only slowed it down temporarily, as shown in table 8. The characteristics of Japan's direct foreign investment in this period were that the investment in advanced countries was mainly for commercial activities while that in Asian countries was mostly for manufacturing.

The fifth period: 1978 onward

The beginning of this period signifies the intensification of the "trade war between Japan and Europe" and "trade friction between Japan and the US." A sharp increase in the value of the yen relative to the dollar began in 1977, and in October 1978 reached the record rate of 176 yen per dollar. These two factors encouraged Japanese enterprises to invest in North America and Europe to circumvent protectionism.

In the 1980s, the pattern of Japanese foreign investment has changed noticeably. The share of investment in resource development and labour-intensive industries has been decreasing, and accordingly the relative importance of developing countries in Japan's total foreign investment has begun to diminish. On the other hand, Japan's investment in advanced countries has been substantially increased, especially in the field of technology-intensive industries such as electronics and transport machinery, in addition to her previous investment in non-manufacturing industries.

The decreasing share of Japan's investment in Asian countries has been caused by the following factors: (a) the problem of debt accumulation in some countries in the third world; (b) the completion of a round of investment in import-substituting industries; (c) the stagnation of the demand for primary products; (d) increasing political instability.

In addition to these, the MITI survey16 lists the following factors, among others, as sources of the difficulties experienced by Japanese investors in Asia: (a) intensification of sales competition; (b) inflation; (c) difficulty in securing labour, both in terms of quantity and quality; (d) restrictions on the employment of foreigners and the obligation to employ local personnel; (e) restrictions on the import of raw materials and parts; (f) localization of equity capital demanded by the host country's government; and (g) restrictions on the mobilization of local capital.

Motivations for direct foreign investment

The MITI survey of Japan's direct foreign investment in 1978 gave information on what motivated Japanese enterprises to invest in foreign countries.

"To secure and expand the market" came first. Then followed: "to diversify and to internationalize business activity," "favourable labour conditions," and so on. The order of priority given to various motivations differed, of course, from region to region, and, even in the same region, from industry to industry. In the case of Asia, the factor of "favourable labour conditions" occupied a prominent position after "to secure and expand the market." This contrasted sharply with the case of the US, where the labour factor had almost no importance.

The labour factor played a more important role in light manufacturing industries such as textiles, electricals, etc., than in other industries. During the 1960s, the labour shortage problem in Japan forced a lot of medium and small-scale enterprises in textile and electrical industries to invest in Asian countries where the wage rate was much lower than in Japan. But this situation seems to have begun to change.

Table 9. Motivation for direct foreign investment in ASEAN (percentages)

Motivation Time of decision Present (1986)
To secure market 30 40
To localize production in the face of host country's import restrictions or ban 14 12
To secure production base as part of global business strategy 13 19
To expand business activities 11 12
To utilize cheap labour 10 7
To take advantage of host country's favourable investment promotion measures 9 3
To meet requests from partners 9 6
To secure raw materials 3 0.5
Others 1 0.5

Source: Japan Overseas Enterprises Association, ASEAN shinshutsu nikkei kigyou ni okeru gijutsu iœn: sono mondaiten kaimei to kaizen no tameno teigen, 1986, pp. 46-47.

A survey of 79 enterprises by the Japan Overseas Enterprises Association on reasons for investing in ASEAN countries at the time the decision was taken, together with a present reassessment, is shown in table 9.

The table reveals that the importance of the host country's favourable investment promotion measures as a pull factor for foreign investment has been decreasing, apparently because of the increasing demands for localization put forward by the host country's government. The desire to secure and to expand the market was maintained throughout the period.

One significant change that should be noted is the importance attached to the motivation to secure the production base from the viewpoint of global business strategies. The emphasis on this factor seems to have been getting stronger, especially in the face of the slow expansion of the world market since the second oil shock. Even in Asia, this factor has gained more importance than before, as is clear from the data from another survey conducted by the Electronic Industries Association of Japan on the motivation of 74 electronic enterprises for investing in ASEAN countries. According to this survey, four major incentives, in descending order of importance, are "export to another country," `'to secure host country's potential market," "to utilize cheap labour", and "host country's favourable policies for foreign investors."17 One interpretation of this order of priorities could be that the aim is first to secure the host country's market by taking advantage of its favourable government policies and cheap labour, and then to export to another country, using not a Japanese brand-name but one from the host country.

This arrangement seems to have been not wholly unwelcome to the host country, because the change of strategy on the part of the Japanese enterprises coincided with the change of development policies from import-substitution to export-oriented ones on the part of the host country's government. This change of policies on both sides has contributed to some extent to the improvement of the balance of payments position of the host country and to the raising of its technological standards, allowing it to compete in the world market.

How to fit into local conditions

Once the decision to invest in Asian countries has been taken, one of the greatest problems faced by investing enterprises is the selection of appropriate partners. According to a survey conducted by the Japan Institute of Labour in 1986,18 only 28.9 per cent of 76 sample enterprises claimed that there was no problem in selecting partners. Sixty per cent have experienced some difficulty in choosing collaborators, and gave the following reasons: (1) lack of rational managerial qualities; (2) inflexibility of political regulations; and (3) late entry into Asian countries.

Recognition of the first factor has resulted in a preponderance of overseas Chinese businessmen as partners of the Japanese affiliates in most Asian countries and regions. The Japan Overseas Enterprises Association gives the following data on the participation of overseas Chinese in joint ventures with Japanese enterprises in ASEAN countries: 36 (57.1 per cent) of 63 sample ventures in Indonesia; 30 (52.6 per cent) of 57 in Thailand; 29 (46.8 per cent) of 62 in Malaysia; 26 (44.8 per cent) of 58 in Singapore; and 8 (33.3 per cent) of 24 in the Philippines.

This might have serious repercussions on Asian people's attitudes toward the Japanese economic advance into these countries. Thus, Ozawa remarks:

It was a rational choice for many Japanese manufacturers to choose as their partners in their new local ventures those Chinese merchants who used to be their import agents. In general, the Japanese found much closer cultural and motivational affinities in the Chinese than in the local people. However, there is a deep-seated resentment against the economic dominance of overseas Chinese in such Asian countries as Indonesia, Malaysia, and Thailand. The

Japanese, by joining economic forces with this particular local interest, unwittingly have made themselves targets of local resentment.19

In the face of the changes in economic policy by developing countries in favour of increasing localization, notably Malayanization in Malaysia, Japanese enterprises intending to establish joint ventures in Asian countries should, in selecting their prospective partners, take into consideration not only the economic calculations, but also the possible political and social implications.

Localization of capital

Concomitant to the selection of partners is the problem of what type of affiliation should be chosen for a joint venture. The number of Japanese affiliates in Asia, by share of equity participation, is shown in table 10. Minority participation below 50 per cent accounts for 42.4 per cent of the total number of affiliates. It should be pointed out that this ratio is quite high if it is compared with the US. Two explanations can be offered for this.

The first is that general trading companies have been playing a prominent role in establishing and operating Japanese affiliates in developing countries. Trading companies lack manufacturing skills and are satisfied with acting as mediators between Japanese manufacturers and local partners in the establishment of joint ventures. Kojima and Ozawa point out:

The trading companies' willingness - and for that matter, the willingness of Japanese interests generally - to remain as minority owners may be related in part to the comparatively small stakes involved in most of these manufacturing ventures. Moreover, trading companies are in a position to exercise a great deal of managerial control without holding majority ownership, since they provide such critical services as supplies of inputs and working capital and access to market.20

Table 10. Number of Japanese affiliates by share of equity participation

Share (%) Number of affiliates % of total
Below 25 126 8.8
25-49 483 33.6
50 116 8.1
51-74 165 11.5
75-99 146 10.2
100 400 27.8
Total 1,436 100.0

Source: MITI, Kaigai toshi tokei souran; dai 2-kai kaigai jigyou katsudou kihon chousa, Tokyo: MITI, 1986, p. 136.

The number of manufacturing joint ventures in Asia in which trading companies have been involved in one way or another was 364 in 1980. This accounted for about one-third of the total number of manufacturing joint ventures in Asia in that year.

Another factor to explain the large proportion of minority ownership in Japan's joint ventures in Asia is the regulations imposed on capital participation by the host country's government. Take Thailand, for example. There is no written rule that foreign capital should be less than 49 per cent. There exist, of course, exceptional cases which the government decides from time to time. Because of this rather ad hoc localization policy by the Thai government, the so-called fading-out process has been accelerating among Japanese affiliates. The average share of Japanese capital declined from 73 per cent in 1963 to 47.8 per cent in 1974, and then to 46.5 per cent in 1981.21 In the case of the Philippines, the limitation imposed on foreign capital participation is, as a rule, 40 per cent. In other Asian countries, a more or less similar policy of localization of capital has been followed in order to facilitate the growth of local enterprises as well as to avoid domination by foreign capital. But a too rigid application of localization policy and the demands of too hasty localization can sometimes cause unnecessary conflict between two partners. It is typical of this situation that one of the Japanese complaints about the performance of affiliates is the local partners' inability to mobilize enough capital.

Localization of staff

The localization demand does not stop at the control of capital. It covers personnel and the procurement of raw materials and parts as well.

Some countries in Asia impose restrictions on the number of foreign nationals working in joint ventures by the system of work permits. This is one of the factors which hamper the smooth transfer of technology, particularly by limiting the entrance of the necessary number of engineers and managing staff required at the initial stage of a joint venture.

To meet the demand for localization put forward by the host country's government, most of the Japanese affiliates have been implementing measures to replace Japanese nationals by local staff, step by step. Generally three stages of localization of staff can be discerned.

At the first stage - 5 to 6 years after the start of the operation control over ordinary operations can be entrusted to local staff. The percentage of Japanese nationals employed declines from 4 per cent at the time of the start of operations to 1 per cent toward the end of this stage.

At the second stage -11 to 12 years after the start of operations the Japanese staff assist only on emergency cases and the rest of the operation is the responsibility of local staff. But the decline in the number of the Japanese nationals slows down. At the third stage, the local staff master the operational techniques to deal with all the possible situations in the production processes of standardized products. The Japanese staff now specialize in managerial activities. At this stage, the number of Japanese staff is stabilized? with 15-20 per cent of directors, 20 per cent of administration staff, and 60-70 per cent of production and technology staff.22

The average number of Japanese staff per affiliate in ASEAN countries in 1986 stood at 4.8 men; 1.6 in management, 2.5 in technology, and 0.9 in other divisions.23 This contrasts sharply with the situation in the US, where the number of Japanese nationals stationed elsewhere is much higher, particularly in commerce-oriented activities (trading companies). So the problem is certainly not one of numbers, but of the degree of participation in the decision-making process, in terms not only of production processes but also of managing all business activities. This topic will be taken up in the next section.

The general pattern of relationships between parents and affiliates in Asian countries that emerges from these surveys is the following:

  1. Matters relating to production and technology are dealt with following the instructions sent by the parent company.
  2. Matters relating to personnel and labour relations are handled according to the host country's laws and customs.
  3. Matters relating to marketing are entirely entrusted to the local staff.

The shares of local staff in the total number of directors, division chiefs, and section chiefs are 34.3, 52.4 and 77.9 per cent respectively. It is considered very difficult to localize the posts of persons in charge of presidentship, finance and accounts, and technology. The main obstruction is deemed to be the difficulty felt by local staff in communicating with the responsible personnel in the parent company. This language problem will appear again in the next section as one of the factors impeding the smooth transfer of technology.

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