Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

Japanese direct foreign investment : sources and sustainability 1989

You don't seem to have a PDF reader installed, try download the pdf

Item Metadata

Download

Media
UBC_1989_A4_6 P74.pdf
UBC_1989_A4_6 P74.pdf [ 12.96MB ]
Metadata
JSON: 1.0097354.json
JSON-LD: 1.0097354+ld.json
RDF/XML (Pretty): 1.0097354.xml
RDF/JSON: 1.0097354+rdf.json
Turtle: 1.0097354+rdf-turtle.txt
N-Triples: 1.0097354+rdf-ntriples.txt
Citation
1.0097354.ris

Full Text

JAPANESE DIRECT FOREIGN INVESTMENT: SOURCES AND SUSTAINABILITY by TRACY J.E. PRICE B.A., UNIVERSITY OF VICTORIA, 1984 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTERS OF SCIENCE in THE FACULTY OF GRADUATE STUDIES Faculty of Commerce and Business Administration We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA August 1989 @ Tracy J.E. Price, 1989 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of Cornr^exe-cg Piroo Sus i rQe^-s «oro\tvv.S"re-ftTi or\J The University of British Columbia Vancouver, Canada Date S~>HPT S / i ^ ' s q DE-6 (2/88) ABSTRACT In 1984, Japan became the world's l e a d i n g c r e d i t o r n a t i o n . Although most of t h i s c a p i t a l has been i n the form of f o r e i g n p o r t f o l i o investment (FPI), f o r e i g n d i r e c t investment (FDI) has c o n t r i b u t e d s i g n i f i c a n t l y t o the t o t a l . The r a p i d a c c e l e r a t i o n of Japanese FDI i s evidenced by the f a c t t h a t the n a t i o n ' s accumulated f o r e i g n d i r e c t a s s e t s i n 1988 exceeded $96 b i l l i o n ( i n 1980 U.S. d o l l a r s ) r o u g h l y 3 times the 1984 t o t a l and 6 times the 1980 t o t a l . T h i s s t a r t l i n g change i n Japan's r o l e i n g l o b a l FDI r a i s e s two important q u e s t i o n s . F i r s t l y , why has Japan been a b l e t o s u b s t a n t i a l l y a c c e l e r a t e i t s f o r e i g n d i r e c t investments i n the 1980s? T h i s study suggests t h a t the c o u n t r y ' s r a p i d expansion i n FDI i s the r e s u l t of macro-economic developments which have taken p l a c e i n Japan s i n c e 1973. These developments i n c l u d e the t r a n s i t i o n of the country from a high-growth t o slow-growth economy a f t e r the f i r s t o i l c r i s i s ; the r e s u l t a n t d e c l i n e i n c a p i t a l f o r m a t i o n requirements and s u s t a i n e d s a v i n g s s u r p l u s e s i n the p r i v a t e s e c t o r ; and the committment of the L i b e r a l Democratic Party (LDP) t o f i s c a l a u s t e r i t y a f t e r 1978. The second q u e s t i o n concerns the f u t u r e s u s t a i n a b i l i t y of Japanese FDI. As d e s c r i b e d i n t h i s study, the answer t o the second i i q u e s t i o n depends l a r g e l y on the answer t o the f i r s t ; namely, t h a t the f u t u r e r a t e of Japanese FDI w i l l be determined by the extent t o which the macro-economic developments noted above p r e v a i l . In format, t h i s study f i r s t p r o v i d e s a h i s t o r i c a l p e r s p e c t i v e of Japanese o f f s h o r e d i r e c t investment, c o n c e n t r a t i n g on the changing l e v e l , nature and m o t i v a t i o n of Japanese FDI i n the post World War I I p e r i o d . The study then p r o v i d e s a b r i e f a n a l y s i s of modern FDI t h e o r y and i t s inadequacy f o r e x p l a i n i n g p a s t Japanese FDI or f o r p r e d i c t i n g i t s f u t u r e s u s t a i n a b i l i t y . A f t e r i n t r o d u c i n g the t h e o r e t i c a l r a t i o n a l e behind the study's two main c o n t e n t i o n s , the a n a l y s i s then t u r n s t o an i d e n t i f i c a t i o n of the f o r c e s which are g e n e r a t i n g the huge amounts of c a p i t a l c u r r e n t l y a v a i l a b l e f o r o f f s h o r e investment. In p a r t i c u l a r , the study suggests t h a t the dramatic a p p r e c i a t i o n of Japanese l a n d p r i c e s has been a primary cause o f excess s a v i n g s i n the p r i v a t e s e c t o r . I t i s these excess s a v i n g s , coupled w i t h the LDP's committment t o balanced budgets a f t e r 1978, t h a t have sponsored Japan's remarkable i n c r e a s e i n FDI i n the 1980s. i i i The study a l s o examines the r e s u l t s o f a r e g r e s s i o n model developed t o t e s t the above macro-economic c o n t e n t i o n s . The model p r o v i d e s some evidence t o support the macro-economic r a t i o n a l e used i n the study but i s l i m i t e d by s t a t i s t i c a l problems w i t h the data. F i n a l l y , the study examines the i s s u e of s u s t a i n a b i l i t y and concludes t h a t , based on l i k e l y macro-economic developments i n the medium term, Japanese FDI w i l l be s u s t a i n e d a t i t s p r e s e n t h i g h l e v e l . i v T A B L E O f CONTENTS 1.0. INTRODUCTION 1 1.1. THESIS STATEMENT AND FORMAT 1 1.2. THE CURRENT STATUS 3 2.0 DEFINITIONS AND DATA SOURCES 5 2.1. DEFINITIONS OF FOREIGN INVESTMENT 5 2.2. SOURCES OF STATISTICAL DATA 8 3.0. HISTORICAL REVIEW OF JAPANESE FOREIGN DIRECT INVESTMENT 11 3.1. JAPANESE FDI PRIOR TO WORLD WAR I I 11 (1870 t o 1940) 3.2. JAPANESE FDI; 1951 t o 1965 14 3.3. JAPANESE FDI; 1966 t o 1973 17 3.4. JAPANESE FDI; 1974 t o 1980 24 3.5. JAPANESE FDI; 1981 t o 1984 33 3.6. JAPANESE FDI; 1985 TO THE PRESENT 38 4.0. TOWARDS A THEORY OF JAPANESE FOREIGN DIRECT INVESTMENT 52 4.1. CONVENTIONAL FDI THEORY 53 4.2. CLASSICAL THEORY 54 4.3. OFFENSIVE FDI THEORY - THE INDUSTRIAL ORGANIZATION APPROACH 56 4.3.1. Economies of S c a l e 57 4.3.2. The p o s e s s i o n of unique s k i l l s o r s p e c i a l e x p e r t i s e 57 4.3.3. D i f f e r e n t i a t e d Products 58 4.3.4. I n t e r n a l i z a t i o n 58 4.3.5 A p p l i c a b i l i t y o f O f f e n s i v e FDI the o r y i n the Japanese FDI Context 50 4.4. DEFENSIVE FDI THEORY 61 4.4.1. Market Imperfections Created by Governments 61 4.4.2. New Markets 62 4.4.3. Access t o New Techn o l o g i e s 62 4.4.4. R i s k D i v e r s i f i c a t i o n 62 4.4.5. Product C y c l e Theory 63 4.4.6. Follow the Leader 64 4.4.7. A p p l i c a b i l i t y o f Defensive FDI models i n the Japanese Context 64 4.5. A MODEL OF JAPANESE FDI 65 v 5.0. MACROECONOMIC BALANCES OF THE JAPANESE ECONOMY 67 6.0. INTERNAL MACROECONOMIC COMPONENTS OF THE JAPANESE 75 6.1. THE PRIVATE SECTOR BALANCE 85 6.1.1. P r i v a t e S e c t o r Savings 78 6.1.1.1. The Need t o Provi d e f o r Retirement 80 6.1.1.2. The High Cost o f Housing 83 6.1.2. P r i v a t e S e c t o r Investment 87 6.1.2.1. R i s i n g I n d u s t r i a l and Commercial Land P r i c e s 88 6.1.2.2. R i s i n g Real Wages 89 6.1.2.3. Reduced P r o d u c t i v i t y Growth 90 6.1.2.4. Environmental C o n s t r a i n t s 90 6.1.2.5. The Impact o f the O i l C r i s i s 91 6.1.2.6. The Investment C l i m a t e s i n c e 1973 93 6.1.3. The P r i v a t e S e c t o r S u r p l u s s i n c e 1986 96 6.1.4. I m p l i c a t i o n s o f P r i v a t e S e c t o r Savings S u r p l u s e s 99 6.2. THE PUBLIC SECTOR BALANCE 100 6.2.1. Government Expenditures a f t e r 1973 101 6.2.2. Government Revenues a f t e r 1973 103 6.2.3. The Press u r e f o r F i s c a l A u s t e r i t y 105 6.2.4. The Government Balance s i n c e 1984 107 6.4. THE DOMESTIC SECTOR - SUMMARY 109 7.0. EXTERNAL MACROECONOMIC COMPONENTS OF THE JAPANESE ECONOMY 111 7.1. NET FOREIGN DIRECT INVESTMENT 111 7.2. NET FOREIGN PORTFOLIO INVESTMENT 113 7.3. NET SHORT TERM CAPITAL INVESTMENT 118 7.4. NET MONETARY MOVEMENTS 119 7.5. SUMMARY OF THE CAPITAL ACCOUNT BALANCE 119 8.0. A STATISTICAL MODEL OF JAPANESE DIRECT FOREIGN INVESTMENT 121 8.1. RATIONALE AND METHODOLOGY OF STATISTICAL APPROACH 123 v i 8.2. NET FOREIGN DIRECT INVESTMENT 125 8.2.1. The NFDI Model; Hypotheses and R a t i o n a l e 126 8.2.2. The NFDI Model; Data Sources 129 8.2.4 R e s u l t s o f the NFDI Model 130 8.3. THE PRIVATE SECTOR BALANCE 131 8.3.1. (S-I) Model; Hypotheses and R a t i o n a l e 132 8.3.2. (S-I) Model; Data Sources 135 8.3.3. (S-I) Model; R e s u l t s 135 8.4. NET FOREIGN PORTFOLIO INVESTMENT 138 8.4.1. NFPI Model; Hypotheses and R a t i o n a l e 139 8.4.2. NFPI Model; Data Sources 141 8.4.3. NFPI Model; R e s u l t s 142 8.5. LIMITATIONS OF THE NFDI RESULTS 143 8.5.1. M u l t i c o l l i n e a r i t y among the E x p l a n a t o r y V a r i a b l e s 143 8.5.2. A u t o - C o r r e l a t i o n o f the R e s i d u a l s 144 8.5.3. The Problem of Endogeneity 144 8.5.4. S t r u c t u r a l Change 144 8.5.5. Problems i n the Data 146 8.6. SUMMARY 147 9.0. JAPANESE FDI; THE FUTURE 148 9.1. AVAILABILITY OF FUNDS 148 9.1.1. P r i v a t e S e c t o r Balance 149 9.1.1.1. Household Savings 149 9.1.1.2. P r i v a t e R e s i d e n t i a l Investment. 152 9.1.1.3. Corporate Savings 153 9.1.1.4. Corporate Investment 154 9.1.1.5. Summary of P r i v a t e S e c t o r Balance 155 9.1.2. Government S e c t o r 156 9.1.2.1. Expenditures 156 9.1.2.2. Income 156 9.1.2.3. Summary o f Government S e c t o r Balance 158 9.1.3. Summary of Macroeconomic Balance 158 v i i 9.1.4. Other F a c t o r s 159 9.1.4.1. Real E s t a t e Market 159 9.1.4.2. Stock Market E a r n i n g s 160 9.1.4.3. Off-Shore E a r n i n g s 160 9.2. THE REQUIREMENTS OF THE CURRENT ACCOUNT BALANCE 161 9.3. THE ALLOCATION PRIORITIES OF FOREIGN INVESTMENT FUNDS 162 9.3.1. The A l l o c a t i o n o f Funds t o D i r e c t F o r e i g n Investment 163 9.3.1.1. Comparative Returns 164 9.3.1.2. Comparative P r o d u c t i o n Costs 165 9.3.1.3. Trade F r i c t i o n s and B a r r i e r s t o Market e n t r y 166 9.3.1.4. Procurement o f Resources 167 9.3.1.5. Longterm S t r a t e g i c Plans 168 9.3.2. A l l o c a t i o n o f Funds t o F o r e i g n P o r t f o l i o Investment 170 9.3.3. A l l o c a t i o n s i n a Competing Environment 171 9.4. ACCEPTABILITY 172 10.0. CONCLUSIONS 177 BIBLIOGRAPHY 179 APPENDICES Appendix 1 Data Used i n Regression Models 188 Appendix 2 R e s u l t s o f Re g r e s s i o n Models 189 v i i i L I S T OF T A B L E S SECTION 1: 1.1 Japanese Net F o r e i g n Investment, F.Y. 1960-1988 SECTION 3; 3.1 Number o f Overseas O f f i c e s o f S e l e c t e d Sogo Shosha P r i o r t o WWII 13 3.2 Approval of Investment P r o j e c t s i n E a s t A s i a , 1960-1974 19 3.3 Supply Sources of S e l e c t e d Resources, 1969 21 3.4 Japanese FDI C l a s s i f i e d by Industry, F.Y. 1965-F.Y. 1972 21 3.5 Japanese FDI by Region, F.Y. 1965-F.Y. 1973 22 3.6 Japanese FDI by Region, F.Y. 1974-F.Y. 1980 25 3.7 Japanese FDI C l a s s i f i e d by Industry, F.Y. 1972-F.Y. 1980 25 3.8 Japanese FDI by Region, F.Y. 1981-F.Y. 1984 31 3.9 Japanese FDI C l a s s i f e d by Industry, F.Y. 1984-F.Y. 1987 34 3.10 Japanese FDI by Region, F.Y. 1984-F.Y. 1987 35 SECTION 6; 6.1 Japanese P r i v a t e S e c t o r Savings-Investment Balance, F.Y. 1960-F.Y. 1987 67 I X Following Page SECTION 6 CONT'D F o l l o w i n g Page 6.2 I n f l a t i o n R e s u l t s and Time Deposit Rates by Type of I n s t i t u t i o n , 1969 t o 1981 70 6.3 L i f e Expectancy and Labour P a r t i c i p a t i o n R a t i o s o f S e l e c t e d C o u n t r i e s 72 6.4 R e s i d e n t i a l Land P r i c e I n d i c e s , Japan, F.Y. 1960-F.Y. 1987 74 6.5 Average P r i c e s o f R e s i d e n t i a l Land o f S i x L a r g e s t C i t i e s 74 6.6 Commercial Land P r i c e I n d i c e s , Japan, F.Y. 1960-F.Y. 1987 77 6.7 I n d u s t r i a l Land P r i c e I n d i c e s , Japan, F.Y. 1960-F.Y. 1987 78 6.8 Real Wage I n d i c e s and Compound Annual Growth Rates, Japan, F.Y. 1960-F.Y. 1987 79 6.9 Average P r i c e s o f Commercial Land o f S i x L a r g e s t C i t i e s 83 6.10 Average P r i c e s o f I n d u s t r i a l Land o f S i x La r g e s t C i t i e s 83 6.11 The P r i v a t e and P u b l i c S e c t o r Balance, F.Y. 1960-F.Y. 1987 87 6.12 Budgeted Government Spending by Category, Real Percentage Change over Prev i o u s F i s c a l Year, F.Y. 1971-F.Y. 1986 89 6.13 Budgeted Government Spending as a Percentage o f GNP, F.Y. 1970-F.Y. 1986 90 6.14 Growth of Budgeted Government Spending, by Category, F.Y. 1970-F.Y. 1986 90 6.15 Percentage Real Increase i n Tax Burden, F.Y. 1961-F.Y. 1987 94 6.16 The Domestic S e c t o r and Current Account Balance, F.Y. 1960-F.Y. 1987 94 x SECTION 7: 7.1 Japanese Net P o r t f o l i o Investment, F.Y. F.Y. 1987 7.2 Investment i n F o r e i g n S e c u r i t i e s by Japanese, F.Y. 1981-F.Y. 1988 7.3 Real Discount Rates, U.S. and Bank of Japan, Averages, F.Y. 1961-F.Y. 1988 7.4 Investment i n Japanese S e c u r i t e s by Non- Japanese, F.Y. 1981-F.Y. 1988 7.5 Japan's Balance of Payments, F.Y. 1961- F.Y.1987 F o l l o w i n g Page 100 100 102 103 104 SECTION 8: 8.1 R e s u l t s of Net F o r e i g n D i r e c t Investment Model (1) 8.2 R e s u l t s of Net F o r e i g n D i r e c t Investment Model (2) 8.3 C o r r e l a t i o n M a t r i x f o r the P r i v a t e Balance R e g r e s s i o n 8.4 R e s u l t s o f P r i v a t e Balance R e g r e s s i o n (1) 8. 5 R e s u l t s of Regressions o f I n d i v i d u a l E x p l a n a t o r y V a r i a b l e s on P r i v a t e Balance 8.6 R e s u l t s o f P r i v a t e Balance R e g r e s s i o n (1) C o r r e c t e d f o r F i r s t Order A u t o - C o r r e l a t i o n 8.7 R e s u l t s o f Regressions o f I n d i v i d u a l E x p l a n a t o r y V a r i a b l e s on P r i v a t e Balance, C o r r e c t e d f o r F i r s t Order A u t o - C o r r e l a t i o n 114 114 119 119 119 120 120 8.8 R e s u l t s of Net F o r e i g n P o r t f o l i o Investment Model 124 8.9 R e s u l t s o f Net F o r e i g n P o r t f o l i o Investment Model, C o r r e c t e d f o r F i r s t Order A u t o - C o r r e l a t i o n 124 8.10 T e s t i n g f o r S t r u c t u r a l Change, 1960 t o 1971 and 1972 t o 1987 127 X I LI8T OF FIGURES F o l l o w i n g S e c t i o n 5; Page F i g u r e 5.1. Balance of Payments Schematic 62 S e c t i o n 8: F i g u r e 8.1. Macro-Economic R a t i o n a l e Behind S t a t i s t i c a l Approach 109 x i i ACKNOWLEGEMENT My deep thanks are extended t o Dr. James Brander f o r h i s enthusiasm, support and encouragement throughout the course of t h i s p r o j e c t . I would a l s o l i k e t o thank Dr. P e t e r Nemetz and Dr. E l a n V e r t i n s k y f o r t h e i r v a l u a b l e c o n t r i b u t i o n s t o the paper and the time and e f f o r t they devoteded on my b e h a l f . The two y e a r s which I have spent a t U.B.C. completing t h i s degree have been both worthwhile and i n f o r m a t i v e ; my thanks are extended t o the a d m i n i s t r a t i v e s t a f f o f the Department of Commerce and t o a l l the p r o f e s s o r s whose courses I had the good f o r t u n e t o take . F i n a l l y , I must acknowledge the encouragement and u n f a i l i n g p a t i e n c e o f my f a m i l y . To my pare n t s , who have g i v e n me constant support throughout t h i s p r o j e c t and my l i f e , and t o my husband, whose f r i e n d s h i p and sense of humour has never f a l t e r e d , I extend both my g r a t i t u d e and l o v e . x i i i 1.0. INTRODUCTION 1.1. THESIS STATEMENT AND FORMAT In each o f the p a s t 4 y e a r s , Japan has been the world's l a r g e s t e x p o r t e r of c a p i t a l . Although most o f t h i s c a p i t a l has been i n the form of f o r e i g n p o r t f o l i o investment (FPI), f o r e i g n d i r e c t investment (FDI) has c o n t r i b u t e d s i g n i f i c a n t l y t o the t o t a l . The s t a r t l i n g change i n Japan's r o l e i n world FDI can be gauged by the f a c t t h a t the country's accumulated d i r e c t f o r e i g n a s s e t s amounted t o over $96 b i l l i o n U.S. ( i n 1980 d o l l a r s 1) by the end of f i s c a l 1988; which was almost 3 times the 1984 f i g u r e of $33 b i l l i o n U.S. and over 6 times the accumulated d i r e c t investment a s s e t s h e l d i n 1980. Both the s i z e and the changed focus o f Japan's FDI are l i k e l y t o be of p i v o t a l importance i n shaping the world economic o r d e r of the 1990s. Any assessment of t h i s impact must address two key q u e s t i o n s : (1) What f a c t o r s are producing the c u r r e n t excess o f c a p i t a l i n the Japanese economy which i s a v a i l a b l e f o r o f f s h o r e investment? (2) Given (1) , i s the c u r r e n t r a t e of Japanese f o r e i g n d i r e c t investment s u s t a i n a b l e ? The answers t o these q u e s t i o n s need t o be e x t r a c t e d from a complex Unless otherwise s t a t e d , a l l f i g u r e s r e f e r r i n g t o the l e v e l o f cumulative and annual Japanese FDI flows w i l l be i n c o n s t a n t 1980 d o l l a r s . - Page l - m a t r i x of economic parameters, d i s p a r a t e c o r p o r a t e c u l t u r e s and o v e r l y i n g p o l i t i c a l c o n s i d e r a t i o n s . N e v e r t h e l e s s , t h e g e n e r a l shape of t h e answers seem c l e a r . The Japanese economy w i l l be a b l e t o s u s t a i n h i g h r a t e s o f f o r e i g n investment and a growing p r o p o r t i o n o f t h i s investment w i l l be d i r e c t e d towards a s s e t a c q u i s i t i o n . As a consequence of t h i s i n c r e a s e d involvement i n o f f - s h o r e ownership and o p e r a t i o n s , the major Japanese companies w i l l develop a f a r g r e a t e r degree o f i n t e r n a t i o n a l i s m than has been the case h i t h e r t o . T h i s l a t e r t r e n d , w i t h i t s concomitant s t r a i n s on t h e t r a d i t i o n a l Japanese management system, w i l l be a major t e s t o f t h e r e s i l i e n c e and a d a p t a b i l i t y of the Japanese i n d u s t r i a l s o c i e t y . T h i s study seeks t o e x p l a i n the r a p i d i n c r e a s e i n Japanese FDI i n the c o n t e x t of macro-economic developments which have taken p l a c e i n Japan s i n c e 1973. In format, t h i s paper w i l l f i r s t p r o v i d e a h i s t o r i c a l p e r s p e c t i v e o f Japanese o f f s h o r e d i r e c t investment, c o n c e n t r a t i n g on the changing l e v e l s , nature and m o t i v a t i o n of Japanese FDI, p a r t i c u l a r l y s i n c e 1973. In s e c t i o n 4, the study w i l l p r o v i d e a b r i e f a n a l y s i s o f c u r r e n t FDI t h e o r i e s and t h e i r inadequacy f o r e x p l a i n i n g p a s t Japanese FDI or f o r p r e d i c t i n g i t s f u t u r e c o n t i n u a t i o n . S e c t i o n 5 w i l l i n t r o d u c e the macro-economic b a s i s f o r the study's c o n t e n t i o n t h a t s t r u c t u r a l changes i n the domestic economy are d r i v i n g Japan's c u r r e n t FDI i n i t i a t i v e s . The study w i l l then i d e n t i f y the f o r c e s which are g e n e r a t i n g the huge amounts of c a p i t a l c u r r e n t l y a v a i l a b l e f o r - Page 2 - o f f s h o r e investment and w i l l seek t o e s t a b l i s h the c o n t r i b u t i o n of each o f t h e s e f o r c e s . In s e c t i o n 8.0, the r e s u l t s and l i m i t a t i o n s o f a r e g r e s s i o n model developed t o support the f o r e g o i n g macro- economic d i s c u s s i o n w i l l be examined. F i n a l l y , s e c t i o n 9.0 w i l l e v a l u a t e the long-term s u s t a i n a b i l i t y of the c a p i t a l g e n e r a t i n g f a c t o r s d e s c r i b e d i n the macro-economic and s t a t i s t i c a l s e c t i o n s o f t h i s study. As w i l l be d i s c u s s e d i n s e c t i o n 9.0, the f u t u r e l e v e l s o f Japanese FDI w i l l depend not o n l y on the e x t e n t t o which c u r r e n t macro-economic c o n d i t i o n s p r e v a i l , but a l s o on the d e s i r a b i l i t y o f c o n t i n u e d Japanese o f f s h o r e investment and i t s f u t u r e a c c e p t a b i l i t y i n terms of the r e c i p i e n t c o u n t r i e s . B e f o r e the s u p p o r t i n g d i s c u s s i o n o f t h i s t h e s i s , i t may be of v a l u e t o p r o v i d e a background b r i e f o f the c u r r e n t circumstances of Japanese f o r e i g n investment. 1.2. THE CURRENT STATUS As noted above, Japan became the world's l e a d i n g c r e d i t o r n a t i o n i n 1984 and, spurred by a g g r e s s i v e p o r t f o l i o , d i r e c t and, i n c r e a s i n g l y , f o r e i g n r e a l e s t a t e investments, has maintained t h i s p o s i t i o n s i n c e . Although t h i s study i s f o c u s s e d on Japan's FDI, i t i s o f i n t e r e s t t o take a b r i e f look a t the c o u n t r y ' s o v e r a l l f o r e i g n investment p r a c t i c e . In f i s c a l y e a r (F.Y.) 1988 (ending March 31, 1989), Japan's net overseas a s s e t s exceeded $260 b i l l i o n - Page 3 - US h a v i n g r i s e n by a r e c o r d $46 b i l l i o n over F.Y. 1987 (2) . T o t a l a s s e t s overseas i n c r e a s e d by 37.1% t o $1,321 b i l l i o n US w h i l e t o t a l debts rose 41.4% t o $1,059 b i l l i o n US. Japan's t o t a l f o r e i g n investment i n 1988 was about $109 b i l l i o n U.S, of which $78.7 b i l l i o n was i n the p o r t f o l i o c l a s s i f i c a t i o n , which r e s u l t e d i n an accumulated net FPI of over $293 b i l l i o n U . S . ( 3 ) . Between 1984 and 1988, t h e sum of the annual net p o r t f o l i o investments amounted t o $313 b i l l i o n U.S.; the co r r e s p o n d i n g f i g u r e f o r the p r e c e d i n g 24 ye a r s was minus $20.2 b i l l i o n U.S. Tab l e 1.1 shows the p a t t e r n of Japan's f o r e i g n investment from 1960 t o 1988 and c l e a r l y i n d i c a t e s the r a p i d expansion of both FPI and FDI s i n c e 1983. Although c u r r e n c y a p p r e c i a t i o n has o v e r - s t a t e d t h i s growth, i t can a l s o be seen t h a t t o t a l f o r e i g n investment has i n c r e a s e d from 0.5 pe r c e n t of GNP i n F.Y. 1983 t o 4.2 p e r c e n t of GNP i n F.Y. 1988. 2 "Japan World's Leading C r e d i t o r , " The P r o v i n c e . May 28, 1989. 3 Both f o r e i g n p o r t f o l i o and f o r e i g n d i r e c t investment w i l l be d e f i n e d i n S e c t i o n 2.1. - Page 4 - TABLE S.i: JAPANESE NET TOTAL OVERSEAS INVESTMENT AS A X OF 6 N P , FISCAL YEAR i960 TO 1987, BILLIONS OF U.S. t *1 BILLIONS OF U.S. $ TOTAL NET NET NET FQREI6N F0REI6N OVERSEAS X OF DIRECT X OF PORTFOLIO I OF YEAR 6NP INVESTMENT 6NP INVESTMENT 6NP INVESTMENT 6NP 1960 45.02 0.09 0.2 0.07 0.2 0.02 0.0 1961 55.15 0.02 0.0 0.03 0.1 -0.01 0.0 1962 60.17 -0.06 -0.1 0.01 0.0 -0.07 -0.1 1963 71.09 -0.13 -0.2 0.02 0.0 -0.15 -0.2 1964 82.39 -0.10 -0.1 0.05 0.1 -0.15 -0.2 1965 91.15 -0.05 -O.i 0.03 0.0 -0.08 -0.1 1966 106.81 0.10 0.1 0.08 0.1 0.02 0.0 1967 125.89 0.09 0.1 0.08 0.1 0.01 0.0 1968 148.24 -0.21 -0.1 0.14 0.1 -0.35 -0.2 1969 172.94 -0.79 -0.5 0.14 0.1 -0.93 -0.5 1970 202.92 0.00 0.0 0.25 0.1 -0.25 -0.1 1971 233.52 -0.66 -0.3 0.14 0.1 -0.80 -0.3 1972 312.26 0.46 0.1 0.54 0.2 -0.08 0.0 1973 396.55 3.66 0.9 1.94 0.5 1.72 0.4 1974 467.07 2.56 0.5 1.69 0.4 0.87 0.2 1975 377.11 -1.06 -0.3 1.53 0.4 -2.59 -0.7 1976 574.24 -0.87 -0.2 1.90 0.3 -2.77 -0.5 1977 703.15 0.99 0.1 1.63 0.2 -0.64 -0.1 1978 982.53 5.17 0.5 2.36 0.2 2.81 0.3 1979 1013.25 3.89 0.4 2.66 0.3 1.23 0.1 1980 1081.25 -7.32 -0.7 2.11 0.2 -9.43 -0.9 1981 1177.42 -2.96 -0.3 4.71 0.4 -7.67 -0.7 1982 1093.56 3.26 0.3 4.10 0.4 -0.84 -0.1 1983 1196.25 6.10 0.5 3.20 0.3 2.90 0.2 1984 1276.34 29.93 2.3 5.97 0.5 23.96 1.9 1985 1344.74 46.83 3.5 5.08 0.4 41.75 3.1 1986 1985.34 116.29 5.9 14.25 0.7 102.04 5.1 1987 2428.01 109.41 4.5 18.61 0.8 90.80 3.7 1988 2889.06 121.30 4.2 33.76 1.2 87.54 3.0 Footnote: *1 + signs refer to net outflows and - siqns refer to net inflows - Page 4a - 2.0 DEFINITIONS AND DATA SOURCES The study makes e x t e n s i v e use of s t a t i s t i c a l data i n d e s c r i b i n g and a n a l y z i n g the s u b j e c t o f Japanese f o r e i g n investment. Before e n t e r i n g the main body o f the d i s c u s s i o n , i t w i l l be h e l p f u l t o d e f i n e the p r i n c i p a l terms used w i t h r e f e r e n c e t o f o r e i g n investment and t o comment on the sources of the data used. 2.1. DEFINITIONS OF FOREIGN INVESTMENT From the balance of payments p e r s p e c t i v e , i n t e r n a t i o n a l c a p i t a l movements which i n v o l v e t r a n s a c t i o n s w i t h c r e d i t m a t u r i t i e s o f l e s s than one year are r e f e r r e d t o as s h o r t term movements, w h i l e t r a n s a c t i o n s which have i n f i n i t e m a t u r i t i e s , or m a t u r i t i e s exceeding one year (such as s t o c k s and p h y s i c a l a s s e t s ) are deemed as l o n g term movements. G e n e r a l l y , s h o r t term c a p i t a l movements serve t o smooth out s h o r t term f l u c t u a t i o n s i n the balance of payments by responding s w i f t l y (overnight) t o changes i n r e l a t i v e i n t e r e s t r a t e s and exchange r a t e s . Although important i n the o v e r a l l monetary sense, s h o r t term movements are, n e c e s s a r i l y , of a t r a n s i e n t nature and do not c o n f e r a l a s t i n g impact on e i t h e r the r e c i p i e n t or donor economies. They have no p a r t i n t h e d i s c u s s i o n a t hand. On the o t h e r hand, long term c a p i t a l movements, r e p r e s e n t an extended t r a n s f e r of c a p i t a l t o the r e c i p i e n t c o u n t r i e s and are, t h e r e f o r e , more important i n the c o n t e x t of l o n g term economic - Page 5 - development. These long term c a p i t a l movements can be f u r t h e r sub- d i v i d e d i n t o i n d i r e c t and d i r e c t a s s e t s . The former, a l s o r e f e r r e d t o as f o r e i g n p o r t f o l i o investment (FPI), i n c l u d e s purchases of f o r e i g n e q u i t i e s , bonds and o t h e r s i m i l a r instruments. In g e n e r a l , f o r e i g n p o r t f o l i o investment does not c o n f e r any d i r e c t management r i g h t s on the f o r e i g n i n v e s t o r . Such investment i s made p u r e l y on the b a s i s o f expected r e t u r n s . C o nversely, f o r e i g n d i r e c t investment (FDI) does a s s i g n management r i g h t s t o the i n v e s t o r and a l l o w s the i n v e s t o r t o i n f l u e n c e , i n p a r t or i n t o t a l , the conduct o f the r e c i p i e n t o r g a n i z a t i o n ' s b u s i n e s s . The l i n e of demarcation between p o r t f o l i o and d i r e c t investment i s o b v i o u s l y an a r b i t r a r y judgement which i s e s t a b l i s h e d more f o r the purposes of f o r e i g n investment a c c o u n t i n g than as a t r u e attempt t o separate p a s s i v e and a c t i v e investment. For Japan, the demarcation p o i n t i s 10 p e r c e n t ; i . e . the a c q u i s i t i o n o f 10 p e r c e n t , or more, o f a f o r e i g n company's e q u i t y i s c o n s i d e r e d t o be d i r e c t f o r e i g n investment. Below t h a t l e v e l , the t r a n s a c t i o n i s g e n e r a l l y r e c o r d e d as f o r e i g n p o r t f o l i o investment. Japan's M i n i s t r y of Finance (MOF) uses a somewhat broader net t o encompass FDI. In a d d i t i o n t o the 10 p e r c e n t r u l e , the MOF a l s o i n c l u d e s investments i n f o r e i g n c o r p o r a t i o n s w i t h which the donor has e s t a b l i s h e d a permanent, economic working r e l a t i o n s h i p . F u r t h e r , i t c l a s s i f i e s loans as FDI when such loans are made t o companies i n which the l e n d e r has 10 p e r c e n t or more e q u i t y i n t e r e s t . - Page 6 - O b v i o u s l y , i f " d i r e c t " i s intended t o convey an a b i l i t y t o i n f l u e n c e , the use of an a r b i t r a r y l e v e l o f investment i s not t e c h n i c a l l y sound. Kojima's (4) d e s c r i p t i o n of d i r e c t f o r e i g n investment p r o v i d e s a more comprehensive d e f i n i t i o n : " . . . d i r e c t f o r e i g n investment should be understood as the t r a n s m i s s i o n o f management r e s o u r c e s i n a package of c a p i t a l , management a b i l i t y , and t e c h n i c a l e x p e r t i s e t o a h o s t country. The management r e s o u r c e s are o r g a n i z a t i o n s t h a t e x h i b i t v a r i o u s c a p a b i l i t i e s i n the pr o c e s s of c o r p o r a t e management, c o n s i s t i n g outwardly o f the nucleus o f managers but encompassing i n a wider sense, managerial knowledge i n c l u d i n g p a t e n t s , t e c h n i c a l know-how and marketing techniques, market p o s i t i o n s i n regards t o s a l e s , m a t e r i a l s procurement, and c a p i t a l r a i s i n g , trademarks and g o o d w i l l and o r g a n i z a t i o n s f o r i n f o r m a t i o n g a t h e r i n g and r e s e a r c h and development." No t w i t h s t a n d i n g i t s a r b i t r a r y nature, the use o f s t a t i s t i c s based on the MOF's d e f i n i t i o n o f FDI i s pro b a b l y a reasonable b a s i s f o r measuring Japanese overseas investment which has i n f l u e n c e on the conduct o f the r e c i p i e n t companies. In many cases, the Japanese p a r t i c i p a t i o n i s c l e a r l y dominant or e x c l u s i v e ; e.g. r e c e n t investments i n North America and Europe by the automobile i n d u s t r y . Where s m a l l e q u i t y investments are concerned, i n f l u e n c e ( i f not c o n t r o l ) i s o f t e n e x e r c i s e d through t e c h n i c a l a s s i s t a n c e , marketing or l i c e n s i n g agreements or, as p r o v i d e d f o r under the MOF i n t e r p r e t a t i o n s , l o a n s . K i y o s h i Kojima, "Japanese-Style D i r e c t F o r e i g n Investment," Japanese Economic S t u d i e s . New York: ME Sharpe Inc., S p r i n g 1986, p. 58. - Page 7 - 2.2. SOURCES OF STATISTICAL DATA Two sources of Japanese DFI s t a t i s t i c s are a v a i l a b l e ; one i s based on n o t i f i c a t i o n s (and l i c e n s e s b e f o r e December 1, 1980) and the o t h e r i s based on implementation. The former r e f e r s t o a p p l i c a t i o n s f o r FDI which are approved by the M i n i s t r y of Finance i n accordance w i t h the F o r e i g n Exchange and Trade C o n t r o l Law (1949 and 1980). The second source i s the Balance o f Payments S t a t i s t i c s compiled by the Bank o f Japan. As the former tends t o i n c l u d e a l l r e p o r t e d or l i c e n s e d investments i n c l u d i n g , those which are not e v e n t u a l l y executed and investments which are d i v e s t e d i n the f u t u r e , the MOF data are an o v e r - e s t i m a t i o n . Conversely, the Bank o f Japan s t a t i s t i c s tend t o u n d e r - s t a t e Japanese FDI, c o v e r i n g o n l y those t r a n s f e r s of monies ( i n the form of investments i n , or loans t o , branch o f f i c e s or s u b s i d i a r i e s ) where the Japanese i n v e s t o r h o l d s 10% o r more (25% b e f o r e 1980) of the common s t o c k . A c c o r d i n g t o Hamada (5) , the r e s u l t i n g d i f f e r e n c e between the MOF and Bank of Japan s t a t i s t i c s suggests t h a t " t h e r e e x i s t s a s u b s t a n t i a l l a g i n the a c t u a l t r a n s f e r o f funds behind a u t h o r i z a t i o n . " Ozawa (6) notes t h a t between 1951 and 1965, the r a t i o of a c t u a l FDI t o the amount approved by the MOF was 44.4%; and i n the p e r i o d s 1965 t o K o i c h i Hamada, "Japanese Investment Abroad'" i n P. Drysd a l e , ed., D i r e c t F o r e i g n Investment i n A s i a and the P a c i f i c , Toronto: U n i v e r s i t y of Toronto Press, 1972. Taken from Terutomo Ozawa, M u l t i n a t i o n a l i s m , Japanese S t y l e . P r i n c e t o n : P r i n c e t o n U n i v e r s i t y P r e s s , 1979 p. 237. 6 Terutomo Ozawa, M u l t i n a t i o n a l i s m . J a p a n e s e - S t y l e . P r i n c e t o n : P r i n c e t o n U n i v e r s i t y P ress, 1979, p. 237. - Page 8 - 1970 and 1971 t o 1979, the r a t i o s were 38.5% and 34.9, r e s p e c t i v e l y . Ozawa a t t r i b u t e s the d e c l i n e i n the e x e c u t i o n r a t i o t o the i n c r e a s e i n the average s i z e o f Japanese overseas investments which has prompted l o n g e r p e r i o d s o f p r e p a r a t o r y a c t i v i t i e s . (7) On balance, and d e s p i t e the p r o p e n s i t y t o over-estimate, i t appears t h a t the MOF s t a t i s t i c s are the b e s t a v a i l a b l e estimates o f Japanese FDI. The MOF s t a t i s t i c s make a number of e x c l u s i o n s which are important i n the co n t e x t of o v e r a l l Japanese FDI. These e x c l u s i o n s i n c l u d e : (1) D i r e c t investments f i n a n c e d through l o c a l borrowing; (2) Technology t r a n s f e r s ; and, (3) Reinvestment of r e t a i n e d e a r n i n g s by Japanese s u b s i d i a r i e s abroad. (8) (1) and (3) are p a r t i c u l a r l y r e l e v a n t s i n c e t h e s i z e o f many Japanese f o r e i g n s u b s i d i a r i e s enables them t o r a i s e c a p i t a l overseas on the b a s i s o f t h e i r own a s s e t s . A c c o r d i n g t o Ozawa (9) , t h e r e f o r e , "the amount o f d i r e c t f o r e i g n investment approved by the Japanese government serve s as a good proxy f o r the a c t u a l amount i n v e s t e d because the amount of c a p i t a l r a i s e d and r e i n v e s t e d overseas, so f a r , roughly matches the amount of delayed or 7 I b i d . . p. 238. 8 OECD Economic Surveys. Japan. 1987/1988. P a r i s , 1988, p. 65. 9 Ozawa, M u l t i n a t i o n a l i s m . J a p a n e s e - S t y l e , p. 238. - Page 9 - c a n c e l l e d c a p i t a l outflows from Japan." In a d d i t i o n t o the above e x c l u s i o n s , s i n c e 1980, the MOF have dropped f o r e i g n r e a l e s t a t e a c q u i s i t i o n s from the FDI s t a t i s t i c s . Under the new F o r e i g n Exchange and Trade C o n t r o l Law of 1980, n o t i f i c a t i o n s of f o r e i g n r e a l e s t a t e purchases were d e c l a r e d non-mandatory. Given the phenomenal i n c r e a s e i n f o r e i g n r e a l e s t a t e h o l d i n g s by Japanese f i r m s and i n d i v i d u a l s , e s p e c i a l l y s i n c e 1984, t h i s e x c l u s i o n p r o b a b l y r e p r e s e n t s a s e r i o u s understatement o f the volumes of investment between 1980 and 1987. F u r t h e r , as the i n v e n t o r y of revenue e a r n i n g investments has i n c r e a s e d , the amount of money a v a i l a b l e f o r reinvestment by the overseas s u b s i d i a r i e s i s l i k e l y t o have ex p e r i e n c e d c o r r e s p o n d i n g growth. Given the above, and because t h e i r b e t t e r a v a i l a b i l i t y , t h i s study has g e n e r a l l y r e l i e d on MOF data. - Page 10 - 3.0. HISTORICAL REVIEW OF JAPANESE FOREIGN DIRECT INVESTMENT D i r e c t f o r e i g n investment i s not a new phenomenon among Japanese s t r a t e g i e s . Such investment has been p r a c t i c e d s i n c e the e a r l y days o f the M e i j i p e r i o d and has formed a v i t a l p a r t of Japan's p a s t p o l i c i e s o f i n d u s t r i a l and p o l i t i c a l expansion. To e s t a b l i s h a proper h i s t o r i c a l p e r s p e c t i v e , w i t h i n which the c u r r e n t FDI s t a t u s can be ev a l u a t e d , t h i s s e c t i o n w i l l p r o v i d e an o u t l i n e o f FDI i n each o f s i x p e r i o d s ; r a n g i n g from 1870 t o the pr e s e n t . For each p e r i o d , the d i s c u s s i o n w i l l p r e s e n t a b r i e f d e s c r i p t i o n , not o n l y o f the investments made, but a l s o the c a u s a l f a c t o r s behind such investment. From the sequence of p e r i o d snapshots a p i c t u r e emerges of an eminently p r a c t i c a l approach t o u s i n g FDI as a t a c t i c a l d e v i c e towards f u r t h e r a n c e o f the s t r a t e g i c o b j e c t i v e s o f the day. 3.1. JAPANESE FDI PRIOR TO WORLD WAR I I (1870 TO 1940) Japan had accumulated approximately Yen 219 b i l l i o n , i n nominal terms, i n overseas a s s e t s by 1945; which was roughly 3 times the v a l u e o f GNP i n 1944 ( 1 0) . G e o g r a p h i c a l l y , t h i s was d i s t r i b u t e d between Manchuria (61.1%) and China (30.1%) w i t h the remaining 8.8% c o n c e n t r a t e d i n other, mainly Southeast A s i a n , n a t i o n s ( 1 1) . Although the l a r g e m a j o r i t y o f these investments K. Yasumuro, "The C o n t r i b u t i o n o f Sogo Shosha t o M u l t i n a t i o n a l i z a t i o n " , i n A. Okochi and T. Inoue, e d i t . , Overseas Business A c t i v i t i e s . Tokyo: U n i v e r s i t y o f Tokyo Press, 1984, p.77. 1 1 I b i d . . p.77. - Page 11 - were o f a m i l i t a r y nature, a number o f important t r e n d s were e s t a b l i s h e d i n the pre-war p e r i o d which l a t e r re-emerged a f t e r 1951 when FDI was once a g a i n p e r m i t t e d . At the f o r e f r o n t o f much o f the n o n - m i l i t a r y investments made i n A s i a p r i o r t o World War I I were those undertaken by the Japanese t e x t i l e i n d u s t r y . The t e x t i l e i n d u s t r y had developed major export markets i n A s i a a f t e r World War I when the B r i t i s h t e x t i l e p r oducers l a r g e l y d i s - i n v e s t e d i n t h i s r e g i o n . The primary market was China and, by 1915, 80% o f Japanese t e x t i l e e x p o r t s were earmarked f o r Chinese markets ( 1 2) . Subsequently, however, these export markets were th r e a t e n e d by the r a p i d expansion o f Chinese c o t t o n s p i n n i n g p r o d u c t i o n c a p a c i t y , which r o s e from 650 thousand s p i n d l e s i n 1915 t o 2.1 m i l l i o n s p i n d l e s i n 1921. T h i s expansion was supported by p r o t e c t i v e measures, i n t r o d u c e d by the Chinese government a f t e r 1919, which i n c l u d e d the r e v i s i o n o f custom r a t e s on imported yarn and t e x t i l e p r o d u c t s . (By 1930, these r a t e s were as h i g h as 40 t o 70 p e r c e n t 1 3) . In response t o these combined t h r e a t s , Japanese c o t t o n s p i n n e r s e s t a b l i s h e d l o c a l m i l l s i n Shanghai and T s i n g t a o between 1917 and 1922. By 1926, Japanese c o t t o n s p i n n e r s accounted f o r 36% o f the t o t a l p r o d u c t i o n c a p a c i t y i n China, c o n t r o l l i n g T. Inoue, "A Comparison o f the Emergence o f MNC manufacturing, 1 1 i n Overseas Business A c t i v i t i e s , p. 13. 1 3 Yasumuro, "The C o n t r i b u t i o n o f Sogo Shosha t o M u l t i n a t i o n a l i z a t i o n , " p. 71. - Page 12 - approximately 1.3 m i l l i o n s p i n d l e s ( ). Thus, these e a r l y investments by the Japanese t e x t i l e i n d u s t r y r e p r e s e n t e d the f i r s t example o f FDI undertaken f o r the purpose o f p r o t e c t i n g important Japanese e x p o r t markets. A second important c h a r a c t e r i s t i c of the pre-World War I I p e r i o d was the FDI undertaken by the l a r g e Japanese g e n e r a l t r a d i n g companies (sogo shosha). The sogo shosha were the t r a d i n g arms of the powerful Japanese f i n a n c i a l and i n d u s t r i a l conglomerates known as z a i b a t s u which have c o n t r i b u t e d e x t e n s i v e l y t o both the p r e - and post-World War I I economic development of Japan. As g l o b a l t r a d e r s , the sogo shosha were i n s t r u m e n t a l i n s o u r c i n g the raw m a t e r i a l s n ecessary f o r Japan's i n d u s t r i a l i z a t i o n and i n e s t a b l i s h i n g overseas export markets f o r Japanese p r o d u c t s . To support t h e i r t r a d i n g b u s i n e s s , the sogo shosha e s t a b l i s h e d a network o f overseas o f f i c e s . M i t s u i Bussan, the l a r g e s t t r a d e r i n the pre-WW I I p e r i o d , e s t a b l i s h e d 46 branches i n A s i a ( p r i m a r i l y China) ; 5 i n Europe, 2 i n the U n i t e d S t a t e s and 1 i n A u s t r a l i a between 1877 and 1914 t o f a c i l i t a t e i t s t r a d e i n t e x t i l e raw m a t e r i a l s and end products ( 1 5) . By 1919, 37% o f M i t s u i Bussan's employees s e r v e d i n overseas branch o f f i c e s ( 1 6) and by 1939, the 1 4 Inoue, p. 13. 1 5 Yasumuro, "The C o n t r i b u t i o n o f the Sogo Shosha t o M u l t i n a t i o n a l i z a t i o n , " p. 67. 1 6 I b i d . . p. 67. - Page 13 - company had e s t a b l i s h e d 91 branch o f f i c e s worldwide ( ) . The e a r l y " i n t e r n a t i o n a l i z a t i o n " of M i t s u i Bussan was matched by o t h e r l a r g e t r a d i n g companies, n o t a b l y M i t s u b i s h i S h o j i ( a c t i v e i n the m i n e r a l t r a d e ) ; C. I t o h and Marubeni ( t e x t i l e s ) , Iwai (chemicals and heavy i n d u s t r i a l p r o d u c t s ) ; Nissho ( f o o d s t u f f s ) and Kanematsu (wool). T a b l e 3.1 i n d i c a t e s the number of overseas o f f i c e s e s t a b l i s h e d by t h e l e a d i n g t r a d i n g companies p r i o r t o World War I I . In a d d i t i o n t o e s t a b l i s h i n g overseas branch o f f i c e s t o support t h e i r t r a d i n g b u s i n e s s , the sogo shosha a l s o p a r t i c i p a t e d i n overseas j o i n t v e n t u r e s w i t h Japanese i n d u s t r i a l e n t e r p r i s e s and l o c a l p a r t n e r s . The m a j o r i t y of these j o i n t v e n t u r e s were i n manufacturing o r e x t r a c t i v e i n d u s t r i e s w i t h the sogo shosha a c c e p t i n g a m i n o r i t y i n t e r e s t i n o r d e r t o secure the t r a d i n g b u s i n e s s generated from the investment. While s m a l l i n number (at the end o f 1942, M i t s u i Bussan had 8 j o i n t v e n t u r e s w i t h Japanese p a r t n e r s and 3 w i t h Japanese and l o c a l p a r t n e r s 1 8) , these investments r e p r e s e n t e d a precedent f o r what would become an important c h a r a c t e r i s t i c o f Japanese FDI i n the 1960s and 1970s. 3.2. JAPANESE FDI; 1951 t o 1965 At the end of 1945, Japan was s t r i p p e d of i t s e n t i r e s t o c k of overseas investments and FDI was f o r b i d d e n u n t i l 1951. A f t e r 1951 Y o s h i h a r a Kunio, The Sogo Shosha. Oxford: Oxford U n i v e r s i t y P r e s s , 1982, p. 17. Yasumoro, "The C o n t r i b u t i o n of the Sogo Shosha t o M u l t i n a t i o n a l i z a t i o n , " p. 76. - Page 14 - TABLE 3.1: NUMBER OF OVERSEAS OFFICES OF SELECTED S060 SHOSHA PRIOR TO tt.U. II NAME TOTAL AS OF HITSUI BUSSAN 91 1939 MITSUBISHI SHOJI 46 1941 C.ITOH 31 1941 IWAI 24 1941 NiSSHO 23 * 1941 •Footnote: includes 4 lanufacturinq subsidiaries in China. Source: Yoshihara Kunio, Sogo Shosha, Oxford: Oxford University Press, 1982, paqes 17, 42, 53, 59 and 69. - Page 14a - modest amounts of Japanese FDI o c c u r r e d but the average between 1951 and 1965 was l e s s than US $70 m i l l i o n , i n nominal terms, per year. There were a number of reasons behind t h i s . F i r s t , FDI was s t r i c t l y r e g u l a t e d t o prevent the o u t f l o w o f s c a r e f o r e i g n r e s e r v e s . A t the end o f 1945, the yen had been pegged a t 360 t o the d o l l a r . During the e a r l y p a r t o f t h i s p e r i o d the r a t e r e p r e s e n t e d an o v e r - v a l u a t i o n of the yen, making i t d i f f i c u l t f o r Japan t o s e l l enough products overseas t o pay f o r i t s much-needed imports o f b a s i c f o o d s t u f f s and raw m a t e r i a l s . Under the B r e t t o n Woods system, the onus o f adjustment was l a r g e l y on the d e f i c i t c o u n t r i e s through e i t h e r r e d u c t i o n s i n the c u r r e n t account d e f i c i t o r d e v a l u a t i o n . For the Japanese, s t r u g g l i n g f o r re-acceptance i n the i n t e r n a t i o n a l community, a d e v a l u a t i o n o f the yen would have r e p r e s e n t e d a major n a t i o n a l h u m i l i a t i o n . Furthermore, the Japanese need t o import c a p i t a l goods t o develop t h e i r heavy i n d u s t r i a l c a p a c i t y was a l s o a s t r o n g argument a g a i n s t d e v a l u a t i o n . To p r o t e c t the yen, the F o r e i g n Exchange and Trade C o n t r o l Act of 1949 made a l l i n t e r n a t i o n a l t r a n s a c t i o n s s u b j e c t t o l i c e n s i n g a p p r o v a l by the M i n i s t r y of Finance. As noted by Uno ( 1 9) , a second f a c t o r behind the l a c k of Japanese FDI between 1951 and 1965 was t h a t investment o p p o r t u n i t i e s i n Japan abounded. Much of the e a r l y p a r t of t h i s p e r i o d was spent r e - b u i l d i n g war-torn f a c t o r i e s and b a s i c s o c i a l Kimio Uno, Japanese I n d u s t r i a l Performance. Amsterdam: E l s e v i e r S c i e n c e P u b l i s h e r s B.V., 1987, p. 402. - Page 15 - i n f r a s t r u c t u r e . L a t e r , supported by a v a r i e t y o f government i n d u s t r i a l p o l i c y measures, Japanese manufacturers o f low technology, consumer goods expanded p l a n t c a p a c i t i e s f o r the purpose o f export. In the second h a l f o f the p e r i o d , government i n d u s t r i a l p o l i c y encouraged investment i n domestic heavy i n d u s t r i e s such as i r o n and s t e e l and p e t r o c h e m i c a l s . Supported by p r o t e c t i v e t a r i f f s and p r e f e r e n t i a l and low i n t e r e s t f i n a n c i n g , these investments tended t o be h i g h l y p r o f i t a b l e . When coupled w i t h the g e n e r a l l a c k o f f i n a n c i a l r e s o u r c e s a v a i l a b l e , the abundance o f domestic investment o p p o r t u n i t i e s tended t o p r e c l u d e the demand f o r FDI. Another c o m p e l l i n g reason f o r Japan's l i m i t e d FDI d u r i n g t h i s p e r i o d was the l a c k o f f i n a n c i a l , managerial and t e c h n o l o g i c a l s o p h i s t i c a t i o n i n Japanese i n d u s t r i e s . (One n o t a b l e e x c e p t i o n , however, was the t e x t i l e s e c t o r ) . I s o l a t i o n imposed by war had l e f t many Japanese i n d u s t r i e s t e c h n o l o g i c a l l y backward; as a r e s u l t , t he p e r i o d between 1951 and 1965 was c h a r a c t e r i z e d by massive e f f o r t s t o import and adapt Western t e c h n o l o g i e s t o Japanese manufacturing p r o c e s s e s . D e s p i t e the r e l a t i v e l y s m a l l s c a l e o f Japanese FDI between 1951 and 1963, the p e r i o d i s important because o f the resumption o f s e v e r a l pre-war FDI p r a c t i c e s noted i n s e c t i o n 3.1. F i r s t , the t r a d i n g companies re-grouped a f t e r 1951 and once a g a i n e s t a b l i s h e d overseas branch o f f i c e s i n p r i n c i p a l export and import markets. Second, the Japanese t e x t i l e i n d u s t r y , the most mature and - Page 16 - c o m p e t i t i v e o f Japan's i n d u s t r i e s i n the immediate post-war p e r i o d , f a c e d r i s i n g t a r i f f b a r r i e r s i n Southeast A s i a where host governments were implementing import s u b s t i t u t i o n p o l i c i e s . The t a r i f f b a r r i e r s , when combined w i t h lower c o s t s o f p r o d u c t i o n i n t h e s e c o u n t r i e s , t h r e a t e n e d the i n t e r n a t i o n a l c o m p e t i t i v e n e s s of Japan's t e x t i l e i n d u s t r y . As a r e s u l t , t e x t i l e producers such as Toyobo, Kanebo, and Kurabo i n v e s t e d o f f s h o r e i n L a t i n America ( p r i m a r i l y B r a z i l ) and Southeast A s i a . F i n a l l y , the p e r i o d a l s o w i t n e s s e d the resumption of investments i n overseas r e s o u r c e developments f o r the purpose of export t o Japan. These i n c l u d e d f o u r l a r g e , government-supported p r o j e c t s : A l a s k a Pulp (1953); the Nippon Usiminas ( B r a z i l ) s t e e l p r o j e c t (1957) ; A r a b i a n O i l (1958); and the North Sumatra O i l development (1960) ( ) . 3.3. JAPANESE FDI; 1966 t o 1973 T o t a l cumulative Japanese FDI i n c r e a s e d r a p i d l y d u r i n g t h i s p e r i o d , r i s i n g from US $2833 m i l l i o n i n 1966 t o US $10,030 m i l l i o n i n 1973; t h a t i s , a t a compounded annual growth r a t e o f 43.4%. The average annual flow jumped t o g r e a t e r than US $750 m i l l i o n between 1966 and 1973. T h i s r a p i d i n c r e a s e can be a t t r i b u t e d t o s e v e r a l f a c t o r s . F i r s t , a f t e r 1965, the balance of payments turne d t o s u r p l u s r e d u c i n g the p r e s s u r e on the c e n t r a l a u t h o r i t i e s t o r e s t r i c t c a p i t a l o u t f l o w s . As a r e s u l t , the p e r i o d witnessed a g r a d u a l l i b e r a l i z a t i o n o f f o r e i g n d i r e c t investment, b e g i n n i n g i n October 1969 when case by case s c r e e n i n g by the M i n i s t r y o f Finance Uno, Japanese I n d u s t r i a l Performance, p. 401. - Page 17 - was r e p l a c e d by automatic approval from the Bank of Japan f o r investments under US $200,000. In September 1970, the l i m i t f o r automatic a p p r o v a l was r a i s e d t o US $1 m i l l i o n and i t was c o m p l e t e l y e l i m i n a t e d i n J u l y 1971 ( 2 1 ) . A c c o r d i n g t o Yoshihara ( 2 2) , t h i s g r a d u a l approach r e f l e c t e d both the government's concern t h a t the BOP s u r p l u s would be s u s t a i n e d and t h a t FDI not be i n j u r i o u s t o domestic i n d u s t r i e s . By 1972, the e f f e c t s of l i b e r a l i z a t i o n were c l e a r l y f e l t ; FDI i n c r e a s e d by $3.9 b i l l i o n i n F.Y. 1972 and by $4.3 b i l l i o n i n F.Y. 1973 w i t h the combined t o t a l f o r t h e s e two y e a r s exceeding the t o t a l f o r the e n t i r e 1951 t o 1971 p e r i o d ( 2 3) . In a d d i t i o n t o l i b e r a l i z i n g c a p i t a l o u t f l o w s , the Japanese government implemented s e v e r a l measures t o encourage FDI. Included among thes e were the p r o v i s i o n of f o r e i g n c u r r e n c y loans t o r e s i d e n t s a f t e r August 1972 (designed t o e l i m i n a t e f o r e i g n exchange r i s k s ) ; the l o w e r i n g of i n t e r e s t r a t e s on monies borrowed f o r FDI through the Export-Import Bank of Japan by 1% i n November, 1972; the p r o v i s i o n o f bank loans through the Export-Import Bank f o r o p e r a t i n g funds as w e l l as machinery and equipment procurement a f t e r November 1972; tax i n c e n t i v e s a l l o w i n g f o r deductions from p r o f i t s t o be used as r e s e r v e s a g a i n s t FDI l o s s e s and c r e d i t s on Ozawa, M u l t i n a t i o n a l i s m Japanese-Style, p. 16. 2 2 Kunio Yoshihara, Japanese Investment i n Southeast A s i a . H onolulu: U n i v e r s i t y Press of Hawaii, 1978, p. 3. 2 3 Uno, Japanese I n d u s t r i a l Performance, p. 403. - Page 18 - t a x e s p a i d abroad; and, f i n a l l y , improved i n s u r a n c e schemes f o r overseas investments. In a d d i t i o n , i n the e a r l y 1970s, the government e s t a b l i s h e d the I n s t i t u t e o f Developing Economies; expanded the Japan E x t e r n a l Trade O r g a n i z a t i o n ' s (JETRO) i n f o r m a t i o n s e r v i c e ; s u b s i d i z e d overseas m i s s i o n s o f the Japan Chamber o f Commerce and o t h e r p r i v a t e o r g a n i z a t i o n s and concluded commercial t r e a t i e s w i t h f o r e i g n c o u n t r i e s t o e x p e d i t e the g r a n t i n g o f b u s i n e s s v i s a s t o Japanese managers ( ). The pro-FDI stance o f the Japanese government r e f l e c t e d t h e i r d e s i r e t o h o l d down the a p p r e c i a t i o n o f the yen and t o r e l i e v e p e r c e i v e d domestic p r e s s u r e s which t h r e a t e n e d Japan's export c o m p e t i t i v e n e s s . In 1971, the world moved t o f l o a t i n g exchange r a t e s and the yen a p p r e c i a t e d by 20% between 1971 and 1973. Domestic p r e s s u r e s i n c l u d e d r i s i n g l a b o u r shortages and a s s o c i a t e d wage h i k e s ; a c c e l e r a t i n g l a n d c o s t s ; p o l l u t i o n problems; and shortages o f new s i t e s f o r i n d u s t r i a l p r o d u c t i o n . Wage and land p r i c e i n c r e a s e s had been p a r t i c u l a r l y severe. In terms of the former, manufacturing wages rose a t an average r a t e o f 10% between 1960 and 1965. In the second h a l f o f the 1960s, r a p i d l y e s c a l a t i n g wage i n c r e a s e s exceeded p r o d u c t i v i t y g a i n s and, i n 1972, wages i n c r e a s e d by 20% ( 2 5) . I n d u s t r i a l l a n d p r i c e s rose 66% between 1966 and 1973. F i n a l l y , p o l l u t i o n problems such as the Minimata mercury p o i s o n i n g i n c i d e n t i n the l a t e 1960s g a l v a n i z e d p u b l i c support f o r Yoshihara, Japanese Investment i n Southeast A s i a , p. 12. I b i d . f p. 4. - Page 19 - i n c r e a s e d investments i n p o l l u t i o n c o n t r o l and f o r f u l l c o n s u l t a t i o n between i n d u s t r y and the communities which c o u l d be a f f e c t e d by p o t e n t i a l developments. These "push" f a c t o r s d r i v i n g Japanese manufacturers o f f s h o r e were r e i n f o r c e d by s e v e r a l " p u l l " f a c t o r s . Japan's export success i n the l a t e 1960s and e a r l y 1970s had met w i t h r i s i n g c r i t i c i s m and the i n t r o d u c t i o n of t r a d e r e s t r i c t i o n s i n s e v e r a l of her p r i n c i p a l export markets i n Southeast A s i a . At the same time, many Southeast A s i a n c o u n t r i e s were p u r s u i n g export promotion s t r a t e g i e s designed t o encourage f o r e i g n c a p i t a l and technology investments. These p o l i c i e s i n c l u d e d the e s t a b l i s h m e n t of export p r o c e s s i n g zones a l l o w i n g f o r the d u t y - f r e e import of i n p u t s , u n r e s t r i c t e d r e p a t r i a t i o n of f o r e i g n e a r n i n g s and the p r o v i s i o n of tax i n c e n t i v e s t o f o r e i g n i n v e s t o r s . A f t e r 1970, f o r example, the government o f Korea allowed f o r 100% ownership o f companies by f o r e i g n i n v e s t o r s , exempted new companies from t a x a t i o n f o r the f i r s t 5 y e a r s o f o p e r a t i o n and gave a 50% t a x r e d u c t i o n on c o r p o r a t e p r o f i t s f o r the succeeding 3 years ( 2 6) . Although formal d i p l o m a t i c r e l a t i o n s were not e s t a b l i s h e d between Japan and Korea u n t i l 1965, by 1974 the number o f Japanese investment p r o j e c t s i n Korea f a r exceeded those i n Taiwan, Singapore and Hong Kong (see T a b l e 3.2). A second i n f l u e n c e which encouraged o f f s h o r e Japanese manufacturing investment i n Southeast A s i a was the d i s m a n t l i n g of Yoshihara, Japanese Investment i n Southeast A s i a , p. 18. - Page 20 - TABLE 3.2: APPROVAL OF INVESTMENT PROJECTS IN EAST ASIA, 1960-1974 YEAR TAIWAN KOREA H0N6 KONG SIN6AP0RE Before 1960 3 - 1 1 1960 4 - 1 - . 1961 2 - 4 1 1962 9 - 1 - 1963 8 - 7 8 1964 - - 4 - 1965 9 - 3 3 1966 24 10 4 1967 46 3 2 4 1968 80 8 1 3 1969 73 15 6 10 1970 50 58 5 7 1971 16 51 10 14 1972 13 113 16 26 1973 68 290 19 38 1974 (1-3) 21 43 7 2 TOTAL 426 581 97 121 MEDIAN (YEAR) 1969 1973 1971 1972 indicates no investients SOURCE: Kunio Yoshihara, Japanese Investient in Southeast Asia, Honolulu: The University of Honolulu, 1978. p.18 - Page 20a - t r a d e b a r r i e r s a g a i n s t imports from d e v e l o p i n g c o u n t r i e s a f t e r 1970. Japanese t a r i f f s , n o t o r i o u s l y h i g h i n the 1950s and 1960s were g r a d u a l l y r e l a x e d a f t e r 1967 w i t h the s i g n i n g o f the Kennedy Round o f GATT. Between 1968 and 1971, t a r i f f s on over 2000 commodities were lowered by 50% and an a d d i t i o n a l 20% r e d u c t i o n was made on 1900 goods a f t e r 1972 ( 2 7) More i m p o r t a n t l y , a f t e r August 1971, Japan allowed the d u t y - f r e e import of manufactured goods from l e s s developed c o u n t r i e s , up t o c e r t a i n p r e s c r i b e d • • • • 28 • l i m i t s . A c c o r d i n g t o Yoshihara ( ) , imports under t h i s scheme amounted t o $760 i n 1972 and $806 m i l l i o n i n 1973. These t a r i f f r e d u c t i o n s p r o v i d e d an i n c e n t i v e f o r Japanese f i r m s t o l o c a t e p r o d u c t i o n o f f s h o r e i n nearby Southeast A s i a and export t o Japan as w e l l as t h i r d c o u n t r i e s . F i n a l l y , Japan's r a p i d i n d u s t r i a l r e s t r u c t u r i n g d u r i n g the 1960s towards chemical and heavy i n d u s t r i e s , produced an i n s a t i a b l e demand f o r raw m a t e r i a l s a t s t a b l e p r i c e s . For example, between 1964 and 1968 Japan's demand f o r petroleum grew a t an average annual r a t e o f almost 18% ( 2 9) . The demand f o r copper, aluminum, n i c k e l and crude s t e e l grew a t 11.7, 21.0, 25.2, and 20.0 percent, r e s p e c t i v e l y over the same p e r i o d . By 1969, Japan's share of the 2 7 I b i d . . p. 5. 28 • • • Yoshihara, Japanese Investment i n Southeast A s i a , p. 6. 2 9 Ozawa, M u l t i n a t i o n a l i s m . J a p a n e s e - S t y l e , p. 159. - Page 21 - OECD c o k i n g c o a l t r a d e exceeded 41%, up from 15.8% i n 1965 ( ) and the c o u n t r y was a l s o a major importer o f i r o n ore. In a d d i t i o n , Japan had developed a pronounced dependency on imported f o o d s t u f f s . By 1974, Japan imported 95% of the wheat consumed, 96% of the soybean and 82% o f the b a r l e y ( 3 1) . T h i s s t r o n g dependence on overseas r e s o u r c e s u p p l i e s , coupled w i t h Japan's h i g h economic growth r a t e s d u r i n g the 1960s (averaging i n excess o f 10% per annum between 1964 and 1968), p r o v i d e d a s i g n i f i c a n t i n c e n t i v e f o r e x t r a c t i v e investment o f f s h o r e . Table 3.3 i n d i c a t e s the percentage o f Japanese r e s o u r c e consumption i n 1969 p r o v i d e d by Develop & Import (D&I) arrangements. The D&I p r o j e c t s were g e n e r a l l y undertaken by consortiums o f Japanese buyers which p r o v i d e d f i n a n c i a l b acking ( p r i n c i p a l l y through l o n g - term l o a n s and purchase agreements, but a l s o through e q u i t y p a r t i c i p a t i o n ) t o develop overseas r e s o u r c e s . Often, the consortiums would c o n s i s t o f s e v e r a l buyers from the same k e i r e t s u or, l a r g e o l i g o p o l i s t i c i n d u s t r i a l group, o r i g i n a t i n g from the former z a i b a t s u conglomerates. However, i n the case o f re s o u r c e developments such as c o a l o r i r o n ore, i n t e r - k e i r e t s u consortiums were a l s o a c t i v e ; j o i n t p u r c h a s i n g by the Japanese s t e e l i n d u s t r y was one such example of t h i s type o f a c t i v i t y . The p r o j e c t s were Japan's share o f OECD t r a d e i n o t h e r raw m a t e r i a l s showed s i m i l a r i n c r e a s e s w i t h i r o n ore r i s i n g from 23.7 t o 39.3%; timber from 15.4 t o 29.9%; copper from 9.5 t o 19.1%; and i n crude o i l from 12.6 t o 15.6%. Ozawa, M u l t i n a t i o n a l i s m . J a p a n e s e - S t y l e , p. 160. 3 1 I b i d . . 160. - Page 22 - TABLE 3.3: SUPPLY SOURCES OF SELECTED RESOURCES, 1969 DEVELOP-AND-IMPORT DOMESTIC (D 4 1) REGULAR SUPPLY INVESTMENT ABROAD IMPORT PURCHASE RESOURCE I % I COPPER 28.3 16.1 (11.6)* 55.6 LEAD 44.7 6.3 49.0 ZINC 51.1 2.5 46.4 ALUMINUM (BAUXITE) - 9.6 90.4 NICKEL - 6.4 93.6 IRON ORE 14.0 82.5 (75.2)* 3.5 COAL 22.4 68.6 (61.5)* 9.0 CRUDE OIL 0.5 10.5 89.1 NATURAL GAS 95.6 4.4 URANIUM - 0.0 100.0 •Footnote: Percentages in parentheses show those i i p o r t s developed under longteri loans instead of direct investment. Source: Terutomo Ozawa, M u l t i n a t i o n a l s , Japanese Style, Princeton: Princeton University Press, 1979, p. 176. - Page 22a - u s u a l l y o r g a n i z e d by the k e i r e t s u major t r a d i n g company and f i n a n c e d by the group's bank ( f o r example, the M i t s u b i s h i Group would be l e d by M i t s u b i s h i T r a d i n g Company and f i n a n c e d by M i t s u b i s h i Bank.) These consortium-backed investments reduced the f i n a n c i a l r i s k o f overseas developments. As noted by Ozawa ( 3 2) , "Group investment...plays an important r i s k - s h a r i n g f u n c t i o n , because l a r g e - s c a l e investments, p a r t i c u l a r l y i n r e s o u r c e development, c a l l f o r huge sums of c a p i t a l o u t l a y i n v o l v i n g extremely h i g h r i s k s . . . t h e l i n k a g e - s h a r i n g f u n c t i o n p l a y e d by group investment appears t o be a p o s i t i v e and unique c h a r a c t e r i s t i c of Japan's system-focused s t r a t e g y f o r overseas e x t r a c t i v e v e n t u r e s . " The importance o f overseas e x t r a c t i v e investments i s c o r r o b o r a t e d by s t a t i s t i c s about the type of FDI undertaken d u r i n g t h i s p e r i o d . As i n d i c a t e d i n T a b l e 3.4, mining investments i n c r e a s e d a t an average annual r a t e o f 26% between F.Y. 1965 and F.Y. 1972, r e p r e s e n t i n g the s i n g l e l a r g e s t p r o p o r t i o n of Japanese FDI (34%) i n F.Y. 1972. However, some of the s t r o n g e s t r a t e s o f growth d u r i n g the p e r i o d F.Y. 1965 t o F.Y. 1972 were witnessed o u t s i d e the primary s e c t o r investments. T h i s was most n o t a b l e i n overseas investments i n chemical manufacturing, e l e c t r i c a l machinery ( i n c l u d i n g consumer e l e c t r o n i c s ) p r o d u c t i o n , and i n the f i n a n c e - i n s u r a n c e and commerce s e c t o r s w i t h compounded annual r a t e s of growth of 42, 37, 27 and 26% r e s p e c t i v e l y . FDI by the t e x t i l e s e c t o r a l s o r e a l i z e d an annual r a t e o f growth i n excess of 20%. The r a p i d growth i n manufacturing investments was l e d by l a b o u r i n t e n s i v e i n d u s t r i e s Ozawa, M u l t i n a t i o n a l i s m . J a p a n e s e - S t y l e , p. 187. - Page 23 - TABLE 3.4: JAPANESE FDI CLASSIFIED BY INDUSTRY, ON A REPORTED BASIS, F.Y. 1%5 TO F.Y. 1972, CUMULATIVE TOTALS FOR SPECIFIED FISCAL YEAR, MILLIONS OF 1980 U.S. * ANNUAL X OF I OF RATE OF YEAR 1965 TOTAL 1972 TOTAL GROWTH INDUSTRY Manufacturing: Food Stuffs 74 2.8 185 1.5 13.9 Textile 173 6.5 776 6.1 23.9 Pulp fc Lufiber Products 205 7.7 552 4.4 15.2 Chemicals 22 0.8 263 2.1 42.2 Iron I Ferrous Metals 168 6.4 448 3.5 15.0 General Machinery 75 2.8 239 1.9 18.0 E l e c t r i c a l Machinery 35 1.3 321 2.5 37.1 Transport Machinery 160 6.0 265 2.1 7.5 Others 59 2.2 218 1-7 20.6 Sub-Total 972 36.7 3267 25.9 18.9 Primary Industries: Agriculture-Forestry 41 1.6 155 1.2 20.7 Fisheries 24 0.9 91 0.7 20.9 Minina 848 32.0 4241 33.6 25.9 Sub-Total 914 34.5 4487 35.5 25.5 Tertiary Industries: Construction 46 1.8 88 0.7 8.9 Commerce 296 11.2 1410 11.2 25.0 Finance-Insurance 191 7.2 1009 8.0 26.8 Others 231 8.7 2375 18.8 39.5 Sub-Total 766 28.9 4882 38.6 30.3 Total 2652 100.0 12636 100.0 25.0 - Page 23a - ( i n the case o f consumer e l e c t r o n i c s and t e x t i l e s ) and r e s o u r c e - i n t e n s i v e i n d u s t r i e s ( i n the case of c h e m i c a l s ) . Investments i n t h e commerce and f i n a n c e - i n s u r a n c e s e c t o r s were undertaken l a r g e l y t o support export o f f e n s i v e s and, i n the case of the l a t t e r , t o p r o v i d e f i n a n c i a l s e r v i c e s t o the growing number o f Japanese companies moving abroad. R e g i o n a l l y , as i n d i c a t e d i n T a b l e 3.5, Japanese FDI was c o n c e n t r a t e d i n North America (24%) and A s i a (23%) w i t h Europe and L a t i n America a c c o u n t i n g f o r 19 and 18%, r e s p e c t i v e l y . While a l l r e g i o n s e x p e r i e n c e d phenomenal r a t e s of growth i n Japanese FDI, Oceania and Europe, w i t h v i r t u a l l y no Japanese investment i n 1965, saw cumulative t o t a l s grow a t annual r a t e s i n excess of 60%. Oceania r e a l i z e d a s i g n i f i c a n t p r o p o r t i o n of Japanese mining investments w h i l e Japanese commercial and f i n a n c i a l investments r a p i d l y i n c r e a s e d i n Europe d u r i n g t h i s p e r i o d . 3.4. JAPANESE FDI; 1974 t o 1980 The r a p i d expansion of Japanese FDI witnessed between 1965 and 1973 was i n t e r r u p t e d by the o i l c r i s i s o f 1973 and the ensuing g l o b a l r e c e s s i o n . Although net FDI averaged about $2 b i l l i o n per annum between 1974 and 1980, net FDI d i d not r e c o v e r t h e i r 1973 l e v e l s u n t i l a f t e r 1981 (see Table 1.1). The d e c l i n e i n Japanese FDI was l a r g e l y induced by the world r e c e s s i o n which f o l l o w e d the 1973 o i l shock. T h i s reduced the p r o f i t a b i l i t y o f Japanese b u s i n e s s e s both a t home and abroad and - Page 24 - TABLE 3.5: JAPANESE FDI BY RE6I0N ON A CUMULATIVE BASIS, F.Y. 1965 TO F.Y. 1973, MILLIONS OF 1980 U.S. $ ANNUAL I OF I OF RATE OF YEAR 1965 TOTAL 1973 TOTAL 6R0WTH RE6I0N N. AMERICA 666 25.4 4069 24.0 25.4 LATIN AMERICA 776 29.6 2993 17.6 18.4 ASIA 519 19.8 3947 23.3 28.9 EUROPE 69 . 2.6 3299 19.4 62.1 OCEANIA 19 0.7 1058 6.2 64.9 AFRICA 30 1.2 418 2.5 38.8 MIDDLE EAST 541 20.7 1183 7.0 10.3 TOTAL 2622 100.0 16969 100.0 26.3 - Page 24a - p r o v i d e d an u n c e r t a i n environment f o r f o r e i g n investment. However, o t h e r f a c t o r s c o n t r i b u t e d t o the d e c l i n e o f Japanese FDI. For example, i n Southeast A s i a r i s i n g n a t i o n a l i s m r e s u l t e d i n a n t i - Japanese demonstrations i n Bangkok and J a k a r t a d u r i n g the v i s i t of Prime M i n i s t e r Kakuei Tanaka i n 1974. The a n t i - J a p a n e s e sentiment was l a r g e l y spawned by the v i s i b l e c o n c e n t r a t i o n o f Japanese investment i n t h i s r e g i o n . As i n d i c a t e d i n T a b l e 3.6, American investment was comparable t o Japanese FDI i n Southeast A s i a a t the end o f 1974, ($3,533 m i l l i o n i n t o t a l US FDI vs $3,764 m i l l i o n i n t o t a l Japanese FDI, nominal terms). However, the number of p r o j e c t s undertaken by Japanese companies i n c o u n t r i e s f o r which i n f o r m a t i o n i s a v a i l a b l e ( 3 3) , exceeded the c o r r e s p o n d i n g number of American p r o j e c t s by 2.7 times. T h i s p r o f u s i o n of p r o j e c t s tended t o make the Japanese economic presence more conspicuous than t h a t suggested by i t s t o t a l v a l u e of investment. The c o n c e n t r a t i o n of Japanese f i r m s i n Southeast A s i a r e s u l t e d from the "bandwagon e f f e c t o f i n v e s t m e n t , " ( 3 4 ) , where the r e l o c a t i o n o f one Japanese f i r m was u s u a l l y f o l l o w e d by s e v e r a l i n the same i n d u s t r y . A c c o r d i n g t o Murakami t h i s " f o l l o w the l e a d e r " investment p a t t e r n r e s u l t e d i n the t r a n s p l a n t i n g of e x c e s s i v e c o m p e t i t i o n by the same f i r m s i n Japan t o ASEAN and NIC n a t i o n s . Because Japanese Indonesia, Taiwan, Hong Kong and South Korea. 3 4 H i k o j i Katano, A t s u s h i Murakami, K i y o s h i Ikemoto, e d i t , Japan's D i r e c t Investment t o Asean C o u n t r i e s . Kobe: Research I n s t i t u t e f o r Economics and Business A d m i n i s t r a t i o n , Kobe U n i v e r s i t y , 1978, p. 8. - Page 25 - TABLE 3.6: JAPANESE FDI.BY REGION ON A CUMULATIVE BASIS, F.Y. 1974 TO F.Y. 1980,. MILLIONS OF 1980 U.S. $ ANNUAL I OF I OF RATE OF YEAR 1974 TOTAL 1980 TOTAL GROWTH REGION N. AMERICA 4120 23.8 9798 26.8 15.5 LATIN AMERICA 3434 19.8 6168 16.9 10.3 ASIA 4267 24.6 9830 26.9 14.9 EUROPE 2989 17.3 4471 12.3 6.9 OCEANIA 1023 5.9 2525 6.9 16.2 AFRICA 421 2.4 1445 4.0 22.8 MIDDLE EAST 1067 6.2 2259 6.2 13.3 TOTAL 17321 100.0 36496 100.0 13.2 - Page 25a - investments were g e n e r a l l y undertaken i n l a b o u r i n t e n s i v e i n d u s t r i e s , domestic f i r m s were o f t e n unable t o develop c o m p e t i t i v e l y . T h i s problem of o v e r - c o n c e n t r a t i o n was not l i m i t e d t o Southeast A s i a . A f t e r 1974, t h e r e was i n c r e a s i n g c r i t i c i s m of Japanese a c q u i s i t i o n s i n Hawaii f o l l o w i n g a surge of investment i n h o t e l s , g o l f courses, condominiums and o t h e r r e a l e s t a t e between 1970 and 1973 ( 3 5) . D e s p i t e the problems r e s u l t i n g from g l o b a l r e c e s s i o n and r i s i n g n a t i o n a l i s m among host c o u n t r i e s , Japanese FDI recovered i n the l a t t e r h a l f o f the 1970s, jumping from $20,257 m i l l i o n , on a n o t i f i c a t i o n s b a s i s , i n 1975 t o $36,496 m i l l i o n i n 1980. The i n c r e a s e i n FDI was a t t r i b u t a b l e t o the r e c o v e r y of the Japanese economy a f t e r 1975; the s u s t a i n e d a p p r e c i a t i o n o f the yen throughout the decade (with the e x c e p t i o n of 1975); and c o n t i n u a l l y a c c e l e r a t i n g domestic c o s t s f o r l a n d , l a b o u r and energy. In a d d i t i o n , Japan became the s u b j e c t of g r e a t e r import r e s t r a i n t s by the i n d u s t r i a l i z e d n a t i o n s . The most n o t a b l e of these were the import r e s t r a i n t s i n t r o d u c e d on c o l o u r t e l e v i s i o n imports by the U n i t e d S t a t e s between J u l y 1977 and June 1980 ( 3 6) . L o c a l p r o d u c t i o n o f c o l o u r t e l e v i s i o n s , i n i t i a t e d i n the U n i t e d S t a t e s i n the f i r s t h a l f o f the 1970s, was r a p i d l y a c c e l e r a t e d . Sony was the f i r s t e l e c t r o n i c s f i r m t o undertake FDI i n the US i n 1972 with 3 5 James C. Abegglen & George S t a l k J r . , K a i s h a : The Japanese C o r p o r a t i o n . Tokyo: C h a r l e s E. T u t t l e Company, 1985, p. 257. 3 6 Uno, Japanese I n d u s t r i a l Performance, p. 405. - Page 26 - c o n s t r u c t i o n o f a p l a n t i n San Diego, but M a t s u s h i t a soon f o l l o w e d , a c q u i r i n g Motorola's TV d i v i s i o n i n 1974. A f i n a l s t i m u l a n t t o renewed FDI i n t h i s p e r i o d was p r o v i d e d by the g r e a t l y i n c r e a s e d degree o f i n t e r n a t i o n a l s o p h i s t i c a t i o n o f Japanese companies, i n terms of the managerial, t e c h n o l o g i c a l and the f i n a n c i a l r e s o u r c e s a v a i l a b l e f o r overseas investment. R e g i o n a l l y , the i n c r e a s e i n Japanese FDI was most n o t a b l e i n North America (from $4977 m i l l i o n i n 1975 t o $9798 m i l l i o n i n 1980); A s i a (from $5361 m i l l i o n i n 1975 t o $9830 m i l l i o n i n 1980); Oceania (from $1182 m i l l i o n i n 1975 t o $2525 m i l l i o n i n 1980) and i n the Mid d l e E a s t (from $1240 m i l l i o n i n 1975 t o $2259 m i l l i o n i n 1980). By 1980, Japanese cumulative investment was e v e n l y d i v i d e d between North America and A s i a (27%). (See T a b l e 3.6). In terms o f s e c t o r a l developments, between 1974 and 1980, t e r t i a r y s e c t o r investments became more s i g n i f i c a n t w h i l e investments i n the overseas r e s o u r c e developments, as a percentage o f o v e r a l l investment, d e c l i n e d . In 1972, t e r t i a r y investments accounted f o r 39% o f t o t a l investments, f o l l o w e d c l o s e l y by primary investments (36%) and manufacturing investments (26%). By 1980, t e r t i a r y investments had expanded t o 44% of t o t a l investments with manufacturing and primary investments a c c o u n t i n g f o r 34% and 22%, r e s p e c t i v e l y . I n d u s t r i e s r e a l i z i n g the l a r g e s t g a i n s d u r i n g the p e r i o d were chemicals (up 898%) ; i r o n and f e r r o u s m a t e r i a l s (up 485%); e l e c t r i c a l machinery (up 392%); c o n s t r u c t i o n (up 350%); commerce (up 284%) ; t r a n s p o r t machinery (up 268%) ; and t e x t i l e s (up - Page 27 - 11.1%) . Although mining investments s t i l l r e p r e s e n t e d the l a r g e s t p r o p o r t i o n o f t o t a l cumulative investment i n 1980, i t s share of t o t a l investment had f a l l e n t o 19% i n FY 1980, from 34% i n FY 1972. (See T a b l e 3.7). The r e l a t i v e d e c l i n e of mining investments and of the primary s e c t o r o v e r a l l , was due t o the slower growth o f t h e Japanese economy a f t e r 1975 and the d e c l i n i n g importance of heavy i n d u s t r y . Although Japanese r e a l GNP c o n t i n u e d t o grow a t around 5% a f t e r 1977, t h i s r e p r e s e n t e d a h a l v i n g of the growth r a t e s experienced d u r i n g the 1960s and e a r l y 1970s. C o n c e n t r a t i o n i n heavy i n d u s t r y and raw m a t e r i a l s p r o c e s s i n g i n d u s t r i e s had been s u s t a i n a b l e w hile Japan was a b l e t o access the necessary r e s o u r c e i n p u t s under s t a b l e p r i c e c o n d i t i o n s . However, these c o n d i t i o n s changed a f t e r the l a t e 1960s. A c c o r d i n g t o Abegglen ( 3 r) , " I t was c l e a r by the l a t e 1960s t h a t raw m a t e r i a l s p r o c e s s i n g i n d u s t r i e s would come under p r e s s u r e t o reduce p r o d u c t i o n i n Japan. The c h o i c e was e i t h e r t o source s e m i - f i n i s h e d or f i n i s h e d p roduct from o f f - s h o r e , or move o f f - s h o r e t o c o n t r o l t h e s o u r c i n g by i n v e s t i n g i n f a c i l i t i e s i n f o r e i g n c o u n t r i e s . T h i s s h i f t i n s t r u c t u r e away from on-shore p r o c e s s i n g was l i k e l y f o r a v a r i e t y of reasons; p r e s s u r e s from m a t e r i a l - s u p p l y i n g c o u n t r i e s t o add v a l u e t o the m a t e r i a l s i n the source c o u n t r y b e f o r e t h e i r export; c o s t s i n Japan from v e r y s t r i n g e n t p o l l u t i o n c o n t r o l requirements; and energy and l a n d c o s t disadvantages i n Japan. The p r o b a b i l i t y of t h i s i n d u s t r i a l s t r u c t u r e change became an i n e v i t a b i l i t y as energy p r i c e s exploded i n the 1970s." The r i s i n g f a c t o r i n p u t c o s t s and s t r u c t u r a l changes i n the economy had a profound e f f e c t on Japan's p e t r o c h e m i c a l i n d u s t r y . A f t e r 1974, f o r e i g n chemical manufacturing investments i n c r e a s e d Abegglen & S t a l k , Kaisha: The Japanese C o r p o r a t i o n , p. 244. - Page 28 - TABLE 3.7: JAPANESE FDI CLASSIFIED BY INDUSTRY, ON A REPORTED BASIS, F.Y. 1972 TO F.Y. 1980, CUMULATIVE TOTALS FOR SPECIFIED FISCAL YEAR, CONSTANT 1980 DOLLARS, MILLIONS OF U.S.* ANNUAL I OF I OF RATE OF YEAR 1972 TOTAL 1980 TOTAL GROWTH INDUSTRY Manufacturing: Food Stuffs 185 1.5 587 1.6 15.6 Textile 776 6.1 1637 4.5 9.8 Pulp & Lumber Products 552 4.4 758 2.1 4.0 Chemicals 263 2.1 2626 .7.2 33.3 Iron & Ferrous Metals 448 3.5 2619 7.2 24.7 General Machinery ,239 1.9 . 894 2.4 17.9 E l e c t r i c a l Machinery 321 2.5 1579 4.3 22.0 Transport Machinery 265 2.1 979 2.7 17.7 Others 218 1-7 894 2.4 19.3 Sub-Total 3267 25.9 12573 34.4 18.3 Primary Industries: Agriculture-Forestry 155 1.2 609 1.7 18.7 Fisheries 91 0.7 301 0.8 16.1 Mining 4241 33.6 7071 19.4 6.6 Sub-Total 4487 35.5 7981 21.9 7.5 Tertiary Industries: Construction 88 0.7 396 1.1 20.7 Commerce 1410 11.2 5409 14.8 18.3 Finance-Insurance 1009 8.0 2426 6.6 11.6 Others 2375 18.8 7712 21.1 15.9 Sub-Total 4882 38.6 15943 43.7 15.9 Total 12636 100.0 36497 100.0 14.2 - Page 28a - s u b s t a n t i a l l y , as Japanese p e t r o c h e m i c a l manufacturers responded t o i n c r e a s e d demands by the o i l - p r o d u c i n g n a t i o n s f o r g r e a t e r value-added p r o d u c t i o n a t home. R i s i n g c o s t s of p r o d u c t i o n d o m e s t i c a l l y and i n c r e a s e d u n c e r t a i n t y about the r e l i a b i l i t y o f supply sources f u r t h e r r e i n f o r c e d the need t o r e l o c a t e p r o d u c t i o n o f f s h o r e . The expansion i n p e t r o c h e m i c a l investments i n the Middle E a s t , e s p e c i a l l y , was accompanied by l a r g e i n c r e a s e s i n government a i d and l o a n s t o these r e g i o n s . T h i s a s s i s t a n c e was intended t o ensure an u n i n t e r r u p t e d flow of o i l s u p p l i e s s i n c e Japan, even by 1978, was s t i l l dependent on the Middle E a s t f o r over 85% of i t s o i l s u p p l i e s . Loans extended by the Japanese government t o the M i d d l e E a s t i n c r e a s e d t o $3 b i l l i o n (nominal d o l l a r s ) i n 1973, up • • • 38 5 times from the c o r r e s p o n d i n g amount extended i n 1972 ( ) . The i n c r e a s e i n government a i d and promises f o r c o r p o r a t e investment was openly welcomed by the Middle E a s t host c o u n t r i e s and a f t e r January 1974, Japan was p l a c e d on OPEC's l i s t o f " f r i e n d l y n a t i o n s . " A f t e r r e a c h i n g an economic and t e c h n o l o g i c a l agreement w i t h the Japanese government i n February 1974, the Saudi A r a b i a n O i l M i n i s t e r , Sheik Ahmed Z a k i Yamani i s r e p o r t e d t o have s t a t e d t h a t "Japan i n the No. 1 p o s i t i o n both t o h e l p us and t o be the r e c i p i e n t o f Saudi A r a b i a n o i l on a l o n g term b a s i s . " ( 3 9) As u s u a l , the soga shosha were a t the f o r e f r o n t o f t h i s surge i n investment i n the Middle E a s t . The t r a d i n g companies e i t h e r Ozawa, M u l t i n a t i o n a l i s m , Japanese-Syle. p.144. I b i d . . p. 145. - Page 29 - p a r t i c i p a t e d i n , o r a c t e d as i n t e r m e d i a r i e s f o r p r a c t i c a l l y a l l the Japanese i n d u s t r i a l p r o j e c t s i n the r e g i o n ( 4 0) . I n c l uded among these p r o j e c t s was the turnkey c o n t r a c t s i g n e d by SONATRAC, A l g e r i a ' s state-owned o i l - g a s c o r p o r a t i o n , w i t h C.Itoh and Toyo E n g i n e e r i n g t o b u i l d a huge maintenance and r e p a i r complex f o r A l g e r i a ' s p i p e l i n e , o i l r e f i n i n g , p e t r o - c h e m i c a l , LNG and mining i n d u s t r i e s ( 4 1) . Other l a r g e p r o j e c t s o r g a n i z e d by the t r a d i n g companies i n c l u d e d the $200 m i l l i o n d i r e c t - r e d u c e d i r o n p l a n t e s t a b l i s h e d , i n 1974, a t A l e x a n d r i a as a j o i n t v e n t u r e between the E g y p t i a n government (50% ownership) and C.Itoh, K o r f - S t a h l o f West Germany, and Compahia V a l e do Rio Doce of B r a z i l ( 4 2) . The Middle E a s t e r n p r o j e c t s were not without t h e i r d i f f i c u l t i e s ; i n the e a r l y 1970s, M i t s u i Bussan agreed t o o r g a n i z e the c o n s t r u c t i o n of the world's l a r g e s t p e t r o c h e m i c a l p r o j e c t i n I r a n i n exchange f o r an o i l c o n c e s s i o n r i g h t i n the L o r e s t a n area southwest of Teheran ( 4 3) . The p r o j e c t , i n which M i t s u i Bussan i n v e s t e d i n excess of $500 m i l l i o n (the l a r g e s t s i n g l e f o r e i g n investment o f the M i t s u i group), f a c e d c o n s t r u c t i o n d e l a y s and f i n a l l y , an i n d e f i n i t e postponement o f completion a f t e r the f a l l o f the Shah i n 1979. Other l a r g e - s c a l e investments undertaken by Japanese companies *u I b i d . , p. 145. 4 1 I b i d . . p. 146. Ozawa, M u l t i n a t i o n a l i s m . Japanese S t y l e , p. 147. 4 3 Yoshihara, The Sogo Shosha. p. 119. - Page 30 - d u r i n g t h i s p e r i o d , i n c l u d e d major p r o j e c t s i n B r a z i l and I n d o n e s i a . B r a z i l has l o n g been a po p u l a r host t o Japanese FDI, i n i t i a l l y i n the t e x t i l e and o t h e r l i g h t manufacturing s e c t o r s d u r i n g the 1950s and 1960s, but l a t e r i n s h i p b u i l d i n g and i r o n & s t e e l . However, a f t e r 1974, f u r t h e r l a r g e investments were undertaken i n the r e s o u r c e p r o c e s s i n g i n d u s t r i e s i n c l u d i n g a l a r g e e l e c t r i c power and aluminum p r o j e c t i n the Amazon b a s i s . The Japanese consortium, o r i g i n a l l y c o n s i s t i n g of 5 major s m e l t e r s but l a t e r expanding t o i n c l u d e p a r t i c i p a t i o n by the governmental agency OECF (the Overseas Economic Cooperation Fund) and 32 p r i v a t e c o r p o r a t i o n s , has a 49% ownership i n the p r o j e c t . The remaining 51% i s c o n t r o l l e d by the s t a t e mining company Companhia V a l e do Rio Doce ( 4 4) . In a d d i t i o n , o t h e r l a r g e investments have been made i n s t e e l making (Kawasaki S t e e l ' s 24.5% p a r t i c i p a t i o n i n the Tubarao ste e l - m a k i n g p r o j e c t i n E s p i r i t o Santo S t a t e ) ; p u l p and paper ( O j i Paper's investment i n the Cinebra pulp p r o j e c t i n the s t a t e of Minas G e r a i s ) ; and f e r t i l i z e r s (Sumitomo Chemicals and Ataka of Japan's investment w i t h a l o c a l p a r t n e r t o b u i l d a m i l l i o n ton c a p a c i t y p l a n t i n R e c i f e ) . In Indonesia, a l s o a p o p u l a r host c o u n t r y t o Japanese investment, the $800 m i l l i o n Asahan e l e c t r i c power and aluminum p r o j e c t i s another example of resource-based investment undertaken a f t e r 1974. The r e f i n e r y i s 90% owned by Japanese i n t e r e s t s , however, i n i t i a l p l a n s were t o t r a n s f e r 25% of the shares o f the p r o j e c t t o the Indonesian government 10 years I b i d . . p. 135. - Page 31 a f t e r i t s completion. In a d d i t i o n , c o n t r o l o f the 430,000 k i l o w a t t h y d r o - e l e c t r i c power p l a n t i s t o r e v e r t t o the Indonesian government a f t e r 30 y e a r s . A f i n a l c h a r a c t e r i s t i c of Japanese FDI undertaken between 1974 and 1980 i s the l a r g e number of overseas investments made by s m a l l t o medium s i z e d f i r m s . At the end o f the 1970s, s m a l l t o medium s c a l e e n t e r p r i s e s accounted f o r 41.8% o f the t o t a l number of o u t s t a n d i n g Japanese manufacturing p r o j e c t s overseas ( 4 5) . However, when examined on a country by country b a s i s , the r a t i o of p a r t i c i p a t i o n by these f i r m s was h i g h e r than t h a t o f l a r g e companies i n some c o u n t r i e s . In Taiwan, they r e p r e s e n t e d 58.6% of the t o t a l investment p r o j e c t s and i n South Korea, they r e p r e s e n t e d 70% ( 4 6) . In 1979, 82.3% of the t o t a l v a l u e of manufacturing investments made by s m a l l t o medium s i z e f i r m s were l o c a t e d i n A s i a . A c c o r d i n g t o Ozawa, t h i s predominance of s m a l l and medium s i z e d f i r m s i n A s i a r e f l e c t e d not o n l y the t r a d i t i o n a l domination o f such e n t e r p r i s e s i n Japan's i n d u s t r i a l s t r u c t u r e but a l s o the "unique p r o c e s s by which the l a b o u r - i n t e n s i v e , low- p r o d u c t i v i t y end of the d u a l i n d u s t r i a l s t r u c t u r e (was) being g r a d u a l l y pushed out of Japan and sent t o more labour-abundant n e i g h b o r i n g c o u n t r i e s through d i r e c t f o r e i g n investment" ( 4 7) . These Yoshihara, The Sogo Shosha. p. 26. Small t o medium s i z e f i r m s r e f e r t o those companies having employees o f 300 o r fewer or p a i d i n c a p i t a l of Y100 m i l l i o n or l e s s . 4 6 I b i d . . p. 28. i 4 7 Yoshih ara, The Sogo Shosha. p. 28. - Page 32 - p r o j e c t s were c o n c e n t r a t e d i n the t e x t i l e s , s u n d r i e s , metal p r o d u c t s and r e l a t i v e l y u n s o p h i s t i c a t e d l i g h t manufacturing i n d u s t r i e s , a c c o u n t i n g f o r 65.5% of the Japanese FDI i n t e x t i l e s , 50.2% of her investments i n e l e c t r i c a l a p p l i a n c e s and 60.7% of her investments i n s u n d r i e s b e i n g l o c a t e d i n A s i a , d u r i n g 1978. T h i s l a r g e overseas investment presence by s m a l l and medium s c a l e companies was i n d i r e c t c o n t r a s t t o t y p i c a l US m u l t i n a t i o n a l investments. The l a t t e r was g e n e r a l l y undertaken by l a r g e , t e c h n i c a l l y and f i n a n c i a l l y , s o p h i s t i c a t e d f i r m s which demonstrated s t r o n g c o m p e t i t i v e advantages i n ( p r i m a r i l y ) growth i n d u s t r i e s . On t h e o t h e r hand, a l a r g e p r o p o r t i o n of Japanese investment p r i o r t o the 1970s was undertaken by f i r m s which were r e l a t i v e l y u n s o p h i s t i c a t e d i n terms of f i n a n c i a l and managerial r e s o u r c e s and was d i r e c t e d towards i n d u s t r i e s which were d e c l i n i n g i n Japan. 3.5. JAPANESE FDI; 1981 t o 1984 A number o f important t r e n d s o c c u r r e d d u r i n g t h i s p e r i o d , i n c l u d i n g the r a p i d e s c a l a t i o n of annual FDI flows. In 1981, Japanese cumulative net FDI reached $27 b i l l i o n w i t h net annual investment flows exceeding $4 b i l l i o n f o r the f i r s t time (see Table 1.1). On a n o t i f i c a t i o n s b a s i s , cumulative FDI i n c r e a s e d from $44 b i l l i o n i n F.Y. 1981 t o $66.6 b i l l i o n i n F.Y. 1984. By the end of F.Y. 1984, annual FDI flows had i n c r e a s e d t o s l i g h t l y over $10 b i l l i o n . The i n c r e a s e i n the volume o f FDI can be l a r g e l y a t t r i b u t e d t o the c o n t i n u i n g a p p r e c i a t i o n of the yen a g a i n s t the - Page 33 - US d o l l a r ; d e c r e a s i n g f a c t o r c o s t d i f f e r e n t i a l s and r i s i n g t r a d e f r i c t i o n s between Japan and her i n d u s t r i a l i z e d t r a d i n g p a r t n e r s ; and i n c r e a s e d i n c e n t i v e s f o r FDI i n many developed c o u n t r i e s . Japanese FDI, however, d i d not grow as f a s t as i n p r e v i o u s p e r i o d s , a v e r a g i n g around 18% per year. T h i s was due, i n l a r g e p a r t , t o the w o r l d r e c e s s i o n f o l l o w i n g the second o i l shock i n 1979. One o f the most s i g n i f i c a n t a s p e c t s o f t h i s p e r i o d was the i n c r e a s e d c o n c e n t r a t i o n of Japanese FDI i n North America. At the end o f 1980, as noted p r e v i o u s l y , Japanese FDI was e v e n l y d i v i d e d between North America and A s i a w i t h each a c c o u n t i n g f o r 27% of the t o t a l investment and L a t i n America and Europe a c c o u n t i n g f o r 17 and 12%, r e s p e c t i v e l y . By F.Y. 1984, 30% of t o t a l Japanese FDI was h e l d by North America; the c o r r e s p o n d i n g A s i a n share had f a l l e n t o 25%. L a t i n America and Europe had i n c r e a s e d t h e i r shares m a r g i n a l l y t o 18% and 13%, r e s p e c t i v e l y (See T a b l e 3.8). A l a r g e p r o p o r t i o n of the incremental investment earmarked f o r North America was i n the commercial and f i n a n c i a l s e c t o r s , however, manufacturing investments a l s o i n c r e a s e d s h a r p l y . By F.Y. 1984, North America accounted f o r 29.4% of t o t a l Japanese manufacturing investment compared t o 19.3% i n F.Y. 1980. (Japanese manufacturing investment i n A s i a accounted f o r 36.4 and 32% of t o t a l m anufacturing investment i n F.Y. 1980 and F.Y. 1984, r e s p e c t i v e l y 4 8) . At the end o f F.Y. 1984, Japanese manufacturing investments J e t r o , White Paper on World and Japanese D i r e c t F o r e i g n Investment, Tokyo, 1986, p. 8. - Page 34 - TABLE 3.8.: JAPANESE FDI BY REGION ON A CUMULATIVE BASIS, F.Y. 1981 TO F.Y. 1984, MILLIONS OF 1980 U.S. * ANNUAL I OF I OF RATE OF YEAR 1980 . TOTAL 1984 TOTAL GROWTH REGION N. AMERICA 9798 26.8 20028 30.1 19.6 LATIN AMERICA 6168 . 16.9 12146 18.2 18.5 ASIA 9830 26.9 16816 25.2 14.4 EUROPE 4471 12.3 8463 12.7 17.3 OCEANIA 2525 6.9 3468 5.2 8.3 AFRICA 1445 4.0 2982 4.5 19.9 MIDDLE EAST 2259 6.2 2730 4.1 4.9 TOTAL 36496 100.0 66633 100.0 16.2 - P a g e 3 4 a - i n the U n i t e d S t a t e s numbered 440, were l o c a t e d a c r o s s 40 s t a t e s and i n v o l v e d f i r m s which employed approximately 80,000 people. The manufacturing investments i n North America were c h a r a c t e r i z e d by investments i n j o i n t - v e n t u r e , t e c h n o l o g y - i n t e n s i v e f i e l d s . Between 1984 and 1985, the number o f cases of US-Japan i n d u s t r i a l c o o p e r a t i o n i n c r e a s e d t o 652, w i t h manufacturing r e l a t e d j o i n t v e n t u r e s a c c o u n t i n g f o r 79%, o r 505 cases. Of these, the g r e a t e s t number o f cases were i n h i g h - t e c h n o l o g y r e l a t e d f i e l d s w i t h 59 cases i n computer-related i n d u s t r i e s ; 51 i n semi-conductors and ICs; and 25 i n new m a t e r i a l s ( ). During the e a r l y 1980s the Japanese auto i n d u s t r y became i n c r e a s i n g l y a c t i v e i n U n i t e d S t a t e s investments, as a means of c i r c u m v e n t i n g t i g h t e r r e s t r i c t i o n s on Japanese auto imports i n t o North America. Honda was the f i r s t auto manufacturer t o begin p r o d u c t i o n w i t h the 1982 opening of i t s M a r y s v i l l e p l a n t i n Ohio. In the e a r l y 1980s, investments by consumer e l e c t r o n i c s and automotive manufacturers, coupled w i t h the demands by r e c i p i e n t c o u n t r i e s f o r g r e a t e r l o c a l procurement, a l s o l e d t o r e l a t e d investments by components-manufacturing i n d u s t r i e s (e.g., auto p a r t s , and e l e c t r o n i c s components). The e a r l y 1980s a l s o witnessed an i n c r e a s e i n the number of a c q u i s i t i o n s i n the North American f i n a n c i a l i n d u s t r y by the l a r g e Japanese banks. By 1984, almost one q u a r t e r of the world's l a r g e s t J e t r o , White Paper on World and Japanese D i r e c t F o r e i g n Investment, p. 12. - Page 35 - banks were Japanese w i t h the l a r g e s t , D a i - I c h i Kangyo ( a s s e t s i n excess o f $108 b i l l i o n ) , b e i n g ranked seventh i n the world. The h i g h - p r o f i l e t a k eovers o f s e v e r a l American banks were an i n d i c a t i o n o f the growing power and i n t e r n a t i o n a l c o n f i d e n c e o f Japanese f i n a n c i a l i n s t i t u t i o n s . Included among thes e a c q u i s i t i o n s were F u j i Bank's $450 m i l l i o n a c q u i s i t i o n of the f i n a n c i a l l y t r o u b l e d H e l l e r F i n a n c i a l S e r v i c e s Group; the $282 m i l l i o n t akeover of the Bank o f C a l i f o r n i a by M i t s u b i s h i Bank; and Sumitomo Bank's takeover o f Union Bank of C a l i f o r n i a i n 1984. Japanese investments i n Europe a l s o i n c r e a s e d s i g n i f i c a n t l y d u r i n g t h i s p e r i o d , r i s i n g a t an average annual r a t e of 19%. P r e v i o u s l y , Japanese FDI i n Europe had been p r i m a r i l y i n the t e r t i a r y s e c t o r (commerce, f i n a n c e , i n s u r a n c e and branch o f f i c e s ) . E a r l y manufacturing investments were mainly i n s a l e s companies and were designed t o promote exports and s e r v e as a f o o t h o l d t o develop d i s t r i b u t i o n and marketing channels, i f and when l o c a l p r o d u c t i o n was undertaken. However, i n the e a r l y 1980s, s e v e r a l European n a t i o n s implemented i n c e n t i v e schemes t o a t t r a c t f o r e i g n d i r e c t investment i n the hopes of r e d u c i n g c h r o n i c unemployment problems. In a d d i t i o n , by the end o f the p e r i o d , f u r t h e r steps were b e i n g s t u d i e d towards removing n o n - t a r i f f b a r r i e r s and u n i f y i n g the EEC i n t o a s i n g l e market. These movements encouraged i n c r e a s e d Japanese manufacturing investment and, by F.Y. 1984, Japanese manufacturing ventures i n - Page 36 - Europe t o t a l l e d 188 ( ) . The p r i n c i p a l r e c i p i e n t s o f t h i s investment were the U n i t e d Kingdom, France and West Germany. In the U.K. the v e n t u r e s i n c l u d e d investments made by B r o t h e r and Sharp I n d u s t r i e s ( e l e c t r o n i c t y p e w r i t e r s ) , Tabuchi E l e c t r i c (small t r a n s f o r m e r s f o r Video Tape Recorders (VTRs) and Nihon R a d i a t o r / T I S i l e n c e r ( m u f f l e r s ) . The French investments i n c l u d e d those by Honda Motor (power mowers) , Canon ( e l e c t r o n i c t y p e w r i t e r s ) and Sony (compact d i s c p l a y e r s ) . In West Germany, the Sanyo Group (tuners f o r VTRs), M a t s u s h i t a E l e c t r i c ( e l e c t r o n i c components), H i t a c h i (VTRs), M a t s u s h i t a Group (car r a d i o s and s t e r e o s ) and H i t a c h i Koki ( e l e c t r i c t o o l s ) were among the p r i n c i p a l i n v e s t o r s ( 5 1) . The average annual growth of Japanese FDI i n A s i a d e c l i n e d m a r g i n a l l y t o 14% d u r i n g the p e r i o d 1981 t o 1984 from 15% over the p r e v i o u s p e r i o d . However, i n a b s o l u t e terms, t o t a l cumulative investment i n c r e a s e d 83% from $9,830 m i l l i o n i n F.Y. 1980 t o $16,816 m i l l i o n by F.Y. 1984. The stagnant growth r a t e may be a t t r i b u t e d t o the f a c t t h a t the m a j o r i t y of l a b o u r - i n t e n s i v e , low t echnology i n d u s t r i e s had a l r e a d y r e l o c a t e d from Japan d u r i n g the 1970s. However, i n c r e a s e d investments were undertaken i n response t o meet the demands of burgeoning consumer markets due t o r a p i d economic growth. In a d d i t i o n , i n c r e a s i n g c o s t s i n the NICs were a l s o r e s u l t i n g i n the s h i f t of investment towards lower c o s t J e t r o , White Paper on World and Japanese D i r e c t F o r e i g n Investment, p. 14. 5 1 J e t r o , White Paper on World and Japanese D i r e c t F o r e i g n Investment, p. 15. - Page 37 - producers such as T h a i l a n d , M a l a y s i a and China. By the end of 1984, China was r e c e i v i n g v i g o r o u s a t t e n t i o n , w i t h 741 a d d i t i o n a l cases o f Japanese investment i n F.Y. 1984 ( 5 2) . 3.6. JAPANESE FDI? 1985 TO THE PRESENT The most r e c e n t p e r i o d of Japanese FDI has been c h a r a c t e r i z e d by a c o n t i n u a t i o n o f t r e n d s s t a r t e d i n the e a r l y 1980s, but on a much l a r g e r s c a l e . The cumulative t o t a l o f Japanese FDI grew by almost 71% from $66.6 b i l l i o n i n F.Y. 1984 t o $130 b i l l i o n i n F.Y. 1987. T h i s i n c r e a s e r e p r e s e n t e d a compounded annual growth r a t e i n excess of 22%. (See Table 3.9). The i n d i c a t e d net FDI f o r F.Y. 1988 showed a f u r t h e r quantum jump from $18.6 b i l l i o n U.S. i n 1987 t o over $33 b i l l i o n U.S. i n 1988. The i n c r e a s e i n the volume of Japanese FDI, e s p e c i a l l y s i n c e 1984, has been due t o a number of f a c t o r s . F i r s t , between 1984 and 1987, the yen a p p r e c i a t e d a g a i n s t the d o l l a r by over 80%. T h i s a p p r e c i a t i o n has both i n c r e a s e d the r e l a t i v e c o s t s o f p r o d u c i n g i n Japan (thus r e d u c i n g the i n t e r n a t i o n a l c o m p e t i t i v e n e s s of Japanese e x p o r t s and i n c r e a s i n g the appeal of imports) and has made overseas investment, e s p e c i a l l y i n North America, v e r y a t t r a c t i v e . In a d d i t i o n , the p r e c i p i t o u s r i s e i n the yen has been accompanied by mounting t r a d e a c t i o n s by developed c o u n t r i e s a g a i n s t Japanese l o c a l procurement p r a c t i c e s and the emergence of p o t e n t i a l l y p r o t e c t i o n i s t t r a d i n g b l o c k s i n Japan's major r e g i o n a l export I b i d . , p. 13. - Page 38 - TABLE 3.9: JAPANESE FDI CLASSIFIED BY INDUSTRY, ON A REPORTED BASIS, F.Y. 1984 TO F.Y. 1987, CUMULATIVE TOTALS FOR SPECIFIED FISCAL YEAR, MILLIONS OF 1980 U.S. * YEAR INDUSTRY Manufacturing: Food Stuffs Textile Pulp k Lunber Products Cheaicals Iron fc Ferrous Metals General Machinery E l e c t r i c a l Machinery Transport Machinery Others Sub-Total Pr i i a r y Industries: Agriculture-Forestry Fisheries Mining Sub-Total Tertiary Industries: Construction Coiaerce Finance-Insurance Services Transportation Real Estate Others Sub-total Total ANNUAL RATE OF I OF I OF GROWTH 1984 TOTAL 1987 TOTAL 1984-87 961 1.3 1398 i . i 13.3 1974 2.7 2127 1.7 2.5 993 1.4 1384 1.1 11.7 3714 5.1 4744 3.8 8.5 4419 6.1 5700 4.5 8.9 1765 2.4 2969 2.4 18.9 3298 4.5 6469 5.1 25.2 2901 4.0 5131 4.1 20.9 21633 29.8 35278 2B.0 17.7 745 1.0 413 0.6 11138 15.3 11696 9.3 1.6 12296 16.9 11696 678 0.9 1025 0.8 14.8 11062 15.2 15196 12.1 11.2 8670 11.9 26014 20.6 44.2 3958 5.4 8161 6.5 27.3 4199 5.8 9014 7.2 29.0 2078 2.9 10812 8.6 73.3 8047 11.1 8762 7.0 3.0 38692 53.3 79005 62.7 26.9 72622 100.0 125980 100.0 20.2 - P a g e 3 8 a - d e s t i n a t i o n s . These combined f o r c e s have pushed Japanese FDI t o r e c o r d l e v e l s , d r a s t i c a l l y i n c r e a s i n g the p r o f i l e o f Japanese overseas investment p r a c t i c e s both a t home and abroad. The r o l e of North America as the primary d e s t i n a t i o n of Japanese FDI was f u r t h e r emphasized a f t e r 1984. By F.Y. 1987, t h i s market accounted f o r 36.1% o f the v a l u e o f Japan's t o t a l cumulative investment and approximately 36.2% of the t o t a l number of cases of FDI (see T a b l e 3.10). A c c o r d i n g t o the U.S. Commerce Department, i n 1987, Japan passed Great B r i t a i n as the l a r g e s t f o r e i g n d i r e c t i n v e s t o r i n the U n i t e d S t a t e s ( 5 3) . The onslaught o f Japanese FDI has l a r g e l y r e s u l t e d from the r a p i d a p p r e c i a t i o n of the yen a g a i n s t the d o l l a r , the dominant p o s i t i o n of the U n i t e d S t a t e s among Japan's export markets and the s t r o n g performance o f the American economy. In a d d i t i o n , investment i n the U n i t e d S t a t e s has been encouraged by the development of s t a t e - b a s e d i n c e n t i v e programs f o r FDI such as government s u b s i d i e s t o f o r e i g n f i r m s l o c a t i n g i n depressed r e g i o n s . F u r t h e r , the u n i t a r y tax systems ( 5 4) were r e p e a l e d i n s e v e r a l s t a t e s , i n c l u d i n g C a l i f o r n i a ; thus removing a c o n t e n t i o u s o b s t a c l e t o f o r e i g n investment. Canada has a l s o e x p e r i e n c e d an i n c r e a s e i n Japanese FDI because o f an improved "Japanese are B i g g e s t F o r e i g n U.S. I n v e s t o r s , " , The F i n a n c i a l Post. June 28, 1989. 5 4 The u n i t a r y tax system, adopted i n s e v e r a l s t a t e s , sums the t o t a l e a r n i n g s of the f i r m uses the r a t i o o f a s s e t s , wages and t u r n o v e r of the p arent t o c a l c u l a t e the c o r p o r a t i o n tax l e v i e d on the s u b s i d i a r y o p e r a t i n g w i t h i n t h a t s t a t e . F o r e i g n i n v e s t o r s charge t h a t the system r e s u l t s i n double t a x a t i o n and cumbersome a d m i n i s t r a t i v e and c l e r i c a l e f f o r t t o c o l l e c t the r e q u i r e d d ata. - Page 39 - TABLE 3.10: JAPANESE FDI BY REGION ON A CUMULATIVE BASIS, F.Y. 1984 TO F.Y. 1987, MILLIONS OF 1980 U.S. i ANNUAL RATE OF X OF I OF GROWTH YEAR 1984 TOTAL 1986 TOTAL 1984-86 RE6I0N N. AMERICA 20028 30.1 33729 35.3 29.8 LATIN AMERICA 12146 18.2 18371 19.2 23.0 ASIA 16816 25.2 19647 20.6 8.1 EUROPE 8463 12.7 13049 13.7 24.2 OCEANIA 3468 5.2 4720 4.9 16.7 AFRICA 2982 4.5 3317 3.5 5.5 MIDDLE EAST 2730 4.1 2720 2.8 -0.2 TOTAL 66633 100.0 95553 100.0 19.8 - P a g e 3 9 a - f o r e i g n investment c l i m a t e and i t s p o t e n t i a l as a s t e p p i n g stone t o the l a r g e r US market. The r e c e n t Free Trade Agreement concluded between Canada and the U n i t e d S t a t e s , i n p a r t i c u l a r , has been c i t e d as an important f u t u r e s t i m u l a n t t o Japanese investment i n Canada ( 5 5) • Europe has a l s o been an i n c r e a s i n g r e c i p i e n t o f Japanese FDI, a c c o u n t i n g f o r 13.5% of the v a l u e of cumulative investment i n F.Y. 1987 and 10.8% o f the t o t a l cases. Although t h e s e p r o p o r t i o n s i n c r e a s e d o n l y m a r g i n a l l y over F.Y. 1984 ( i n F.Y. 1984, Europe accounted f o r approximately 13% o f t o t a l Japanese cumulative investment) , the r a t e of growth of Japanese FDI i n Europe has averaged 31% a n n u a l l y s i n c e 1984 (versus 24% f o r North America). The r a p i d r a t e of growth i n Japanese FDI i n Europe has been f u e l l e d by two important f a c t o r s . F i r s t l y , the number o f t r a d e a c t i o n s a g a i n s t Japanese imports and p e r c e i v e d " s c r e w d r i v e r " assembly p l a n t s has i n c r e a s e d d r a m a t i c a l l y . In terms of the former, i n 1987, a 20% dumping t a r i f f was a p p l i e d t o a l l Japanese c o p i e r s , thus f o r c i n g l o c a l p r o d u c t i o n by Canon Inc., Konica Inc., R i c o h Co., M i n o l t a Camera Co., Toshiba, M a t s u s h i t a E l e c t r i c I n d u s t r i a l Co. and Sharp Corp ( 5 6) In a d d i t i o n , i n November of 1988, a 47% anti-dumping tax was p l a c e d on F u j i t s u computer Report prepared by the Gleneagles Group, Japanese D i r e c t F o r e i g n Investment i n North America - A Canadian P e r s p e c t i v e . Vancouver, January 1988, p. i v . 5 6 "Challenge and Dilemma f o r Corporate Japan, the EC Gears up f o r 1992," TOKYO Business Today. Tokyo, A p r i l 1989, p. 26. - Page 40 - p r i n t e r s and a 20 t o 34% duty on a l l o t h e r Japanese p r i n t e r s ( ) . Severe p e n a l t i e s have a l s o been l e v i e d a g a i n s t Japanese manufacturers i n Europe which do not meet mandatory l o c a l procurement requirements. Under EC l o c a l c ontent r u l e s , a t l e a s t 40% o f the v a l u e o f the product must be generated from l o c a l p r o d u c t i o n ; the percentage i s even h i g h e r f o r c e r t a i n products (e.g., automobiles, 60%) and c e r t a i n c o u n t r i e s (e.g., France, automobiles, 80%). Japanese s u b s i d i a r i e s p r o d u c i n g e l e c t r o n i c t y p e w r i t e r s , p h o t o c o p i e r s and e l e c t r o n i c s c a l e s have been p a r t i c u l a r l y a f f e c t e d s i n c e 1987 ( 5 8) . Secondly, the commitment by the 12 member EC t r a d i n g b l o c k t o complete u n i f i c a t i o n o f the European Community market by 1992 has a l s o prompted investment by Japanese f i r m s s e e k i n g t o e s t a b l i s h a f o o t h o l d b e f o r e " F o r t r e s s Europe" emerges. Although down-played by t h e European Parliament, 1992 has sparked s t r o n g a n t i - p r o t e c t i o n i s t f e a r s among Europe's major t r a d i n g p a r t n e r s . The b r o a d l y - d e f i n e d r e c i p r o c i t y concept i n t r o d u c e d i n 1988, (whereby t r a d i n g p a r t n e r s would be allowed equal access t o European markets, i f and o n l y i f , European companies have the same degree o f access t o f o r e i g n markets) has l e d t o concern t h a t c e r t a i n European markets p r e v i o u s l y open t o f o r e i g n e x p o r t e r s w i l l be c l o s e d a f t e r 1992. D e s p i t e reassurances t o the c o n t r a r y , the i l l - d e f i n e d nature 5 7 I b i d . . p. 26. "Japan C o p i e r s Made i n U.S. May Be H i t With EC D u t i e s , " The A s i a n Wall S t r e e t J o u r n a l . February 8, 1989, p. 4. Page 41 - o f 1992's impact on the i n t e r n a t i o n a l community and the t h r e a t of e x c l u s i o n from the world's l a r g e s t common market, has been a s t r o n g impetus t o Japanese FDI i n Europe s i n c e 1985. With the r i s e i n r e l a t i v e importance o f i n d u s t r i a l i z e d n a t i o n s as h o s t s t o Japanese FDI has been a concomitant d e c l i n e i n the p r o p o r t i o n o f Japanese investment i n the d e v e l o p i n g c o u n t r i e s . The d e c l i n e has been most n o t a b l e i n A s i a . The r e g i o n i n F.Y. 1987 accounted f o r o n l y 20.6% of t o t a l Japanese investment, down from 25% i n 1984 (see T a b l e 3.10). N e v e r t h e l e s s , investment i n A s i a has been i n c r e a s i n g i n a b s o l u t e terms s i n c e 1984, a l b e i t a t a slower r a t e than was p r e v i o u s l y the case, (8%/annum v e r s u s 14%/annum between 1980 and 1984). As a r e s u l t , t o t a l cumulative investment i n c r e a s e d from $16.8 b i l l i o n i n F.Y. 1984 t o $20.6 b i l l i o n i n F.Y. 1987. An i n t e r e s t i n g f e a t u r e o f the investment p a t t e r n s i n A s i a s i n c e 1984 has been the i n c r e a s i n g s h i f t o f investment from the NICs t o r e l a t i v e l y lower c o s t producers such as T h a i l a n d , M a l a y s i a , the P h i l i p p i n e s and China. Yamaha's investment sequence p r o v i d e s an example of t h i s s h i f t i n g f o c u s . In 1979, Yamaha went t o Singapore t o produce t e n n i s r a c k e t s ; i n 1982, t o Taiwan t o produce g o l f c l u b s ; i n 1987, t o T h a i l a n d t o produce s k i s ; and i n 1988, t o Indonesia t o produce e l e c t r o n i c organs ( 5 9) . Manufacturing p r o d u c t i o n i n some i n s t a n c e s has a l s o been s c a l e d down, or shut completely, i n the NICs. Uniden, a manufacturer of telecommunications equipment, i s c l o s i n g f a c t o r i e s i n Taiwan and "On the Move Again," The Economist. November 5, 1988, p. 83. - Page 42 - Hongkong and moving t o the P h i l i p p i n e s and China; A s a h i O p t i c a l has reduced the number o f employees a t i t s Pentax Camera p l a n t i n Hongkong t o 150 from 350 ( 6 0) . A f r i c a and the Middle E a s t have experienced d e c l i n e s i n both the p r o p o r t i o n o f t o t a l and r a t e o f growth o f Japanese FDI i n t h e i r r e g i o n s . L a t i n America, on the o t h e r hand, has i n c r e a s e d both i t s growth r a t e s and o v e r a l l p r o p o r t i o n of Japanese FDI s i n c e 1984. T h i s , however, i s a t t r i b u t e d t o the r i s e i n Japanese banking and i n s u r a n c e investments i n such "tax havens" as the Bahamas, Cayman and Panama r a t h e r than i n c r e a s e s i n manufacturing investment. The d e c r e a s i n g importance of the d e v e l o p i n g r e g i o n s i s due t o s e v e r a l reasons. F i r s t , p o l i t i c a l and economic i n s t a b i l i t y i n the d e v e l o p i n g c o u n t r i e s , p r i m a r i l y the Middle E a s t , A f r i c a and L a t i n America, g r e a t l y i n c r e a s e d the r i s k s a s s o c i a t e d w i t h f o r e i g n investment. Second, s t r i c t e r government c o n t r o l s on FDI, p a r t i c u l a r l y w i t h r e g a r d t o r e s o u r c e investments, a l s o d e t e r r e d f o r e i g n investment by the Japanese. T h i r d , s t r u c t u r a l changes i n Japan l e a d i n g t o lower requirements f o r o f f s h o r e r e s o u r c e s f u r t h e r i n h i b i t e d Japanese FDI i n the r e s o u r c e s e c t o r s o f d e v e l o p i n g n a t i o n s . F o u r t h l y , as p r e v i o u s l y mentioned, most of the o f f s h o r e l a b o u r - i n t e n s i v e manufacturing investment by Japan had been completed by the l a t e 1970s. F i n a l l y , t h e r e i s an emerging t r e n d of Japanese FDI i n v e n t u r e s which are p r i m a r i l y t a r g e t e d towards p r o f i t maximization. In the case o f manufacturing companies t h i s "On the Move Again," The Economist, p. 83. - Page 43 - means ad o p t i n g the m u l t i n a t i o n a l companies' approach of making maximum p e r m i t t e d use of comparative advantage t o i n c r e a s e r e t u r n s , r a t h e r than b e i n g i n f l u e n c e d p r i m a r i l y (as they were i n the past) by domestic (Japanese) market c o n s i d e r a t i o n s . The s i t u a t i o n i s even more c l e a r - c u t i n the r e a l e s t a t e and f i n a n c i a l areas. In the former case, investments are b e i n g made because r e a l e s t a t e , e s p e c i a l l y i n North America, i s c o n s i d e r e d t o be under-valued, w i t h good a p p r e c i a t i o n p o t e n t i a l . Shuwa C o r p o r a t i o n (Shigeru Kobayashi) which, by 1987 had purchased about $1.5 b i l l i o n U.S. of American r e a l e s t a t e , now earns more r e n t a l income from i t s U.S. a s s e t s than i t does from i t s Japanese h o l d i n g s . T h i s s h i f t has r e s u l t e d from the massive i n c r e a s e s i n Japanese r e a l e s t a t e p r i c e s (which have p r o v i d e d huge amounts of c o l l a t e r a l ) , the r e l a t i v e l y low c o s t of borrowing i n Japan and the i n c r e a s e d p u r c h a s i n g power o f the yen i n North America ( 6 1) . The investments i n the f i n a n c i a l s e c t o r r e f l e c t the enormous f i n a n c i a l power of the Japanese banks, in s u r a n c e companies and s e c u r i t y f i r m s and the n a t u r a l p r o g r e s s i o n towards t r a n s l a t i n g t h i s power t o an i n t e r n a t i o n a l market s c a l e . The FDI of the 1970s was c h a r a c t e r i z e d by the t r a n s f e r of l a b o u r - and r e s o u r c e - i n t e n s i v e manufacturing p r o d u c t i o n o f f s h o r e . However, d u r i n g the 1980s, and p a r t i c u l a r l y s i n c e 1984, the t r e n d has been towards t e c h n o l o g y - i n t e n s i v e manufacturing i n d u s t r i e s . Examples o f t h i s t r e n d i s p r o v i d e d by the automobile, e l e c t r o n i c s 6 1 "The Shuwa Shogun", Tokyo Business Today. Tokyo, March 1987, p.28-32. - Page 44 - and o f f i c e and automation i n d u s t r i e s . U n t i l r e c e n t l y , the t e c h n o l o g y - i n t e n s i v e i n d u s t r i e s have tended t o remain i n Japan because they have been a b l e t o absorb the i n c r e a s i n g c o s t s o f l o c a l f a c t o r s o f p r o d u c t i o n through r a p i d p r o d u c t i v i t y improvements. In f a c t , many o f these i n d u s t r i e s would p r e f e r not t o i n v e s t o f f s h o r e . As noted by P r e s i d e n t Jun Kobayashi o f Tokyo E l e c t r i c , "To be q u i t e honest, i t would be so simple t o j u s t produce e v e r y t h i n g i n Japan, and then s e l l i t around the world. The f a c t than we cannot f o r c e s us t o adopt new s t r a t e g i e s " ( 6 2) . However, d u r i n g the 1980s, many of t h e s e i n d u s t r i e s have been f o r c e d t o move o f f s h o r e because of r i s i n g t r a d e r e s t r i c t i o n s i n important export markets. The FDI of the Japanese automobile i n d u s t r y i n North America and Europe i s a c l e a r example of t h i s . S t a r t l i n g p r o d u c t i v i t y g a i n s i n t h i s i n d u s t r y a t home (around 45% s i n c e 1985) have meant t h a t exports are s t i l l more p r o f i t a b l e than overseas p r o d u c t i o n d e s p i t e the 80% a p p r e c i a t i o n o f the yen over the p a s t 4 y e a r s . A c c o r d i n g t o an a r t i c l e by Kevin Done of the F i n a n c i a l Times ( 6 3) , the exchange r a t e break-even p o i n t f o r c a r s i s now Y105 t o the d o l l a r whereas f i v e y e a r s ago i t was Y160-170 t o the d o l l a r . (By 1991, t h i s break-even p o i n t c o u l d be as low as Y95 t o the d o l l a r . ) However, as a r e s u l t o f the v o l u n t a r y export r e s t r a i n t s (VERs) i n t r o d u c e d i n the e a r l y 1980s, l o c a l p r o d u c t i o n i n the U n i t e d S t a t e s by Japanese auto- "Challenge and Dilemma f o r Corporate Japan," TOKYO Business Today. A p r i l 1989, p. 28. 6 3 Kevin Done, "Car Wars A f t e r the Yen Shock," The F i n a n c i a l Times, London, May 12, 1989. - Page 45 - manufacturers c o u l d reach between 1.8 t o 2.2 m i l l i o n u n i t s per year by 1992. Honda, the l a r g e s t Japanese manufacturer o p e r a t i n g i n the U.S., c u r r e n t l y produces over 500,000 c a r s p e r year. As noted above, another important t r e n d i n Japanese FDI s i n c e 1984, has been the emergence of the f i n a n c i a l - i n s u r a n c e i n d u s t r y as the dominant overseas i n v e s t o r . By 1987, f i n a n c e - i n s u r a n c e investments accounted f o r the l a r g e s t s i n g l e p r o p o r t i o n o f t o t a l Japanese FDI (17.1%). Again, these investments have been c o n c e n t r a t e d i n the U n i t e d S t a t e s and Europe. Japanese banks now own 5 o f the l a r g e s t 11 banks i n C a l i f o r n i a , c o n t r o l l i n g $363 b i l l i o n i n banking a s s e t s ( w ) . Accompanying the investment surge i n the f i n a n c e - i n s u r a n c e i n d u s t r i e s has been a boom i n r e a l e s t a t e a c q u i s i t i o n s . F o r e i g n r e a l e s t a t e h o l d i n g s by Japanese i n c r e a s e d a t a phenomenal pace between 1985 and 1987, r i s i n g from $2.9 b i l l i o n i n F.Y. 1984 t o almost $11 b i l l i o n by F.Y. 1987. These a c q u i s i t i o n s have o f t e n i n v o l v e d h i g h - p r o f i l e purchases such as the $610 m i l l i o n a c q u i s i t i o n by M i t s u i Real E s t a t e Development Co. L t d o f the Exxon B u i l d i n g i n New York and the $620 m i l l i o n purchase o f the Arco P l a z a i n Los Angeles by Shuwa C o r p o r a t i o n ( 6 5) . A c c o r d i n g t o James D. Noteware, the n a t i o n a l d i r e c t o r of r e a l e s t a t e s e r v i c e s f o r L a v e n t h o l & Horwath, the f u t u r e Japanese a c t i v i t y i n US r e a l e s t a t e John Woodruff, "Banking on the Golden S t a t e , " The Japan Times. May 22, 1989, p. 6. 6 5 "Overseas Investment", Japan Economic Almanac. 1987. Tokyo, 1988, p. 32. - Page 46 - w i l l be d i v e r s i f i e d away from " h i g h - p r o f i l e trophy o f f i c e b u i l d i n g s " t o suburban o f f i c e b u i l d i n g s , i n d u s t r i a l / b u s i n e s s parks, r e s o r t s and s p e c i a l f a c i l i t i e s such as n u r s i n g homes and c a s i n o s as s m a l l e r , more f l e x i b l e Japanese i n v e s t o r s become a c t i v e i n the market ( b b) . The Japanese have a l s o been a c t i v e i n r e a l e s t a t e investment i n Europe and A u s t r a l i a . In A u s t r a l i a , t he boom has been c o n c e n t r a t e d i n the Gold Coast t o u r i s t r e g i o n , where the Japanese spent over A u s t r a l i a n $1.2 b i l l i o n a c q u i r i n g h o t e l s , r e s o r t s , and f u t u r e t o u r i s m - r e l a t e d development s i t e s i n F.Y. 1988. Japanese i n v e s t o r s now c o n t r o l 57% of the v a l u e and 64% of the number o f rooms of the seven l a r g e s t i n t e r n a t i o n a l h o t e l s i n the Gold Coast area ( 6 7) . Three o t h e r important c h a r a c t e r i s t i c s o f Japanese FDI s i n c e 1984 a re important s i g n a l s o f the f u t u r e p a t t e r n o f investment towards the i n t e r n a t i o n a l i z a t i o n o f Japanese company p r o f i t s t r a t e g i e s . F i r s t , mergers and a c q u i s i t i o n s a re becoming an i n c r e a s i n g l y p o p u l a r method of e n t e r i n g f o r e i g n markets, r e f l e c t i n g the i n c r e a s i n g a g g r e s s i v e n e s s and i n t e r n a t i o n a l c o n f i d e n c e o f Japanese companies. Between 1984 and 1987, the number o f annual M&As undertaken by Japanese f i r m s i n c r e a s e d from 44 t o 228. M&As i n t he U.S. i n c r e a s e d from 33 i n 1984 t o 120 i n 1987; i n Europe, from 12 i n 1985 t o 36 i n 1987; and i n A u s t r a l i a from 1 i n 1984 t o "Japanese L i k e l y t o D i v e r s i f y US Investment P o r t f o l i o , " World P r o p e r t y . London: RICS J o u r n a l s L t d . , A p r i l 1989, p. 21 6 7 "The Overwhelming Japanese," World P r o p e r t y . London: RICS J o u r n a l s L t d . , May 1989, p. 32. - Page 47 - 16 i n 1987 ( ) . Most of the M&As occur w i t h b u s i n e s s e s s i m i l a r t o those conducted by the Japanese buyer; examples o f which i n c l u d e Sony's $2 b i l l i o n t akeover o f CBS Records, B r i d g e s t o n e * s $2.6 b i l l i o n a c q u i s i t i o n o f F i r e s t o n e Corp and Dainippon Ink's $500 m i l l i o n purchase o f R e i c h o l d Chemicals. Other M&As i n v o l v e the d i v e r s i f i c a t i o n o f the Japanese companies main l i n e o f b u s i n e s s , such as the $2.15 b i l l i o n purchase o f I n t e r c o n t i n e n t a l H o t e l s from Grand M e t r o p o l i t a n PLC of B r i t a i n by Seibu S a i s o n Group, a major p r i v a t e r e t a i l e r i n Japan. Both types o f M&As are undertaken t o f u r t h e r t he g l o b a l i z a t i o n o f the Japanese buyer; e i t h e r by p r o v i d i n g overseas p r o d u c t i o n bases, s e c u r i n g s t r o n g l o c a l markets or p r o v i d i n g access t o important new technology. A second important t r e n d i s the r i s i n g movement of R & D f u n c t i o n s o f f s h o r e . Many Japanese companies b e l i e v e t h i s i s the key t o becoming t r u l y g l o b a l c o r p o r a t i o n s . Sony, f o r example, c u r r e n t l y has l a b o r a t o r i e s i n West Germany, New J e r s e y and B r i t a i n and i s p l a n n i n g t o double i t s s c i e n t i f i c s t a f f overseas d u r i n g the next two t o t h r e e years ( 6 9) • The f i n a l important t r e n d i s " r e - i m p o r t i n g " and t h i r d country e x p o r t i n g from the i n d u s t r i a l i z e d c o u n t r i e s . "Re-importing" or "Reverse E x p o r t i n g " r e f e r s t o the im p o r t i n g o f p r o d u c t i o n from Japanese s u b s i d i a r i e s abroad back t o Japan. In the p a s t , most "Rapid I n c r e a s e i n Japanese Overseas M&A," TOKYO Business Today. Tokyo, January, 1989, p. 21. 6 9 "...As b i g Japanese f i r m s attempt t o r e a l l y go g l o b a l , " The Globe and M a i l , J u l y 3, 1989, p. B4. - Page 48 - f o r e i g n p r o d u c t i o n was earmarked f o r l o c a l o r t h i r d c o u n t r y markets and i f r e - i m p o r t i n g was p r a c t i c e d , i t was g e n e r a l l y between Japan and Southeast A s i a . However, i n 1985, the U.S. Department noted t h a t Japanese companies o p e r a t i n g i n the U.S. exported products worth $22.75 b i l l i o n , o f which $15.85 b i l l i o n was d e s t i n e d f o r par e n t companies i n Japan ( 7 0) . Honda Motor Inc. c u r r e n t l y exports U.S.-made c a r s t o Japan and i s c o n s i d e r i n g t h i r d c ountry exports t o Europe. R i c o h Co., exports c o p i e r s from i t s C a l i f o r n i a p l a n t t o Europe and o t h e r e l e c t r o n i c s and machinery manufacturers are c o n s i d e r i n g s i m i l a r p l a n s ( 7 1) . The t r e n d s i n Japanese FDI s i n c e 1984 are important h a r b i n g e r s of the f u t u r e s t r a t e g y o f Japanese investment. A c c o r d i n g t o Hollerman ( 7 2) , c u r r e n t Japanese FDI i s p a r t o f a g e n e r a l p l a n t o s h i f t from an economy based on manufacturing exports t o a "headquarters" economy f u e l l e d by s e r v i c e account s u r p l u s e s . T h i s s t r a t e g y i s designed t o l e s s e n d i r e c t t r a d e f r i c t i o n s between Japan and her major t r a d i n g p a r t n e r s ; as noted by Hollerman, "Japan's t r a d e balance w i l l t u r n t o d e f i c i t ; i t s s e r v i c e account ...to s u r p l u s . Japan's s t r a t e g y w i l l have c o n t r i v e d t o smother i t s b i l a t e r a l t r a d e f r i c t i o n w i t h the U.S. w h i l e promoting m u l t i l a t e r a l "Overseas Investment," Japan Economic Almanac. 1988. Tokyo, p. 42. 7 1 "Japan C o p i e r s Made i n U.S. May Be H i t w i t h EC D u t i e s , " The A s i a n W a l l S t r e e t J o u r n a l . Tokyo, February 9, 1989, p. 4. 7 2 Leon Hollerman, Japan's Economic S t r a t e g y i n B r a z i l : C h a l l e n g e f o r the U n i t e d S t a t e s f Lexington, Ma: Lexington Books, 1988. - Page 49 - f r i c t i o n between the U.S. and the new Japans." While perhaps not, as some suggest, p a r t o f a M a c h i a v e l l i a n c o n s p i r a c y , Japanese overseas investment i s an important component o f the n a t i o n ' s economic s t r a t e g y . The d e - i n d u s t r i a l i z a t i o n o f Japan, d e s p i t e longterm employment f e a r s a t home, has been promoted by the government through a i d packages t o d e c l i n i n g i n d u s t r i e s and worker r e - t r a i n i n g schemes. As i n the 1960s and 1970s, Japan r e f u s e s t o be f e t t e r e d by d e c l i n i n g i n d u s t r i e s a t home, p r e f e r r i n g t o move them o f f s h o r e w i t h s u r p r i s i n g ease and panache. T h i s g l o b a l i z a t i o n p r o c e s s i s aid e d by Japan's c a p i t a l s u r p l u s p o s i t i o n , which p l a c e s i t i n an e n v i a b l e p o s i t i o n . As i n the 1960s, when Japan c o u l d shop the world f o r the cheapest r e s o u r c e i n p u t s , i n the 1980s they can shop the world f o r the l e a s t c o s t p r o d u c t i o n s i t e s ; the h i g h e s t y i e l d i n g a s s e t s ; and the most a u s p i c i o u s markets. In a d d i t i o n , Japanese f i r m s have reached a l e v e l o f s o p h i s t i c a t i o n such t h a t they can undertake i n t e r n a t i o n a l v e n t u r e s and investments w i t h i n c r e a s i n g c o n f i d e n c e . Only two f o r c e s are l i k e l y t o impede t h i s f o r e i g n "buying binge". They ar e : the l a c k o f a t r u l y i n t e r n a t i o n a l mindset and the p o t e n t i a l f o r host country p r o t e c t i o n i s m a g a i n s t Japanese FDI. The former r e f e r s t o Japan's r e l a t i v e d i f f i c u l t y i n d e a l i n g w i t h non-homogeneous workforces; promoting f o r e i g n n a t i o n a l s t o e x e c u t i v e p o s i t i o n s ; and adapting t o l o c a l c u l t u r e s e t c . With r e g a r d t o the l a t t e r , the c o n c e n t r a t i o n and t i d e o f Japanese investment has a l r e a d y r a i s e d demands f o r p r o t e c t i o n i s t a c t i o n i n - Page 50 - the U n i t e d S t a t e s , Europe and A u s t r a l i a . In a d d i t i o n , t h e r e i s a dawning r e a l i z a t i o n t h a t the former p r o t e c t i o n i s t a c t i o n s taken t o l i m i t imports from Japanese may have had the even more adverse consequence o f i n t r o d u c i n g the Japanese " T r o j a n horse" i n t o the indigenous economies. As noted i n one A s i a n W a l l S t r e e t J o u r n a l a r t i c l e , "...European i n d u s t r i a l i s t s must c o n f r o n t t h e i r worst nightmare; because o f t h e i r own p o l i c i e s , they w i l l soon have t o compete i n t h e i r own back yards w i t h the v e r y Japanese i n d u s t r i a l g i a n t s they were t r y i n g t o keep out" f 7 3) . In Europe, t h e r e i s growing support f o r the e l i m i n a t i o n of host c o u n t r y s u b s i d i e s f o r f o r e i g n investment. "Competition from Japan Begins i n the Back Yard," A s i a n Wall S t r e e t J o u r n a l . March 4, 1989, p. 13. Page 51 - 4.0. TOWARDS A THEORY OF JAPANESE FOREIGN DIRECT INVESTMENT The f o r e g o i n g s e c t i o n s have p r o v i d e d a h i s t o r i c a l p e r s p e c t i v e o f the developments i n Japanese d i r e c t f o r e i g n investment p a r t i c u l a r l y s i n c e World War I I . In l e s s than 40 y e a r s , Japan has become one o f the world's most important sources o f o f f s h o r e d i r e c t investment, w i t h the l a r g e s t i n c r e a s e i n FDI t a k i n g p l a c e i n the l a s t 8 y e a r s . As w i l l be d i s c u s s e d i n subsequent s e c t i o n s of t h i s study, t h e r i s e i n Japanese d i r e c t f o r e i g n investment can be a t t r i b u t e d l a r g e l y t o macro-economic developments which have taken p l a c e i n Japan s i n c e 1973. However, w h i l e Japan's r a p i d i n c r e a s e i n o f f s h o r e investment i s o f i n t e r e s t , from a g l o b a l p e r s p e c t i v e the more p e r t i n e n t i s s u e may be the l i k e l y s u s t a i n a b i l i t y of Japanese FDI f l o w s . The l a t t e r depends g r e a t l y on the c o n t i n u a t i o n of the macro-trends a l l u d e d t o above, a s u b j e c t which w i l l be addressed i n s e c t i o n 9.0. The emphasis on macro-economic developments i n t h i s study stems l a r g e l y from the i n a b i l i t y of modern FDI t h e o r y t o adequately e x p l a i n e i t h e r the p a s t p a t t e r n s of Japanese o f f s h o r e investment o r t o p r e d i c t i t s l i k e l y c o n t i n u a t i o n . Thus, b e f o r e a d d r e s s i n g the study's macro-economic r a t i o n a l e f o r Japanese f o r e i g n d i r e c t investment, a b r i e f a n a l y s i s of modern FDI t h e o r i e s and t h e i r shortcomings i n the Japanese co n t e x t i s p r o v i d e d below. Page 52 4.1. C O N V E N T I O N A L F D I THEORY During the p a s t 30 y e a r s , t h e r e has been a s u b s t a n t i a l i n c r e a s e i n the l i t e r a t u r e d e a l i n g w i t h the s u b j e c t o f FDI. Modern t h e o r i e s have tended t o c o n c e n t r a t e on f i r m - s p e c i f i c m o t i v a t i o n s f o r u n d e r t a k i n g f o r e i g n investment abroad as opposed t o e x p o r t i n g or l i c e n s i n g . These t h e o r i e s have two drawbacks i n terms of t h e i r a p p l i c a b i l i t y t o Japanese FDI. F i r s t , e x i s t i n g t h e o r i e s have been developed p r i m a r i l y on the b a s i s of Western m u l t i n a t i o n a l s ; i n t h i s c o n t e x t , Japanese m u l t i n a t i o n a l s have been regarded as e i t h e r s p e c i a l cases o r newcomers which w i l l e v e n t u a l l y emulate t h e i r Western c o u n t e r p a r t s . However, as noted by Ozawa, the i n d u s t r i a l p a t t e r n of Japanese m u l t i n a t i o n a l s may warrant a d i f f e r e n t t h e o r e t i c a l approach ( 7 4) . In a d d i t i o n , c u r r e n t t h e o r i e s focus on micro-economic e x p l a n a t i o n s f o r FDI, a t t r i b u t i n g FDI t o the p a r t i c u l a r circumstances of f i r m s or i n d u s t r i e s . On the other hand, Japanese m u l t i n a t i o n a l s have h i s t o r i c a l l y been s t r o n g l y i n f l u e n c e d by p r e v a i l i n g macro-economic f a c t o r s i n both t h e i r own economy and i n the host country. On t h i s b a s i s , micro-economic t h e o r i e s o f FDI may not be the most u s e f u l f o r e x p l a i n i n g Japanese o f f s h o r e investment. In the f o l l o w i n g s e c t i o n , c u r r e n t t h e o r i e s r e l a t i n g t o FDI and t h e i r a p p l i c a b i l i t y t o the Japanese c o n t e x t are examined. In g e n e r a l , these t h e o r i e s c l a s s i f y FDI as e i t h e r o f f e n s i v e or d e f e n s i v e s t r a t e g i e s undertaken t o support the f i r m ' s g o a l o f p r o f i t maximization. In the p a s t , Japanese Ozawa, M u l t i n a t i o n a l i s m . Japanese S t y l e , p. 41. - Page 53 - m u l t i n a t i o n a l s have tended t o undertake FDI f o r d e f e n s i v e reasons; t o ensure c o n t i n u e d access t o raw m a t e r i a l s u p p l i e s ; t o circumvent f o r e i g n government-imposed t r a d e b a r r i e r s ; and t o p r o t e c t the comparative advantages of f i r m s o p e r a t i n g i n i n t e r n a t i o n a l markets. I n c r e a s i n g l y , however, o f f e n s i v e s t r a t e g i e s have become more and more important i n e x p l a i n i n g Japanese f o r e i g n d i r e c t investment. An examination of these FDI t h e o r i e s p r o v i d e s a u s e f u l background t o t h e l i k e l y e v o l u t i o n o f Japanese FDI i n the f u t u r e . A b r i e f e x p l a n a t i o n o f the c l a s s i c a l model i s p r o v i d e d as a t h e o r e t i c a l background f o r modern FDI t h e o r y . 4.2. CLASSICAL THEORY The c l a s s i c a l t h e o r y o f i n t e r n a t i o n a l c a p i t a l flows i s d e r i v e d from the Hechsher-Ohlin-Samuelson (H-O-S) f a c t o r - p r o p o r t i o n s model o f i n t e r n a t i o n a l t r a d e , m o d i f i e d t o a l l o w f o r i n t e r n a t i o n a l c a p i t a l m o b i l i t y . The m o d i f i e d v e r s i o n of the H-O-S model assumes p e r f e c t c o m p e t i t i o n i n c a p i t a l markets. Under t h i s assumption, c a p i t a l flows t o where i t earns the h i g h e s t r a t e o f r e t u r n . The d i f f e r e n c e s i n n a t i o n a l r a t e s of r e t u r n s on c a p i t a l occur because of d i f f e r i n g f a c t o r p r o p o r t i o n s and p r i c e s a c r o s s c o u n t r i e s . Under the a d d i t i o n a l assumption t h a t the marginal p r o d u c t i v i t y of c a p i t a l i n each c o u n t r y i s equal t o the i n t e r e s t r a t e on bonds, c o u n t r i e s w i t h a r e l a t i v e abundance of c a p i t a l (and t h e r e f o r e , a r e l a t i v e l y lower domestic marginal p r o d u c t i v i t y of c a p i t a l ) w i l l buy bonds from c a p i t a l - s c a r c e c o u n t r i e s l e a d i n g t o a t r a n s f e r of r e a l Page 54 - c a p i t a l . Barring market imperfections, these c a p i t a l flows w i l l tend to equalize c a p i t a l endowments over time and remove a basis for trade. Although useful as a possible explanation f o r foreign p o r t f o l i o investment, c l a s s i c a l theory f a i l s to explain the economic rat i o n a l e behind foreign d i r e c t investment. For example, i f c a p i t a l markets are p e r f e c t l y competitive, entrepreneurs i n c a p i t a l scarce countries could s e l l bonds to investors i n c a p i t a l r i c h countries and use the proceeds to e s t a b l i s h operating f a c i l i t i e s at home where the rates of return are higher. Presumably, these l o c a l entrepreneurs could earn a higher rate of return than foreigners investing i n t h e i r country because of t h e i r superior knowledge of the l o c a l market. This would tend to preclude d i r e c t investment i n productive f a c i l i t i e s by foreigners. However, i n the 2 0 t h century, foreign d i r e c t investment has been substantial and, i n the case of the United States, the world's largest cumulative foreign d i r e c t investor, has accounted for a larger proportion of international c a p i t a l flows than p o r t f o l i o r e l a t e d investments. In addition, the theory does not address why c a p i t a l flows occur i n both d i r e c t i o n s . I f the productivity of c a p i t a l i s higher i n the capital-scarce country then there should be no flow of c a p i t a l from the capital-scarce country to the c a p i t a l - r i c h country. The problems associated with the c l a s s i c a l theory of in t e r n a t i o n a l c a p i t a l flows have prompted modern economists to - Page 55 - develop t h e o r i e s o f FDI which are based on g l o b a l o l i g o p o l i s t i c c o m p e t i t i o n i n i m p e r f e c t markets. These t h e o r i e s e x p l a i n FDI as o f f e n s i v e and d e f e n s i v e s t r a t e g i e s used by m u l t i n a t i o n a l c o r p o r a t i o n s t o maximize g l o b a l p r o f i t p o s i t i o n s . 4.3. OFFENSIVE FDI THEORY - THE INDUSTRIAL ORGANIZATION APPROACH T h e o r i e s e x p l a i n i n g o f f e n s i v e FDI emphasize i n d u s t r i a l o r g a n i z a t i o n as a b a s i s f o r o f f s h o r e investment. T h i s framework has been developed by Hymer, K i n d l e b e r g e r and Caves and p o s t u l a t e s t h a t FDI o c c u r s i n i n d u s t r i e s which are c h a r a c t e r i z e d by o l i g o p o l i s t i c markets i n both the domestic and f o r e i g n economy. FDI, on t h i s b a s i s , i s undertaken by a few r e l a t i v e l y l a r g e f i r m s and y i e l d s products which are h i g h l y d i f f e r e n t i a t e d i n terms of market a c c e p t a b i l i t y o r t e c h n i c a l s u p e r i o r i t y . The t h e o r y assumes t h a t the i n v e s t i n g f i r m s are a b l e t o e x p l o i t some f i r m - s p e c i f i c , c o m p e t i t i v e advantage i n g l o b a l markets. These c o m p e t i t i v e advantages compensate the MNC f o r the a d d i t i o n a l c o s t s a s s o c i a t e d w i t h o p e r a t i n g i n f o r e i g n markets such as l a c k of knowledge r e g a r d i n g l o c a l customs, markets, and l e g a l matters and g r e a t e r communication and c o n t r o l c o s t s . F u r t h e r , these advantages a l l o w the f i r m t o earn a h i g h e r r a t e of r e t u r n than i t would undertaking p r o j e c t s of s i m i l a r s i z e and r i s k i n the home market. Because the s e c o m p e t i t i v e advantages generate monopoly p r o f i t s , the i n v e s t i n g f i r m w i l l be more i n c l i n e d t o s e t up wholly-owned s u b s i d i a r i e s r a t h e r than l i c e n s e or export so as not t o share the - Page 56 r e n t s w i t h l o c a l i n t e r e s t s . Some o f these c o m p e t i t i v e advantages are d i s c u s s e d b r i e f l y below. 4.3.1. Economies o f S c a l e The e x i s t e n c e o f economies o f s c a l e i n p r o d u c t i o n , marketing, r e s e a r c h and development, t r a n s p o r t a t i o n and p u r c h a s i n g i s regarded as a p o s s i b l e r a t i o n a l e f o r FDI. Firms undertake FDI t o expand markets and t h e r e f o r e , spread t h e i r f i x e d c o s t s over a l a r g e r volume o f p r o d u c t i o n . E m p i r i c a l s t u d i e s tend t o support the need f o r m u l t i n a t i o n a l s t o be l a r g e t o succeed. In a comparison o f US m u l t i n a t i o n a l and domestic manufacturing concerns, H o r s t found t h a t the f i r m s i z e was the on l y s t a t i s t i c a l l y s i g n i f i c a n t v a r i a b l e . However, these s t u d i e s do not determine c a u s a l i t y , i . e . , i s an MNC l a r g e r and more p r o f i t a b l e than domestic f i r m s because i t i s a m u l t i n a t i o n a l o r i s i t a m u l t i n a t i o n a l because i t i s l a r g e and more p r o f i t a b l e . 4.3.2. The p o s e s s i o n o f un i q u e s k i l l s o r s p e c i a l e x p e r t i s e Other t h e o r i e s p o s t u l a t e t h a t MNCs undertake FDI because they posess s p e c i a l s k i l l s which can be t r a n f e r r e d i n t e r n a t i o n a l l y . These s p e c i a l s k i l l s i n c l u d e managerial and marketing e x p e r t i s e , t e c h n o l o g i c a l know-how and f i n a n c i a l s t r e n g t h s which a l l o w MNCs t o overcome the s u p e r i o r knowledge of competing host country f i r m s . E m p i r i c a l s t u d i e s r e g a r d i n g t h e s i g n i f i c a n c e o f - Page 57 - managerial/marketing e x p e r t i s e i n the f o r e i g n investment d e c i s i o n are l i m i t e d ; however, t h e r e have been numerous s t u d i e s which u n d e r l i n e the importance of R & D as a c h a r a c t e r i s t i c of m u l t i n a t i o n a l f i r m s . These i n c l u d e Raymond Vernon's product c y c l e t h e o r y , i n which MNCs are the o r i g i n a t o r s o f new t e c h n o l o g i e s because of emphasis on R&D f u n c t i o n s . 4.3.3. D i f f e r e n t i a t e d P r o d u c t s A c c o r d i n g t o R i c h a r d Caves, m u l t i n a t i o n a l f i r m s tend t o operate i n marketing o r r e s e a r c h i n t e n s i v e i n d u s t r i e s . Because of t h i s , m u l t i n a t i o n a l s are a b l e t o develop f i r m - s p e c i f i c advantages by p r o d u c i n g o r marketing d i f f e r e n t i a t e d p r o d u c t s . To maximize the r e t u r n on the l a r g e f i x e d c o s t s a s s o c i a t e d w i t h R&D and marketing, the m u l t i n a t i o n a l may want t o market these d i f f e r e n t i a t e d products g l o b a l l y . Caves notes t h a t d i r e c t f o r e i g n investment w i l l not be used i n every case t o p e n e t r a t e f o r e i g n markets. However, i f the f i r m ' s main c o m p e t i t i v e s t r e n g t h l i e s i n r e s e a r c h , marketing, and managerial e x p e r t i s e r a t h e r than i n any s p e c i f i c d i f f e r e n t i a t e d product, then d i r e c t f o r e i g n investment may be used t o expand o v e r a l l p r o d u c t i o n . 4.3.4. I n t e r n a l i z a t i o n A c c o r d i n g t o Buckley, Casson and Dunning, the e x i s t e n c e of i m p e r f e c t markets and c o m p e t i t i v e advantages i s not s u f f i c i e n t t o induce f o r e i g n d i r e c t investment. Rather, the c o m p e t i t i v e - Page 58 - advantages must be f i r m - s p e c i f i c . F i n a n c i a l s t r e n g t h and economies o f s c a l e a re not unique t o any one f i r m . Some technology can be l i c e n s e d , bought o r c o p i e d and d i f f e r e n t i a t e d p roducts can l o s e advantage t o m o d i f i e d a l t e r n a t i v e s w i t h a p p r o p r i a t e marketing. Buckley e t a l . p o s t u l a t e t h a t o n l y p o s e s s i o n o f p r o p r i e t a r y knowledge and c o n t r o l o f human c a p i t a l can generate s u f f i c i e n t competitve advantages t o warrant FDI. In t h i s sense, p r o d u c t i o n by overseas s u b s i d i a r i e s i s p r e f e r r a b l e t o l i c e n s i n g o r j o i n t v e n t u r e s because the l a t t e r would j e o p a r d i z e the i n f o r m a t i o n monopoly o f the MNC and i t s a b i l i t y t o g a i n monopoly p r o f i t s . 4.3.5 A p p l i c a b i l i t y o f O f f e n s i v e FDI t h e o r y i n Japanese FDI C o n t e x t The i n d u s t r i a l o r g a n i z a t i o n approach p o s t u l a t e d by Hymer, K i n d l e b e r g e r and Caves i s not s u f f i c i e n t t o e x p l a i n the l a r g e m a j o r i t y o f Japanese overseas d i r e c t investment undertaken i n the p a s t . As o u t l i n e d i n S e c t i o n 3.0, a v a s t p r o p o r t i o n o f Japanese manufacturing FDI has been undertaken by s m a l l and medium s c a l e o p e r a t i o n s i n Southeast A s i a and L a t i n America. These f i r m s produce p r i m a r i l y s t a n d a r d i z e d , low-technology p r o d u c t s i n which t h e r e i s l i t t l e o p p o r t u n i t y f o r economies o f s c a l e o r product d i f f e r e n t i a t i o n . In a d d i t i o n , as noted by Ozawa f 7 5) , the market i m p e r f e c t i o n s which g i v e Japanese f i r m s advantages i n these c o u n t r i e s o r i g i n a t e s from the underdeveloped nature o f the host Ozawa, M u l t i n a t i o n a l i s m . Japanese S t y l e , p. 44. - Page 59 - economies r a t h e r than o l i g o p o l i s t i c c h a r a c t e r i s t i c s o f the i n v e s t i n g Japanese companies. T h i s i s i n d i r e c t c o n t r a s t t o the i n d u s t r i a l o r g a n i z a t i o n approach which s t i p u l a t e s t h a t FDI only o c c u r s when o l i g o p o l i s t i c market s t r u c t u r e s f o r a p a r t i c u l a r i n d u s t r y e x i s t i n both the i n v e s t i n g and ho s t country. The f a c t t h a t Japanese f i r m s d e r i v e t h e i r quasi-advantages from the backwardness o f the host country i l l u m i n a t e s an important concern f o r many Japanese f i r m s o p e r a t i n g abroad. I f such i s the case, then the advantage of the i n v e s t i n g Japanese concern must i n e v i t a b l y be t r a n s i e n t , e s p e c i a l l y i f one impact o f FDI i s t o f u r t h e r the economic development of the ho s t c o u n t r y . However, Ozawa notes t h a t t h e r e i s one " l a s t i n g advantage" of Japanese f i r m s . T h i s i s the world-wide marketing networks developed by many Japanese companies. These networks can a l s o be accessed by small/medium concerns through p a r t n e r s h i p s w i t h the l a r g e sogo shosha. T h i s r e p r e s e n t s a s t r o n g advantage of Japanese f i r m s o p e r a t i n g i n underdeveloped c o u n t r i e s where the g l o b a l marketing s k i l l s o f l o c a l f i r m s i s o f t e n weak. Although i n d u s t r i a l o r g a n i z a t i o n t h e o r i e s a re not a p p l i c a b l e t o a s i g n i f i c a n t p r o p o r t i o n o f p a s t Japanese overseas investment, r e c e n t l y , t h e r e has been an i n c r e a s e i n Japanese investment which does f i t the t h e o r e t i c a l framework. Such f i r m s as Sony, Toyota, M i t s u b i s h i Heavy I n d u s t r i e s , Nippon S t e e l , M a t s u s h i t a and Honda operate i n g l o b a l o l i g o p o l i s t i c markets and are u s i n g FDI as an o f f e n s i v e s t r a t e g y t o f o s t e r g l o b a l p r o f i t maximization and the - Page 60 - e v o l u t i o n towards t r u e m u l t i n a t i o n a l s t a t u s . 4.4. DEFENSIVE FDI THEORY Some FDI t h e o r i e s p o s t u l a t e t h a t f o r e i g n investment occurs because MNCs must p r o t e c t t h e i r g l o b a l p r o f i t p o s i t i o n s from e x t e r n a l t h r e a t s . P r i n c i p a l m o t i v a t i o n s behind d e f e n s i v e FDI i n c l u d e : 4.4.1. M a r k e t I m p e r f e c t i o n s C r e a t e d by Governments Market i m p e r f e c t i o n s r e s u l t i n g from t a r i f f o r n o n - t a r i f f b a r r i e r s , p r e f e r e n t i a l puchasing p o l i c i e s , t a x i n c e n t i v e s , c a p i t a l market and exchange market c o n t r o l s , can l e a d t o d e f e n s i v e f o r e i g n d i r e c t investment. In a d d i t i o n , the form a t i o n o f p r o t e c t i o n i s t , m u l t i - n a t i o n t r a d i n g b l o c s , such as the the European Economic Community, can a l s o induce FDI by non-member c o u n t r i e s . N e v e r t h e l e s s , government p o l i c i e s l e a d i n g t o the c r e a t i o n of p r o t e c t e d markets w i l l o n l y l e a d t o FDI i f the markets are s u f f i c i e n t l y l a r g e o r p r o t e c t e d t o compensate the MNC f o r the a d d i t i o n a l c o s t s o f o p e r a t i n g abroad. 4.4.2. New M a r k e t s MNCs may reach a stage where o p p o r t u n i t i e s a t home are l i m i t e d . Home markets may be c h a r a c t e r i z e d by product s a t u r a t i o n , i n t e n s i v e c o m p e t i t i o n , o r changing consumer t a s t e s . The f i r m i s fa c e d w i t h the a l t e r n a t i v e o f expanding i n t o new prod u c t s a t home - Page 61 - o r s e e k i n g new f o r e i g n markets f o r the e x i s t i n g product. P e n e t r a t i n g f o r e i g n markets may be p r e f e r r a b l e because o f the f i r m ' s b u i l t - u p e x p e r i e n c e i n producing and marketing the product. I f t r a n s p o r t a t i o n c o s t s f o r the product are h i g h then FDI may be the most a p p r o p r i a t e method of a c c e s s i n g l o c a l markets. Other i n c e n t i v e s f o r o f f - s h o r e investment i n se a r c h o f new markets i n c l u d e f o l l o w i n g domestic c l i e n t s abroad. T h i s i s p a r t i c u l a r l y r e l e v a n t t o the s e r v i c e i n d u s t r i e s such as banking, i n s u r a n c e , and f i n a n c e which have undertaken FDI t o counter e f f o r t s by f o r e i g n s e r v i c e f i r m s t o a t t r a c t the b u s i n e s s o f domestic c l i e n t s . 4.4.3. A c c e s s t o New T e c h n o l o g i e s An i n c r e a s i n g l y important m o t i v a t i o n f o r FDI i s t o access technology i n f o r e i g n c o u n t r i e s , e s p e c i a l l y f o r f o r e i g n MNCs und e r t a k i n g FDI i n the U n i t e d S t a t e s . Defensive FDI of t h i s type u s u a l l y t a k e s the form of j o i n t - v e n t u r e s w i t h l o c a l companies. Technology a c q u i r e d from these j o i n t venture investments can then be used t o improve p r o d u c t i o n processes i n a l l g l o b a l s u b s i d i a r i e s . 4.4.4. R i s k D i v e r s i f i c a t i o n R i s k d i v e r s i f i c a t i o n t heory e x p l a i n s FDI by MNCs as a means of r e d u c i n g s y s t e m a t i c r i s k . T h i s occurs because p r o j e c t r e t u r n s i n one coun t r y w i l l not be p e r f e c t l y c o r r e l a t e d w i t h r e t u r n s from p r o j e c t s i n o t h e r c o u n t r i e s due t o d i f f e r i n g economic environments. - Page 62 - By d i v e r s i f y i n g i n t e r n a t i o n a l l y , t h e r e f o r e , a f i r m can reduce the v o l a t i l i t y o f i t s cash flows. S t a b l e cash flows reduce the need t o s e t a s i d e funds i n l i q u i d , l o w e r - y i e l d i n g bank accounts t o cover unexpected sho r t a g e s ; a l l o w f o r u n i n t e r r u p t e d d i v i d e n d payments; and enable the f i r m t o enjoy a lower c o s t o f funds from s h a r e h o l d e r s o r banks. 4.4.5. Product C y c l e Theory Raymond Vernon's product c y c l e t h e o r y i s perhaps one of the most r e c o g n i z e d t h e o r i e s d e s c r i b i n g d e f e n s i v e FDI. A c c o r d i n g t o Vernon, FDI i s a n a t u r a l stage i n the l i f e c y c l e o f a product. Vernon p o s t u l a t e s t h a t o l i g o p o l i s t i c c o m p e t i t i o n , economies of s c a l e and o t h e r i m p e r f e c t i o n s i n product and f a c t o r markets l e a d f i r m s i n advanced c o u n t r i e s t o undertake e x t e n s i v e R&D, l e a d i n g t o the c r e a t i o n o f new, t e c h n o l o g i c a l l y - a d v a n c e d gOods. These goods are f i r s t i n t r o d u c e d i n t o the home market because c l o s e c o o r d i n a t i o n o f the p r o d u c t i o n and marketing d i v i s i o n s o f the f i r m i s r e q u i r e d . A f t e r a s h o r t time l a g , the product i s then exported. As i t reaches m a t u r i t y , c o m p e t i t i o n from near s i m i l a r products w i l l reduce the p r o f i t margin o f the product both i n home and export markets. In or d e r t o m a i n t a i n i t s p r o f i t margins, the f i r m w i l l undertake FDI t o e s t a b l i s h manufacturing f a c i l i t i e s i n areas which p r o v i d e the lowest u n i t c o s t o f p r o d u c t i o n . Thus, d e f e n s i v e FDI oc c c u r s because o f the need t o p r o t e c t p r o f i t margins. - Page 63 - 4.4.6. F o l l o w t h e Leader A f i n a l t h e o r y d e s c r i b i n g d e f e n s i v e FDI i s F r e d e r i c k K n i c k e r b o c k e r ' s f o l l o w the l e a d e r model of f o r e i g n investment. K n i c k e r b o c k e r contends t h a t when one f i r m i n an o l i g o p o l i s t i c i n d u s t r y undertakes a FDI, oth e r f i r m s i n the same i n d u s t r y make d e f e n s i v e FDIs i n the same market. These investments are undertaken t o prevent competing f i r m s from e n j o y i n g c o m p e t i t i v e advantages such as economies of s c a l e through FDI. 4.4.7. A p p l i c a b i l i t y o f D e f e n s i v e FDI models i n t h e Japanese C o n t e x t D e f e n s i v e FDI models can be used t o e x p l a i n p a r t i c u l a r cases of p a s t Japanese f o r e i g n investment. Japanese f i r m s have undertaken FDI i n the p a s t t o circumvent government imposed t r a d e b a r r i e r s ; t o develop new markets; and t o access f o r e i g n t e c h n o l o g i e s and s t r a t e g i c r e s o u r c e s . In a d d i t i o n , Japanese manufacturing investment by small/medium s c a l e f i r m s i n Southeast A s i a and L a t i n America has a l s o e x h i b i t e d a f o l l o w the l e a d e r p a t t e r n o f investment. However, u n l i k e K n i c k e r b o c k e r ' s theory, these f i r m s have tended t o produce low-technology, s t a n d a r d i z e d p r o d u c t s and operate i n i n d u s t r i e s which are not o l i g o p o l i s t i c . A m o d i f i e d v e r s i o n o f the product c y c l e t h e o r y may be more a p p r o p r i a t e f o r e x p l a i n i n g Japanese manufacturing FDI. The product c y c l e t h e o r y i s based on the i n v e s t i n g f i r m d e v e l o p i n g new t e c h n o l o g i e s which are s u c c e s s f u l l y i n t r o d u c e d a t home and t r a n s p l a n t e d abroad. In c o n t r a s t , Japanese i n d u s t r y "has not - Page 64 - i n t r o d u c e d any s i g n i f i c a n t i n n o v a t i o n s t h a t would i n v i t e massive i m i t a t i o n s overseas as envisaged by the model. 1 1 ( 7 6) As importers of t e c h n o l o g i e s , Japanese f i r m s were concerned about r e d u c i n g p r o d u c t i o n c o s t s , not sprea d i n g the overhead o f l a r g e R&D ex p e n d i t u r e s . In the 1950s and 1960s, Japanese f i r m s accumulated v a l u a b l e e x p e r i e n c e i n impo r t i n g t e c h n o l o g i e s and ad a p t i n g them t o a r e l a t i v e l y l a b o u r i n t e n s i v e environment. When Japanese p r o d u c t i o n c o s t s became too h i g h t h i s e x p e r i e n c e was then used t o t r a n s p l a n t p r o d u c t i o n t o lower c o s t c o u n t r i e s . In r e c e n t years, many o f these t e c h n o l o g i c a l importers have graduated from i n t e r c e p t o r s o f Western t e c h n o l o g i e s t o i n n o v a t o r s ; i n p a r t i c u l a r , Japanese f i r m s have developed e f f i c i e n t , h i g h l y p r o d u c t i v e manufacturing p r o c e s s e s which can be t r a n s p l a n t e d t o r e l a t i v e l y c a p i t a l i n t e n s i v e r e g i o n s l i k e North America and Europe. Others are now overcoming technology t r a d e b a r r i e r s by i n v e s t i n g i n j o i n t v e n t u r e s i n the U n i t e d S t a t e s t o g a i n access t o new t e c h n o l o g i e s . Thus, i n the f u t u r e , the product c y c l e t h e o r y may be more r e l e v a n t t o Japanese f i r m s as i n n o v a t o r s r a t h e r than i m p o r t e r - m o d i f i e r s of o l d t e c h n o l o g i e s . 4.5. A MODEL OF JAPANESE FDI Both o f f e n s i v e and d e f e n s i v e based models o f FDI f a i l t o e x p l a i n adequately the r i s e i n Japanese FDI s i n c e the 1970s and, i n p a r t i c u l a r , the dramatic growth s i n c e 1984. T h i s f a i l u r e occurs Ozawa, M u l t i n a t i o n a l i s m . Japanese S t y l e , p. 52. - Page 65 - because o f the c o n c e n t r a t i o n on f i r m - s p e c i f i c m o t i v a t i o n s f o r un d e r t a k i n g FDI. Conversely, Japanese economists, such as Kojima and Ozawa, have tended t o a t t r i b u t e p a s t Japanese FDI t o macro- economic developments a t home and abroad. These developments i n c l u d e the dependency o f Japan on f o r e i g n markets both as o u t l e t s f o r h er exp o r t s and as important sources o f v i t a l p r o d u c t i v e i n p u t s ; the r i s i n g c o s t s o f i n d u s t r i a l i z a t i o n a t home i n c l u d i n g massive f a c t o r p r i c e i n c r e a s e s and environmental p o l l u t i o n ; i n c r e a s i n g p r o t e c t i o n i s m i n f o r e i g n markets; and the d e s i r e s o f de v e l o p i n g n a t i o n s t o a t t r a c t f o r e i g n c a p i t a l t o f u r t h e r economic development. Macro-economic f a c t o r s a re suggested as the reason f o r o f f s h o r e investment by Japanese f i r m s which e x h i b i t few of the c h a r a c t e r i s i t i c s o f t r u e m u l t i n a t i o n a l s . Yet, as noted by Ozawa C 7 7 ) , " . . . i r o n i c a l l y , from a macroeconomic view p o i n t , they are judged both a p p r o p r i a t e and ready t o be t r a n s p l a n t e d overseas." Thus, i n or d e r t o e x p l a i n the change i n the l e v e l and d i r e c t i o n o f Japanese FDI flows s i n c e the 1970s, an understanding of t h e macro-economic f a c t o r s s t i m u l a t i n g o f f s h o r e investment i s r e q u i r e d . An examination o f macro-economic developments i n Japan i n d i c a t e s t h a t the i n c r e a s e i n FDI on a n a t i o n a l b a s i s can be l a r g e l y a t t r i b u t e d t o the economic slowdown a f t e r 1973 and the i n a b i l i t y o f the domestic economy t o absorb the s u r p l u s o f savings i n t he p r i v a t e s e c t o r d u r i n g the 1980s. These i s s u e s w i l l be d i s c u s s e d f u l l y i n S e c t i o n 5.0. Ozawa, M u l t i n a t i o n a l i s m . Japanese S t y l e , p. 40. - Page 66 - 5.0. MACROECONOMIC BALANCES OF THE JAPANESE ECONOMY Japanese net longterm c a p i t a l investment [net f o r e i g n d i r e c t investment (NFDI) p l u s net f o r e i g n p o r t f o l i o investment (NFPI)] has e x p e r i e n c e d dramatic growth d u r i n g the p a s t few y e a r s , r i s i n g from U.S.$17.7 b i l l i o n i n 1983 t o U.S.$121.3 b i l l i o n i n 1988, with a peak of U.S. $144.7 b i l l i o n i n 1986. To understand the s o u r c i n g of t h e s e funds, and t o judge the ongoing s u s t a i n a b i l i t y o f t h i s magnitude o f investment, i t i s necessary t o examine the u n d e r l y i n g macroeconomic f e a t u r e s of the Japanese economy. T h i s examination w i l l a l s o p r o v i d e a p e r s p e c t i v e from which t o view the s t a t i s t i c a l a n a l y s i s c o n t a i n e d i n s e c t i o n 8.0. of t h i s r e p o r t . The macro-economic f e a t u r e s of a n a t i o n a l economy can be summarized by an a c c o u n t i n g i d e n t i t y which d e f i n e s the n a t i o n ' s fundamental domestic and e x t e r n a l b a l a n c e s . The i d e n t i t y a l s o p r o v i d e s a u s e f u l p e r s p e c t i v e from which Japanese FDI i n the post 1973 e r a can be examined. T h i s p e r s p e c t i v e i s clouded by two c h a r a c t e r i s t i c s of i d e n t i t i e s ; namely, they do not p r o v i d e q u a n t i t a t i v e p r e c i s i o n , and they do not e x p l a i n c a u s a l i t y . The f i r s t d i f f i c u l t y i s not important w i t h i n the c o n t e x t o f t h i s paper, s i n c e our approach w i l l , i n any event, i n v o l v e c e r t a i n s i m p l i f y i n g assumptions. On the o t h e r hand, c a u s a l i t y i s important t o the c o n c l u s i o n s b e i n g sought. However, as l o n g as the d i s c u s s i o n o c c u r s w i t h i n the c o n t e x t o f what a c t u a l l y happened i n the Japanese economy a f t e r 1973, reasonable i n f e r e n c e s can be made about i n t e r - f a c t o r dependencies w i t h r e s p e c t t o the d i r e c t i o n o f c a u s a l i t y . - Page 67 - The macro-economic a c c o u n t i n g i d e n t i t y can be d e r i v e d as f o l l o w s . Gross n a t i o n a l product which i s the sum of a l l goods and s e r v i c e s produced i n an economy i s made up o f p r i v a t e - s e c t o r consumption (C) and investment ( I ) ; government spending (G); and the d i f f e r e n c e between the exports o f goods and s e r v i c e s produced i n an economy (X) and the imports of goods and s e r v i c e s produced i n o t h e r c o u n t r i e s (M). T h i s can be s t a t e d as: GNP can a l s o be d e f i n e d i n terms of how the t o t a l income produced i n an economy i s spent, o r: GNP = C + I + G + ( X - M ) (1) GNP = C + S + T ( 2 ) where: C = t o t a l income consumed 8 = t o t a l income saved, and T = t o t a l income p a i d t o the government i n t a x e s . E q u a t i n g (1) and (2): C + I + G + (X-M) = C + S + T Which may be reduced t o : - Page 68 - (S-I) = (G-T) + (X-M) (3) A c c o r d i n g t o ( 3 ) , s u r p l u s e s or d e f i c i t s between p r i v a t e s e c t o r s a v i n g s and investment (S-I) must be o f f s e t by s u r p l u s e s or d e f i c i t s i n the government sector- (G-T), o r i n the c u r r e n t account balance (X-M). Any excess of investment over s a v i n g s ( i . e . S-I < 0 ) , must be o f f s e t by e i t h e r a government s e c t o r s u r p l u s ( i . e . G- T < 0) , o r a c u r r e n t account d e f i c i t ( i . e . X-M < 0) , or a combination of both. S i m i l a r l y , a p r i v a t e s e c t o r s a v i n g s u r p l u s ( i . e . S-I > 0) must be balanced by e i t h e r a government s e c t o r d e f i c i t ( i . e . G-T > 0 ) , or a c u r r e n t account s u r p l u s ( i . e . X-M > 0 ) , o r both. A second macro-economic concept of importance i n the f o l l o w i n g d i s c u s s i o n i s the Balance of Payments (BOP). The l a t t e r must always sum t o zero; what e x i t s the country must equal what e n t e r s . As such, although subsets of the BOP accounts can be i n s u r p l u s or d e f i c i t , the BOP must balance. Under the Japanese a c c o u n t i n g framework, the Balance o f Payments i s determined by the sequence o u t l i n e d i n F i g u r e 1. For the BOP t o balance, the c u r r e n t account balance must, n e c e s s a r i l y , be o f f s e t by the c a p i t a l account balance which equals net l o n g term and s h o r t term c a p i t a l , e r r o r s and omissions, and o f f i c i a l and p r i v a t e monetary movements. T h i s can be i l l u s t r a t e d by an example. I f Japan has a c u r r e n t account s u r p l u s i t means t h a t Japan i s p a y i n g out l e s s f o r e i g n exchange f o r i t s imports than - Page 69 - i t was r e c e i v i n g f o r i t s e x p o r t s . T h i s excess o f f o r e i g n currency can be used i n e i t h e r o f two ways: (1) Japanese c o r p o r a t i o n s , i n d i v i d u a l s o r p u b l i c i n t e r e s t s c o u l d purchase i n t e r e s t b e a r i n g f o r e i g n debt instruments such as f o r e i g n e q u i t i e s or bonds; o r (2) they c o u l d h o l d the excess f o r e i g n c u r r e n c y which i s a n o n - i n t e r e s t b e a r i n g debt instrument o f f o r e i g n governments. - Page 70 - Less Exports (f.o.b.) Imports (f.o.b.) FIGURE 1 BOP Schematic Equals Merchandise Trade Balance P l u s S e r v i c e Exports P l u s S e r v i c e Imports Pl u s U n i l a t e r a l T r a n s f e r s Equals Current Account Balance P l u s Longterm C a p i t a l Balance Equals B a s i c Balance P l u s Short Term C a p i t a l Balance P l u s E r r o r s & Omissions Equals O v e r a l l Balance Minus O f f i c i a l Monetary Movements Minus P r i v a t e Monetary Movements Equals • ZERO • - Page 71 - In both cases, the t r a n s a c t i o n s would equal a c a p i t a l outflow; the f i r s t on e i t h e r the l o n g term o r s h o r t term c a p i t a l balance, depending on the d u r a t i o n of the debt instrument; and the second on the p r i v a t e monetary movements. The argument works i n r e v e r s e f o r c u r r e n t account d e f i c i t s ; the shortage of f o r e i g n c u r r e n c y can be made up e i t h e r by s e l l i n g domestic e q u i t i e s , bonds e t c . t o f o r e i g n e r s ( r e p r e s e n t i n g a c a p i t a l i n f l o w on the l o n g o r s h o r t term balance) o r by f o r e i g n e r s h o l d i n g the debtor n a t i o n ' s c u r r e n c y . From the above, i t i s c l e a r t h a t the c a p i t a l account i s merely the f l i p s i d e o f the c u r r e n t account balance. T h i s can be expressed as: (X-M) = Lc + SC + E + F (4) where: Lc = Net Long term c a p i t a l Sc = Net Short term c a p i t a l E = E r r o r s & Omissions P = O f f i c i a l and P r i v a t e Monetary Movements E r r o r s and omissions (E) r e p r e s e n t a b a l a n c i n g item which b r i n g s the BOP t o zero a f t e r the e f f e c t s of c u r r e n t account balance, the l o n g term and s h o r t term c a p i t a l b alances, and the o f f i c i a l and p r i v a t e monetary movements are c o n s i d e r e d . Because E i s a random q u a n t i t y , used o n l y t o balance (X-M) and (Lc+Sc+F), i t cannot be c o n s i d e r e d a c a u s a l f a c t o r d e t e r m i n i n g the l e v e l of - Page 72 - NFDI and has, therefore, been omitted from our discussion. Therefore: ( X - M ) = L c + S c + F and since, based on the discussion i n section 2.0, L c i s equal to Net Foreign P o r t f o l i o Investment ( N F P I ) and Net Foreign Direct Investment ( N F D I ), then: ( X - M ) = N F P I + N F D I + SC + F (5) Substituting ( 5 ) into equation ( 3 ) , gives the expression: N F D I + N F P I + SC + F = (8-1) - ( G - T ) (6) According to t h i s equation, t o t a l net external investments are equal to the private sector savings balance minus the government sector balance. The excess monies avail a b l e i n the inter n a l sector (either because of a private sector surplus or government surplus or both) are available for net d i r e c t , net p o r t f o l i o and net short term c a p i t a l investments plus o f f i c i a l and private monetary movements. Presumably, i f we can i d e n t i f y the factors which generate excess c a p i t a l i n the domestic economy and the factors which determine the d i s t r i b u t i o n of t h i s excess c a p i t a l among the various external investment options, we can develop some - P a g e 73 - u n d e r s t a n d i n g o f the f o r c e s determining the l e v e l o f NFDI. U s i n g i d e n t i t y (6) as a base, the next two s e c t i o n s w i l l examine the i n t e r n a l [(S-I) and (G-T)] and e x t e r n a l [NFDI, NFPI, Sc and F] macroeconomic components of the Japanese economy. - Page 74 - 6.0. INTERNAL MACROECONOMIC COMPONENTS OF THE JAPANESE ECONOMY S i n c e 1973, Japan has been g e n e r a t i n g l a r g e s u r p l u s savings i n the p r i v a t e s e c t o r which, u n t i l the l a t e 1970s, were more or l e s s absorbed by government d e f i c i t s . With the implementation of f i s c a l a u s t e r i t y programs a f t e r 1978, government d e f i c i t s no l o n g e r f u l l y absorbed the excess sa v i n g s i n the p r i v a t e s e c t o r and the s u r p l u s was i n c r e a s i n g l y c h a n n e l l e d o f f s h o r e i n l o n g and s h o r t term c a p i t a l investments. In order t o determine whether o r not t h i s s i t u a t i o n can c o n t i n u e t o p e r s i s t , i t i s important t o examine the f a c t o r s which have been c a u s i n g the p r i v a t e s e c t o r s u r p l u s e s and the e v o l u t i o n o f Japanese f i s c a l p o l i c y s i n c e 1973. The s u s t a i n a b i l i t y o f the p o s t 1973 t r e n d s w i l l determine the excess c a p i t a l a v a i l a b l e f o r f u t u r e o f f s h o r e investment. 6.1. THE PRIVATE SECTOR BALANCE The 1973 o i l c r i s i s was a watershed not o n l y f o r the Japanese economy as a whole but as a f o r c e f o r g e n e r a t i n g l a r g e amounts of s u r p l u s c a p i t a l i n the p r i v a t e s e c t o r . Japan's h i g h growth r a t e s had begun t o d e c l i n e from 1970 onwards but i t was the 1973 c r i s i s which f i n a l l y t e r m i n a t e d the l o n g c y c l e o f economic growth. In 1974, the economy d e c l i n e d 0.4% i n r e a l terms, thus r e g i s t e r i n g i t s f i r s t r e a l n e g a t i v e growth s i n c e the end of the war. A f t e r 1974, economic growth r e f l e c t e d the m a t u r i t y o f the economy, with an average r e a l growth r a t e of 3.8% per year between 1974 and 1985. - Page 75 - T h i s economic slowdown had s i g n i f i c a n t impact on the p r i v a t e s e c t o r s a v i n g s and investment p a t t e r n s and was the s i n g l e most important f a c t o r c o n t r i b u t i n g t o the r a p i d i n c r e a s e i n Japanese f o r e i g n investment a f t e r 1980. Table 6-1 shows the breakdown of t o t a l p r i v a t e s a v i n g s and investment as a percentage o f GNP between 1960 and 1987 f o r both the household and c o r p o r a t e s e c t o r s . The p a t t e r n o f savings/investment balances can be c o n v e n i e n t l y s e p a r a t e d i n t o t h r e e time p e r i o d s : t h a t i s , from 1960 t o 1964; from 1965 t o 1974; and from 1975 onwards. During the f i r s t p e r i o d , p r i v a t e s e c t o r investment tended t o exceed s a v i n g s , sometimes by l a r g e margins. In 1961 the net d e f i c i t peaked a t the e q u i v a l e n t of 7.4% of GNP. Between 1960 and 1964, t h i s average d e f i c i t was equal t o about 3.2% o f GNP. The d e f i c i t was f i n a n c e d from two sources; an excess o f government s a v i n g s over investment, which averaged about 1.6% o f GNP; and s m a l l c u r r e n t account d e f i c i t s . The p r i v a t e s e c t o r d e f i c i t s r e f l e c t e d l a r g e i n c r e a s e s i n c a p i t a l f o r m a t i o n d u r i n g the 1960s w i t h annual c o r p o r a t e investments between 1960 and 1964 averaging about 24.4% o f GNP. During the second p e r i o d , between 1965 and 1974, p r i v a t e s e c t o r s a v i n g s and investment remained more or l e s s i n balance; the former averaged about 31.23% o f GNP and the l a t t e r about 31.27% o f GNP. In r e l a t i v e terms both the average annual c o r p o r a t e investment and sa v i n g s d e c l i n e d m a r g i n a l l y d u r i n g t h i s p e r i o d (investment dropped t o 23.8% of GNP from 24.4% i n 1960-1964 and - Page 76 - TABLE 6.1: THE JAPANESE PRIVATE SECTOR SAVINGS-INVESTMENT BALANCE, F.Y. 1960-1987 PERCENTAGE OF 6NP CORPORATE HOUSEHOLDS TOTAL PRIVATE SECTOR rEAR SAVINGS INVESTMENT BALANCE SAVINGS INVESTMENT BALANCE SAVIN6S INVESTMENT BALANCE 1960 16.5 24.6 -8.1 11.8 6.6 5.2 28.3 31.2 -2.9 1961 16.5 29.9 -13.4 12.0 6.1 5.9 28.5 36.0 -7.5 1962 15.6 21.8 -6.2 12.3 6.7 5.6 27.9 28.5 -0.6 1963 15.9 23.7, -7.8 11.6 7.1 4.5 27.5 30.8 -3.3 1964 16.0 21.9 -5.9 11.2 7.3 3.9 27.2 29.2 -2.0 1965 15.8 19.1 -3.3 11.6 8.4 3.2 27.4 27.5 -0.1 1966 17.5 20.4 -2.9 11.9 8.3 3.6 29.4 28.7 0.7 1967 18.4 23.8 -5.4 13.0 8.9 4.1 31.4 32.7 -1.3 1968 19.7 24.1 -4.4 13.2 8.9 4.3 32.9 33.0 -0.1 1969 19.8 25.3 -5.5 12.7 9.2 3.5 32.5 34.5 -2.0 1970 18.7 27.5 -8.8 14.6 6.5 8.1 33.3 34.0 -0.7 1971 16.1 24.8 -8.7 14.9 5.2 9.7 31.0 30.0 1.0 1972 16.9 23.9 -7.0 15.1 5.3 9.8 32.0 29.2 2.8 1973 15.4 26.2 -10.8 16.9 5.4 11.5 32.3 31.6 0.7 1974 10.3 23.1 -12.8 19.7 8.3 11.4 30.0 31.4 -1.4 1975 8.4 17.9 -9.5 20.6 8.9 11.7 29.0 26.8 2.2 1976 9.1 16.2 -7.1 21.3 9.8 11.5 30.4 26.0 4.4 1977 9.5 15.2 -5.7 20.0 9.4 10.6 29.5 24.6 4.9 1978 11.4 13.9 -2.5 19.4 10.0 9.4 30.8 23.9 6.9 1979 11.7 16.1 -4.4 17.3 9.2 8.1 29.0 25.3 3.7 1980 11.3 17.0 -5.7 17.1 8.1 9.0 28.4 25.1 3.3 1981 10.6 16.9 -6.3 17.3 7.3 10.0 27.9 24.2 3.7 1982 11.2 16.2 -5.0 16.0 7.1 8.9 27.2 23.3 3.9 1983 11.0 15.3 -4.3 15.9 6.6 9.3 26.9 21.9 5.0 1984 11.4 15.9 -4.5 15.3 6.4 8.9 26.7 22.3 4.4 1985 11.8 17.2 -5.4 15.0 5.6 9.4 26.8 22.8 4.0 1986 - - - - - - -. - 5.8 1987 - - - - - - - - 4.5 - Page 76a - s a v i n g s dropped from 16.1% of GNP t o about 15.8%). The major f a c t o r behind the b a l a n c i n g i n the p r i v a t e s e c t o r was the surge i n s u r p l u s s a v i n g s i n the household s e c t o r which averaged approximately 7% o f GNP throughout the p e r i o d . Thus the household s e c t o r p r o v i d e d an important source o f investment funds f o r the c o r p o r a t e s e c t o r d u r i n g the h i g h growth e r a . F i n a l l y , from 1975 onwards, p r i v a t e s a v i n g s has exceeded p r i v a t e investment by a s u b s t a n t i a l margin; w i t h an average annual s a v i n g s s u r p l u s o f 4.2% o f GNP between 1975 and 1985, and a peak of 6.8% i n 1978. GNP growth r a t e s were h a l v e d i n the l a t t e r p a r t of the 1970s but t h i s had l i t t l e impact on the r a t i o of p r i v a t e s a v i n g s t o GNP, which e x h i b i t e d o n l y marginal d e c l i n e s . During the p e r i o d the average s a v i n g s r a t e was about 28.4% o f GNP, compared t o around 31.2% o f GNP between 1965 and 1974. P r i v a t e investment, however, f e l l s u b s t a n t i a l l y , dropping from an average of 31.3% between 1965 and 1974 t o o n l y 24.4% a f t e r 1974. An understanding of the reasons f o r the change from p r i v a t e s e c t o r s a v i n g s d e f i c i t t o s u r p l u s i s c r u c i a l t o any assessment of the s u s t a i n a b i l i t y of the c u r r e n t l e v e l of Japanese FDI. I f the s u r p l u s e s are maintained, the Japanese can, i f they so choose, c o n t i n u e t o i n v e s t h e a v i l y i n f o r e i g n a s s e t s ; w i t h the c h o i c e being between d i r e c t and p o r t f o l i o investments. To g a i n such an understanding, we w i l l examine both components o f the p r i v a t e s e c t o r balance, i . e . , p r i v a t e s e c t o r s a v i n g s and p r i v a t e s e c t o r investment. - Page 77 - 6.1.1. P r i v a t e S e c t o r Savings T a b l e 6.1 shows t h a t the two components o f p r i v a t e s e c t o r s a v i n g s , i . e . , households and c o r p o r a t i o n s , demonstrated markedly d i f f e r e n t responses t o the post-1973 economic slowdown. Corporate p r o f i t s f e l l d r a m a t i c a l l y i n the p e r i o d o f economic s t a g n a t i o n which f o l l o w e d the 1973 c r i s i s . T h i s caused c o r p o r a t e s e c t o r s a v i n g s t o drop t o an average o f 10.7% o f GNP a f t e r 1974, down from the 17.9% average between 1965 and 1974. Conversely, household s a v i n g s i n c r e a s e d s h a r p l y a f t e r 1973; r i s i n g from an average of 13% o f GNP between 1960 and 1973 t o over 20% between 1974 and 1978. T h e r e a f t e r , the r a t e d e c l i n e d , averaging about 16% from 1979 t o 1985. C o n t r a r y t o c o n v e n t i o n a l theory, the h i g h i n f l a t i o n o f 1973- 75 and the accompanying r e c e s s i o n caused the a c c e l e r a t i o n o f Japanese household savings r a t e s d u r i n g the 1974 t o 1978 p e r i o d . The r a p i d i n f l a t i o n r e s u l t e d i n s u b s t a n t i a l l o s s e s i n the r e a l v a l u e o f accumulated sa v i n g s i n the household s e c t o r . Bank time d e p o s i t s make up the l a r g e s t p r o p o r t i o n o f f i n a n c i a l a s s e t s ; and the i n t e r e s t r a t e s on these instruments were, and remain, c o n t r o l l e d a t v e r y low l e v e l s by the M i n i s t r y o f Finance (MOF). As i n d i c a t e d i n Tabl e 6.2, ne g a t i v e r e a l i n t e r e s t r a t e s on savings d e p o s i t s c o n t i n u e d u n t i l 1978, w i t h even the h i g h e s t y i e l d - Page 78 - TABLE 6-2: INFLATION RATES AND TIME DEPOSIT RATES BY TYPE OF INSTITUTION, 1969 TO 1981. PERCENT POSTAL SAVINGS COrMERCIAL BANKS TRUST BANKS MAX I HUM niNinufi HAXIHUt1 niNinun MAXIHUtt niNinun INFLATION ) 3 YEARS LESS THAN M ) 3 YEARS *1 LESS THAN * i : ) 3 YEARS M LESS THAN M (EAR RATES 1 YEAR 1 YEAR 1 YEAR 1969 5.2 5.50 4.20 5.50 4.00 7.27 5.50 1970 7.7 5. 75 (4) 4.25 (4) 5.75 (4) - 7.47 (3) 5.75 (4) 1971 6.1 6.00 (2) - 6.00 (2) - 7.17 (9) - 1972 4.5 - - -• - 7.12 (4) - 5.50 (8) 4.00 (8) 5.50 (8) 3.75 (7) 6.82 (7) 5.25 (7) 1973 11.7 6.00 (4) 4.25 (4) 6.00 (4) 4.00 (4) 7.12 (4) 5.75 (4) 6.50 (7) • - ' 6.50 (7) - 7.42 (7) 6.00 (7) 6.75 (10) 4.50 (10) 6.75 (10) . A-25 (10) 7.72 (9) 6.25 (9) • - - - - 8.52 (12) - 1974 24.5 7.50 (1) 5.25 (1) 7.50 (1) 5.25 (1) - 7.25 (1) £.00 (9) 6.00 (9) 8.00 (9) 5.50 (9) 9.02 (9) 7.75 (9) 1975 11.8 7.00 (11) 5.00 (11) 7.00 (11) 4.50 (11) 8.82 (8) 6.75 (11) - - - 8.32 (11) - 1976 9.3 ': - - - - - - 1977 8.1 6.00 (5) 4.25 (S) 6.00 (5) 3.75 (5) 7.52 (5) 5.75 (5) 5.50 (9) 3.75 (9) 5.50 (9) 3.25 (9) 6.72 (9) 5.25 (9) 1978 3.8 4.75 (4). 3.00 (4) 4.75 (4) 2.50 (4) 6.22 (4) 4.50 (3) 1979 3.6 5. SO (5) 3.75 (5) 5.50 (5) 3.25 (5) 6.82 (5) 5.25 (5) 6.25 (8) 4.50 (8) 6.25 (8) 4.00 (8) 7.32 (8) 6.00 (8) 1980 8 7.25 (3) 5.50 (3) 7.25 (3) 5.00 (3) 7.92 (2) 7.00 (3) 8.00 (4) 6.50 (4) 8.00 (4) 6.00 (4) 8.62 (3) 7.75 (4) r 7.25 (12) 5.50 (12) 7.25 (12) 5.00 (12) . 7.92 (12) 7.00 (3) 1981 4.9 6.50 (4) 4.75 (4) 6.50 (4) 4.25 (4) 7.62 (5) 6.25 (4) Footnotes: *1 Figures in brackets refer to ionth in which interest rates were changed. Source: Bank of Japan, E c o n o i i c S t a t i s t i c s Annual, 1985, p. 177-78; 1979, p. 73-74. - Page 78a - instruments l o s i n g 30% of t h e i r v a l u e between 1973 and 1978 ( ) . A c c o r d i n g t o L i n c o l n , the d e c l i n e i n the r e a l v a l u e o f savings prompted Japanese households t o t e m p o r a r i l y i n c r e a s e s a v i n g s r a t e s t o r e c o v e r these l o s s e s . T h i s p o r t f o l i o r e f u r b i s h i n g , and the g e n e r a l d i s i n c l i n a t i o n t o consume t r i g g e r e d by the u n c e r t a i n t y f o l l o w i n g the 1973 o i l c r i s i s , s e rved as a powerful s t i m u l u s f o r i n c r e a s e d s a v i n g s a f t e r 1975. However, t h i s was a temporary phenomenon and Japanese household s a v i n g s r a t e s as a percentage of GNP have been f a l l i n g g r a d u a l l y s i n c e 1978. N e v e r t h e l e s s , c u r r e n t household s a v i n g s r a t e s are s t i l l h i g h e r than the average of the pre-1973 p e r i o d and exceed those o f a l l OECD n a t i o n s except I t a l y ( r e) . (Even t h i s e x c e p t i o n may be somewhat i l l u s o r y , s i n c e the I t a l i a n r a t e i s g r e a t l y d i s t o r t e d by the e x i s t e n c e o f a l a r g e "underground", and undeclared, s e c t o r o f the I t a l i a n economy.) In a b s o l u t e terms, the 1985 l e v e l of household s a v i n g s (nominal) was more than 336% t h a t o f 1972; even a f t e r a p p l y i n g the GNP d e f l a t o r , the 1985 a v a i l a b l e p o o l o f household s a v i n g s was 66% h i g h e r than t h a t o f 1972. The f a c t o r s behind the h i g h household s a v i n g s r a t e i n Japan have been a s u b j e c t o f len g t h y debate w i t h no c l e a r consensus. Two p r i n c i p a l reasons put forward are u n c e r t a i n r e t i r e m e n t incomes Edward J . L i n c o l n , Japan: F a c i n g Economic M a t u r i t y . Washington: The Brookings I n s t i t u t i o n , 1988, p. 152. 7 9 A t s u s h i Maki, "Why i s the Japanese Household Savings Rate So High?," Keio Business Review. No.24. 1987. Tokyo: Keio U n i v e r s i t y Press, 1987, p. 2. Page 79 which, i n t u r n , i s l i n k e d t o inadequate s o c i a l s e c u r i t y pensions and extended l o n g e v i t i e s , and the h i g h c o s t o f housing. Both of t h e s e reasons are h i g h l i g h t e d below. 6.1.1.1. The Need t o P r o v i d e f o r R e t i r e m e n t I n s u f f i c i e n t s o c i a l s e c u r i t y pensions have o f t e n been c i t e d as a p r i n c i p a l f a c t o r behind h i g h Japanese s a v i n g s r a t e s . The argument was more a p p l i c a b l e d u r i n g the 1950s and 1960s than i t i s today. S o c i a l s e c u r i t y c o n t r i b u t i o n s as a percentage o f GNP i n Japan are now on a par w i t h the U*S., the U.K. and Canada, although they are s u b s t a n t i a l l y below the l e v e l s i n France, Sweden, I t a l y and West Germany ( 8 0) . However, the downward p r e s s u r e o f improved s o c i a l s e c u r i t y b e n e f i t s on the s a v i n g s r a t e has been negated by two f a c t o r s . F i r s t , the mandatory r e t i r e m e n t age f o r most Japanese companies i s 55, although i n r e c e n t y e a r s many companies have • 81 r a i s e d the age t o 60 ( ) . Second, the average l o n g e v i t y i n Japanese i s the h i g h e s t i n the world w i t h 1986 f i g u r e s o f 75 and • 82 81 y e a r s f o r men and women, r e s p e c t i v e l y ( ). These two f a c t o r s Maki, "Why i s the Japanese Household Savings Rate so High?," Keio Business Review, p. 3. As a percentage o f GNP, s o c i a l s e c u r i t y c o n t r i b u t i o n s are 18.2% f o r France; 16.2% f o r I t a l y ; 13.8% f o r Sweden; 12% f o r West Germany; 7.8% f o r Japan; 6.5% f o r the U.S. and U.K.; and 5.6% f o r Canada. 8 1 Kazuo Sato, "Savings and Investment," The P o l i t i c a l Economy of Japan: Volume 1 - The Domestic Tra n s f o r m a t i o n , e d i t e d by Kozo Yamamura and Y a s u k i c h i Yasuba, S t a n f o r d : S t a n f o r d U n i v e r s i t y P r e s s , 1987, p.163. 8 2 Japan 1988. An I n t e r n a t i o n a l Comparison, Tokyo: K e i z a i Koho Centre, 1988, p. 8. - Page 80 - have lengthened the p e r i o d which must be covered by savings generated i n the p r i n c i p a l working y e a r s . Although the average l a b o u r f o r c e p a r t i c i p a t i o n by males over 65 i s h i g h by Western standards (see T a b l e 6.3), Sato notes t h a t the growing i n v e r t e d pyramid s t r u c t u r e of Japanese demographics w i l l i n e v i t a b l y r e s u l t i n a l a r g e r number of people competing f o r the l i m i t e d number of j o b s a v a i l a b l e t o the over 60 age-category o f workers ( 8 3) . The r a p i d a g ing of Japan i s a l s o expected t o p l a c e a g r e a t e r burden on the working p o p u l a t i o n t o support an i n c r e a s i n g number of r e t i r e d workers. As noted by Sato f 8 4) , "The s o c i a l s e c u r i t y burden on workers w i l l r i s e t o an i n t o l e r a b l e l e v e l i f the p r e s e n t b e n e f i t l e v e l i s maintained. A debasement i n the b e n e f i t s t r u c t u r e i s i n e v i t a b l e i f the s o c i a l s e c u r i t y system i s t o remain s o l v e n t . " These views are based on a c l a s s i c a l concept o f a g e - c a p a b i l i t y r e l a t i o n s h i p s and do not take i n t o account the changing nature of t e c h n o l o g y and r e l a t e d l a b o u r demands. N e v e r t h e l e s s , the p e r c e p t i o n o f a need t o p r o v i d e f o r a l o n g e r post-employment p e r i o d may tend t o support c o n t i n u e d h i g h s a v i n g s r a t e s i n Japan. The c o n t r a r y argument has a l s o been advanced; namely, t h a t the r a p i d a g i n g o f Japan w i l l r e s u l t i n a g r a d u a l d e c l i n e i n the s a v i n g s r a t e s . T h i s view h o l d s t h a t r e t i r e d o r e l d e r l y workers are d i s - s a v e r s and t h a t , as the p r o p o r t i o n of e l d e r l y t o the Sato, "Savings and Investment", The P o l i t i c a l Economy of Japan. Volume 1. p. 163. 8 4 I b i d . . p. 164. - Page 81 - TABLE 6-3: LIFE EXPECTANCY AND LABOUR PARTICIPATION RATIOS OF SELECTED COUNTRIES LABOUR FORCE PARTICIPATION RATIO LIFE 1982 (PERCENT! 1 EXPECTANCY COUNTRY (YEARS) HALE FEMALE HALE 65+ YEARS JAPAN 73.8 (1981) 89.2 55.9 38.3 UNITED STATES 69.9 (1979) 88.1 63.1 : 17.8 CANADA 70.2 (1977) 86.2 59.7 13.8 FRANCE 70.1 (1980) 79.8 56.0 5.9 GERMANY 69.9 (1981) 80.6 49.6 6.0 ITALY 69.7 (1977) 81.3 . 4 0 . 0 11.7 UNITED KINGDOM 70.4 (1978) 89.2 58.1 7.8 Source: Kazuo Sato, 'Savings and Investment" The P o l i t i c a l Economy of Japan, Vol 1, p. U7. - Page 81a - g e n e r a l working p o p u l a t i o n i n c r e a s e s , the p r o p o r t i o n o f households which are e i t h e r not adding t o , o r drawing down, t h e i r s avings s t o c k s w i l l a l s o r i s e . The case f o r t h i s view i s by no means proven. As people age, t h e i r p u r c h a s i n g needs ( e s p e c i a l l y f o r " b i g t i c k e t " items such as houses, c a r s , etc.) may be s i g n i f i c a n t l y reduced. While a f f l u e n t s e n i o r s i n North America are a prime t a r g e t f o r the marketing of expensive goods and s e r v i c e s , Japanese s e n i o r s , used t o a more f r u g a l l i f e s t y l e , may not f o l l o w the same p a t t e r n . Thus, w i t h the p r o b a b i l i t y of extended working l i f e spans, o l d e r Japanese may continue t o do what they have done throughout t h e i r a d u l t l i v e s ; i . e . , save. In a d d i t i o n , Hayashi ( 8 5) , notes t h a t t h e r e i s l i t t l e c r o s s - s e c t i o n a l i n d i c a t i o n of wealth b e i n g run-down d u r i n g the r e t i r e m e n t p e r i o d . H e l l i w e l l ( ) , suggests t h a t t h i s may be p a r t l y e x p l a i n e d by the importance of bequests and i n t e r - v i v o s g i f t s i n the extended f a m i l y system i n Japan. In view o f t h i s , the downward p r e s s u r e on s a v i n g s of the changing demographic s t r u c t u r e of Japan may, a t l e a s t , be o f f s e t t o a c o n s i d e r a b l e degree. The Economic P l a n n i n g Agency, i n i t s o f f i c i a l l o n g term f o r e c a s t , has estimated the s i z e o f household Fumio Hayashi, "Why i s J a p a n 1 s Savings Rate So A p p a r e n t l y High?", NBER Macroeconomics Annual. 1986. Cambridge, Ma.: N a t i o n a l Bureau of Economic Research, 1986, p. 196-197. 8 6 John F. H e l l i w e l l , "Some Comparitive Macroeconomics of the U n i t e d S t a t e s , Japan, and Canada," D i s c u s s i o n Paper No. 87-04, U n i v e r s i t y o f B r i t i s h Columbia Department of Economics, Vancouver, March 1987, p. 10. - Page 82 - s a v i n g s i n the year 2000 w i t h and without demographic changes. T h e i r f i n d i n g s i n d i c a t e t h a t the average s a v i n g s r a t e , as a r a t i o o f GNP, may d e c l i n e by o n l y 2 percentage p o i n t s i f demographic • 87 changes are f a c t o r e d i n ( ) . 6.1.1.2. The High Cost o f Housing The t a r g e t - m o t i v e o f owning a home and the h i g h c o s t of housing r e l a t i v e t o household income have been c o n s i d e r e d important s t i m u l i f o r h i g h household sa v i n g s r a t e s . The Japanese owner- occupancy r a t e has been remarkably s t a b l e f o r many ye a r s and, a t a l e v e l o f about 60 percent, i s comparable t o the U n i t e d S t a t e s where the c o s t o f home ownership i s c o n s i d e r a b l y l e s s f 8 8) . F u r t h e r , d e s p i t e the massive c o n c e n t r a t i o n o f the p o p u l a t i o n i n the s i x l a r g e s t urban areas o f Tokyo, Yokohama/Kanagawa, Osaka, Nagoya, Kyoto and Kobe, the t r e n d towards urban, r a t h e r than suburban l i v i n g c o n t i n u e s . I l l u s t r a t i v e o f t h i s t r e n d i s the growing c o n c e n t r a t i o n o f m u l t i p l e u n i t s t r u c t u r e s i n h i g h d e n s i t y urban areas ( r e p r e s e n t i n g 38.4% of t o t a l housing i n these areas versus 26.9% f o r the n a t i o n as a whole) where such u n i t s have doubled i n • 89 number d u r i n g the l a s t 20 years ( ) . T h i s c o n c e n t r a t i o n of p o p u l a t i o n has p l a c e d s t r o n g p r e s s u r e on the a v a i l a b l e s t o c k of L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 79. 8 8 Maki, "Why i s the Japanese Household Savings Rate So High?," p. 4. 8 9 I b i d . . p. 4. - Page 83 - u s a b l e r e s i d e n t i a l l a n d and p r i c e s have e x h i b i t e d massive i n c r e a s e s , p a r t i c u l a r l y i n the s i x l a r g e s t urban areas l i s t e d above. T a b l e 6.4 shows the r e s i d e n t i a l l a n d p r i c e indexes f o r the n a t i o n , the s i x l a r g e s t c i t i e s , and a l l o t h e r d i s t r i c t s . For the n a t i o n as a whole, average r e s i d e n t i a l l a n d p r i c e s have been growing a t 13% per year s i n c e 1960. The same f i g u r e f o r the 6 l a r g e s t c i t i e s and a l l o t h e r d i s t r i c t s i s 14% and 12%, r e s p e c t i v e l y . However, s i n c e 1985, r e s i d e n t i a l l a n d p r i c e s have been i n c r e a s i n g a t 18% per year. As i n d i c a t e d i n T a b l e 6.5, the average p r i c e of r e s i d e n t i a l l a n d i n Tokyo has, on average, r i s e n a t 24 p e r c e n t per year between 1980 and 1987, and 73 percent between 1985 and 1987. R e s i d e n t i a l l a n d p r i c e s i n Kanagawa (which comprises Yokohama and Kawasaki c i t y ) t o the south o f Tokyo, have a l s o r e a l i z e d s u b s t a n t i a l g a i n s , r i s i n g a t an annual average of 17% between 1980 and 1987, and 32% between 1985 and 1987. These two areas account f o r almost 15 m i l l i o n people, or roughly 12% of the t o t a l p o p u l a t i o n of Japan. R i s i n g l a n d p r i c e s s i n c e 1960, e s p e c i a l l y i n the urban areas, have l e d t o g r e a t e r p r o p o r t i o n s of household income b e i n g a l l o c a t e d t o s a v i n g s f o r down payments. A 1983 survey i n d i c a t e d t h a t the Japanese average a c q u i s i t i o n p r i c e f o r a new home was 5 times the annual average household income wi t h 39% of - Page 84 - TABLE 6.4: RESIDENTIAL LAND PRICE INDICES, JAPAN, F.Y. 1960-1987 COMPOUNDED ANNUAL RATE OF 6R0WTH ALL OTHER SIX LARGEST ALL OTHER SIX LARGEST fEAR AVERA6E DISTRICTS CITIES PERIOD AVERAGE DISTRICTS CITIES 1960 6.1 6.9 5.2 1960-1965 24.2 20.9 28.0 1961 8.5 9.5 7.5 1962 11.3 12.0 10.6 1963 13.5 13.8 13.1 1964 15.8 15.6 16.0 1965 17.9 17.8 17.9 1965-1970 13.5 14.9 12.0 1966 18.8 19.0 18.5 1967 20.4 21.0 19.7 1968 23.4 24.5 22.2 1969 27.8 29.3 26.2 1970 33.6 35.7 31.5 1970-1975 16.1 16.2 15.9 1971 39.9 42.3 37.4 1972 45.8 48.4 43.1 1973 60.9 62.2 59.5 1974 75.0 78.7 71.3 1975 70.8 75.7 65.9 1975-1980 7.2 5.7 8.7 1976 72.0 76.8 67.2 1977 75.1 79.8 70.3 1978 78.8 83.6 74.0 1979 86.5 89.6 83.3 1980 100.0 100.0 100.0 1980-1985 6.3 6.6 6.0 1981 111.3 112.0 110.6 1982 120.3 122.6 117.9 1983 126.1 129.7 122.5 1984 130.6 134.4 126.8 1985 135.9 137.9 133.8 1985-1987 10.0 2.7 17.0 1986 143.6 140.4 146.7 1987 164.4 145.4 183.3 1960-1987 12.5 11.5 13.6 - P a g e 8 4 a - TABLE 6.5: AVERA6E PRICES OF RESIDENTIAL LAND OF SIX CITIES, PER ONE METRE SQUARED, 1000 YEN LARGEST YEAR TOKYO OSAKA KANA6AHA 1980 197 96 92 1981 225 112 106 1982 249 128 126 1983 268 150 157 1984 279 157 160 1985 297 165 163 1986 431 170 170 1987 890 184 283 SAITAMA KYOTO NAGOYA AVERAGE 77 71 53 98 99 80 63 114 115 110 76 134 127 132 92 154 128 140 96 160 129 145 97 166 121 123 94 185 158 128 98 290 RATE OF INCREASE 1980-1987 24.0 9.7 17.4 10.8 8.8 9.2 16.8 1985-1987 73.1 5.6 31.8 10.7 -6.0 0.5 32.2 Source: Ministry of Finance, Japan S t a t i s t i c a l Yearbook, 1980-1987. - Page 84b - the purchase p r i c e b e i n g s e l f f i n a n c e d ( ) . In Tokyo, the 1983 r a t i o was 7.9 times annual income. Savings r a t e s have had t o accommodate t o these g r e a t e r e q u i t y demands. In the f u t u r e , i t i s u n c e r t a i n what the impact of the c u r r e n t l e v e l o f housing p r i c e s w i l l be on s a v i n g s r a t e s . The phenomenal i n c r e a s e i n l a n d p r i c e s s i n c e 1985, e s p e c i a l l y i n the g r e a t e r Tokyo area, has l e d t o r i s i n g f r u s t r a t i o n among young urban workers who f a c e growing o b s t a c l e s t o owning a home i n the f u t u r e . Indeed, the r i s e i n l a n d p r i c e s has sponsored a sharp demarcation l i n e between landowners and the r e s t o f Japan. As noted by one w r i t e r : ...Japan, which has p r i d e d i t s e l f on i t s e g a l i t a r i a n s o c i e t y , i s suddenly becoming a n a t i o n o f haves and have- n o t s . The haves are those w i t h l a n d ; the have-nots, those without i t . ( 9 1) A 1987 survey by the M i n i s t r y of H e a l t h and Welfare i n d i c a t e d t h a t n e a r l y 50% of the n a t i o n ' s 38 m i l l i o n households are having t r o u b l e making ends meet d e s p i t e average annual incomes of Canadian $50,000 ( 9 2) . Although mortgage i n t e r e s t r a t e s are low (around 6%) , the average s a l a r i e d worker can expect t o take a l i f e t i m e t o pay o f f h i s mortgage; w i t h a good chance t h a t h i s c h i l d r e n may have t o f i n i s h the j o b . The h i g h c o s t and i n c r e a s i n g d i f f i c u l t y o f home-ownership Sato, "Savings and Investment," The P o l i t i c a l Economy of Japan. Volume 1. p. 608. 9 1 E d i t h T e r r y , "Why the Japanese Can't Relax," The Globe and M a i l Report on Business. August 1989, p. 23. 9 2 Angela B i a n c h i , "Home Ownership an E l u s i v e Dream f o r Most," The F i n a n c i a l Post. J u l y 24, 1989, p. 26. - Page 85 - c o u l d be a c r u c i a l i n f l u e n c e on the l e v e l o f f u t u r e Japanese s a v i n g s r a t e s . I f p o t e n t i a l buyers abandon the g o a l o f home- ownership, monies which would have p r e v i o u s l y been s e t - a s i d e f o r down payments may be d i v e r t e d t o o t h e r consumption purposes. T h i s c o u l d r e s u l t i n a f a l l i n the domestic s a v i n g s r a t e . On the oth e r hand, i f the g o a l o f home-ownership p e r s i s t s as a g e n e r a l o b j e c t i v e , an even g r e a t e r p r o p o r t i o n o f household income may have t o be saved f o r t h i s purpose, thus l e a d i n g t o an i n c r e a s e i n the household s a v i n g s r a t e . In summary, the p r i n c i p a l f a c t o r s i n f l u e n c i n g the g e n e r a l l y s u s t a i n e d h i g h r a t e s o f Japanese household s a v i n g s r a t e s appear t o be a co n t i n u e d concern f o r p o s t - r e t i r e m e n t w e l f a r e and r i s i n g h ousing c o s t s . Savings r a t e s reached t h e i r h i g h e s t l e v e l s j u s t a f t e r the 1973 o i l shock, f u e l l e d by a g e n e r a l u n c e r t a i n t y as t o the f u t u r e w e l l - b e i n g o f the economy and Japanese l i v i n g standards. S i n c e 1985, household savings r a t e s have e x h i b i t e d o n l y marginal d e c l i n e s d e s p i t e v e r y s i g n i f i c a n t i n c r e a s e s i n housing c o s t s . T h i s suggests t h a t e i t h e r house ownership (and, hence, a need t o save f o r down payments) remains as a g e n e r a l g o a l , o r t h a t t h e r e has been an o f f - s e t t i n g t r e n d towards reduced c o n f i d e n c e i n the f u t u r e . The l a t t e r h y p o t h e s i s i s not supported by the f i n d i n g s of a r e c e n t survey undertaken by the Bank o f Japan. The survey i n d i c a t e d t h a t b u s i n e s s - c o n f i d e n c e i s a t an a l l - t i m e h i g h ( 9 3) . I f Ian Rodger, "Many Pre s s u r e s S t r a i n New E r a , " The F i n a n c i a l Post. J u l y 24, 1989, p. 24. - Page 86 - Japanese households share t h i s c o n f i d e n c e , i t c o u l d be expected t h a t consumption would be s t i m u l a t e d and s a v i n g s reduced. Indeed, d e s p i t e problems r e l a t i n g t o home-ownership and g e n e r a l l y h i g h l i v i n g c o s t s (the average Japanese household spends more than $1500 per month on b a s i c food s u p p l i e s ) , a p u b l i c o p i n i o n p o l l i n 1988 i n d i c a t e d t h a t more than 67% o f those p o l l e d were e i t h e r " f u l l y " o r " g e n e r a l l y " s a t i s f i e d w i t h t h e i r way o f l i f e ( 9 4) . Thus the marginal decreases ( r e l a t i v e t o GNP) i n household s a v i n g s r a t e s d u r i n g r e c e n t y e a r s c o u l d be i n t e r p r e t e d as b e i n g the net r e s u l t of d e creases due t o h i g h e r p u b l i c c o n f i d e n c e i n the f u t u r e being l a r g e l y o f f - s e t by i n c r e a s e d s a v i n g s t o p r o v i d e f o r the h i g h e r down-payments needed t o buy housing i n today's i n f l a t e d market. 6.1.2. P r i v a t e S e c t o r Investment The second c o n t r i b u t o r t o the l a r g e p r i v a t e s e c t o r s u r p l u s e s a f t e r 1974 was the s u b s t a n t i a l d e c l i n e i n c o r p o r a t e investment. The l a t t e r dropped t o an average of 16.2% of GNP between 1975 and 1985 a f t e r a t t a i n i n g an average r a t e o f 23.8% between 1965 and 1974. Accompanying t h i s d e c l i n e , c o r p o r a t e s a v i n g s a l s o f e l l d u r i n g the p e r i o d from 16.9% of GNP between 1965 and 1974 t o 10.1% between 1975 and 1985. D e s p i t e t h i s drop, the c o r p o r a t e s e c t o r s a v i n g s d e f i c i t narrowed from about 6.9% of GNP between 1965 and 1974 t o 5.5% o f GNP a f t e r 1975. (See T a b l e 6.1). Thus, c o r p o r a t i o n s were no l o n g e r absorbing the excess s a v i n g s i n the T e r r y , "Why the Japanese Can't Relax," p. 20 - Page 87 - household s e c t o r . As a r e s u l t , the p r i v a t e s e c t o r , i n aggregate, t u r n e d t o s u r p l u s a f t e r 1974. A number o f f a c t o r s c o n t r i b u t e d t o the downturn i n c o r p o r a t e investment a f t e r 1973. I t i s important t o note t h a t , w h i l e o i l supply and p r i c e problems were the immediate cause of slower growth, p r e c u r s o r s o f t h i s reduced growth r a t e had a l r e a d y m a n i f e s t e d themselves p r i o r t o 1973 and would have i n e v i t a b l y p r e v a i l e d , even i n the absence o f the o i l c r i s i s . An a n a l y s i s of r e a l GNP growth r a t e s l e a d i n g up t o 1973 a t t e s t t o t h i s p o i n t . Although growth r a t e s i n excess of 12 p e r c e n t were ac h i e v e d d u r i n g the 1960s, the 1970-73 average f e l l t o 7.5 p e r c e n t ( 9 5 ) . The p r e c u r s o r s i n c l u d e d e s c a l a t i n g l a n d c o s t s ; r i s i n g shortages of l a b o u r and, hence, r i s i n g r e a l wages; the c l o s i n g of the technology gap w i t h the West; and more s t r i n g e n t environmental r e g u l a t i o n s . These f a c t o r s have p r e v a i l e d i n the slower growth p e r i o d of the 1970s and 1980s and, as such, warrant b r i e f d i s c u s s i o n . 6.1.2.1. R i s i n g I n d u s t r i a l and Commercial Land P r i c e s The r a p i d e s c a l a t i o n of i n d u s t r i a l l a n d p r i c e r i s e s i n the 1960s and e a r l y 1970s i n c r e a s e d the c o s t s o f d e v e l o p i n g new i n d u s t r i a l and commercial s i t e s and reduced the expected r e t u r n from new o p e r a t i o n s . Between 1960 and 1970 l a n d p r i c e s i n c r e a s e d a t phenomenal r a t e s , a v e r a g i n g 20% and 25% f o r commercial and i n d u s t r i a l l a n d , r e s p e c t i v e l y (see T a b l e s 6.6 and 6.7). The r a t e s L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 3. - Page 88 - TABLE 6.6: COMMERCIAL LAND PRICE INDICES. JAPAN, F.Y. 1960-1987 ALL OTHER SIX LARGEST YEAR AVERAGE DISTRICTS CITIES 1960 10.9 10.5 11.2 1961 16.1 14.2 17.9 1962 20.9 17.6 24.2 1963 23.9 20.7 27.1 1964 27.2 23.2 .31.1 1965 30.1 26.4 33.8 1966 31.3 28.1 34.5 1967 34.1 31.9 36.3 1968 37.2 35.5 38.8 1969 43.1 41.7 44.4 1970 50.6 49.8 51.4 1971 56.7 56.9 56.5 1972 62.5 63.2 61.7 1973 76.8 76.5 77.0 1974 90.1 91.4 88.7 1975 85.1 88.1 82.1 1976 85.4 88.4 82.4 1977 86.7 89.4 83.9 1978 88.5 91.2 85.7 1979 92.1 93.8 90.3 1980 100.0 100.0 100.0 1981 107.5 106.9 108.1 1982 115.0 113.2 116.7 1983 121.3 117.9 124.6 1984 128.5 121.3 135.7 1985 139.1 124.5 153.6 1986 163.1 128.3 197.9 1987 191.8 136.9 246.7 COMPOUNDED ANNUAL RATE OF GROWTH ALL OTHER SIX LARGEST PERIOD AVERAGE DISTRICTS CITIES 1960-1965 22.6 20.2 24.7 1965-1970 10.9. 13.5 8.7 1970-1975 11.0 12.1 9.8 1975-1980 3.3 2.6 4.0 1980-1985 6.8 4.5 9.0 1985-1987 17.4 4.9 26.7 1960-1987 10.8 9.6 • 11.7 - Page 88a - TABLE 6.7: INDUSTRIAL LAND PRICES, JAPAN, F.Y. i960-19B7 ALL OTHER SIX LARGEST YEAR AVERAGE DISTRICTS CITIES 1960 8.8 9.7 7.9 1961 14.7 14.6 14.8 1962 20.6 18.9 22.3 1963 24.3 22.4 26.1 1964 28.5 26.6 30.4 1965 31.2 29.3 33.1 1966 32.2 30.3 34.0 1967 34.0 31.7 36.3 1968 38.0 35.1 40.9 1969 40.6 40.3 40.9 1970 47.6 47.3 47.8 1971 55.0 54.1 55.9 1972 62.3 61.8 62.7 1973 78.9 76.8 80.9 1974 95.1 94.9 95.3 1975 88.3 89.9 86.7 1976 88.7 90.4 86.9 1977 89.3 91.1 87.5 1978 90.4 92.2 88.5 1979 93.4 94.7 92.0 1980 100.0 100.0 100.0 1981 106.7 106.7 106.7 1982 112.7 112.7 112.6 1983 116.9 117.1 116.7 1984 120.5 120.4 120.6 1985 124.1 123.1 125.0 1986 128.4 125.5 131.2 1987 . 141.2 128.8 153.6 COMPOUNDED ANNUAL RATE OF GROWTH ALL OTHER SIX LARGEST PERIOD AVERA6E DISTRICTS CITIES 1960-1965 28.8 24.7 33.2 1965-1970 8.8 10.1 7.6 1970-1975 13.2 13.7 12.6 1975-1980 2.5 2.2 2.9 1980-1985 4.4 4.2 4.6 1985-1987 6.7 2.3 10.9 1960-1987 10.4 9.7 11.2 - Page 88b - o f i n c r e a s e were even h i g h e r between 1960 and 1965, av e r a g i n g 29% f o r i n d u s t r i a l l a n d (with the s i x l a r g e s t c i t y areas w i t n e s s i n g an annual growth r a t e o f 33%), and 23% f o r commercial l a n d (with the s i x l a r g e s t urban areas r e a l i z i n g an annual growth r a t e o f 25%) . T h i s r a p i d e s c a l a t i o n continued i n t o the e a r l y 1970s, w i t h p r i c e s f o r i n d u s t r i a l l a n d i n c r e a s i n g by 17, 15.5, 13.3 and 26.6 percent i n 1970, 1971, 1972 and 1973, r e s p e c t i v e l y . The corres p o n d i n g i n c r e a s e s f o r commercial l a n d were 17.4, 12, 10.2 and 22.8 percent over the same p e r i o d . 6.1.2.2. R i s i n g R e a l Wages In a d d i t i o n t o e s c a l a t i n g l a n d c o s t s , Japanese c o r p o r a t i o n s a l s o encountered r i s i n g r e a l wage c o s t s . During the p r e v i o u s p e r i o d o f r a p i d economic growth, much o f the u n d e r - u t i l i z e d l a b o u r i n Japan had been absorbed, l e a d i n g t o t i g h t e n e d l a b o u r market c o n d i t i o n s and r i s i n g r e a l wages. Real wages grew a t compounded annual r a t e s o f 6% between 1960 and 1970, 8% between 1965 and 1970, and i n 1971, 1972, and 1973, they a c c e l e r a t e d by 8, 10.4 and 9.5%, r e s p e c t i v e l y (see Tab l e 6-8). For u n i o n i z e d workers the 1974 "shunto" ( s p r i n g wage o f f e n s i v e ) r e s u l t e d i n an average, nominal wage i n c r e a s e o f 32.9%, f o l l o w i n g an i n c r e a s e o f 20.1% i n 1973 ( 9 6) . These h i g h wage se t t l e m e n t s served t o r e i n f o r c e the i n f l a t i o n a r y e f f e c t s o f r a p i d l y i n c r e a s i n g energy p r i c e s a f t e r 1973, and worked t o r e t a r d economic a c t i v i t y . L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 32. - Page 89 - TABLE 6-8: REAL WAGE INDICES AND COMPOUNDED ANNUAL GROWTH RATES, F.Y. 1960-1987 REAL COMPOUNDED WAGE ANNUAL RATE YEAR INDEX PERIOD OF GROWTH 1960 38.4 1960-1970 0.06 1961 40.6 1962 41.9 1963 42.6 1960-1965 . 0.04 1964 45.1 1965 46.3 1966 48.9 1965-1970 0.08 1967 52.6 1968 56.8 1969 62.4 1970 67.8 1970-1980 0.04 1971 73.2 1972 80.8 1973 88.5 1970-1975 0.07 1974 90.5 1975 92.9 1976 95.6 1975-1980 0.01 1977 96.1 1978 98.4 1979 101.7 1980 100.0 1980-1987 0.01 1981 101.1 1982 101.8 1983 104.0 1980-1985 0.01 1984 104.8 1985 104.9 1986 107.4* 1987 109.7 1965-1987 0.02 1960-1980 0.04 - Page 89a - 6.1.2.3. Reduced P r o d u c t i v i t y Growth The impact o f h i g h e r wage c o s t s was exacerbated by slower p r o d u c t i v i t y g a i n s . Rapid wage i n c r e a s e s d u r i n g the 1960s had been l a r g e l y o f f s e t by improved p r o d u c t i v i t y . Much of t h i s improvement had been e f f e c t e d by the i m p o r t a t i o n and a d a p t a t i o n o f technology from the West. T h i s p r o c e s s had enabled Japanese i n d u s t r y t o make s i g n i f i c a n t improvements i n p r o d u c t i v i t y a t r e l a t i v e l y low c o s t , w i thout h a v i n g t o make cor r e s p o n d i n g e x p e n d i t u r e s on r e s e a r c h and development. By 1973, Japan was more o r l e s s t e c h n o l o g i c a l l y equal t o h er Western t r a d i n g p a r t n e r s , making i t much more d i f f i c u l t t o o b t a i n the low c o s t , f o r e i g n technology which had supported p r e v i o u s investments. As noted by L i n c o l n ( 9 7) , The impact o f t e c h n o l o g i c a l e q u a l i t y on c a p i t a l f o r m a t i o n was s t r a i g h t f o r w a r d : because r a p i d i n c r e a s e s i n p r o d u c t i v i t y based on imported technology were no l o n g e r p o s s i b l e , c o r p o r a t i o n s c o u l d no l o n g e r expect the h i g h l e v e l s o f p r o f i t from new investment t o which they had become accustomed. With lower e x p e c t a t i o n s , investment d e - a c c e l e r a t e d . What had once been a powerful i n c e n t i v e f o r investment q u i c k l y evaporated i n t he mid-1970s. 6.1.2.4. E n v i r o n m e n t a l C o n s t r a i n t s A f u r t h e r impediment t o c o r p o r a t e investment a f t e r the advent of t he 1970s was i n c r e a s i n g p u b l i c p r e s s u r e on the c e n t r a l government t o p r o v i d e b e t t e r environmental p r o t e c t i o n . The deadly Minimata mercury p o i s o n i n g i n c i d e n t o f the l a t e 1960s and a host of o t h e r p o l l u t i o n - r e l a t e d i n c i d e n t s served t o g a l v a n i z e p u b l i c L i n c o l n , Japan: F a c i n g Economic M a t u r i t y f p. 44. - Page 90 - p r e s s u r e f o r more s t r i n g e n t r e g u l a t i o n o f i n d u s t r y p o l l u t i o n l e v e l s and new developments. The government responded w i t h l e g i s l a t i o n i n 1970 which l e d t o a q u a d r u p l i n g of p u b l i c spending on p o l l u t i o n c o n t r o l between 1970 and 1973; t o 430 b i l l i o n yen, or $1.6 b i l l i o n go t a t 1973 exchange r a t e s ( ). I n d u s t r y was a l s o f o r c e d t o i n c r e a s e p o l l u t i o n c o n t r o l spending t o comply w i t h government d i r e c t i v e s . By 1974, t o t a l p r i v a t e s e c t o r e x p e n d i t u r e s on p o l l u t i o n c o n t r o l was r o u g h l y two times the l e v e l o f c e n t r a l government spending and on a par w i t h t h a t of l o c a l governments. These investments i n p o l l u t i o n abatement, w h i l e s o c i a l l y i m p e r a t i v e , i n c r e a s e d the c o s t per u n i t o f p l a n t c a p a c i t y and thereby a c t e d as a d i s - i n c e n t i v e t o investment. 6.1.2.5. The Impact o f the O i l C r i s i s Superimposed on these o t h e r f a c t o r s , the h i g h e r energy c o s t s a f t e r 1973 posed a d i f f i c u l t (and f o r some i n d u s t r i e s , t e r m i n a l ) impediment t o c a p a c i t y expansion. O i l p r i c e i n c r e a s e s brought a premature end t o Japan's s t r a t e g y of r e l y i n g on heavy i n d u s t r y f o r economic growth. The i n c r e a s e s i n o i l p r i c e s were o f p a r t i c u l a r concern t o Japan g i v e n i t s severe dependence on o u t s i d e o i l s u p p l i e s . E n e r g y - i n t e n s i v e i n d u s t r i e s which had grown up behind a w a l l o f p r o t e c t i v e b a r r i e r s , l o s t t h e i r i n t e r n a t i o n a l c o m p e t i t i v e n e s s and were f o r c e d t o down-size o r even c l o s e . The Japanese aluminum i n d u s t r y i s a case i n p o i n t ; investment i n I b i d . . p. 49. - Page 91 - aluminum r e f i n i n g had been s u b s t a n t i a l d u r i n g the 1950s and 1960s because o f t a r i f f b a r r i e r s and h i g h expected p r o f i t s from u t i l i z i n g s t a t e o f the a r t technology. By 1984, because of the combined o i l shocks, c a p a c i t y i n the aluminum i n d u s t r y had been g r e a t l y reduced and imports r e p r e s e n t e d 71% of t o t a l aluminum consumption i n Japan v e r s u s 7% i n 1965 (") . L i n c o l n , Japan; F a c i n g Economic M a t u r i t y , p. 47. - Page 92 - 6.1.2.6. The Investment C l i m a t e s i n c e 1973 The impact o f the above f a c t o r s on c a p i t a l f o r m a t i o n a f t e r 1973 was f o r m i d a b l e . As noted, c o r p o r a t e s e c t o r investment f e l l s u b s t a n t i a l l y a f t e r 1973 i n response t o the combined e f f e c t s of h i g h e r energy p r i c e s and the induced r e c e s s i o n o f 1975-1976. The a c c e l e r a t o r p r i n c i p l e meant t h a t reduced economic growth r e q u i r e d g r e a t l y reduced l e v e l s o f c o r p o r a t e f i x e d investment. From 1966 t o 1972 r e a l GNP and c o r p o r a t e investment grew a t r a t e s o f 9.4 and 15.0 p e r c e n t , r e s p e c t i v e l y . However, between 1974 and 1985, the growth o f r e a l GNP was reduced t o an average o f 3.8% and t h a t of c o r p o r a t e investment t o 3.9% (10°) . In the immediate aftermath of the 1973 o i l shock, the p r e v i o u s h i g h r a t e s o f investment r e s u l t e d i n o v e r - c a p a c i t y i n most i n d u s t r i e s . T h i s removed most of the i n c e n t i v e f o r f u r t h e r investment. Indeed, the average c a p a c i t y u t i l i z a t i o n index (1980 = 100) f e l l from 106 f o r the p e r i o d 1965 t o 1973, t o 96 f o r the p e r i o d from 1974 t o 1984. Corporate p r o f i t s a l s o dropped s u b s t a n t i a l l y , thereby r e s t r i c t i n g the c a p a c i t y t o make new investment. The average r a t i o o f r e c u r r i n g p r o f i t s ( 1 0 1) t o n e t worth decreased from 25.6% between 1965 t o 1972 t o 21.7% between 1974 and 1984. These f i g u r e s , however, should be t r e a t e d w i t h some c a u t i o n . Net worth i s , as noted by L i n c o l n , o f t e n g r o s s l y under-valued i n Japan because c o r p o r a t i o n s c a r r y l a n d L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 81. 1 0 1 " R e c u r r i n g p r o f i t s " i s a b e f o r e - t a x measurement which i n c l u d e s non-operating income and expenses but excludes e x t r a o r d i n a r y g a i n s and l o s s e s . - Page 93 - v a l u e s a t purchase c o s t on t h e i r books; t h i s o v e r s t a t e s the p r o f i t s t o n e t worth r a t i o . On the oth e r hand, the average debt t o e q u i t y r a t i o o f Japanese companies was h i g h e r d u r i n g the 1974-84 p e r i o d than d u r i n g the 1965-72 p e r i o d , so the r a t i o o f p r o f i t s t o a s s e t s used may not have r e f l e c t e d the same decrease. The 1980s have seen a g e n e r a l r e c o v e r y o f the Japanese economy, e s p e c i a l l y s i n c e 1986. Corporate investment s t i l l remains s u b s t a n t i a l l y below i t s pre-1973 l e v e l s although i n the l a s t two y e a r s , c o r p o r a t e f i x e d investment has shown an upward t r e n d , r i s i n g • 102 a t r a t e s i n excess o f 17% perc e n t ( ). N e v e r t h e l e s s , the f a c t o r s which l e d t o slower c a p i t a l f ormation i n the 1970s are s t i l l l a r g e l y a p p l i c a b l e today and, i n many r e s p e c t s , have been exacerbated by the r a p i d a p p r e c i a t i o n o f the yen a f t e r 1985. As noted i n Tabl e 6.8, r e a l wages have r i s e n o n l y m a r g i n a l l y s i n c e 1975 but the 80% a p p r e c i a t i o n o f the yen s i n c e 1985 has made Japan a r e l a t i v e l y h i g h - c o s t l a b o u r country even compared t o the U n i t e d S t a t e s and most West European n a t i o n s . The problems of commercial and, t o a l e s s e r e x t e n t , i n d u s t r i a l l a n d p r i c e s have a l s o i n t e n s i f i e d s i n c e 1985. Commercial l a n d p r i c e s , which had been r e l a t i v e l y q u i e s c e n t d u r i n g the 1970s and e a r l y 1980s, i n c r e a s e d s h a r p l y between 1985 and 1987. Commercial l a n d p r i c e s i n the s i x l a r g e s t urban areas rose a t an average compounded r a t e o f 63% per year (see T a b l e 6.9) . As shown i n Table 102 * * Q u a r t e r l y Economic Review. August 1989. Vol.19. No. 3. Nomura Research I n s t i t u t e , Tokyo, 1989, p. 41. - Page 94 - TABLE 6.9: AVERAGE PRICES OF COMMERCIAL LAND OF SIX CITIES, PER ONE METRE SQUARED, 1000 YEN LARGEST EAR TOKYO OSAKA KANA6AWA SAITAMA KYOTO NA60YA AVERAGE 1980 636 353 261 202 201 129 297 1981 713 399 291 251 271 145 345 1982 866 460 320 285 330 185 406 1983 1117 684 395 324 433 236 532 1984 1333 753 419 333 459 260 593 1985 1894 855 464 351 481 308 726 1986 4211 1159 628 392 460 367 1203 1987 6493 2025 1279 658 606 473 1922 RATE OF INCREASE 19B0-19B7 39.4 28.3 25.5 1B.4 17.1 20.4 30.6 1985-1987 85.2 53.9 66.0 36.9 12.2 23.9 62.8 Source: Ministry of Finance, Japan S t a t i s t i c a l Yearbook, 1980-1987. - Page 94a - 6.9, the average p r i c e o f commercial l a n d i n c r e a s e d by 85%, 66% and 54% i n Tokyo, Kanagawa, and Osaka, r e s p e c t i v e l y d u r i n g t h i s 3 year p e r i o d . The average c o s t per square metre f o r commercial l a n d i n Tokyo r o s e t o 6.5 m i l l i o n yen i n 1987, o r about $45,000 U.S. Inc r e a s e s i n i n d u s t r i a l l a n d p r i c e s a l s o underscore the problems f a c i n g f i r m s w i s h i n g t o make investments i n new p l a n t l o c a t i o n s ; as p r i c e s p e r square metre rose by an average o f 48% and 28% per annum i n Tokyo and Kanagawa, r e s p e c t i v e l y between 1985 and 1987 (see T a b l e 6.10). These l a n d p r i c e i n c r e a s e s , i n c o n j u n c t i o n with the a p p r e c i a t i o n o f the yen, have made l a n d i n the g r e a t e r Tokyo area the most expensive i n the world by a l a r g e margin. The h i g h f a c t o r p r i c e s f o r l a b o u r and l a n d have, s i n c e 1974, ac t e d as powerful l i m i t s t o c a p i t a l investment. However, another prime reason f o r reduced investment has been the s t r u c t u r a l changes t a k i n g p l a c e i n the Japanese economy. R e c o g n i z i n g the u n f a v o r a b l e p r o g n o s i s f o r con t i n u e d r e l i a n c e on the heavy i n d u s t r i a l s e c t o r , Japan has s h i f t e d i t s emphasis t o an economy based on technology i n t e n s i v e manufactured products and s e r v i c e i n d u s t r i e s . T h i s s t r u c t u r a l change has l e d t o a v e r y s i g n i f i c a n t r e d u c t i o n i n the investment requirements o f the c a p i t a l i n t e n s i v e heavy i n d u s t r i e s . I t r e f l e c t s , once again, the Japanese a b i l i t y t o adapt t o r a d i c a l adjustments i n the domestic economic environment and c l e a r l y s i g n a l s the mat u r a t i o n o f the country's i n d u s t r i a l economy. Given t h i s r e - d i r e c t i o n o f the Japanese economy, i t seems reasonable t o p r o j e c t t h a t the s t a b i l i z a t i o n o f c a p i t a l f o r m a t i o n r a t e s (at - Page 95 - TABLE 6.10: AVERA6E PRICES OF INDUSTRIAL LAND OF SIX LAR6EST CITIES, PER ONE METRE SQUARED, 1000 YEN ;AR TOKYO OSAKA KANA6AHA SAITAHA KYOTO NA60YA AVERAGE 1980 136 70 51 33 50 36 63 1981 152 79 54 45 54 39 71 1982 175 93 55 50 72 45 82 1983 208 113 85 61 102 56 104 1984 208 112 87 63 106 56 105 1985 212 124 99 67 100 58 110 1986 243 123 112 64 82 58 114 1987 462 136 162 81 89 59 165 RATE OF INCREASE 1980-1987 19.1 10.0 18.0 13.7 8.6 7.3 14.7 1985-1987 47.6 4.7 27.9 10.0 -5.7 0.9 22.5 Source: Ministry of Finance, Japan S t a t i s t i c a l Yearbook, 1980-1987. - Page 95a - between 15 and 17% of GNP) experienced s i n c e 1975 w i l l be continued i n t o the f u t u r e . 6.1.3. The P r i v a t e S e c t o r Surplus s i n c e 1986 S i n c e 1986, the p r i v a t e s e c t o r s a v i n g s s u r p l u s has narrowed, from a peak of about 32.3 t r i l l i o n yen i n 1986 t o 17.8 t r i l l i o n yen i n 1987; and i t i s p r o j e c t e d t o f a l l f u r t h e r i n F.Y. 1988 and 1989 t o 15.1 and 13.3 t r i l l i o n yen, r e s p e c t i v e l y ( 1 0 3) . The narrowing o f the p r i v a t e s e c t o r s a v i n g s s u r p l u s i s a d i r e c t r e s u l t o f Japan's i n c r e a s i n g emphasis on domestic demand l e d growth, r a t h e r than export l e d growth. S i n c e 1986, the Japanese economy has been one l e d overwhelmingly by domestic demand. In F.Y. 1986 and F.Y. 1987, domestic demand c o n t r i b u t e d 2.8 and 5.8 percentage p o i n t s t o r e a l economic growth, r e s p e c t i v e l y ( ). Net expo r t s , i n the same two yea r s , c o n t r i b u t e d minus 1.4 and minus 1.0 percen t , r e s p e c t i v e l y . P e r s o n a l consumption has been l e a d i n g the domestic demand based economic growth and has c o n t r i b u t e d 1.9 and 2.5 per c e n t t o r e a l economic growth i n F.Y. 1986 and F.Y. 1987, r e s p e c t i v e l y . T h i s consumption boom has been sponsored by improved employment; h i g h e r nominal wages and bonuses; i n c r e a s e d l e i s u r e time; and s t r o n g housing investment due t o the s p e c u l a t i v e l a n d boom o f 1985-87. In 1989, household r e s i d e n t i a l 1 0 3 Nomura Q u a r t e r l y Economic Review V o l . 19. No. lf Tokyo: NRI & NCC Co. L t d , February 1989 p. 43. 1 0 4 Nomura Q u a r t e r l y Economic Review. V o l . 19. N o . l . p. 15. - Page 96 - investment i s expected t o moderate somewhat, w i t h r e s i d e n t i a l h ousing s t a r t s e a s i n g from 1.65 m i l l i o n u n i t s i n F.Y. 1988 t o 1.53 • • • • 105 • • m i l l i o n u n i t s i n F.Y. 1989 ( ). D e s p i t e the 3% consumption tax imposed e a r l i e r t h i s year, massive c u t s i n p e r s o n a l income taxes amounting 3.3 t r i l l i o n yen are expected t o m a i n t a i n p e r s o n a l consumption a t h i g h l e v e l s over the next year, o r so; thereby c o n t r i b u t i n g a p r o j e c t e d 2.8% t o r e a l economic growth i n F.Y. 1988 and F.Y. 1989 ( 1 0 6) . T h i s consumption boom has l e d t o a r e v e r s a l o f the t r e n d towards lower c o r p o r a t e investment and t h e r e were sharp i n c r e a s e s i n such investment d u r i n g 1987 and 1988. The i n c r e a s e i n c o r p o r a t e investment has been due t o the improved c o r p o r a t e p r o f i t s which r e s u l t e d from the expansion o f domestic demand and the r e c o v e r y i n e x p o r t s a f t e r 1987 (pre-tax p r o f i t s b e f o r e e x t r a o r d i n a r y items f o r a l l i n d u s t r i e s were up by 28.8% i n 1988, compared t o 1987); low i n f l a t i o n ; c o n t i n u e d low i n t e r e s t c o s t s ; and unexpectedly l a r g e p r o d u c t i v i t y g a i n s which have o f f s e t r e c e n t r i s e s i n r e a l wage r a t e s . A c c o r d i n g t o the Nomura Research I n s t i t u t e , planned investment f o r F.Y. 1989 has r i s e n t o i t s h i g h e s t l e v e l i n 15 y e a r s , a p r o j e c t e d 10.5% i n c r e a s e over F.Y. 1988 ( 1 0 7) . However, the l o n g e v i t y of t h i s i n c r e a s e d consumption c y c l e i s not c l e a r , s i n c e i t may have been f u e l l e d , i n p a r t , by the wealth 1 0 5 I b i d . . p. 15. 1 0 6 I b i d . . p., 15. 107 • • Nomura Q u a r t e r l y Economic Review. V o l . 19. No. 1. p. 15 - Page 97 - e f f e c t o f i n c r e a s e d s t o c k p r i c e s and, e s p e c i a l l y , o f s o a r i n g l a n d • 108 p r i c e s ( ). In the l o n g e r term, i t seems probable t h a t the t r e n d towards reduced investment i n t e n s i t y w i l l be confirmed by the s t r u c t u r a l change which Japanese i n d u s t r y i s undergoing. T h i s change away from heavy i n d u s t r y as the v e h i c l e of growth towards advanced technology i n t e n s i v e i n d u s t r i e s and the s e r v i c e s e c t o r , i s l i k e l y t o reduce the need f o r the huge, c o n c e n t r a t e d investments a s s o c i a t e d w i t h b l a s t furnace s t e e l m i l l s , r e f i n e r i e s and s i m i l a r i n s t a l l a t i o n s . F u r t h e r , the o t h e r s i d e o f the c o r p o r a t e s e c t o r b a l a n c e i s now improving. Corporate p r o f i t s have s i g n i f i c a n t l y i n c r e a s e d i n r e c e n t y e a r s ( e s p e c i a l l y i n 1988) and, g i v e n the r e c e n t emphasis of the p r o f i t motive by most l a r g e Japanese companies, c o r p o r a t e s a v i n g s can be expected t o improve. Thus, the r e c e n t p a t t e r n o f reduced c o r p o r a t e s e c t o r d e f i c i t s i s l i k e l y t o c o n t i n u e and, indeed, s t r e n g t h e n . In t h i s regard, i t i s worthy of note t h a t by the end of f i s c a l 1988, the average r a t i o of net worth t o t o t a l c a p i t a l i n the manufacturing s e c t o r was 31.1%, the f i r s t • • • 109 time t h a t t h i s r a t i o has exceeded 30% ( ). In g e n e r a l , i t seems the f a c t o r s which have c o n t r i b u t e d t o the p r i v a t e s e c t o r balances of r e c e n t years appear l i k e l y t o have f u t u r e v a l i d i t y . "The Consumption Boom i n Japan", T o k a i Monthly Economic L e t t e r , No. 125, T o k a i Bank, Tokyo, June 1989, p.5. "Corporate P r o f i t Performance", NRI Q u a r t e r l y Review, Nomura Research I n s t i t u t e , Tokyo, August 1989, p.20. Page 98 6.1.4. I m p l i c a t i o n s o f P r i v a t e S e c t o r S a v i n g s S u r p l u s e s D e s p i t e i t s r e c e n t narrowing, the p r i v a t e s e c t o r savings s u r p l u s c o n t i n u e s t o be hi g h , a t around U.S. $100 b i l l i o n . T h i s has s i g n i f i c a n t i m p l i c a t i o n s f o r the remaining macro-economic bala n c e s o f the Accounting I d e n t i t y i n t r o d u c e d i n 5.1. As noted p r e v i o u s l y , p r i v a t e s e c t o r savings s u r p l u s e s must be accommodated by government d e f i c i t s o r by c u r r e n t account s u r p l u s e s . The l a t t e r , as d e f i n e d i n the balance of payments a c c o u n t i n g framework, n e c e s s a r i l y r e q u i r e s an equal c a p i t a l account d e f i c i t . As w i l l be shown i n the f o l l o w i n g d i s c u s s i o n , the p r i v a t e s e c t o r s a v i n g s u r p l u s up t o 1982 was, t o a l a r g e extent, absorbed by government d e f i c i t s . S i n c e 1983, however, the s u r p l u s has been a s s i m i l a t e d by widening c u r r e n t account s u r p l u s e s . These developments are d i s c u s s e d i n the f o l l o w i n g s e c t i o n . - Page 99 6.2. THE PUBLIC SECTOR BALANCE Ta b l e 6.11 shows t h a t , between 1975 and 1983, the p r i v a t e s e c t o r s u r p l u s was p r i n c i p a l l y absorbed by i n c r e a s i n g l y l a r g e government ( c e n t r a l , m u n i c i p a l and p r e f e c t u r a l ) f i s c a l d e f i c i t s . A lthough bond i s s u a n c e s were l e g i s l a t i v e l y p e r m i s s i b l e a f t e r 1949, the Japanese government p r a c t i c e d balanced budgets u n t i l 1966, when the f i r s t long-term p u b l i c bonds were i s s u e d . Because o f a tendency t o underestimate economic growth, the government s e c t o r remained l a r g e l y i n s u r p l u s throughout t h i s p e r i o d , w i t h an annual average s u r p l u s of about 2% of GNP. T h i s s i t u a t i o n changed a f t e r 1975, w i t h f i s c a l d e f i c i t s a v eraging 4% of GNP between 1975 and 1983 and peaking a t 5.5% of GNP i n 1978. S i n c e 1984, the d e f i c i t has c o n t i n u e d t o narrow and i s p r o j e c t e d t o be about 300 b i l l i o n yen i n 1989, down from Yen 19,100 b i l l i o n i n 1983. Two important p o i n t s emerge from T a b l e 6-11. F i r s t , although the government d e f i c i t widened c o n s i d e r a b l y a f t e r 1974, government investment as a percentage of GNP remained l a r g e l y unchanged. During the 1970s, government investment averaged about 6.2% of GNP, o n l y s l i g h t l y h i g h e r than the 5.2% average o f the 1960s. Second, government s a v i n g s which averaged about 6.9% o f GNP i n the 1960-74 p e r i o d , d e c l i n e d s h a r p l y a f t e r 1975 and averaged o n l y 2.7% of GNP from 1975 t o 1983. The post-1973 d e f i c i t s were caused by s u s t a i n e d , moderate government spending and lowered tax revenues. Nominal expenditure growth remained more or l e s s c onstant, a v e r a g i n g 17.9% between F.Y. - Page 100 - TABLE 6.11: THE PRIVATE AND PUBLIC SECTOR BALANCE, F.Y. 1960-1987, PERCENTA6E OF 6NP TOTAL PRIVATE SECTOR YEAR SAVINGS INVESTMENT BALANCE 1960 28.3 31.2 -2.9 1961 28.5 36.0 -7.5 1962 27.9 28.5 -0.6 1963 27.5 30.8 -3.3 1964 27.2 29.2 -2.0 1965 27.4 27.5 -0.1 1966 29.4 28.7 0.7 1967 31.4 32.7 -1.3 1968 32.9 33.0 -0.1 1969 32.5 34.5 -2.0 1970 33.3 34.0 -0.7 1971 31.0 30.0 1.0 1972 32.0 29.2 2.8 1973 32.3 31.6 0.7 1974 30.0 31.4 -1.4 1975 29.0 26.8 2.2 1976 30.4 26.0 4.4 1977 29.5 24.6 4.9 1978 30.8 23.9 6.9 1979 29.0 25.3 3.7 1980 28.4 25.1 3.3 1981 27.9 24.2 3.7 1982 27.2 23.3 3.9 1983 26.9 21.9 5.0 1984 26.7 22.3 4.4 1985 26.6 22.8 4.0 1986 - - 5.8 1987 - - 4.5 BALANCE TOTAL PUBLIC SECTOR AVAILABLE FOR FOREIGN SAVINGS INVESTMENT BALANCE INVESTMENT 7.7 4.7 3.0 0.1 8.5 4.8 3.7 -3.8 8.2 5.7 2.5 1.9 7.5 5.3 2.2 -1.1 6.6 5.3 1.5 -0.5 6 5.4 0.6 0.5 5.6 5.4 0.2 0.9 6.3 5.1 1.2 -0.1 6.9 5.1 1.8 1.7 7.5 5 2.5 0.5 6.8 5.1 1.7 1 7 5.8 1.2 2.2 6.2 6.3 -0.1 2.7 6.9 6.4 0.5 1.2 6.3 6 0.3 -1.1 3.3 6 -2.7 -0.5 2.1 5.8 -3.7 0.7 2.5 6.3 -3.8 1.1 1.5 7 -5.5 1.4 2.5 7.2 -4.7 -1 2.7 7.1 -4.4 -1.1 3.3 7.1 -3.8 -0.1 3.2 6.8 -3.6 0.3 2.8 6.4 -3.6 1.4 3.9 6 -2.1 2.3 4.8 5.6 -0.8 3.2 - - -1.1 4.7 - - -0.2 4.3 - P a g e 1 0 0 a - 1970 and 1973 and 17.4% between F.Y. 1974 and 1979 (11°) . However, because o f h i g h i n f l a t i o n d u r i n g t h i s p e r i o d , the growth i n r e a l e x p e n d i t u r e s decreased from an average of 13.9% t o an average of 8.5%. The combined i n f l u e n c e of s u s t a i n e d nominal e x p e n d i t u r e s and decreased tax revenues on the government balance i s d i s c u s s e d below. 6.2.1. Government E x p e n d i t u r e s a f t e r 1973 Some a u t h o r i t i e s have a t t r i b u t e d the Japanese p u b l i c s e c t o r d e f i c i t t o the growth i n s o c i a l s e c u r i t y spending which o c c u r r e d a f t e r 1970 ( 1 1 1) . As can be seen i n T a b l e 6.12, i n r e a l terms, s o c i a l s e c u r i t y e xpenditures i n c r e a s e d a t an average o f 15% per annum d u r i n g the 1970s, w h i l e the g e n e r a l account budget grew at an average o f 9.3% per year. The i n c r e a s e i n s o c i a l s e c u r i t y spending r e f l e c t e d the p o l i t i c a l commitment of the LDP t o improved s o c i a l w e l f a r e c o n d i t i o n s i n Japan; a commitment which emerged a f t e r the p u b l i c d i s s e n t of the l a t e 1960s. P r i o r t o 1973, o l d age p e n s i o n b e n e f i t s were o n l y 20% o f the average s a l a r y but the r a t i o jumped t o 43% a f t e r 1974 and an i n d e x a t i o n p r o v i s i o n f o r i n f l a t i o n was added ( 1 1 2) . The commitment t o improved s o c i a l c o n d i t i o n s was a l s o r e f l e c t e d i n expanded p u b l i c works programs d u r i n g the 1970s, L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 92. 1 1 1 Yukio Noguchi, " P u b l i c Finance," The P o l i t i c a l Economy of Japan. Volume 1. p. 187-219. 1 1 2 I b i d . . p. 205. - Page 101 - TABLE 6.12: GROUTH OF BUDGETED GOVERNMENT SPENDING BY CATEGORY, F.Y. 1970-1986 REAL PERCENTAGE CHAN6E OVER PREVIOUS PERIOD YEAR 1972 1974 1976 1978 1980 1981 1982 1983 19B4 1985 1986 CATE60RY ' SOCIAL WELFARE: 30.2 36.3 33.8 26.7 13.8 4.0 1.3 0.2 3.6 -0.1 0.9 Social security 30.4 51.2 39.1 31.5 15.5 5.1 -0.2 -5.4 -5.5 2.5 3.5 health 20.9 -4.2 2.2 8.7 6.3 -1.3 0.3 1.1 10.5 2.9 5.4 EDUCATION/SCIENCE 26.4 24.3 14.9 14.2 11.1 1.5 -1.6 -0.8 1.3 -2.5 -1.7 GOVT. PENSIONS 10.3 18.9 43.6 21.2 15.4 6.5 3.0 -0.8 -1.5 -2.7 -2.6 DEFENSE 24.7 9.4 7.7 11.0 13.1 3.8 3.8 6.8 6.0 5.3 116.7 PUBLIC WORKS 67.7 -17.6: 10.9 38.0 9.6 -0.3 2.1 -1.5 -5.6 -1.0 -75.2 F0REI6N AID 14.4 3.6 -5.2 39.0 27.1 8.1 9.6 3.9 7.4 5.7 4.5 SMALL BUSINESS 26.0 9.9 22.9 40.1 -1.2 -1.2 -3.3 -2.6 -5.3 -8.8 -6.1 ENERGY 45.2 13.3 10.5 -1.1 8.1 1.0 -1.7 FOODSTUFF CONTROL 4.1 38.2 -21.1 -5.8 -4.4 2.8 -2.6 -8.8 10.5 -13.8 -14.1 OTHER 41.5 20.7 11.6 9.2 8.4 -2.1 -2.4 -2.2 -2.3 -1.2 -7.0 REVENUE SHARING 22.8 28.1 -15.2 31.4 27.4 7.9 -9.6 -4.4 18.7 3.5 3.2 DEBT SERVICE 41.9 37.0 87.6 58.1 58.9 17.4 1.9 17.4 11.6 8.6 8.7 TOTAL 34.4 16.0 12.7 26.9 18.7 5.0 -0.9 1.6 5.3 1.7 -1.7 - P a g e 1 0 1 a - a l t h o u g h the l a t t e r tended t o c l o s e l y f o l l o w economic c y c l e s . Noguchi a t t r i b u t e s i n c r e a s e d s o c i a l w e l f a r e and p u b l i c works spending t o the f a v o r a b l e f i s c a l c o n d i t i o n s o f the e a r l y 1970s. By 1970, Japan had a t t a i n e d a " f i s c a l a f f l u e n c e " , w i t h i n which i n c r e a s e d government expenditures c o u l d be supported by the " n a t u r a l " i n c r e a s e s i n tax revenues which r e s u l t e d from s u s t a i n e d economic growth ( 1 1 3) . That t h i s s i t u a t i o n d i d not endure a f t e r 1974 i s evidenced by the i n c r e a s e i n government bond i s s u e s i n the l a t t e r h a l f o f the 1970s. As a r e s u l t , the l a r g e s t i n c r e a s e i n p u b l i c e x p e n d i t u r e s between 1970 and 1986 was t h a t r e l a t i n g t o d e b t - s e r v i c e , which grew a t an average r e a l r a t e o f over 39% per y e a r . D e s p i t e the s i g n i f i c a n t annual i n c r e a s e s i n r e a l government spending, expressed as a percentage of GNP, a c t u a l program ex p e n d i t u r e s remained s u r p r i s i n g l y c o n s t a n t . Average government expe n d i t u r e as a percentage of GNP grew from an annual average 14.6% o f GNP d u r i n g the 1970s.to 17.1% a f t e r 1980 (see T a b l e 6.13). However, most of t h i s i n c r e a s e was due the r i s i n g c o s t of debt- s e r v i c e , which r e p r e s e n t e d the l a r g e s t s i n g l e e xpenditure item on the g e n e r a l account by 1985 (see T a b l e 6.14). 1 1 3 I b i d . . p. 206. - Page 102 - TABLE 6.13: 60VERNMENT SPENDING BY CATEGORY AS A PERCENTAGE OF GNP, F.Y. 1970-1986 YEAR CATE60RY SOCIAL WELFARE: Social security Health EDUCATION/SCIENCE 60VT. PENSIONS DEFENSE PUBLIC WORKS F0REI6N AID SHALL BUSINESS ENERGY FOODSTUFF CONTROL OTHER REVENUE SHARING DEBT SERVICE TOTAL 1970 1972 1974 1976 1978 1980 1981 1982 1983 1984 1985 19B6 1.5 2.5 2.2 0.9 1.4 1.4 0.2 0.3 0.2 1.3 2.1 1.7 0.4 0.6 0.4 0.8 1.3 0.9 2.0 4.2 2.2 0.1 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.5 0.6 0.5 1.3 2.3 1.8 2.3 3.5 2.9 0.4 0.7 0.6 11.1 18.5 13.9 2.8 3.2 3.3 1.8 2.1 2.2 0.2 0.2 0.2 1.8 1.8 1.9 0.6 0.6 0.7 0.9 0.9 0.9 2.3 2.9 2.8 0.1. 0.1 0.2 0.1 0.1 0.1 0.0 0.1 0.2 0.4 0.3 0.3 1.8 1.8 1.8 2.3 2.8 3.2 1.1 1.6 2.2 14.3 16.4 17.6 3.3 3.3 3.2 2.3 2.2 2.0 0.1 0.1 0.1 1.8 1.8 1.7 0.7 0.7 0.7 0.9 0.9 1.0 2.8 2.7 2.6 0.2 0.2 0.2 0.1 O.l 0.1 0.2 0.2 0.2 0.3 0.3 0.2 1.7 1.6 1.5 3.3 2.9 2.7 2.6 2.5 2.9 17.9 17.2 17.7 3.1 3.1 3.0 1.6 1.8 1.8 0.1 0.1 0.1 1.6 1.5 1.5 0.6 0.6 0.6 1.0 1.0 2.1 2.3 2.2 0.5 0.2 0.2 0.2 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.2 0.2 1.4 1.3 1.2 3.0 3.0 3.1 3.1 3.2 3.4 16.8 16.4 16.3 - P a g e 1 0 2 a - TABLE 6.14: BUD6ETED GOVERNMENT SPENDIN6 BY CATE60RY, F.Y. 1970-1986 REAL EXPENDITURES, BILLIONS OF YEN YEAR 1970 i972 1974 1976 1978 1980 1981 1982 1983 1984 1985 1966 CATE60RY SOCIAL WELFARE: 2350 3060 4172 5582 7073 8049 8369 8474 8494 8803 8793 8666 Social security 1298 1692 2558 3559 4681 5405 5682 5670 5364 5070 5196 5378 Health 273 330 316 323 351 373 368 369 373 412 424 447 EDUCATION/SCIENCE 1983 2507 3116 3580 4087 4541 4611 4538 4503 4560 4444 4369 GOVT. PENSIONS 623 687 817 1173 1422 1641 1748 1800 1786 1760 1713 1668 DEFENSE 1217 1517 1659 1786 1983 2243 2328 2416 2580 2735 2881 6243 PUBLIC WORKS 2996 5024 4138 4590 6335 6942 6922 7069 6960 6567 6503 1612 FOREIGN AID 194 222 230 218 303 385 416 456 474 509 538 562 SMALL BUSINESS 104 131 144 177 248 245 242 234 228 216 197 185 ENER6Y 0 0 0 0 294 427 484 535 529 572 578 568 FOODSTUFF CONTROL 702 731 1010 797 751 718 738 719 656 725 625 537 OTHER 1948 2757 3327 3713 4053 4395 4301 4198 4105 4011 3961 3683 REVENUE SHARING 3475 4269 5468 4638 6096 7769 8386 7582 7249 8602 8899 9164 DEBT SERVICE 602 854 1170 2195 3470 5513 6474 6598 7747 8647 9389 10207 TOTAL 16194 21759 25251 28449 36115 42868 45019 44619 45311 47707 48521 47666 Source: Lincoln, Japan: Facing Econoaic Maturity, p. 92 - P a g e 1 0 2 b - 6.2.2. Government Revenues a f t e r 1973 As noted above, the primary cause o f r i s i n g government d e f i c i t s d u r i n g the 1970s was the d e c l i n e i n t a x revenues. Both nominal and r e a l r e c e i p t s decreased markedly a f t e r 1975. In r e a l terms, n a t i o n a l t a x r e c e i p t s grew a t an average o f 11.7% between 1960 and 1973, f e l l c o n s e c u t i v e l y i n 1974 and 1975 by 7.2 and 14.5%, r e s p e c t i v e l y , and averaged 6.5% growth t h e r e a f t e r (see Table 6.15). Thus, tax revenues were p e r m i t t e d t o l a g behind moderate i n c r e a s e s i n r e a l spending. L i n c o l n ( m ) p o i n t s out t h a t : The most s t r i k i n g f e a t u r e (of government f i s c a l p o l i c y ) , i n f a c t , i s t h a t a l l c a t e g o r i e s of e x p e n d i t u r e s c o n t i n u e d t o r i s e r e l a t i v e l y r a p i d l y i n nominal terms, w h i l e taxes were allowed t o l a g behind. Thus, Japan d i d not get i t s e l f i n t o l a r g e d e f i c i t s because of a major b u r s t of new spending so much as from a l a c k of revenue t o support i t s r e l a t i v e l y modest r e a l i n c r e a s e s i n spending. The r e a l terms s h o r t f a l l s i n tax revenues i n i t i a l l y o c c u r r e d because o f the economic r e c e s s i o n which f o l l o w e d the o i l shock of 1973. However, over the l o n g e r term, the p r i n c i p a l reason f o r l a g g i n g t a x r e c e i p t s l a y i n the psyche of the Japanese p u b l i c . Throughout the 1970s and e a r l y 1980s, tax reform was s t r o n g l y opposed by powerful lobby i n t e r e s t s . In 1979, the M i n i s t r y of Finance proposed t h a t a 5% v a l u e added tax be imposed on a l l f i r m s w i t h s a l e s i n excess o f 20 m i l l i o n yen. O p p o s i t i o n from sma l l b u s i n e s s e s , h i s t o r i c a l l y s t r o n g backers of the LDP, was so i n t e n s e t h a t p r i o r t o the 1979 e l e c t i o n f o r the Lower House of the D i e t , the L i b e r a l Democratic P a r t y (LDP) was f o r c e d t o promise t h a t i t L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 96. - Page 103 - TABLE 6.15: PERCENTAGE REAL INCREASE iN TAX.BURDEN, F.Y. 1961-1S87 PERCENTAGE INCREASE OVER PREVIOUS F.Y. (REAL TERNS) YEAR 6NP NATIONAL INCOME TOTAL TAXES NATIONAL LOCAL TAXES TAXES 1961 13.5 10.0 14.1 14.6 12.9 1962 5.4 8.7 6.2 3.7 12.6 1963 13.0 11.3 9.4 9.3 9.8 1964 11.1 8.7 10.7 10.8 10.6 1965 17.3 19.6 12.3 10.1 17.4 1966 11.6 10.1 7.2 6.5 8.8 1967 10.9 12.0 13.4 12.9 14.3 1968 11.9 12.6 14.8 15.1 14.1 1969 11.2 10.7 3.0 -2.4 14.1 1970 9.0 13.5 25.3 32.4 12.8 1971 5.7 2.2 4.2 2.8 6.9 1972 9.8 9.5 14.9 16.5 11.7 1973 8.2 6.2 18.1 19.7 14.9 1974 -2.4 0.8 -3.3 -7.2 5.0 1975 1.9 3.4 -12.3 -14.5 -8.1 1976 6.2 3.8 8.6 8.2 9.5 1977 4.8 4.4 5.5 3.7 8.7 1978 4.5 4.1 14.9 20.2 6.1 1979 4.3 3.9 6.7 4.3 11.3 1980 6.3 7.9 9.3 9.5 9.1 1981 2.6 1.4 11.5 13.9 7.1 1982 3.0 2.1 -2.4 -5.8 4.1 1983 3.5 4.4 5.9 5.9 5.7 1984 5.4 3.8 6.6 6.3 7.0 1985 4.2 4.5 5.5 4.8 6.8 1986 1.4 2.1 2.0 1.4 3.1 1987 4.4 4.4 3.8 5.1 1.8 Average increase over period: 1960-1973 1976-1987 11.8 6.5 11.7 6.5 12.4 6.7 1960-1974 1976-1987 17.7 9.6 17.3 9.6 18.8 9.8 - P a g e 1 0 3 a - would not i n t r o d u c e the tax. In s p i t e of t h i s , the LDP l o s t i t s m a j o r i t y i n the lower house and was o n l y a b l e t o r e t a i n power wit h the support o f a number of independents ( 1 1 5) . Other attempts t o c o r r e c t t a x l o o p h o l e s met w i t h s i m i l a r o p p o s i t i o n . The attempt t o i n t r o d u c e the "green c a r d " system was a p a r t i c u l a r l y i l l u s t r a t i v e example o f the o p p o s i t i o n t o change. P r i o r t o 1987, savers were not taxed on i n t e r e s t income earned by s a v i n g s accounts which t o g e t h e r t o t a l l e d l e s s than 3 m i l l i o n yen. Commercial banks were r e q u i r e d t o f i l e i n f o r m a t i o n on a l l s a v i n g s accounts t o a l l o w the a u t h o r i t i e s t o determine i f an i n d i v i d u a l ' s t o t a l accounts exceeded 3 m i l l i o n yen. However, the p o s t a l s a v i n g s system, which has, by f a r , the c o u n t r y ' s l a r g e s t d e p o s i t base, was o n l y r e q u i r e d t o f i l e r e p o r t s on accounts which exceeded t h i s amount. T h i s l o o p h o l e enabled d e p o s i t o r s t o open numerous accounts. ( I t i s r e p o r t e d t h a t the number of accounts i n the p o s t a l s a v i n g s system exceeds the p o p u l a t i o n of Japan). In 1979, the M i n i s t r y of Finance (MOF) attempted t o c o r r e c t t h i s weakness by p r o p o s i n g t h a t every saver be i s s u e d a green i d e n t i t y c a r d t h a t would have t o be produced whenever opening a t a x - q u a l i f i e d s a v i n g s account. However, the proposed reform was s t r o n g l y opposed by the M i n i s t r y of Posts and Telecommunications which c o n t r o l s the p o s t a l s a v i n g s system and by the p u b l i c , who d e c r i e d the p r o p o s a l as an unwarranted i n t r u s i o n of the government i n t o t h e i r p e r s o n a l a f f a i r s ( 1 1 6) . A f t e r t h r e e 1 1 5 Noguchi, " P u b l i c Finance," p. 209. 1 1 6 L i n c o l n , Japan: F a c i n g Economic M a t u r i t y . f p. 106. - Page 104 - y e a r s o f u n s u c c e s s f u l attempts t o have the program i n t r o d u c e d , the MOF advanced a compromise p r o p o s a l t h a t a low r a t e o f tax be charged on a l l i n t e r e s t income. T h i s p r o p o s a l was f i n a l l y implemented i n 1987. 6.2.3. The P r e s s u r e f o r F i s c a l A u s t e r i t y As a r e s u l t o f the f a i l u r e o f tax r e c e i p t s t o match spending i n c r e a s e s , government revenue s h o r t f a l l s were met w i t h i n c r e a s i n g l y l a r g e bond i s s u e s a f t e r 1973. Between 1973 and 1986, the proportion o f bonds, i n t o t a l government borrowing, i n c r e a s e d from 69% t o 81% ( 1 1 7) . By 1978, the MOF began t o v o i c e i n c r e a s i n g concern over the s i z e o f the d e f i c i t s and t o p r e s s u r e the government t o r e t u r n t o a b a l a n c e d budget f i s c a l p o l i c y . The M i n i s t r y v o i c e d s e v e r a l concerns, i n c l u d i n g the p o s s i b i l i t y t h a t f u t u r e f i s c a l p o l i c y c o u l d be c o n s t r a i n e d by the i n c r e a s i n g d e b t - s e r v i c e requirements, a non- d i s c r e t i o n a r y component on the g e n e r a l account budget. A d d i t i o n a l arguments encompassed the burden p l a c e d on f u t u r e g e n e r a t i o n s ; the p o t e n t i a l "crowding-out" e f f e c t of p r i v a t e investment; the i n f l a t i o n p o t e n t i a l o f monetized government debt; and the removal of the n a t u r a l l i m i t a t i o n of government spending t o government tax r e c e i p t s . As L i n c o l n has p o i n t e d out ( 1 1 8) , many o f these arguments were e i t h e r not a p p l i c a b l e , or tended t o be l e s s important than 1 1 7 I b i d . . p. 140. 1 1 8 L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 101-102. - Page 105 - c o n s t r u e d by the M i n i s t r y of Finance. In view of the l a r g e p r i v a t e - s e c t o r s u r p l u s , the "crowding-out" argument was p a r t i c u l a r l y weak; even a t t h e i r h e i g h t i n the l a t e 1970s and e a r l y 1980s, government d e f i c i t s f a i l e d t o f u l l y absorb p r i v a t e s e c t o r s u r p l u s e s . However, r e g a r d l e s s o f the s t r e n g t h o f the counter arguments, the end of the 1970s brought a g e n e r a l , p u b l i c and p r i v a t e s e c t o r consensus t h a t government d e f i c i t s s hould be c u r t a i l e d . I n d i c a t i v e of t h i s , i n J u l y 1980, n e w l y - e l e c t e d Prime M i n i s t e r Suzuki announced t h a t the i s s u a n c e of d e f i c i t f i n a n c i n g bonds would be e l i m i n a t e d by F.Y. 1984. S e v e r a l measures were i n t r o d u c e d t o a c h i e v e t h i s g o a l . In F.Y. 1980, the c e i l i n g f o r annual i n c r e a s e s i n budget r e q u e s t s f o r each m i n i s t r y and government department was lowered from around 20% t o 10%. P e r m i s s i b l e i n c r e a s e s were e l i m i n a t e d i n F.Y. 1982; and a f t e r 1984, a " m i n u s - c e i l i n g " was i n t r o d u c e d f o r c e r t a i n expenditures ( 1 1 9) . In a d d i t i o n , the government e s t a b l i s h e d the Ad Hoc C o u n c i l on A d m i n i s t r a t i v e Reform i n March 1981, w i t h the mandate t o assess government a c t i v i t i e s f o r methods of r a t i o n a l i z i n g e x p e n d i t u r e s . The C o u n c i l , commonly known as Rincho, was headed by Toshio Doko, the r e t i r i n g chairman o f the Keidanren, a f e d e r a t i o n of economic o r g a n i z a t i o n s i n Japan and the " v o i c e of b i g b u s i n e s s i n 120 t Japan"( ). The c o u n c i l recommended a p o l i c y o f " f i s c a l r e c o n s t r u c t i o n without tax i n c r e a s e s " i n which government d e f i c i t s 1 1 9 Noguchi, " P u b l i c Finance," p. 211. 1 2 0 L i n c o l n , p. 117. - Page 106 - were t o be c u r t a i l e d by decreases i n e x p e n d i t u r e s r a t h e r than tax reform. To t h i s end, the c o u n c i l proposed t h a t the s o c i a l s e c u r i t y system be r e v i s e d and t h a t government-run monopolies such as the Japan N a t i o n a l Railway, Nippon Telephone and T e l e g r a p h C o r p o r a t i o n , and Japan Tobacco and S a l t be p r i v a t i z e d ( 1 2 1) . The f i s c a l a u s t e r i t y program proved s u c c e s s f u l i n r e d u c i n g government bond i s s u e s ; however, the t a r g e t o f e l i m i n a t i n g a l l i s s u a n c e s by F.Y. 1984 was not a c h i e v e d and has s i n c e been postponed t o F.Y. 1990 ( 1 2 2) • 6.2.4. The Government Balance s i n c e 1984 S i n c e 1984, a number of changes have taken p l a c e which i n d i c a t e t h a t the government i s r e c o n s i d e r i n g i t s f i s c a l a u s t e r i t y program. T h i s time, the p r e s s u r e f o r change has been from e x t e r n a l , r a t h e r than i n t e r n a l , f o r c e s . In p a r t i c u l a r , the l a r g e s u s t a i n e d s u r p l u s e s i n the Japanese c u r r e n t account balance has l e d t o mounting p r e s s u r e from the c ountry's l e a d i n g t r a d e p a r t n e r s f o r f i s c a l expansion. In a d d i t i o n , the a p p r e c i a t i o n of the yen s i n c e 1985 by 80% has ushered i n a new phase of Japanese macro-economic growth. Although the c u r r e n t account s u r p l u s has f a i l e d t o d e c l i n e s u b s t a n t i a l l y i n d o l l a r terms (due t o the s h o r t term e f f e c t s of yen a p p r e c i a t i o n through the J-curve e f f e c t , s i g n i f i c a n t p r o d u c t i v i t y g a i n s i n some key export i n d u s t r i e s , and the c o n t i n u i n g p o p u l a r i t y L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 118. Noguchi, " P u b l i c Finance," p. 211. - Page 107 - o f Japanese e x p o r t s ) , the p r o s p e c t o f reduced c u r r e n t account s u r p l u s e s i n the f u t u r e must be c o n s i d e r e d from the p e r s p e c t i v e of the macro economic i d e n t i t y presented e a r l i e r . As evidenced i n T a b l e 6.16, the p r i v a t e s e c t o r s u r p l u s was i n c r e a s i n g l y absorbed by l a r g e c u r r e n t account (merchandise trade) s u r p l u s e s a f t e r 1980 as t h e government implemented i t s program o f f i s c a l reform. As merchandise t r a d e s u r p l u s e s d e c l i n e i n the f u t u r e , the economy may have t o a d j u s t by e i t h e r reduced s u r p l u s e s i n the p r i v a t e s e c t o r o r l a r g e r government d e f i c i t s . T h i s adjustment, however, c o u l d be postponed o r reduced by o f f s e t t i n g changes i n the s e r v i c e s t r a d e balance, which has posted i n c r e a s i n g l y l a r g e r e c e i p t s o f f o r e i g n investment e a r n i n g s s i n c e 1980. The l a t t e r has important r a m i f i c a t i o n s f o r the s u s t a i n a b i l i t y of Japanese f o r e i g n d i r e c t investment i n the f u t u r e and w i l l be d i s c u s s e d i n S e c t i o n 9.0. To some extent, some adjustment i n the domestic s e c t o r has a l r e a d y s t a r t e d t o occur i n response t o d e c l i n i n g merchandise t r a d e b a l a n c e s . Government expenditures on s o c i a l i n f r a s t r u c t u r e have been undertaken t o s t i m u l a t e domestic demand i n l i g h t of the reduced demand i n the export s e c t o r . These ex p e n d i t u r e s were encouraged by the Maekawa r e p o r t o f A p r i l 1986 which recommended t h a t Japan reduce i t s r e l i a n c e on exports f o r economic growth and move towards a domestic-demand d r i v e n economy. However, movements away from f i s c a l a u s t e r i t y have met w i t h s t r o n g o p p o s i t i o n from the M i n i s t r y o f Finance and the Bank o f Japan. In a d d i t i o n , c e r t a i n a c t i o n s taken by the government i n 1989 would seem t o i n d i c a t e some - Page 108 TABLE 6.16: THE DOMESTIC SECTOR AND CURRENT ACCOUNT BALANCE, F.Y. 1960-1987, PERCENTAGE OF 6NP PERCENTA6E OF GNP TOTAL PRIVATE SECTOR TOTAL PUBLIC SECTOR CURRENT ACCOUNT /EAR SAVIN6S INVESTMENT BALANCE SAVINGS INVESTMENT BALANCE BALANCE 1960 28.3 31.2 -2.9 7.7 4.7 3.0 0.0 1961 28.5 36.0 -7.5 8.5 4.8 3.7 -1.8 1962 27.9 28.5 -0.6 8.2 5.7 2.5 0.0 1963 27.5 30.8 -3.3 7.5 5.3 2.2 -1.5 1964 27.2 29.2 -2.0 6.8 5.3 1.5 0.0 1965 27.4 27.5 -0.1 6 5.4 0.6 1.2 1966 29.4 2B.7 0.7 5.6 5.4 0.2 0.9 1967 31.4 32.7 -1.3 6.3 5.1 1.2 -0.3 1968 32.9 33.0 -0.1 6.9 5.1 1.8 1.0 1969 32.5 34.5 -2.0 7.5 5 2.5 1.2 1970 33.3 34.0 -0.7 6.8 5.1 1.7 1.0 1971 31.0 30.0 1.0 7 5.8 1.2 2.5 1972 32.0 29.2 2.8 6.2 6.3 -0.1 2.2 1973 32.3 31.6 0.7 6.9 6.4 0.5 0.0 1974 30.0 31.4 -1.4 6.3 6 0.3 -1.0 1975 29.0 26.8 2.2 3.3 6 -2.7 -0.1 1976 30.4 26.0 4.4 2.1 5.8 -3.7 0.7 1977 29.5 24.6 4.9 2.5 6.3 -3.8 1.5 1978 30.8 23.9 6.9 1.5 7 -5.5 1.7 1979 29.0 25.3 3.7 2.5 7.2 -4.7 -0.9 1980 28.4 25.1 3.3 2.7 7.1 -4.4 -1.0 1981 27.9 24.2 3.7 3.3 7.1 -3.8 0.5 1982 27.2 23.3 3.9 3.2 6.8 -3.6 0.7 1983 26.9 21.9 5.0 2.8 6.4 -3.6 1.6 1984 26.7 22.3 4.4 3.9 6 -2.1 2.8 1985 26.8 22.8 4.0 4.8 5.6 -0.8 3.7 1986 - - 5.8 - - -1.1 4.3 1987 - - 4.5 - - -0.2 3.6 - Page 108a - c o n f u s i o n as t o the f u t u r e d i r e c t i o n o f f i s c a l p o l i c y and e f f o r t s t o reduce the p r i v a t e s e c t o r s a v i n g s s u r p l u s . In terms o f the l a t t e r , some o f the tax reforms undertaken a f t e r 1987, have been d i r e c t e d a t r e d u c i n g the tax advantages of p e r s o n a l s a v i n g s ( i . e . , t he 20% tax l e v i e d on a l l i n t e r e s t income from s a v i n g s accounts) . At the same time, the consumption tax i n t r o d u c e d i n the s p r i n g of 1989 i s b i a s e d a g a i n s t p e r s o n a l consumption. These reforms mean h i g h e r t a x r e c e i p t s which, when coupled w i t h o n l y moderate i n c r e a s e s i n government expenditures, seem t o i n d i c a t e t h a t the LDP i s u n w i l l i n g t o s h i f t away from f i s c a l a u s t e r i t y . 6.4. THE DOMESTIC SECTOR - SUMMARY The p r e c e d i n g s e c t i o n s have h i g h l i g h t e d the f a c t o r s behind the enormous p o o l of c a p i t a l which has been a v a i l a b l e f o r o f f s h o r e investment s i n c e the e a r l y 1980s. T h i s p o o l can be t r a c e d t o the p r i v a t e s e c t o r s a v i n g s s u r p l u s where s u s t a i n e d h i g h l e v e l s of household s a v i n g s have more than o f f s e t the savings/investment d e f i c i t s of the c o r p o r a t e s e c t o r . Up t o 1986, d e c l i n i n g savings r a t e s i n the p r i v a t e s e c t o r were more than matched by r e d u c t i o n s i n investment i n the c o r p o r a t e s e c t o r so t h a t net d e f i c i t s are w e l l below the pre-1975 l e v e l s . S i n c e 1987, c o r p o r a t e investment has i n c r e a s e d s h a r p l y and i s expected t o remain h i g h i n 1989. However, i n the l o n g e r term, the s t r u c t u r a l change o f the Japanese economy towards technology and s e r v i c e i n d u s t r i e s w i l l reduce investment i n t e n s i t y and t h i s , t o g e t h e r w i t h improved p r o f i t s and h i g h e r - Page 109 e q u i t y r a t i o s , w i l l p robably l i m i t the s i z e o f c o r p o r a t e s e c t o r d e f i c i t s . As w i l l be d i s c u s s e d i n S e c t i o n 9.0., these f o r c e s are l i k e l y t o m a i n t a i n the p r i v a t e s e c t o r s u r p l u s e s a t reasonably h i g h l e v e l s . Government a c t i o n s s i n c e 1978 have c o n t r i b u t e d t o the r e c y c l i n g o f t h i s excess c a p i t a l i n the domestic economy o f f s h o r e . N o t w i t h s t a n d i n g the p r o p o s a l s o f the Maekawa Report of 1986 and the r e c e n t modest s t i m u l a t i o n s o f the economy, government p r a c t i c e suggests t h a t f i s c a l a u s t e r i t y and balanced budgets are the p r i n c i p a l p o l i c y aims. The r e c e n t , and p o l i t i c a l l y unpopular consumption t a x i s the most e v i d e n t m a n i f e s t a t i o n o f these o b j e c t i v e s . The i n a b i l i t y o f the domestic economy t o absorb the excess s a v i n g s o f the p r i v a t e s e c t o r has been ma n i f e s t e d i n the huge i n c r e a s e i n d e f i c i t s on the c a p i t a l account balance and cocommittant s u r p l u s e s on the c u r r e n t account balance. As the c u r r e n t s i t u a t i o n i n the p r i v a t e and government s e c t o r balances appears u n l i k e l y t o change d r a m a t i c a l l y i n the near f u t u r e , the d i s p o s i t i o n o f these excess sa v i n g s among v a r i o u s f o r e i g n investment uses becomes important i n deter m i n i n g the s u s t a i n a b i l i t y of r e c e n t i n c r e a s e s i n f o r e i g n d i r e c t investment. As such, S e c t i o n 7.0. w i l l examine the e x t e r n a l components of the macro-economic a c c o u n t i n g i d e n t i t y from the p e r s p e c t i v e o f the c a p i t a l account ba l a n c e . - Page 110 - 7.0. EXTERNAL MACRO-ECONOMIC COMPONENTS OF THE JAPANESE ECONOMY The f o u r e x t e r n a l macroeconomic components o f the Japanese economy a r e : * Net F o r e i g n D i r e c t Investment * Net F o r e i g n P o r t f o l i o Investment * Net F o r e i g n Short term C a p i t a l Investment and, * Net O f f i c i a l and P r i v a t e Monetary Movements. Each o f the above components o f the o v e r a l l economic balance w i l l be examined b r i e f l y . 7.1. NET FOREIGN DIRECT INVESTMENT Japanese FDI i s the f o c a l s u b j e c t o f t h i s paper. The net d i r e c t investment balance o f Japan i s a r e f l e c t i o n o f the power of the Japanese economy and, i f c o n t i n u e d a t the c u r r e n t h i g h l e v e l s , w i l l be a powerful determinant of f u t u r e economic developments w e l l beyond Japan's own b o r d e r s . S e c t i o n 4.0. d e s c r i b e d the p r a c t i c e o f Japanese f o r e i g n d i r e c t investment s i n c e World War I I and, e s p e c i a l l y , s i n c e the mid-nineteen e i g h t i e s , when f o r e i g n d i r e c t investment a c c e l e r a t e d t o dimensions of g l o b a l s t r a t e g i c importance. Net f o r e i g n d i r e c t investment must a l s o c o n s i d e r the impact of f o r e i g n d i r e c t investment i n Japan. To date, such investment has been r e l a t i v e l y s m a l l ; f o r the p e r i o d F.Y. 1950 t o F.Y. 1987, - Page 111 - cumulative d i r e c t f o r e i g n investment i n Japan t o t a l l e d a pproximately $8.5 b i l l i o n ( 1 2 3) . U n t i l 1980, f o r e i g n investment i n Japan was s t r i c t l y r e g u l a t e d by government a u t h o r i t i e s i n i t i a l l y t o p r o t e c t the cou n t r y ' s p r e c a r i o u s balance o f payments p o s i t i o n and then t o p r o t e c t " i n f a n t i n d u s t r i e s " from f o r e i g n c o m p e t i t i o n . In t he 1980s, however, f o r e i g n investment has been completely de- r e g u l a t e d although, as noted by H i g a s h i and L a u t e r ( 1 2 4) , f o r e i g n h o s t i l e a c q u i s i t i o n s o f Japanese companies are s t i l l d i s c o u r a g e d . D e s p i t e the l e s s e n i n g o f r e g u l a t o r y r e s t r i c t i o n s on f o r e i g n investment i n Japan, FDI s t i l l remains r e l a t i v e l y weak i n the 1980s. The reasons behind t h i s m i r r o r the f a c t o r s r e s p o n s i b l e f o r Japan's FDI push o f f s h o r e ; h i g h r e l a t i v e l a b o u r c o s t s , e x o r b i t a n t l a n d p r i c e s and l a n d use r e s t r i c t i o n s , and h i g h energy c o s t s . As a r e s u l t , f o r e i g n investment t o date has c o n s i s t e d p r i m a r i l y o f investments i n d i s t r i b u t i o n , w h o l e s a l i n g and r e t a i l i n g as opposed t o t he set-up o f p r o d u c t i o n f a c i l i t i e s , e t c . There i s some evidence t h a t t h i s may be changing as f o r e i g n companies seek new methods o f p e n e t r a t i n g Japanese markets and a c c e s s i n g Japanese technology. As noted by H i g a s h i and Lau t e r ( 1 2 5) , d u r i n g the l a t t e r Nippon. Business F a c t s and F i g u r e s . 1989. J e t r o , Tokyo, 1989, p. 49. C h i k a r a H i g a s h i and G. P e t e r Lauter, The I n t e r n a t i o n a l i z a t i o n o f the Japanese Economy r Boston: Kluwer Academic P u b l i s h e r s , 1987, p. 16.1. 1 2 5 I b i d . . p. 161. - Page 112 - h a l f o f t h e 1980s, More f o r e i g n companies de c i d e d t h a t the o n l y way t o s t a y i n the h i g h l y c o m p e t i t i v e Japanese marketplace was t o e s t a b l i s h a manufacturing and maybe even a r e s e a r c h and development base. They concluded t h a t investments i n d i s t r i b u t i o n f a c i l i t i e s alone would not be s u f f i c i e n t i n the f u t u r e because not o n l y does a p r o d u c t i o n and r e s e a r c h base enhance c o m p e t i t i v e a b i l i t i e s but i t a l s o makes the a c q u i s i t i o n o f the i n c r e a s i n g l y s i g n i f i c a n t Japanese r e s e a r c h f i n d i n g s much e a s i e r . Although f o r e i g n investment may i n c r e a s e i n Japan as a r e s u l t o f t h e s e i s s u e s i n the f u t u r e , the l i k e l i h o o d i s t h a t FDI i n Japan w i l l c o n t i n u e t o be dwarfed by Japanese f o r e i g n investment abroad. F o r e i g n investment w i l l remain l i m i t e d by the h i g h c o s t s o f o p e r a t i n g i n the Japanese market. 7.2. NET FOREIGN PORTFOLIO INVESTMENT Net f o r e i g n p o r t f o l i o investment i s , by f a r , the l a r g e s t component of t o t a l Japanese net investment o u t f l o w s . Purchases of f o r e i g n s e c u r i t i e s r ose from U.S. $10.3 b i l l i o n i n 1982 t o U.S. $296.9 b i l l i o n i n 1985 and t o U.S. $1,440.6 b i l l i o n i n 1988; d u r i n g the same time frame, net purchases i n c r e a s e d from U.S. $6 b i l l i o n i n 1982 t o U.S. $88.8 b i l l i o n i n 1988, w i t h a 1986 peak of U.S. $100.1 b i l l i o n i n 1986( 1 2 6). Net purchases o f Japanese s e c u r i t i e s by non-Japanese, d u r i n g the same p e r i o d , ranged between U.S. $1.2 b i l l i o n i n 1981 and minus U.S. $2.8 b i l l i o n i n 1988. 1 2 6 NRI Q u a r t e r l y Review. Nomura Research I n s t i t u t e , Tokyo, August 1989, p.67 - Page 113 - NFPI accounts f o r about 70 t o 75% of t o t a l Japanese net f o r e i g n l o n g term investments. D e s p i t e t h i s , NFPI w i l l be g i v e n o n l y c u r s o r y examination i n t h i s a n a l y s i s because, w i t h i n the co n t e x t o f the paper, NFPI i s o n l y o f i n t e r e s t as a competing u t i l i z a t i o n o f excess Japanese s a v i n g s . Furthermore, p o r t f o l i o investments are predominantly made f o r the s o l e purpose o f r e t u r n and, i n the l o n g run, are of much l e s s s t r a t e g i c importance than d i r e c t f o r e i g n investment, which seeks t o shape and c o n t r o l p o l i c y of f o r e i g n based o p e r a t i o n s . Although r e a l Japanese net f o r e i g n p o r t f o l i o investment has i n c r e a s e d a t a compounded annual r a t e o f 134% s i n c e 1982 (see Table 7.1), i t tended t o f l u c t u a t e s u b s t a n t i a l l y p r i o r t o 1982. As i n d i c a t e d i n Tab l e 7.2, 91.4% of Japanese net f o r e i g n p o r t f o l i o investment s i n c e 1980 has been d i r e c t e d towards bonds and o n l y 8.6% has been i n v e s t e d i n f o r e i g n s e c u r i t i e s . N e v e r t h e l e s s , s e c u r i t i e s investment showed a remarkable jump i n F.Y. 1987, r i s i n g t o U.S. $16.9 from approximately U.S. $7 b i l l i o n i n F.Y. 1986, although i t dropped back t o U.S. $3 b i l l i o n i n F.Y 1988. The U n i t e d S t a t e s remains the l a r g e s t r e c i p i e n t o f Japanese net f o r e i g n p o r t f o l i o 127 investment. A c c o r d i n g t o J e t r o ( ), n e a r l y 70% o f the t o t a l 1988 purchases were U.S. s e c u r i t i e s . There are s e v e r a l f a c t o r s behind the r i s e i n net f o r e i g n p o r t f o l i o h o l d i n g s by the Japanese. From a macro-economic vi e w p o i n t , the r i s e i n Japanese NFPI c o i n c i d e d w i t h the e a s i n g of Nippon 1988. J e t r o , Tokyo, 1989, p. 94. - Page 114 - TABLE 7.1: REAL JAPANESE NET FOREIGN PORTFOLIO INVESTMENT, F.Y. 1960-1987, U.S.* BILLIONS ! REAL NET ! PORTFOLIO ! INVESTMENT YEAR ! US$ BILLIONS I I 1960 I -0.06 ! 1961 ! 0.03 i 1962 ! 0.20 ! 1963 ! 0.41 ! 1964 ! 0.39 ! 1965 ! 0.22 ! 1966 I -0.05 ! 1967 ! -0.02 ! 1968 ! 0.82 i 1969 ! 2.09 IRATE OF 6R0WTH 1970 ! 0.52 IPER ANNUM 1971 ! 1.58 11983-1987 134X 1972 I 0.15 ! 1973 i -2.84 ! 1974 ! -1.19 ! 1975 ! 3.29 ! 1976 ! 3.29 ! 1977 ! 0.72 ! 1978 ! -3.01 ! 1979 I -1.28 ! 1980 i 9.43 ! 1981 ! 7.43 ! 1982 ! 0.80 i 1983 ! -2.74 1 1984 ! -22.35 i 1985 ! -38.34 ! 1986 ! -92.01 ! 1987 ! -82.10 ! - Page 114a - TABLE 7-2: INVESTMENT IN FOREIGN SECURITIES BY JAPANESE,F.Y. 1981 U.S. t MILLIONS U.S. DOLLAR MILLIONS STOCKS 1 1 BONDS NET 1 1 NET YEAR PURCHASE SALE PURCHASE {PURCHASE 1 SALE PURCHASE 1981 937 697 240 1 ! 9399 3591 5808 1982 1127 976 151 ! 16970 10904 6066 1983 2105 1447 658 ! 22906 10399 12507 1984 1569 1519 50 ! 56347 29576 26771 1985 5484 4489 995 ! 291376 237859 53517 1986 20917 13869 7048 i 1346989 1253965 93024 1987 70935 54061 16874 ! 1274201 1200944 73257 1988 76560 73564 2996 ! 1364061 1 1 1278248 85813 - Page 114b - the government's f i s c a l d e f i c i t p o s i t i o n and the r e l e a s e o f l a r g e amounts o f excess p r i v a t e s a v i n g s f o r o f f s h o r e investment. Many commentators p o i n t t o the 1980 r e v i s i o n o f the 1949 F o r e i g n Exchange C o n t r o l Law as a f a c t o r behind the i n c r e a s e i n o f f s h o r e s e c u r i t i e s investment a f t e r 1980. Under the 1949 law, a l l f o r e i g n exchange t r a n s a c t i o n s were c o n t r o l l e d u n l e s s otherwise excepted. The r e v i s e d law o f 1980 p e r m i t t e d a l l t r a n s a c t i o n s u n l e s s excepted. However, the government d i d r e t a i n e x t e n s i v e powers t o c o n t r o l t r a n s a c t i o n s which might damage the domestic economy ( ). In r e a l i t y , t h e r e had been de f a c t o l i b e r a l i z a t i o n o f f o r e i g n exchange t r a n s a c t i o n s s i n c e the e a r l y 1970s but the new law was important i n f o r m a l i z i n g and c o d i f y i n g a d m i n i s t r a t i v e p r a c t i c e . L i n c o l n notes ( 1 2 9) : By c o n f i r m i n g the v a l i d i t y o f p r e v i o u s changes, the r e v i s i o n a l s o l e g i t i m i z e d c ontinued l i b e r a l i z a t i o n ; i n e f f e c t i t was a p u b l i c statement t h a t a new consensus had formed, an acknowledgement t h a t i n t u r n c o n t r i b u t e d t o the momentum f o r f u r t h e r change i n the same d i r e c t i o n . A d m i n i s t r a t i v e encouragement of the outflo w o f c a p i t a l was a necessary plank o f the government's p o l i c y o f f i s c a l a u s t e r i t y . In a d d i t i o n , Japanese o f f s h o r e investment a l s o h e l p e d t o ma i n t a i n the low v a l u e o f the yen which had been depressed as a r e s u l t o f the 1979 c r i s i s ; which improved the co m p e t i t i v e n e s s o f Japanese e x p o r t s and generated o f f s e t t i n g s u r p l u s e s on the c u r r e n t account balance. L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 250. I b i d . . p. 250-251. - Page 115 - Macro-economic developments e x t e r n a l t o Japan a l s o c o n t r i b u t e d t o the i n c r e a s e i n net NFPI. These developments i n c l u d e d the U.S. government's d e c i s i o n t o pursue f i s c a l expansion a f t e r 1980 and the consequent need of the U.S. economy t o a t t r a c t l a r g e amounts of f o r e i g n c a p i t a l t o f i n a n c e the r e s u l t i n g d e f i c i t s . U n l i k e Japan, the U.S. p r i v a t e s e c t o r s a v i n g s r a t e i s v e r y low (about 3% o f GNP) ; thus, f i s c a l expansion had t o be accommodated by an i n c r e a s e i n c a p i t a l i n f l o w s . T h i s was achieved by a sharp i n c r e a s e i n U.S. i n t e r e s t r a t e s i n the e a r l y 1980s. Coupled w i t h s t r o n g economic growth and low i n f l a t i o n , i t s h i g h e r r e l a t i v e i n t e r e s t r a t e s made the U.S.A. an a t t r a c t i v e r e c i p i e n t c o u n t r y f o r f o r e i g n investment (see T a b l e 7.3). As of March 1987, approximately 60 p e r c e n t of Japanese f o r e i g n bond h o l d i n g s were d o l l a r denominated, p r i n c i p a l l y i n U.S. T r e a s u r y i s s u e s . ( 1 3 0) . Return on f o r e i g n p o r t f o l i o investment r e q u i r e s c o n s i d e r a t i o n not o n l y o f i n t e r e s t earned but a l s o of the exchange r a t e a t which e a r n i n g s can be converted f o r r e p a t r i a t i o n . I t i s , t h e r e f o r e , somewhat s u r p r i s i n g t h a t the most s u b s t a n t i a l i n c r e a s e s i n Japanese FPI came a f t e r 1984 when the yen was a p p r e c i a t i n g r a p i d l y . Indeed, i t has been r e p o r t e d t h a t the 23 major Japanese l i f e i nsurance companies (which, t o g e t h e r , h o l d about 30% o f a l l f o r e i g n s e c u r i t i e s h o l d i n g s ) wrote o f f f o r e i g n exchange l o s s e s of $14.8 130 • • • • Aron Vmer, The F i n a n c i a l Samurai. The Emerging Power of Japanese Money. London: Kogan Page L i m i t e d , 1988, p. 164. - Page 116 - TABLE 7.3: REAL DISCOUNT RATES, U.S. AND BANK OF JAPAN, AVERAGE F.Y. 1961-•1988 REAL U.S. REAL REAL DISCOUNT B.O.J. U.S. - JAPAN RATE DISCOUNT DISCOUNT RAT (AVERAGE) RATE DIFFERENTIAL YEAR 1961 4.3 -0.64 -5.41 1962 1.2 3.04 1.84 1963 l.B 1.29 -0.48 1964 2.0 2.22 0.22 1965 2.5 11.21 8.67 1966 1.4 0.51 -0.90 1967 1.6 -0.48 -2.27 1968 0.5 1.01 0.53 1969 1.4 1.31 -0.12 1970 1.1 -1.37 -2.49 1071 0.2 -0.13 -0.34 1972 0.5 -0.72 -1.21 1973 -0.2 -5.62 -5.41 1974 -2.7 -11.58 -8.84 1975 -1.2 -1.16 -0.01 1976 -0.1 -0.62 -0.50 1977 -0.9 -1.56 -0.64 1978 0.8 -1.32 -2.07 1979 1.5 3.26 1.72 1980 1.9 3.41 1.50 1981 3.3 2.30 -1.02 1982 3.9 3.16 -0.71 1983 4.6 4.24 -0.36 1984 5.1 3.77 -1.37 1985 4.7 3.41 -1.30 1986 3.6 1.16 -2.45 1987 2.3 2.77 0.45 1988 2.8 2.14 -0.66 - Page 116a - b i l l i o n f o r the year ending March 31, 1987 ( ) . The l a r g e s t i n c r e a s e i n f o r e i g n s e c u r i t i e s h o l d i n g s o c c u r r e d i n 1986 (net purchases o f $92 b i l l i o n ) when the yen a p p r e c i a t e d from 238.54 yen t o the d o l l a r t o 168.52 yen t o the d o l l a r . T h i s i n c r e a s e may have o c c u r r e d because Japanese i n v e s t o r s m i s t a k e n l y assumed t h a t the a p p r e c i a t i o n of the yen had peaked. N e v e r t h e l e s s , the l o s s e s accrued i n F.Y. 1986 d i d not prevent a f u r t h e r net p o r t f o l i o investment o f $82 b i l l i o n i n 1987. V i n e r observes ( 1 3 2) : The d e c l i n e of the d o l l a r has simply reduced the f o r e i g n currency expense of buying d o l l a r a s s e t s w h i l e s i m u l t a n e o u s l y r e d u c i n g the chances t h a t the h o l d e r s w i l l i n c u r exchange r a t e l o s s e s i n the f u t u r e . The o t h e r s i d e of the NFPI equation i s the i n f l o w of f o r e i g n c a p i t a l i n t o Japan. P r i o r t o 1980, the i n f l o w o f e i t h e r p o r t f o l i o o r d i r e c t investment was g e n e r a l l y d i s c o u r a g e d by r e g u l a t o r y r e s t r i c t i o n s . The new F o r e i g n Exchange C o n t r o l Law o f 1980 removed • • 133 • • many o f these r e s t r i c t i o n s ( ). N e v e r t h e l e s s , f o r e i g n investment i n Japan has remained r e l a t i v e l y s m a l l (see T a b l e 7.4). From the p o r t f o l i o investment p e r s p e c t i v e , t h i s l a c k o f i n t e r e s t may be a t t r i b u t e d t o the lower r e l a t i v e i n t e r e s t r a t e s on Japanese V i n e r , The F i n a n c i a l Samurai, p. 184. 1 3 2 I b i d . . p. 184. 1 3 3 M i c h e l e Schmiegelow, "The Reform of Japan's F o r e i g n Exchange and F o r e i g n Trade C o n t r o l Law: A case of Q u a l i t a t i v e Economic P o l i c y , " Japan's Response t o C r i s i s and Change i n the World Economy. e d i t , by M i c h e l e Schmiegelow, New York: M.E. Sharpe, Inc., 1986, p.19-22. - Page 117 - TABLE 7.4: INVESTMENT iN JAPANESE SECURITIES, BY NON JAPANESE. F.Y. 1981-1988. YEN BILLIONS YEN BILLIONS STOCKS I I 1 ' . . . . . BONDS NET 1 I NET YEAR PURCHASE SALE PURCHASE 1 PURCHASE SALE PURCHASE 1981 5399.6 4576.7 822.9 1 ! 5179.4 3953.2 1226.2 1982 4000.0 6320.2 -2320.2 ! 6970.8 5846.1 1124.7 1983 7683.7 6640.9 1042.8 ! 9746.5 9213.6 532.9 1984 8440.6 10157.6 -1717.0 ! 14776.5 13960.4 816.1 1985 9381.0 10160.6 -779.6 ! 25193.7 24044.6 1149.1 1986 17026.9 20617.0 -3590.1 i 41143.3 41528.7 -385.4 1987 23371.5 30822.9 -7451.4 ! 43908.6 42915.6 993.0 1988 21995.2 21744.7 250.5 i 36088.0 1 38893.6 -2805.6 Source: Quarterly Econosic Review, August 1989 Nooura Research Institute, Tokyo, p. 67 - Page 117a - government bonds and the lower e a r n i n g s p o t e n t i a l o f Japanese s t o c k s ( p r i c e e a r n i n g s r a t i o s average about 60 t o 1 i n Japan). The weakening v a l u e o f the yen p r i o r t o 1984 has a l s o been suggested as a c o n t r i b u t i n g f a c t o r . However, the subsequent r a p i d a p p r e c i a t i o n o f the yen has not been accompanied by a c o r r e s p o n d i n g r i s e i n p o r t f o l i o investment by f o r e i g n e r s i n Japan; s u g g e s t i n g t h a t the l a t t e r may have had minimal impact on f o r e i g n long-term c a p i t a l i n f l o w s ( 1 3 4) . 7.3. NET SHORT TERM CAPITAL INVESTMENT As i n d i c a t e d i n T a b l e 7.5, net s h o r t - t e r m c a p i t a l movements are an e r r a t i c component of the balance of payments. These c a p i t a l movements f l u c t u a t e s u b s t a n t i a l l y w i t h changes i n i n t e r n a t i o n a l s h o r t - t e r m i n t e r e s t r a t e d i f f e r e n t i a l s and, p a r t i c u l a r l y , w i t h changes i n f o r e i g n exchange r a t e s . The net flows can be c o n s i d e r a b l e ; i n 1987 and 1988, f o r example, net s h o r t term c a p i t a l flows were $20.5 and $31.1 b i l l i o n , r e s p e c t i v e l y ( 1 3 5) . The r e l a t i v e l y l a r g e p o s i t i v e i n f l o w s of c a p i t a l d u r i n g these two years presumably r e f l e c t e d f o r e i g n e x p e c t a t i o n s of the continued a p p r e c i a t i o n of the Japanese yen/U.S. d o l l a r exchange r a t e . Although n u m e r i c a l l y s u b s t a n t i a l , s h o r t - t e r m c a p i t a l flows have not been c o n s i d e r e d e x t e n s i v e l y i n t h i s study due t o the 1 3 4 L i n c o l n , Japan: F a c i n g Economic M a t u r i t y , p. 249. 1 3 5 Q u a r t e r l y Economic Review. August 1989. V o l . 19. No. 3. Nomura Research I n s t i t u t e , August 1989, p. 52. Page 118 - TABLE 7.5: JAPAN'S BALANCE OF PAYMENTS. F.Y. 1961-F.Y. 1987, MILLIONS OF U.S. $ 1 1 1 CURRENT ACCOUNT BALANCE 1 1 1 1 1 IL0N6-TERM SHORT-TERM BASIC OVERALL j TOTAL TRADE UNREQUITTED! CAPITAL CAPITAL ERRORS ' BALANCE ' BALANCE YEAR ! (A) BALANCE EXPORTS IMPORTS SERVICES TRANSFERS 1 (B) (C) (D) (A+B) (A+B+D) - j 1 1 1961 i -982 -558 4149 4707 -383 1 1 -41 I -11 21 20 -993 -952 1962 : -48 401 4861 4460 -420 -29 ! 172 107 6 124 237 1963 : -780 -166 5391 5557 . -569 -45 ! 467 107 45 -313 -161 1964 : -480 377 6704 6327 -784 -73 i 107 234 10 -373 . -129 1965 I 932 1901 8332 6431 -884 -85 i -415 -61 -51 517 405 1966 ! 1254 2275 9641 7366 -886 -135 : -808 -64 -45 446 337 1967 ! -190 1160 10231 9071 -1172 -178 : -812 506 -75 -1002 -571 1968 : 1048 2529 12751 10222 -1306 -175 1 -239 209 84 809 1102 1969 ! 2119 3699 15679 11980 -1399 -181 ! -155 178 141 1964 2283 1970 ! 1970 3963 18969 15006 -1785 -208 ! -1591 724 271 379 1374 1971 ! 5777 7787 23566 15779 1758 -252 ! -1082 2435 527 4695 7657 1972 ! 6624 8971 28032 19061 -1883 -464 ! -4487 2137 1966 2137 6240 1973 ! -136 3688 36264 32576 -3510 -314 ! -9750 2407 -2595 -9886 -10074 1974 ! -4693 1436 54480 53044 -5842 -287 I -3881 1778 -43 -8574 -6839 1975 : -682 5028 54734 49706 -5354 -356 1 -272 -1138 , -584 -954 -2676 1976 : 3680 9887 66026 56139 -5867 -340 I -964 111 117 2696 2924 1977 ! 10918 17311 79333 62022 -6004 -389 : -3184 648 657 7734 9039 1978 ! 16534 24596 95634 71038 -7387 -675 ! -12389 1538 267 4145 5950 1979 ! -8754 1845 101232 99387 -9472 -1127 : -12618 2377 2333 -21372 -16662 1980 i -10746 2125 126736 124611 -11343 -1528 ! 2324 3141 -3115 -8422 -8396 1981 i 4770 19967 149522 129555 -13573 -1624 ! -9672 2265 493 -4902 -2144 1982 i 6850 16079 13663 119584 -9848 -1381 : -14969 -1579 . 4727 -8H9 -4971 1983 ! 20799 31454 145468 114014 -9106 -1549 : -17700 23 ! 2055 3099 5177 1984 ! 35003 44257 168290 124033 -7747 -1507 ! -49651 -4295 . 3743 -14648 -15200 1985 i 55019 61601 180664 119063 -4745 -1837 : -73177 -1475 , 4034 -18158 -15599 1986 : 94139 10648 211293 109645 -5135 -2374 ! -144680 899 . 5698 -50541 -43944 1987 ! 83474 94034 233435 139401 -5591 -3867 ! -119465 20502 ! -1490 -35991 -16979 - Page 118a - u n p r e d i c t a b i l i t y o f t h e i r movements and g e n e r a l l y t r a n s i e n t nature o f t h e i r impacts. 7.4. NET MONETARY MOVEMENTS Net monetary movements i n c l u d e o f f i c i a l i n t e r v e n t i o n s on the f o r e i g n exchange markets (accumulation of f o r e i g n r e s e r v e s ) and p r i v a t e h o l d i n g s of f o r e i g n exchange and g o l d . Between F.Y. 1980 and F.Y. 1988, these monetary movements i n aggregate t o t a l l e d approximately -$103.7 b i l l i o n . Of t h i s t o t a l , s l i g h t l y g r e a t e r than 70% was accounted f o r by o f f i c i a l (net) p o s i t i v e puchases of f o r e i g n c u r r e n c i e s and g o l d ( 1 3 6) . The balance r e f l e c t e d (net) p o s i t i v e h o l d i n g s of f o r e i g n c u r r e n c i e s and g o l d i n the p r i v a t e s e c t o r . The h i g h v a r i a b i l i t y and l i q u i d i t y o f these movements suggests t h a t they w i l l not be s i g n i f i c a n t f a c t o r s i n de t e r m i n i n g the s u s t a i n a b i l i t y o f d i r e c t f o r e i g n investment. For t h a t reason, t h i s paper has not c o n s i d e r e d o f f i c i a l and p r i v a t e monetary movements i n i t s a n a l y s i s . 7.5. SUMMARY OF THE CAPITAL ACCOUNT BALANCE As i n d i c a t e d i n the p r e v i o u s s e c t i o n s , the p r i n c i p a l components of the c a p i t a l account balance are net f o r e i g n p o r t f o l i o and d i r e c t investment and s h o r t term c a p i t a l movements, w i t h the remaining Q u a r t e r l y Economic Review. V o l . 19. No. 3. Nomura Research I n s t i t u t e , Tokyo, August 1989, p. 52. - Page 119 - components a c t i n g as p r i m a r i l y b a l a n c i n g items. Of the former, the most important from a numerical s t a n d p o i n t i s net f o r e i g n p o r t f o l i o investment, r e p r e s e n t i n g about 70% o f Japanese c a p i t a l o u tflows. In o r d e r t o understand the determinants of Japanese FDI, t h e r e f o r e , two i s s u e s become important. F i r s t , the f a c t o r s behind the domestic p r i v a t e s e c t o r savings-investment d i f f e r e n t i a l must be understood and, secondly, the f a c t o r s r e s p o n s i b l e f o r determining t h e l e v e l of net f o r e i g n p o r t f o l i o investment must a l s o be c o n s i d e r e d . Both these i s s u e s are t r e a t e d i n s e c t i o n 8.0, where the r e s u l t s o f a r e g r e s s i o n model, based on the s t r u c t u r e o f the macro-economic a c c o u n t i n g framework, are a n a l y z e d . Page 120 - 8.0. A STATISTICAL MODEL OF JAPANESE DIRECT FOREIGN INVESTMENT In the p r e c e d i n g macro-economic d i s c u s s i o n , i t was p o s t u l a t e d t h a t t h e r a p i d growth i n the amount o f Japanese c a p i t a l a v a i l a b l e f o r o f f s h o r e investment, p a r t i c u l a r l y s i n c e the mid-1980s, i s a t t r i b u t a b l e t o s t r u c t u r a l changes i n the Japanese economy s i n c e 1973. These s t r u c t u r a l changes have i n c l u d e d the h a l v i n g of economic growth r a t e s and a consequent decrease i n c a p i t a l investment requirements; a s u s t a i n e d tendency towards l a r g e p r i v a t e s e c t o r s a v i n g s imbalances; and the u n w i l l i n g n e s s o f the government t o absorb excess s a v i n g s from the p r i v a t e s e c t o r by d e f i c i t f i n a n c i n g a f t e r 1978. On t h i s b a s i s , s e c t i o n 7 d e l i n e a t e d f o r e i g n d i r e c t investment as the r e s i d u a l of the t o t a l f o r e i g n investment funds a v a i l a b l e a f t e r a l l o w i n g f o r o t h e r competing o f f s h o r e investments such as net f o r e i g n p o r t f o l i o investment and short-term c a p i t a l investments. T h i s macro-economic approach p r o v i d e s a p e r s p e c t i v e o f the source o f funds used i n d i r e c t and o t h e r f o r e i g n investment a c t i v i t i e s . In c o n t r a s t , p o p u l a r e x p l a n a t i o n s of Japanese FDI have c o n c e n t r a t e d on the m o t i v a t i o n s f o r such investment i n c l u d i n g ; the a p p r e c i a t i o n o f the yen, p r o t e c t i o n i s m i n Japan's major export markets; and the reduced c o m p e t i t i v e n e s s of Japanese domestic p r o d u c t i o n i n some i n d u s t r i e s . More r e c e n t l y , the huge e s c a l a t i o n s i n l a n d p r i c e s have allowed Japanese i n v e s t o r s , both i n d i v i d u a l and c o r p o r a t e , t o use domestic l a n d h o l d i n g s as c o l l a t e r a l f o r both d i r e c t f o r e i g n investments and expanded e q u i t y c a p i t a l . The use of Japanese r e a l - Page 121 e s t a t e as s e c u r i t y f o r f o r e i g n purchases i s t y p i f i e d by the t a c t i c s o f S h i g e r u Kobayashi, chairman and founder o f the Shuwa C o r p o r a t i o n , who owns over $1.5 b i l l i o n o f U.S. r e a l e s t a t e . Kobayashi notes t h a t h i s r e c e n t i n c r e a s e i n U.S. r e a l e s t a t e a c q u i s i t i o n s i s " p a r t l y due t o the s o a r i n g l a n d p r i c e s i n Tokyo, p a r t l y due t o the a p p r e c i a t i o n of the yen and p a r t l y due t o l u c k . " ( « 7 , The m o t i v a t i n g i n f l u e n c e s noted above have v a l i d i t y as determinants used t o a l l o c a t e f o r e i g n investment r e s o u r c e s between d i r e c t , p o r t f o l i o and short-term f o r e i g n investments. However, they do not p r o v i d e any i n s i g h t i n t o the source of the funds; nor do they o f f e r any p r o j e c t i o n s as t o the s u s t a i n a b i l i t y o f Japanese d i r e c t f o r e i g n investment i n the f u t u r e . The macro-economic approach d e s c r i b e d i n t h i s paper addresses these f a c t o r s . I t p r o v i d e s , i n one package, a q u a n t i t a t i v e method f o r a s s e s s i n g and p r o j e c t i n g the p o o l o f c a p i t a l s u r p l u s t o domestic needs and p r o v i d i n g a framework w i t h i n which the a l l o c a t i o n a l i n f l u e n c e s of exchange r a t e s , t r a d e p o l i c i e s and o t h e r f a c t o r s can be judged. The balance o f t h i s s e c t i o n w i l l e x p l a i n the r e s u l t s of a s t a t i s t i c a l model developed t o t e s t the v a l i d i t y o f some these f a c t o r s as e x p l a n a t o r y v a r i a b l e s of f o r e i g n d i r e c t investment by Japan. 137 n T n e shuwa Shogun," Tokyo Business Today, Tokyo, March 1987, p. 28. - Page 122 - 8.1. RATIONALE AND METHODOLOGY OF STATISTICAL APPROACH In s e c t i o n 5, an i d e n t i t y was i n t r o d u c e d t o e x p l a i n the amount of c a p i t a l a v a i l a b l e f o r f o r e i g n investment i n terms o f the amount generated and used i n the domestic economy. T h i s i d e n t i t y was, NFDI + NFPI + SC + F = (S-I) - (G-T) (6) S i n c e NFDI i s the f o c a l p o i n t o f t h i s " d i s c u s s i o n , i t i s u s e f u l t o reform the i d e n t i t y as f o l l o w s , NFDI = (S-I) - (G-T) - NFPI - SC - F (7) From t h i s p e r s p e c t i v e , the amount of c a p i t a l d e d i c a t e d t o NFDI i s dependent on the excess c a p i t a l generated i n the domestic s e c t o r , and the amount o f the excess which i s earmarked f o r net f o r e i g n p o r t f o l i o investment (NFPI), net s h o r t - t e r m c a p i t a l investment (Sc) and net monetary flows ( F ) . Each component of t h i s i d e n t i t y i s determined by the i n t e r a c t i o n o f a number o f fundamental economic i n d i c a t o r s . For example, i t c o u l d be h y p o t h e s i z e d t h a t the p r i v a t e s e c t o r b alance (S-I) i s determined by the combined e f f e c t s o f i n t e r e s t r a t e s , changes i n income, and l a n d p r i c e s on both s a v i n g s and investment. S i m i l a r i l y , net f o r e i g n p o r t f o l i o investment might be determined by the combined i n t e r a c t i o n o f i n t e r n a t i o n a l i n t e r e s t r a t e d i f f e r e n t i a l s , the exchange r a t e e t c . Because we have p o s t u l a t e d t h a t the components have some r e l a t i o n s h i p w i t h the l e v e l o f net f o r e i g n d i r e c t investment, we can a l s o h y p o t h e s i z e t h a t the u n d e r l y i n g determinants of the components may a l s o e x p l a i n , i n p a r t , NFDI. - Page 123 - Based on t h i s r e a s o ning, we have r e g r e s s e d s e v e r a l p e r c e i v e d determinants of the components of i d e n t i t y (7) on net f o r e i g n d i r e c t investment. (The r a t i o n a l e behind the approach i s d e p i c t e d i n F i g u r e 8.1.) The hypotheses c o n c e r n i n g the r e l a t i o n s h i p s o f the s e v a r i a b l e s w i t h NFDI and the r e s u l t s o f the model are e x p l a i n e d i n s e c t i o n 8.2. Because o f the v o l a t i l i t y o f Sc and nature o f F as a b a l a n c i n g item on the c a p i t a l account, the determinants of these components w i l l not be i n c o r p o r a t e d i n the NFDI r e g r e s s i o n model. In a d d i t i o n , the government balance was i n c l u d e d i n the model as an exogenous f a c t o r , although t h i s i s somewhat p r o b l e m a t i c g i v e n the p r o b a b i l i t y o f interdependence between the government and p r i v a t e s e c t o r b a l a n c e s . T h e r e f o r e , the primary focuses o f the NFDI r e g r e s s i o n model are the determinants of the p r i v a t e s e c t o r savings-investment balance and net f o r e i g n p o r t f o l i o investment. T h i s focus i s j u s t i f i e d by the macro-economic developments i n Japan s i n c e 1973, s p e c i f i c a l l y t he exogenous i n c r e a s e i n the excess s a v i n g s generated i n the p r i v a t e s e c t o r and the dominance of net p o r t f o l i o investment i n t o t a l Japanese o f f s h o r e investment. Presumably, i f we can determine the f a c t o r s r e s p o n s i b l e f o r the g e n e r a t i o n of excess c a p i t a l i n the domestic s e c t o r and f o r i t s p a r t i a l a l l o c a t i o n t o NFPI, some i n f e r e n c e can be made r e g a r d i n g the f o r c e s behind NFDI. In o r d e r t o t e s t the hypotheses c o n c e r n i n g the r e l a t i o n s h i p between p e r c e i v e d u n d e r l y i n g determinants and NFDI, r e g r e s s i o n models were a l s o developed f o r the i n d i v i d u a l components o f the - Page 124 - FIGURE 8.1 Macro-Economic R a t i o n a l e B e h i n d S t a t i s t i c a l Approach NFDI = (S-I) - (G-T) - NFPI - Sc - F ****** * * -*— =*= * :*= COMPONENT REGRESSIONS *** * * * * * * * * * * * F*= (S-I) ******* * * *= =*= * * ***** **** * * =* (N PI) FUNDAMENTAL DETERMINANTS I n t e r e s t R a t es Changes i n Income Land P r i c e s =*= * * * ** =*= * * ****** **** * * =*= *** * * * * * * * * * * * *= I n t e r n a t i o n a l I n t e r e s t Rate D i f f e r e n t i a l s Exchange R a t e s NET FOREIGN DIRECT INVESTMENT =*= * * * ** - P a g e 1 2 4 a - i d e n t i t y ; s p e c i f i c a l l y those for (S-I) and NFPI. The rationale and r e s u l t s of these models are contained i n sections 8.3. and 8.4., respectively. I t should be noted that the NFDI model represents a f i r s t attempt at explaining the factors behind foreign d i r e c t investment. A more formal approach would have to account for the problem of interdependence between the explanatory variables, a problem which i s common among regressions using macro-economic data and which w i l l be referred to i n section 8.5.3. However, as a supplement to the foregoing macro-economic discussion, the model provides some useful, i f a l b e i t uncertain, r e s u l t s . The regressions and t h e i r r e s u l t s are discussed below. 8 . 2 . NET F O R E I G N D I R E C T I N V E S T M E N T As stated e a r l i e r , the independent variables which have been regressed against net foreign d i r e c t investment have been chosen because of t h e i r perceived explanatory power i n determining the components of i d e n t i t y (7). However, the independent variables r e a l wages, r e a l land prices, and the Yen/U.S. d o l l a r exchange rate are also popularly regarded as factors behind the r i s e i n Japanese foreign d i r e c t investment. The hypotheses and r e s u l t s of the model are l i s t e d below. - P a g e 125 - 8.2.1. The NFDI Model; Hypotheses and R a t i o n a l e Before examining the hypotheses behind the NFDI model, i t should be noted t h a t both NFDI and NFPI (to be d i s c u s s e d i n s e c t i o n 8.4.) are e n t e r e d i n t o the r e g r e s s i o n model as they appear i n the balance o f payments accounts i . e . , n e g a t i v e numbers f o r net outflows and p o s i t i v e numbers o f net i n f l o w s . The assumptions behind the NFDI model i n c l u d e : * Real Wages (W): R i s i n g r e a l wage c o s t s i n Japan has been proposed as a r a t i o n a l e behind the r e l o c a t i o n of l a b o u r i n t e n s i v e i n d u s t r i e s from Japan t o low l a b o u r c o s t c o u n t r i e s . Thus, Japanese FDI would i n c r e a s e and f o r e i g n FDI would decrease, l e a d i n g t o a l a r g e r net outflow o f f o r e i g n d i r e c t investment ( i . e . , NFDI would become more negative) . T h i s would suggest a n e g a t i v e r e l a t i o n s h i p between NFDI and r e a l wages. * Real Land P r i c e s (L): R i s i n g r e a l l a n d p r i c e s ( a s s o c i a t e d w i t h l a n d shortages, environmental c o n s t r a i n t s , etc.) have a l s o been suggested as a reason f o r the r e l o c a t i o n of some Japanese i n d u s t r i e s o f f s h o r e . In more r e c e n t y e a r s , i t has a l s o been contended t h a t Japanese l a n d a s s e t s have been used i n c r e a s i n g l y as c o l l a t e r a l f o r purchases of f o r e i g n r e a l e s t a t e . These two c o n t e n t i o n s would support a n e g a t i v e r e l a t i o n s h i p between NFDI and r e a l l a n d p r i c e s . Page 126 - * The Government Balance ( G O V ) : The Government (spending minus revenues) balance i s entered i n t o the model as an exogenous f a c t o r . T h i s approach can be r a t i o n a l i z e d on the b a s i s t h a t the government s e c t o r absorbs, i n p a r t , some of the excess c a p i t a l generated i n the p r i v a t e s e c t o r (which i n t h i s model i s d e s c r i b e d by r e a l wages and r e a l l a n d p r i c e s ) . T h e r e f o r e , the government balance i s a dete r m i n i n g f a c t o r i n the amount of c a p i t a l a v a i l a b l e f o r t o t a l o f f s h o r e investment. As the government balance i n c r e a s e s ( i . e . , the government d e f i c i t i n c r e a s e s ) , the amount of c a p i t a l a v a i l a b l e f o r t o t a l o f f s h o r e investment d e c l i n e s . Under such c o n d i t i o n s , f o r e i g n d i r e c t investment by Japanese w i l l decrease, r e s u l t i n g i n NFDI becoming l e s s n e g a t i v e . Thus, the government balance should be p o s i t i v e l y c o r r e l a t e d w i t h NFDI. * The Exchange Rate (EXCH): I t i s a p o p u l a r c o n t e n t i o n t h a t the a p p r e c i a t i o n of the yen i s the primary reason f o r the i n c r e a s e i n Japanese o f f s h o r e d i r e c t investment i n r e c e n t y e a r s . ( T h i s phenomenon a l s o o c c u r r e d t o some exte n t i n the e a r l y 1970s when the yen a p p r e c i a t e d r a p i d l y a f t e r the i n t r o d u c t i o n o f f l o a t i n g exchange r a t e s . ) Based on t h i s c o n t e n t i o n , Japanese NFDI should be p o s i t i v e l y c o r r e l a t e d w i t h the exchange r a t e . - page 127 - * The Bank o f Japan-U.S. Discount Rate d i f f e r e n t i a l (DISC): As w i l l be d i s c u s s e d i n s e c t i o n 8.4.1., i f the spread (SPR) between the Bank of Japan d i s c o u n t r a t e and the U.S. F e d e r a l Reserve d i s c o u n t r a t e ( i . e . , the Bank o f Japan d i s c o u n t r a t e minus the U.S. F e d e r a l Reserve d i s c o u n t r a t e ) i s i n c r e a s i n g , FPI by Japanese w i l l tend t o decrease and FPI by f o r e i g n e r s i n Japan w i l l tend t o i n c r e a s e . T h i s should r e s u l t i n a p o s i t i v e r e l a t i o n s h i p between SPR and NFPI. S i n c e NFPI i s a competing o u t l e t f o r Japanese excess c a p i t a l i n the Japanese economy, the o p p o s i t e should be t r u e f o r Japanese net d i r e c t f o r e i g n investment ( i . e . Japanese net d i r e c t f o r e i g n investment should be n e g a t i v e l y c o r r e l a t e d t o SPR.) Based on the above, the NFDI model can be w r i t t e n as: DIR t = Qtt - B n(W) t - B 2 ( L ) t + B 3(GOVT) t + B 4(EXC) - fl5(SPR)t + e t where DIR i s net f o r e i g n d i r e c t investment, GOVT i s the government balance and e« N ( 0 , a 2 ) . - Page 128 - 8.2.2. The NFDI Model; Data Sources Data f o r net f o r e i g n d i r e c t investment was taken from the IMF's I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s . 1988 f o r Japan. The data, as noted, has been en t e r e d i n t o the model as i t i s r e p r e s e n t e d i n the balance o f payments statements ( i . e . n e g a t i v e numbers f o r net outflows and p o s i t i v e numbers f o r net i n f l o w s ) and i s i n b i l l i o n s of yen (see Appendix 1). Real wages and l a n d p r i c e s were taken from the Japan S t a t i s t i c a l Yearbook (years 1970 through 1988). Both i n d i c e s use 1980 as the base y e a r . The r e a l wage index i s based on the nominal wage index (compiled from the average cash e a r n i n g s o f e s t a b l i s h m e n t s w i t h 30 or more r e g u l a r workers) d i v i d e d by the c o r r e s p o n d i n g consumer p r i c e index f o r the y e a r i n q u e s t i o n . The l a n d p r i c e index r e p r e s e n t s the average l a n d p r i c e s of the s i x l a r g e s t urban areas i n Japan ( 1 3 8) . For EXCH, data were taken from the IMF's I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s . F o r e i g n Exchange Rate Supplement 1985 f o r data p r i o r t o 1985 and the Nomura Research I n s t i t u t e ' s Q u a r t e r l y Economic Review, f o r 1986 and 1987. Data f o r the Bank o f Japan d i s c o u n t r a t e were a l s o compiled from the Japan S t a t i s t i c a l Yearbook. The r e g r e s s i o n uses the average r a t e f o r the y e a r i n q u e s t i o n . The d i s c o u n t r a t e data f o r the U.S. was taken from the Business S t a t i s t i c s . 1986 p u b l i s h e d by the U.S. Department o f Commerce, 138 • These areas i n c l u d e : Tokyo, Kanagawa (Yokohama and Kawasaki C i t y ) , Osaka, Kyoto, Sapporo and Nagoya - Page 129 - Bureau o f Economic A n a l y s i s and the monthly p u b l i c a t i o n Economic I n d i c a t o r s (June 1989) prepared f o r the J o i n t Economic Committee by the C o u n c i l of Economic A d v i s o r s . Both the Bank o f Japan and U.S. d i s c o u n t r a t e s were d e f l a t e d by t h e i r r e s p e c t i v e GNP d e f l a t o r s t o remove the e f f e c t o f i n f l a t i o n (see Appendix 1). A l l v a r i a b l e s , w i t h the e x c e p t i o n o f the r e a l wage index, were d e f l a t e d u s i n g the c o r r e s p o n d i n g GNP d e f l a t o r f o r each year t o remove d i s t o r t i o n s a s s o c i a t e d w i t h i n f l a t i o n . 8.2.4 R e s u l t s o f the NFDI Model The r e s u l t s f o r the NFDI model are l i s t e d i n T a b l e 8.1. The s i g n s of the estimated c o e f f i c i e n t s support the hypotheses of 8.2.1.; a l l estimated c o e f f i c i e n t s w i t h the e x c e p t i o n of the government balance were s i g n i f i c a n t i n terms o f t h e i r t - v a l u e s . Because of the i n s i g n i f i c a n c e of the government balance, a second r e g r e s s i o n was run o m i t t i n g the l a t t e r as an e x p l a n a t o r y v a r i a b l e . The r e s u l t s o f the second r e g r e s s i o n are l i s t e d i n T a b l e 8.2. The e s t i m a t e d c o e f f i c i e n t s f o r the remaining e x p l a n a t o r y v a r i a b l e s changed m a r g i n a l l y over T a b l e 8.1. In a d d i t i o n , both the F - r a t i o and Durbin Watson s t a t i s t i c s improved w i t h the o m i s s i o n of GOVT (from 18.8 t o 24.1, i n terms of the former and from 1.56 t o 1.63 i n terms o f the l a t t e r ) . The Durbin Watson s t a t i s t i c o f 1.63 suggests the p o s s i b i l i t y o f some p o s i t i v e a u t o - c o r r e l a t i o n i n the e r r o r term; however, the D-W s t a t i s t i c i s i n the i n d e t e r m i n a t e range o f 1.29 t o 1.74 ( f o r a 5% c o n f i d e n c e l e v e l g i v e n the number - Page 130 - TABLE 8.1.: RESULTS OF NET FOREIGN DIRECT INVESTMENT MODEL (1) DEPENDENT VARIABLE: DIR INDEPENDENT VARIABLES: WAGE, LAND. GOVT, EXCH, SPR VARIABLE ESTIMATED STANDARD STANDARD. T-RATIO SEQUENTIAL SIMPLE NAME COEFFICIENT ERROR COEFFICIENT R-SQUARED R-SQUARED WAGE -19.14 7.69 -0.7756 -2.49 0.6043 0.6043 LAND -5.16 3.14 -0.2656 -1.64 0.6445 0.548 GOVT 0.01417 0.0228 0.0979 0.62 0.7193 0.0994 EXCH 3.67 1.62 0.4099 2.27 0.765 0.6699 SPR -6212.5 2685.6 -0.5459 -2.31 0.811 0.295 CONSTANT 287.43 908.85 0 0.32 R-SQUARED: 0.811 ADJUSTED R-SQUARED: 0.767 DURBIN-WATSON: 1.56 F-RATIO: 18.88 - P a g e 13.0a - TABLE 8.2.: RESULTS OF NET FOREIGN DIRECT INVESTMENT MODEL (2) DEPENDENT VARIABLE: DIR INDEPENDENT VARIABLES: WAGE, LAND, EXCH. SPR VARIABLE ESTIHATED STANDARD STANDARD. T-RATIO SEQUENTIAL SIMPLE NAME COEFFICIENT ERROR COEFFICIENT R-SQUARED R-SQUARED WAGE -17.7 7.24- -0.7173 -2.45 0.6043 0.6043 LAND -5.77 2.94 -0.2969 -1.96 0.6445 0.548 EXCH 3.96 1.52 0.4447 2.62 0.7331 0.6699 SPR -6992.3 2342.4 -0.6145 . -2.99 0.8077 0.295 CONSTANT 225.8 891.29 0 0.25 R-SQUARED: 0.808 ADJUSTED R-SQUARED: 0.774 DURBIN-WATSON: 1.63 F-RATIO: 24.14 - Page 130b - o f o b s e r v a t i o n s and e x p l a n a t o r y v a r i a b l e s ) . Thus, the h y p o t h e s i s o f no a u t o c o r r e l a t i o n cannot be r e j e c t e d . T u r n i n g t o the simple R-squared r e s u l t s , the exchange r a t e would appear t o have the l a r g e s t e x p l a n a t o r y power f o r Japanese net f o r e i g n d i r e c t investment. The i n t e r e s t r a t e d i f f e r e n t i a l has the l e a s t e x p l a n a t o r y power. The o v e r a l l R-squared f o r the r e g r e s s i o n i s .81. C o r r e c t e d f o r the d i s t o r t i o n of the number o f r e g r e s s o r s , the a d j u s t e d R-squared i s .77. These r e s u l t s suggest t h a t t h e r e i s a s t a t i s t i c a l l y s i g n i f i c a n t n e g a t i v e r e l a t i o n s h i p between net f o r e i g n d i r e c t investment and r e a l wages, r e a l l a n d p r i c e s and the Bank of Japan-U.S. F e d e r a l Reserve d i s c o u n t r a t e spread and a p o s i t i v e r e l a t i o n s h i p between net f o r e i g n d i r e c t investment and the exchange r a t e . 8.3. THE PRIVATE SECTOR BALANCE Re g r e s s i o n models were a l s o developed f o r s p e c i f i c components o f i d e n t i t y (7), namely (S-I) and NFPI. These r e g r e s s i o n s were conducted t o t e s t the model hypotheses c o n t a i n e d i n s e c t i o n 8.1, t h a t e x p l a n a t o r y v a r i a b l e s used i n NFDI model should be determinants o f the components of i d e n t i t y (7) . In o r d e r t o r e i n f o r c e the r a t i o n a l e behind the NFDI s t a t i s t i c a l approach, t h e r e f o r e , t h e s e r e g r e s s i o n s should show s t r o n g r e l a t i o n s h i p s between the components (S-I) and NFPI and the fundamental determinants used i n the NFDI model. Page 131 - The f o l l o w i n g s e c t i o n s examine the r a t i o n a l e and r e s u l t s behind the model developed f o r the p r i v a t e s e c t o r b a l a nce. I t i s important t o determine the f a c t o r s behind the p r i v a t e s e c t o r s a v i n g s and investment d i f f e r e n t i a l from the p e r s p e c t i v e of d e t e r m i n i n g the amount of excess c a p i t a l i n the domestic economy which i s a v a i l a b l e f o r o f f s h o r e investment. Three e x p l a n a t o r y v a r i a b l e s were s e l e c t e d t o be r e g r e s s e d a g a i n s t ( S - I ) , namely; * the r e a l wage r a t e index (W); * the r e a l l a n d p r i c e index ( L ) ; and, * the r e a l Bank of Japan d i s c o u n t r a t e (D). 8.3.1. (S-I) Model; Hypotheses and R a t i o n a l e Real wages were chosen as an e x p l a n a t o r y v a r i a b l e because of t h e i r p o s i t i v e impact on r e a l incomes and household s a v i n g s . (Corporate s a v i n g s , or r e t a i n e d e a r n i n g s , c o u l d be n e g a t i v e l y impacted by r i s i n g r e a l wages; however, r i s i n g r e a l wages should a l s o be s u g g e s t i v e of economic growth and r i s i n g c o r p o r a t e p r o f i t s . ) From the p e r s p e c t i v e of investment, r i s i n g r e a l wages i n c r e a s e o p e r a t i n g expenses and reduce p r o f i t e x p e c t a t i o n s of f i r m s . As such, r i s i n g r e a l wages should have a n e g a t i v e impact on planned investment. Based on t h i s , i t was h y p o t h e s i z e d t h a t the r e a l wages should be p o s i t i v e l y c o r r e l a t e d t o the p r i v a t e s e c t o r b a l a n c e . The d i s c o u n t r a t e should a l s o have a p o s i t i v e c o r r e l a t i o n with the p r i v a t e s e c t o r balance. C l a s s i c a l economic t h e o r y p o s t u l a t e s - Page 132 - t h a t p r e s e n t consumption i s dependent on c u r r e n t and f u t u r e income, the r a t e o f i n t e r e s t and f a m i l y p r e f e r e n c e . I f the r e a l i n t e r e s t r a t e r i s e s , t he p r e s e n t v a l u e o f f u t u r e income d e c l i n e s and c u r r e n t consumption w i l l decrease. The c o r o l l a r y t o t h i s i s i n c r e a s e d c u r r e n t s a v i n g s . In terms of investment, r i s i n g r e a l i n t e r e s t r a t e s r e s u l t i n a h i g h e r c o s t o f funds thereby d e t e r r i n g c u r r e n t investment. The r e l a t i o n s h i p o f l a n d p r i c e s w i t h the p r i v a t e s e c t o r balance i s l e s s i n t u i t i v e . The l e v e l o f savi n g s c o u l d be s t i m u l a t e d by r i s i n g r e s i d e n t i a l l a n d p r i c e s as p o t e n t i a l home-buyers s e t a s i d e more money f o r l a r g e r down-payments. Conversely, Japanese l a n d and housing p r i c e s have i n c r e a s e d so d r a m a t i c a l l y over the l a s t f o u r y e a r s t h a t home-ownership may be out of the reach o f an i n c r e a s i n g p r o p o r t i o n o f the p o p u l a t i o n . I f the l a t t e r i s c o r r e c t and p o t e n t i a l home-buyers abandon the g o a l o f home-ownership, sav i n g s p r e v i o u s l y ^ s e t - a s i d e f o r t h i s purpose may be r e l e a s e d f o r consumption, thereby r e d u c i n g the savi n g s r a t e . However, as noted i n S e c t i o n 6, sa v i n g s r a t e s have d e c l i n e d o n l y m a r g i n a l l y i n s p i t e o f l a n d p r i c e i n c r e a s e s i n excess o f 70% per yea r i n Tokyo s i n c e 1985. On balance, i t i s assumed t h a t home ownership remains a fundamental o b j e c t i v e o f Japanese s o c i e t y and t h a t r e a l l a n d p r i c e i n c r e a s e s should have a p o s i t i v e impact on s a v i n g s . The impact o f r i s i n g l a n d p r i c e s on investment i s c l e a r e r . D r a m a t i c a l l y h i g h e r l a n d p r i c e s a c t as a d e t e r r e n t t o new developments a t home. On the ot h e r hand, companies w i t h l a r g e l a n d - Page 133 - h o l d i n g i n v e n t o r i e s have seen a massive a p p r e c i a t i o n of t h e i r a s s e t base; and a c o r r e s p o n d i n g i n c r e a s e i n the market assessment of t h e i r s t o c k v a l u e s . The l a r g e steel-making companies o f f e r c l e a r examples o f l a n d r i c h companies which have experie n c e d huge i n c r e a s e s i n t h e i r market assessed v a l u e , w h i l e having poor p r o f i t performance i n t h e i r ongoing o p e r a t i o n s . In many cases, l a n d - r i c h companies have taken the o p p o r t u n i t y t o make new share i s s u e s , thus u s i n g t h e i r l a n d - f u e l l e d p r i c e s t o generate new e q u i t y funds. Some o f these new funds have been d i r e c t e d towards FDI. Higher l a n d v a l u e s have a l s o p r o v i d e d the c o l l a t e r a l f o r d i r e c t f o r e i g n investment i n r e a l e s t a t e both by c o r p o r a t i o n s and i n d i v i d u a l s . In f a c t , l o a n s made by Japanese f i n a n c i a l i n s t i t u t i o n s f o r f o r e i g n r e a l e s t a t e investments are t y p i c a l l y secured by mortgages on domestic p r o p e r t y , w i t h the f o r e i g n r e a l e s t a t e p r o v i d i n g o n l y secondary s e c u r i t y ( 1 3 9) . Thus, we have assumed t h a t h i g h l a n d p r i c e s are p o s i t i v e l y c o r r e l a t e d w i t h s a v i n g s and n e g a t i v e l y c o r r e l a t e d w i t h domestic investment. Higher l a n d p r i c e s have i n c r e a s e d the need f o r down- payment r e l a t e d s a v i n g s and have r e t a r d e d p l a n t development a t home because o f i n c r e a s e d s t a r t - u p c o s t s . At the same time, however, f o r e i g n d i r e c t investment has become more a t t r a c t i v e because the h i g h v a l u e of domestic r e a l e s t a t e a c t s as a p o o l of ready c o l l a t e r a l f o r o f f s h o r e investments. On t h i s b a s i s , the (S-I) 139 • • W i l l i a m Krueger, "Japanese Real E s t a t e : A t Home and Abroad," Tokyo Business Today, Dec. 1988. p. 37. - Page 134 - b a l a n c e should be p o s i t i v e l y c o r r e l a t e d w i t h r i s i n g l a n d p r i c e s . Given the above hypotheses, the o r i g i n a l model f o r S-I was, PRIV t = o t + B^(Ml)t + B 2 ( L ) t + B 3 ( D ) t + e t (1) where PRIV i s the p r i v a t e s e c t o r s a v i n g s - investment balance, W i s r e a l wages; L i s r e a l l a n d p r i c e s ; and D i s the d i s c o u n t r a t e . The e r r o r term, e, i s d i s t r i b u t e d normally w i t h mean 0 and c o n s t a n t v a r i a n c e a2 . 8.3.2. ( S - I ) Model; Data Sources A l l d ata f o r the f o l l o w i n g r e g r e s s i o n s are l i s t e d i n Appendix 1. The data f o r the p r i v a t e s e c t o r balance were taken from annual data p r o v i d e d by the Japanese Economic P l a n n i n g Agency i n the Annual Report on N a t i o n a l Income S t a t i s t i c s (years 1970 and 1971) and the Annual Report on N a t i o n a l Accounts (years 1984 and 1987). Data f o r 1986 and 1987 were taken from the OECD Report on Japan, 1987 e d i t i o n . The data cover the p e r i o d from f i s c a l y e a r 1960 t o f i s c a l y e a r 1987 and are recorded i n b i l l i o n s o f yen. The e x p l a n a t o r y v a r i a b l e s , r e a l wages, r e a l l a n d p r i c e s and the Bank of Japan d i s c o u n t r a t e are as d e s c r i b e d above i n 8.2.2. 8.3.3. (S-I) Model; R e s u l t s R e s u l t s f o r the (S-I) r e g r e s s i o n proved i n c o n c l u s i v e due t o l i m i t a t i o n s i n the data s e t . A number of f a c t o r s c o u l d e x p l a i n t h e s e r e s u l t s . Included among these i s the s t r o n g - Page 135 - m u l t i c o l l i n e a r i t y between the e x p l a n a t o r y v a r i a b l e s as i s evidenced i n the c o r r e l a t i o n m a t r i x f o r r e g r e s s i o n (1) l i s t e d i n Ta b l e 8.3. ( C o r r e l a t i o n s between the d i s c o u n t r a t e and wages and l a n d p r i c e s were p a r t i c u l a r l y h i g h i . e . , -.95 and -.76, r e s p e c t i v e l y ) . M u l t i c o l l i n e a r i t y i s a problem because i t l e a d s t o h i g h v a r i a b i l i t y i n the OLS e s t i m a t o r s . T h i s means t h a t the e s t i m a t e d c o e f f i c i e n t s a r e i m p r e c i s e and cannot be used r e l i a b l y t o t e s t the u n d e r l y i n g hypotheses o f the model. However, i t i s a l s o l i k e l y t h a t the model i s m i s - s p e c i f i e d i n some way ( i . e . t h a t the e x p l a n a t o r y f a c t o r s don't f u l l y i n c o r p o r a t e the t r u e r e l a t i o n s h i p between s a v i n g s and investment). In a d d i t i o n , important determinants may have been omitted from the model which might b i a s the r e s u l t s . The r e s u l t s o f r e g r e s s i o n (1) are shown i n T a b l e 8.4. Contrary t o the o r i g i n a l hypotheses, the estimated c o e f f i c i e n t s f o r a l l e x p l a n a t o r y v a r i a b l e s showed a n e g a t i v e r e l a t i o n s h i p w i t h the dependent v a r i a b l e ( S - I ) . The t - v a l u e f o r wages was i n s i g n i f i c a n t (-0.10729). In a d d i t i o n , the Durbin Watson s t a t i s t i c was low (1.072) s u g g e s t i n g some f i r s t o r d e r a u t o - c o r r e l a t i o n of the e r r o r term. F u r t h e r r e g r e s s i o n s , c o n t a i n e d i n Ta b l e 8.5, which r e g r e s s e d the e x p l a n a t o r y v a r i a b l e s independently a g a i n s t (S-I) showed s t r o n g p o s i t i v e r e l a t i o n s h i p s between wages and (S-I) and between l a n d and ( S - I ) , but a n e g a t i v e r e l a t i o n s h i p between (S-I) and the d i s c o u n t r a t e . However, because of the wide d e v i a t i o n s o f these - Page 13 6 - TABLE 8.3.: CORRELATION MATRIX FOR THE PRIVATE BALANCE REGRESSION WAGES LAND DISCOUNT RATE PRIVATE BALANCE WAGES LAND 1.00 0.80 0.80 1.00 -0.95 -0.77 0.85 0.61 DISCOUNT PRIVATE RATE BALANCE -0.95 0.85 -0.77 0.61 1.00 -0.92 -0.92 1.00 - P a g e 1 3 6 a - TABLE 8.4.: RESULTS OF PRIVATE BALANCE REGRESSION 1 DEPENDENT VARIABLE: PRIV INDEPENDENT VARIABLES: UA6E, LAND, DISC VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARD. ELASTICITY NAME COEFFICIENT ERROR CORR. COEFFICIENT AT MEANS UA6E -7.0493 65.703 -0.10729 -0.0219 -0.026339 -0.1118 LAND -49.478 26.176 -1.8902 -0.36 -0.23476 -1.0379 DISC -133000 27517 -4.8333 -0.7023 -1.123 -2.8197 CONSTANT .24561 7751.5 3.1686 0.5431 0 4.9693 R-SQUARED: 0.8654 R-SQUARED 0.84B5 ADJUSTED: DURBIN WATSON: 1.072 F-RATIO: 51.421 - P a g e 1 3 6 b - TABLE 8.5.: RESULTS OF REGRESSIONS OF INDIVIDUAL EXPLANATORY VARIABLES ON PRIVATE SECTOR BALANCE DEPENDENT VARIABLE: PRiV INDEPENDENT VARIABLES: WAGE VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARD. ELASTICITY NAME COEFFICIENT ERROR CORR. COEFFICIENT AT MEANS WAGE 227.34 27.698 8.2078 0.8494 0.84943 3.6055 CONSTANT -12878 2279.5 -5.6494 -0.7423 0 -2.6055 R-SQUARED: 0.7215 R-SQUARED 0.7108 ADJUSTED: DURBIN WATSON: 0.8825 F-RATIO: . 67.369 - P a g e 1 3 6 c - TABLE 8.5 CONT'D: RESULTS OF REGRESSIONS OF INDIVIDUAL EXPLANATORY VARIABLES ON PRIVATE SECTOR BALANCE DEPENDENT VARIABLE: PRIV INDEPENDENT VARIABLES: DISC VARIABLE NAME DISC CONSTANT ESTIMATED STANDARD COEFFICIENT ERROR T-RATiO PARTIAL CORR. STANDARD. ELASTICITY COEFFICIENT AT MEANS -108670 16329 9234 1100 -11.758 -0.9176 -0.91757 -2.3038 14.845 0.9458 0 3.3038 R-SQUARED: 0.8419 R-SQUARED 0.8359 ADJUSTED: DURBIN WATSON: 0.9032 F-RATIO: 138.484 - Page 136d - c o e f f i c i e n t s from those produced i n r e g r e s s i o n (1) , the r e s u l t s are a l s o suspect. Again, these r e g r e s s i o n s a l s o had low Durbin- Watson s t a t i s t i c s . Because o f the low Durbin Watson s t a t i s t i c s , the above r e g r e s s i o n s were a l l c o r r e c t e d f o r f i r s t o r d e r a u t o - c o r r e l a t i o n . The r e s u l t s are c o n t a i n e d i n Table 8.6. and 8.7. Although the Durbin Watson s t a t i s t i c of the aggregate r e g r e s s i o n (Table 8.6.) improved s u b s t a n t i a l l y , the t - v a l u e f o r wages was i n s i g n i f i c a n t . Only the d i s c o u n t r a t e showed s t r o n g s i g n i f i c a n c e i n the c o r r e c t e d aggregate r e g r e s s i o n . In terms of the c o r r e c t e d i n d i v i d u a l r e g r e s s i o n s (Table 8.7.), r e a l wages showed a s i g n i f i c a n t p o s i t i v e r e l a t i o n s h i p w i t h the p r i v a t e s e c t o r balance as p r e d i c t e d by the h y p o t h e s i s o f 8.3.1. However, once c o r r e c t e d , the i n d i v i d u a l r e g r e s s i o n o f l a n d on PRIV became i n s i g n f i c a n t ( t - v a l u e o f 0.18). The r e s u l t s f o r the d i s c o u n t r a t e were more i n t e r e s t i n g , demonstrating a s t r o n g n e g a t i v e r e l a t i o n s h i p between the p r i v a t e b a lance and the d i s c o u n t r a t e . These r e s u l t s n e c e s s i t a t e some r e - t h i n k i n g of the o r i g i n a l h y p o t h e s i s t h a t the d i s c o u n t r a t e should have a p o s i t i v e r e l a t i o n s h i p w i t h the p r i v a t e s e c t o r balance. Savings r a t e s i n Japan have been r e l a t i v e l y c o n s t a n t (with the e x c e p t i o n o f the y e a r s immediately f o l l o w i n g the 1973 o i l c r i s i s ) . In a d d i t i o n , i n t e r e s t y i e l d s on s a v i n g s have remained r e g u l a t e d a t low l e v e l s . Given t h i s , the n e g a t i v e parameter e s t i m a t e i s more l i k e l y e x p l a i n e d by the r e l a t i o n s h i p between investment and the - Page 137 - TABLE 8.6.: RESULTS OF PRIVATE BALANCE REGRESSION 1 CORRECTED FOR FIRST ORDER AUTO-CORRELATION DEPENDENT VARIABLE: PRIV INDEPENDENT VARIABLES: WAGE, LAND, DISC VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR CORRELATION COEFFICIENT AT MEANS WAGE LAND DISC CONSTANT 5.8604 -37.283 -120690 21213 77.296 28.665 28854 8342.6 .075818 -1.3006 -4.1826 2.5427 .0155 .2566 .6493 .4607 .021897 -.1769 -1.0191 0 .092942 -.78205 -.25586 4.2918 R-SQUARED: R-SQUARED ADJUSTED: .8891 .8753 DURBIN-WATSON: 2.0393 - P a g e 1 3 7 a - TABLE 8.7.: RESULTS OF-REGRESSIONS OF INDIVIDUAL EXPLANATORY VARIABLES, CORRECTED FOR FIRST ORDER AUTO-CORRELATION DEPENDENT VARIABLE: PRIV INDEPENDENT VARIABLE: WAGE VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR CORRELATION COEFFICIENT AT MEANS WAGE 224.19 47.143 4.7556 .6821 .83767 3.5555 CONSTANT -12360 3887.7 -3.1793 -.5291 6 -2.5008 R-SQUARED: .8044 R-SQUARED .7969 ADJUSTED: DURBIN-UATSON: 1.9135 - P a g e 1 3 7 b - TABLE B.7. CONT'D: RESULTS OF REGRESSIONS OF INDIVIDUAL EXPLANATORY . VARIABLES, CORRECTED FOR FIRST ORDER AUTO-CORRELATION DEPENDENT VARIABLE: PRIV INDEPENDENT VARIABLE: LAND VARIABLE ESTIMATED STANDARD . T-RAT10 PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR CORRELATION COEFFICIENT AT MEANS LAND -6.8307 37.145 -.1839 -.036 -.03241 -.14328 CONSTANT 6519.5 6192.4 1.0528 .2022 0 1.319 R-SQUARED: .7565 R-SQUARED .7471 ADJUSTED: DURBIN-WATSON: 1.8045 TABLE 8.7. CONT'D: RESULTS OF REGRESSIONS OF INDIVIDUAL EXPLANATORY VARIABLES, CORRECTED FOR FIRST ORDER AUTO-CORRELATION DEPENDENT VARIABLE: PRIV INDEPENDENT VARIABLE: DISC VARIABLE ESTIMATED . STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR CORRELATION COEFFICIENT AT MEANS DISC -106930 13066 -8.1838 -.8487 -.9029 -2.267 CONSTANT 16393 1616 10.144 .8935 0 3.3166 R-SQUARED: .8811 R-SQUARED .8765 ADJUSTED: DURBIN-WATSON: 2.0337 - Page 137c - d i s c o u n t r a t e . S e v e r a l f a c t o r s c o u l d be a t work. F i r s t , the d i s c o u n t r a t e may not be an a p p r o p r i a t e proxy f o r the i n t e r e s t r a t e s charged f o r c o r p o r a t e borrowing. Second, the Japanese d i s c o u n t r a t e might be p o s i t i v e l y c o r r e l a t e d w i t h o t h e r world i n t e r e s t r a t e s but demonstrate a lower v a r i a n c e over time. Thus, alth o u g h Japanese domestic i n t e r e s t r a t e s may have been r i s i n g , i n t e r e s t c o s t s a t home would have remained r e l a t i v e l y low promoting domestic v e r s u s f o r e i g n investment. F i n a l l y , assuming a g a i n t h a t Japanese d i s c o u n t r a t e s were p o s i t i v e l y c o r r e l a t e d w i t h world i n t e r e s t r a t e s , i f the l a t t e r were r i s i n g , t h i s might imply u n s t a b l e economic c o n d i t i o n s abroad ( i . e . impending r e c e s s i o n , etc) . Assuming i n v e s t o r s are r i s k - a v e r s e , under these c o n d i t i o n s , domestic investment would be p r e f e r r e d t o f o r e i g n investment. 8.4. NET FOREIGN PORTFOLIO INVESTMENT Two e x p l a n a t o r y v a r i a b l e s were chosen t o be r e g r e s s e d a g a i n s t net f o r e i g n p o r t f o l i o investment ( d e s c r i b e d as POR i n the r e g r e s s i o n model). Again, the v a r i a b l e s i n c l u d e annual data exte n d i n g from f i s c a l y ear 1960 t o f i s c a l y ear 1987. The v a r i a b l e s chosen were: * The Yen/U.S. d o l l a r (average annual) spot r a t e , (EXCH); and, * The d i f f e r e n c e between the Bank of Japan and U.S. F e d e r a l Reserve ( r e a l ) d i s c o u n t r a t e s , (SPR). - Page 138 - 8.4.1. NFPI Model; Hypotheses and R a t i o n a l e Because o f the l a r g e p r o p o r t i o n of U.S. s e c u r i t i e s i n Japanese f o r e i g n p o r t f o l i o investment (approximately 60-65%), the Yen/U.S. d o l l a r exchange r a t e and the d i f f e r e n t i a l between the Bank o f Japan and the U.S. F e d e r a l Reserve d i s c o u n t r a t e s were chosen as p o s s i b l e e x p l a n a t o r y v a r i a b l e s f o r Japanese NFPI. The spot r a t e was used as the e x p l a n a t o r y v a r i a b l e although forward r a t e s c o u l d be c o n s i d e r e d more a p p r o p r i a t e as o f f s h o r e p o r t f o l i o investment i s m o t i v a t e d by e x p e c t a t i o n s of f u t u r e , not c u r r e n t , exchange r a t e s . By d e f i n i t i o n , p o r t f o l i o investment i n c l u d e s instruments with m a t u r i t i e s o f 1 year or more. However, the market f o r forward r a t e s becomes t h i n a f t e r 180 days and p a s t data on forward r a t e s i n excess o f 12 months i s d i f f i c u l t t o f i n d . In a d d i t i o n , academic s t u d i e s ( ) suggest t h a t forward r a t e s i n c o r p o r a t e o t h e r f a c t o r s i n a d d i t i o n t o exchange r a t e e x p e c t a t i o n s (such as a premium f o r a i d i n g the hedging of exchange r a t e r i s k , t r a n s a c t i o n c o s t s , and government i n t e r v e n t i o n ) which can r e s u l t i n s u b s t a n t i a l d e v i a t i o n s between forward and a c t u a l f u t u r e spot exchange r a t e s ( 1 4 1) . E m p i r i c a l s t u d i e s i n d i c a t e t h a t the spot r a t e tends t o f o l l o w a random walk pr o c e s s such t h a t the "market's b e s t f o r e c a s t o f the See, f o r example, R i c h a r d M. L e v i c h , " Are Forward Exchange Rates Unbiased P r e d i c t o r s o f Future Spot Rates," Columbia J o u r n a l of World Business 14. No.. 4. (Winter 1979). p. 49-61. R i c h a r d M. L e v i c h , " E v a l u a t i n g the Performance of the F o r e c a s t e r s , " I n t e r n a t i o n a l F i n a n c i a l Management, Donald R. L e s s a r d e d i t . , New York: John Wiley and Sons, 1985, p. 218. - Page 139 - f u t u r e spot r a t e i s (approximately) the c u r r e n t spot r a t e . " ( ) On the o t h e r hand, g i v e n t h a t the e x p l a n a t o r y v a r i a b l e chosen i n c o r p o r a t e s o n l y average annual data, the spot r a t e may not adequately d e s c r i b e the a c t u a l i n t e r n a t i o n a l f i n a n c i a l a r b i t r a g e e f f e c t . T u r n i n g t o the i n t e r e s t r a t e d i f f e r e n t i a l , d i s c o u n t r a t e s were used because of the d i f f i c u l t y i n f i n d i n g s i m i l a r i n t e r e s t - b e a r i n g instruments over the p e r i o d i n q u e s t i o n i n the U.S. and Japanese c a p i t a l markets. The d i s c o u n t r a t e s e r v e s as a b a s i c i n d i c a t o r of a l l o t h e r i n t e r e s t r a t e s i n the economy and can, t h e r e f o r e , be viewed as an a p p r o p r i a t e proxy. The r e l a t i o n s h i p between the Yen/U.S. d o l l a r exchange r a t e and NFPI i s not i n t u i t i v e l y obvious. I f the c u r r e n t spot r a t e i s u s e f u l i n p r e d i c t i n g f u t u r e spot exchange r a t e s , as suggested by the random walk h y p o t h e s i s , as EXCH r i s e s ( i m p l y i n g a d e p r e c i a t i o n o f the yen) then FPI by Japanese w i l l i n c r e a s e (and FPI by f o r e i g n e r s i n Japan w i l l decrease) r e s u l t i n g i n a l a r g e r outflow o f net Japanese f o r e i g n p o r t f o l i o investment ( i . e . Japanese net f o r e i g n p o r t f o l i o investment w i l l become more n e g a t i v e ) . T h i s would tend t o support a n e g a t i v e c o r r e l a t i o n between the spot exchange r a t e and NFPI. T h i s r a t i o n a l e might e x p l a i n continued r e c o r d amounts o f investment by Japanese i n f o r e i g n s e c u r i t i e s d u r i n g 1986 (net purchases of $92 b i l l i o n ) d e s p i t e the 30% Jacob A. F r e n k e l , " F l e x i b l e Exchange Rates, P r i c e s and the Role o f *News'," I n t e r n a t i o n a l F i n a n c i a l Management f Donald R. L e s s a r d , e d i t . , New York: John Wiley & Sons, 1985, p. 131. - Page 140 - a p p r e c i a t i o n o f the yen d u r i n g the same year. Japanese i n v e s t o r s m i s t a k e n l y assumed t h a t the yen a p p r e c i a t i o n had peaked. In g e n e r a l , assuming the random walk t h e o r y h o l d s , the r e l a t i o n s h i p between the spot exchange r a t e and NFPI should be n e g a t i v e l y c o r r e l a t e d . T u r n i n g t o the i n t e r e s t r a t e d i f f e r e n t i a l (the BOJ d i s c o u n t r a t e minus the U.S. F e d e r a l Reserve d i s c o u n t r a t e ) , i f SPR i s i n c r e a s i n g ( i m p l y i n g a widening spread between the Bank o f Japan and U.S. d i s c o u n t r a t e s ) , f o r e i g n p o r t f o l i o investment by Japanese w i l l tend t o decrease and p o r t f o l i o investment i n Japan by f o r e i g n e r s w i l l t e n d t o i n c r e a s e . T h i s should l e a d t o a p o s i t i v e i n c r e a s e i n Japanese NFPI. S i m i l a r i l y , i f SPR i s d e c r e a s i n g ( i m p l y i n g a narrowing d i f f e r e n t i a l between the BOJ and U.S. d i s c o u n t r a t e s ) , f o r e i g n p o r t f o l i o investment by Japan w i l l tend t o i n c r e a s e and p o r t f o l i o investment i n Japan w i l l tend t o decrease r e s u l t i n g i n a l a r g e r o u t f l o w o f f o r e i g n p o r t f o l i o investment. Thus, the r e l a t i o n s h i p between NFPI and SPR should be p o s i t i v e . Thus, the model f o r NFPI can be expressed as: PORt = Qtt + fi1(SPR)t - fi2(EXCH)t + e t (2) where POR i s net f o r e i g n p o r t f o l i o investment and e « N(0,a 2 ) . 8.4.2. NFPI Model; Data Sources Data f o r NFPI were taken from the IMF's I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s . 1988 f o r Japan. The data, as d i s c u s s e d , are entered - Page 141 - i n t o the model as they appear on the balance o f payments ( i . e . n e g a t i v e numbers f o r net outflows and p o s i t i v e numbers f o r net i n f l o w s ) and i s i n b i l l i o n s o f yen. The data f o r the e x p l a n a t o r y v a r i a b l e s , EXCH and SPR are as d e s c r i b e d above i n s e c t i o n 8.2.2. 8.4.3. NFPI Model; R e s u l t s The r e s u l t s o f the r e g r e s s i o n (2) are l i s t e d i n Ta b l e 8.8. The s i g n s o f the estimated c o e f f i c i e n t s were o p p o s i t e t o what was p r e d i c t e d i n s e c t i o n 8.4.1. Because of the low Durbin Watson s t a t i s t i c o f Ta b l e 8.8. (.68), the r e g r e s s i o n was c o r r e c t e d f o r f i r s t - o r d e r a u t o - c o r r e l a t i o n . These r e s u l t s a re c o n t a i n e d i n Table 8.9. The Durbin Watson s t a t i s t i c remained low (1.35), s u g g e s t i n g second-order c o r r e l a t i o n . The estimated c o e f f i c i e n t s f o r both e x p l a n a t o r y v a r i a b l e s d i f f e r e d s i g n i f i c a n t l y from the r e g r e s s i o n c o n t a i n e d i n T a b l e 8.8. (although the s i g n s remained the same) and the T-value f o r SPR became i n s i g n i f i c a n t . These r e s u l t s are l a r g e l y a t t r i b u t a b l e t o the severe a u t o - c o r r e l a t i o n of the e r r o r terms and, because of t h i s , cannot be used r e l i a b l y t o prove or d i s p r o v e the hypotheses c o n t a i n e d i n S e c t i o n 8.4.1. Page 142 - TABLE 8.8.: RESULTS OF NET FOREIGN PORTFOLIO INVESTMENT HODEL DEPENDENT VARIABLE: POR INDEPENDENT VARIABLES: SPR, EXCH VARIABLE NAME EXCH SPR CONSTANT ESTIMATED STANDARD COEFFICIENT ERROR 56.65 -38939 -18092 11.499 14637 3459.3 T-RATIO PARTIAL STANDARD. ELASTICITY CORR. COEFFICIENT AT MEANS 4.9264 0.7018 0.9673 -13.117 -2.6604 -0.4697 -0.52237 0.0040636 -5.2299 -0.7226 0 14,113 R-SQUARED: R-SQUARED ADJUSTED: DURBIN WATSON: F-RATIO: 0.5043 0.4646 0.6774 12.175 - P a g e . 1 4 2 a - TABLE 8.9.: RESULTS Of HE I FOREIGN PORTFOLIO INvtSTMENT HODEL CORRECTED FOR FIRST ORDER AUTO-CORRELATION DEPENDENT VARIABLE: PGR INDEPENDENT VARIABLES: SPR, EXCH VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARD. ELASTICITY NAME COEFFICIENT ERROR CORR. COEFFICIENT AT MEANS EXCH 22.168 10.314 2.1493 0.3949 0.37852 -5.1327 SPR -737.86 18196 -0.0406 -0.0081 -0.0099 0.0001 CONSTANT -9391.1 4180.5 -2.2464 -0.4098 0 7.3256 R-SQUARED: 0.8032 R-SQUARED 0.7874 ADJUSTED: DURBIN WATSON: 1.3507 - P a g e 1 4 2 b - 8.5. LIMITATIONS OF THE NFDI RESULTS As i n d i c a t e d i n the p r e c e d i n g s e c t i o n s the r e s u l t s f o r the component r e g r e s s i o n s d i d not g e n e r a l l y support the r a t i o n a l e u n d e r l y i n g the c h o i c e o f ex p l a n a t o r y v a r i a b l e s f o r the NFDI model. In a d d i t i o n , although the r e s u l t s l i s t e d i n T a b l e 8.1 appear t o c o r r o b o r a t e the hypotheses of s e c t i o n 8.2.1., a number o f important q u a l i f i c a t i o n s must be noted. These q u a l i f i c a t i o n s r e s t r i c t the v a l u e o f the approach as a model f o r Japanese f o r e i g n d i r e c t investment. 8.5.1. M u l t i c o l l i n e a r i t y among t h e E x p l a n a t o r y V a r i a b l e s A c o r r e l a t i o n m a t r i x f o r the e x p l a n a t o r y v a r i a b l e s used i n the NFDI model i s p r o v i d e d i n Appendix 2., page 2.2. As noted e a r l i e r , r e a l wage and l a n d p r i c e s are c l o s e l y c o r r e l a t e d (.80) as are r e a l wages and the spot exchange r a t e (-.84) and the i n t e r e s t d i f f e r e n t i a l and r e a l wages (-.89). M u l t i c o l l i n e a r i t y between the e x p l a n a t o r y v a r i a b l e s can r e s u l t i n l a r g e standard e r r o r s i n the OLS parameter es t i m a t e s so t h a t the p r e c i s i o n o f the c o e f f i c i e n t s may be susp e c t . The presence o f m u l t i c o l l i n e a r i t y , t h e r e f o r e , makes i t d i f f i c u l t t o d i s e n t a n g l e the marginal e f f e c t s o f e x p l a n a t o r y v a r i a b l e s on net f o r e i g n d i r e c t investment. - Page 143 - 8.5.2. A u t o - C o r r e l a t i o n o f t h e R e s i d u a l s As noted i n 8.2.3., the Durbin-Watson s t a t i s t i c f o r the second NFDI model i s 1.63. While t h i s s t a t i s t i c i s near the upper l i m i t i n g d i s t r i b u t i o n , t h e r e i s s t i l l some s u g g e s t i o n of p o s i t i v e a u t o - c o r r e l a t i o n i n the r e s i d u a l s . The e x i s t e n c e of the l a t t e r tends t o b i a s the R-squared upwards and may suggest some mis- s p e c i f i c a t i o n i n the model. With a u t o - c o r r e l a t i o n p r e s e n t , the s t a n d a r d d e v i a t i o n s of the c o e f i c i e n t s are under-estimated and thus, the c o e f f i c i e n t s o f the e x p l a n a t o r y v a r i a b l e s may appear s i g n i f i c a n t when they are not. 8.5.3. The Problem o f E n d o q e n e i t y The approach has used the O r d i n a r y L e a s t Squares (OLS) technique t o e s t i m a t e the r e g r e s s i o n c o e f f i c i e n t s o f the model. The OLS t e c h n i q u e assumes t h a t the e x p l a n a t o r y v a r i a b l e s are d i s t r i b u t e d i n d e pendently o f the r e s i d u a l s ; i f t h i s i s not the case then the r e g r e s s i o n c o e f f i c i e n t s can be b i a s e d , even a s y m p t o t i c a l l y . S i n c e the model d e s c r i b e d i n t h i s study makes use of macro-economic data, t h e r e i s a s t r o n g l i k e l i h o o d t h a t the r e g r e s s o r s are not independent o f the r e s i d u a l s and t h a t a more formal approach u s i n g simultaneous equations i s warranted. 8.5.4. S t r u c t u r a l Change I f s i g n i f i c a n t s t r u c t u r a l changes occur i n an economy over a p e r i o d under c o n s i d e r a t i o n , the r e g r e s s i o n c o e f f i c i e n t s may not be - Page 144 - s t a b l e over time and, t h e r e f o r e , may not be r e l i a b l e e s t i m a t o r s of the t r u e e f f e c t s of the independent v a r i a b l e s . Given the macro- economic developments i n the Japanese economy d e s c r i b e d i n S e c t i o n 6, i t was d e c i d e d t o t e s t f o r s t r u c t u r a l changes. In p a r t i c u l a r , r e g r e s s i o n s were run on f o r e i g n d i r e c t investment u s i n g the p r e v i o u s l y l i s t e d r e g r e s s o r s f o r 2 time p e r i o d s : 1960 t o 1971 and 1972 t o 1987. The demarcation year of 1971 was chosen f o r two reasons: (1) i n 1971, the world moved from a f i x e d t o f l o a t i n g exchange r a t e system, w i t h the yen a p p r e c i a t i n g by almost 20% between 1970 and 1973; and (2) by 1971, the i n t e r n a l p r e s s u r e s a s s o c i a t e d w i t h a decade of r a p i d economic growth ( i . e . , h i g h l a n d p r i c e s , h i g h e r r e a l wages, h i g h e r i n f l a t i o n , etc.) were manifested i n the d i p p i n g o f Japanese r e a l growth r a t e s from 10% d u r i n g the 1960s t o 4.3% i n 1971. Although 1973 c o u l d have a l s o been chosen as the demarcation year, as noted i n S e c t i o n 6.0, the e v o l u t i o n towards slower growth i n Japan began e a r l i e r . The r e g r e s s i o n r e s u l t s of these two time p e r i o d s are shown i n T a b l e 8.10. The r e g r e s s i o n c o e f f i c i e n t s d i f f e r s i g n i f i c a n t l y between p e r i o d s , w i t h the s i g n s of the LAND, EXCH, and SPR changing over the two time frames. To f u r t h e r i l l u s t r a t e t h i s problem, the i n d i v i d u a l r e g r e s s o r s were p l o t t e d a g a i n s t f o r e i g n d i r e c t investment f o r the two time frames. The p l o t s of these data are c o n t a i n e d i n Appendix 2, pages 2.33 through 2.36 f o r 1960 t o 1971 and pages 2.37 through 2.40 f o r 1972 t o 1987. These p l o t s i n d i c a t e t h a t the l o c a t i o n of the sample data f l u c t u a t e d c o n s i d e r a b l y over - Page 145 - T A B L E 8 . 1 0 : T E S T I N G FOR S T R U C T U R A L CHANGE - 1960 TO 1971 D E P E N D E N T V A R I A B L E : D I P I N D E P E N D E N T V A R I A B L E : . WAGE, L A N D , E X C H , SPR V A R I A B L E E S T I M A T E D STANDARD S T A N D A R D I Z E D T - R A T I O P A R T I A L E L A S T I C I T Y . NAME C O E F F I C I E N T ERROR . C O E F F I C I E N T C O R R E L A T I O N AT WEANS WAGE L A N D E X C H SPR C O N S T A N T -6.8838 1.4295- - 7 . 3 3 4 S 116 . 25 1 . 3 4 2 . 6 0 8 9 7 3 . 0 6 4 5 . 3 9 8 . 5 7 1 1 7 0 . 7 - 1 . 5 4 7 S . 7 2 2 2 1 - . 4 4 6 9 4 . . 1 0 4 3 5 0 - 5 . 1 0 5 8 2 . 3 4 7 4 - 2 . 3 9 3 4 . 2 9 6 7 7 . 8 8 7 9 . 6 6 3 7 . 6 7 0 9 . 1 1 1 5 . 6 7 0 3 4 . 8 1 5 9 - 1 . 0 5 5 3 5 . 8 6 2 . 0 7 9 3 1 3 - 3 8 . 0 9 3 R - S Q U A R E D : P - S O U A R E D A D J U S T E D : F : R A T 10: D U R B I N WATSON . 8 8 8 6 . 8 2 4 9 1 3 . 9 5 6 - P a g e 1 4 5 a - TABLE 8.10 CONT'D: TESTING FOR STRUCTURAL CHANGE - 1972 TO 1387 DEPENDENT VARIABLE: DIR '. INDEPENDENT VARIABLE: WAGE, LAND, EXCH, SPR VARIABLE ESTIMATED STANDARD STANDARDIZED T-RATIO PARTIAL ELASTICITY •NAME COEFFICIENT ERROR COEFFICIENT CORRELATION AT MEANS WAGE LAND EXCH SPR ' •CONSTANT -62.145 -IE.316 -2.2909 -£96.92 7978 15.643 2.718 589.1 2581.8 -.79489 -.64866 -.22792 .029726 0 -3.9727 -2.66 -.84288 -.12505 3.091 .7676 .6257 .2463 .0377 .6817 6.3883 2.3558 ; .59713 -.026904 -8.3143 R-SE'UARED: R-SQUARED ADJUSTED: . FiRATIO: DURBIIM WATSON .8239 .7598 12.863 .279 - Page 145b - the two p e r i o d s . As such, the use of a simple l i n e a r r e g r e s s i o n e q u a t i o n t o model the data i s q u e s t i o n a b l e . The l a r g e d e v i a t i o n s o f the c o e f f i c i e n t s suggest e i t h e r o f two problems: (1) t h a t s t r u c t u r a l change d i d occur i n the Japanese economy making i t d i f f i c u l t t o use r e g r e s s i o n a n a l y s i s t o model d i r e c t f o r e i g n investment, or (2) the model i s m i s - s p e c i f i e d . In e i t h e r case, the r e g r e s s i o n r e s u l t s l i s t e d i n Table 8.7 are n e c e s s a r i l y suspect. 8.5.5. Problems i n the Data The problems l i s t e d above are m a n i f e s t a t i o n s o f the l i m i t e d i n f o r m a t i o n c o n t a i n e d i n the data s e t . A number o f problems with the data e x i s t , some o f which have a l r e a d y been a l l u d e d t o . These problems i n c l u d e the use of annual averages f o r the spot r a t e and i n t e r e s t r a t e s . As noted, the former was p r o b a b l y not a p p r o p r i a t e as an e x p l a n a t o r y f a c t o r f o r NFPI because o f i t s i n a b i l i t y t o d e s c r i b e the a c t u a l i n t e r n a t i o n a l a r b i t r a g e e f f e c t . From the p e r s p e c t i v e o f NFDI, g i v e n i t s l o n g e r time frame, the use o f the annual average spot r a t e i s not unreasonable. The use o f indexes f o r the r e a l wages and l a n d p r i c e s may a l s o be i n a p p r o p r i a t e . In the case o f r e a l wages, the index i n c o r p o r a t e s the averages f o r a broad spectrum o f i n d u s t r i e s which may c l o u d the r e l e v a n t data i f the impact o f r e a l wages on f o r e i g n d i r e c t investment i s s e c t o r - s p e c i f i c . For example, the r e a l wage index i n c l u d e s wages f o r s e c t o r s which do not engage i n d i r e c t f o r e i g n investment such as a g r i c u l t u r e and c e r t a i n s e r v i c e s e c t o r - Page 146 - i n d u s t r i e s . F i n a l l y , the l a n d index i n c o r p o r a t e s the average and l a n d v a l u e s ( i n the case of r e a l l a n d p r i c e s ) . These averages may u n d e r s t a t e the t r u e e x p l a n a t o r y power o f each v a r i a b l e . In a d d i t i o n , the data f o r the government and p r i v a t e s e c t o r b a l a n c e s came from two or more sources which c o u l d have r e s u l t e d i n f u r t h e r measurement problems. F i n a l l y , the data s i z e was r e l a t i v e l y s m a l l i n c l u d i n g o n l y 28 (annual) o b s e r v a t i o n s . 8.6. SUMMARY A number o f c o n c l u s i o n s can be gathered from the f o r e g o i n g s t a t i s t i c a l attempt t o e x p l a i n Japanese net f o r e i g n d i r e c t investment. Based on the r e g r e s s i o n r e s u l t s c o n t a i n e d i n Table 8.1., t h e r e i s some support, a l b e i t weak, f o r the h y p o t h e s i s t h a t the determinants of the components of i d e n t i t y (7) are a l s o determinants o f Japanese net d i r e c t f o r e i g n investment. However, the model s u f f e r s from a number of problems which are p a r t i c u l a r l y m a n i f e s t e d i n the r e s u l t s of the component r e g r e s s i o n s . These problems, as d i s c u s s e d , l i e l a r g e l y w i t h the data s e t and the s t a t i s t i c a l problems noted i n S e c t i o n 8.5. and not n e c e s s a r i l y w i t h t h e u n d e r l y i n g hypotheses o f the model. The r e s u l t s and t h e i r a s s o c i a t e d problems underscore the l i m i t a t i o n s of the data used i n the model and the d i f f i c u l t i e s o f u s i n g the OLS technique w i t h macro-data t o determine the f a c t o r s behind Japanese net d i r e c t f o r e i g n investment. - Page 147 9.0. JAPANESE FDI; THE FUTURE The f u t u r e l e v e l s of Japanese d i r e c t f o r e i g n investment w i l l be shaped by f o u r c o n s i d e r a t i o n s : a. the a v a i l a b i l i t y o f funds f o r f o r e i g n investment; b. t h e requirements of the Current Accounts balance: c. the a l l o c a t i o n p r i o r i t i e s f o r these funds; and, d. the a c c e p t a b i l i t y of Japanese f o r e i g n d i r e c t investment i n the r e c i p i e n t c o u n t r i e s . 9.1. AVAILABILITY OF FUNDS Any d i s c u s s i o n of the f u t u r e a v a i l a b i l i t y o f Japanese f o r e i g n investment funds r e q u i r e s t h a t we r e t u r n t o the macroeconomic i d e n t i t y i n t r o d u c e d i n s e c t i o n 5.0. I t w i l l be r e c a l l e d t h a t t h i s i d e n t i t y can be s t a t e d as: NFDI + NFPI + SC + F = (S-I) + (G-I) + E where: NFDI = net f o r e i g n d i r e c t investment NFPI = net f o r e i g n p o r t f o l i o investment Sc = s h o r t term c a p i t a l investment F = p r i v a t e and government monetary flows (S-I) = p r i v a t e s e c t o r balance (savings - investment) (G-I) = government s e c t o r balance E = e r r o r s and omissions. - Page 148 - In the case o f Japan, e r r o r s and omissions are random i n nature, u s u a l l y q u i t e s m a l l and, f o r c u r r e n t purposes, can be ignored. P r i v a t e and government monetary flows may a l s o be d i s r e g a r d e d . Thus the t o t a l , i n t e r n a l l y - f u n d e d amount of money a v a i l a b l e f o r f o r e i g n investment ( s h o r t and long term) can be assumed t o be equal t o the net p r i v a t e s e c t o r and government s e c t o r b a l a n c e s . 9.1.1. P r i v a t e S e c t o r B a l a n c e The p r i v a t e s e c t o r balance r e f l e c t s the l e v e l s o f household s a v i n g s , p r i v a t e r e s i d e n t i a l investment, c o r p o r a t e s a v i n g s and c o r p o r a t e c a p i t a l o u t l a y s . 9.1.1.1. Household S a v i n g s As i n the p a s t , f u t u r e l e v e l s o f household s a v i n g s w i l l be a f u n c t i o n o f the s t r e n g t h o f the economy (GNP) , r e a l wage r a t e s , the p r o p e n s i t y t o consume, the g e n e r a l p e r c e p t i o n of f u t u r e s e c u r i t y , the c o s t o f r e a l e s t a t e and the i n h e r e n t tendency of the Japanese t o save. The g e n e r a l f e e l i n g i s t h a t the economy, buoyed by c a p i t a l spending and s t r o n g domestic consumer demand, w i l l s t a y reasonably h e a l t h y over the medium term, a t l e a s t . Key i n d u s t r i e s , such as automobile manufacturing, have made v e r y s i g n i f i c a n t p r o d u c t i v i t y g a i n s t o counter-balance the impact of the h i g h yen. In f a c t , i t has been s t a t e d t h a t the automobile i n d u s t r y c o u l d be c o m p e t i t i v e i n world markets even i f the exchange r a t e r o s e as h i g h as 95 yen - Page 149 - t o the U.S. d o l l a r ( ) . The programs of r a t i o n a l i z a t i o n and d i v e r s i f i c a t i o n of the e s t a b l i s h e d , heavy i n d u s t r i a l companies are c o n t i n u i n g , d e s p i t e a number of i n i t i a l s e t - b a c k s . For example, s i n c e 1987 Nippon S t e e l has c l o s e d 4 of i t s 8 s t e e l w o r k s , w i l l reduce i t s 1991 workforce t o o n l y 46% o f the 1987 l e v e l , and expects a h a l f of i t s 1995 revenue t o accrue from non steel-making a c t i v i t i e s , as opposed t o the c u r r e n t 20 p e r c e n t ( U A ) . High u t i l i z a t i o n r a t e s , s t r o n g c o r p o r a t e p r o f i t s and a f a i r l y t i g h t l a b o r market appear l i k e l y t o c o n t i n u e the upward p r e s s u r e on wages. However, the expanded use o f automation, the d e c l i n e i n the r a t i o o f o r g a n i z e d l a b o r , and the c u r r e n t round o f e f f i c i e n c y enhancing investments w i l l p r obably keep such i n c r e a s e s w i t h i n reasonable bounds. At the same, i n f l a t i o n i s w e l l under c o n t r o l ( d e s p i t e the a p p r e c i a t i o n of the yen) and t h i s s i t u a t i o n w i l l be supported by the i n c r e a s e d a v a i l a b i l i t y o f imported goods. A l l i n a l l , t he p r o g n o s i s would seem t o be f o r a c o n t r o l l e d , steady growth i n r e a l wages ( 1 4 5) . I n c r e a s e d domestic consumption i s b e i n g encouraged by a number of government i n i t i a t i v e s . The r e c e n t r e d u c t i o n i n p e r s o n a l income Kevin Done, "Car Wars A f t e r the Yen Shock", The F i n a n c i a l Times. London, May 12, 1989. "Japan's smokestack f i r e - s a l e " ; The Economist; 19-25 August, 1989; p.51. "Labor supply and wage c o s t s " ; Japan Times. August 19, 1989; p. 7. - Page 150 - t a x e s and M I T I 1 s support of tax i n c e n t i v e s t o promote imports ( ) are examples of such i n i t i a t i v e s . Conversely, the 3 p e r c e n t consumption tax, i n t r o d u c e d i n A p r i l , w i l l tend t o r e s t r i c t consumption. On balance, i t can be expected t h a t consumer spending w i l l remain s t r o n g , but not more so than the a n t i c i p a t e d growth i n r e a l p u r c h a s i n g power. Furthermore, the r e s t r a i n t shown l a s t w i n t e r , d u r i n g the l o n g i l l n e s s of the Emperor, i s a c l e a r i n d i c a t i o n t h a t f r u g a l i t y i s not f a r below the s u r f a c e o f the average Japanese consumer's buying h a b i t s . As noted i n s e c t i o n 6, the g e n e r a l l e v e l of c o n f i d e n c e i n Japan, both i n b u s i n e s s and a t the i n d i v i d u a l l e v e l , i s h i g h ; i n a d d i t i o n t h e r e has been a s i g n i f i c a n t improvement i n the s o c i a l s e r v i c e s programs. N e v e r t h e l e s s , the i n - g r a i n e d h a b i t s o f p r u d e n t l y p r o v i d i n g f o r the f u t u r e w i l l d i e hard i n Japan. F i n a l l y , l a n d p r i c e s i n the Tokyo m e t r o p o l i t a n have r e c e n t l y begun t o r i s e again, a f t e r s l i g h t d e c l i n e s d u r i n g the p a s t 2 years ( 1 4 7) . The u n c e r t a i n impact of h i g h e r r e a l e s t a t e p r i c e s on s a v i n g s has a l r e a d y been noted. Savings c o u l d go up as p o t e n t i a l buyers put a s i d e money f o r down payments which i n c r e a s e i n l o c k s t e p w i t h housing p r i c e s . On the o t h e r hand, h i g h e r p r i c e s c o u l d f o r c e p o t e n t i a l buyers out of the market. However, d u r i n g the t h i r d q u a r t e r o f f i s c a l 1988, housing investment i n c r e a s e d by 5.6 "MITI supports tax i n c e n t i v e s t o promote imports"; Japan Times; August 18, 1989; p.12 "Sumitomo R e a l t y and Development Co.", Japan Times. Tokyo, August 19, 1989, p.9 - Page 151 - 146 147 p e r c e n t , d e s p i t e a s i g n i f i c a n t r e d u c t i o n (to 1.62 m i l l i o n ) i n housing s t a r t s ( U 8 ) . O v e r a l l , i t i s reasonable t o assume t h a t the c u r r e n t l e v e l s o f r e a l e s t a t e r e l a t e d s a v i n g s w i l l be maintained. In summary, household savings i n Japan should remain h i g h f o r the f o r e s e e a b l e f u t u r e . During the p a s t few y e a r s , when Japanese f o r e i g n investment has exploded, the l e v e l of household s a v i n g s has s t a y e d f a i r l y c o n s t a n t a t around 15 t o 16 p e r c e n t . At t h i s time t h e r e i s l i t t l e , i f any, evidence t o suggest t h a t t h i s w i l l change. 9.1.1.2. P r i v a t e R e s i d e n t i a l I n vestment. N o t w i t h s t a n d i n g the v e r y h i g h c o s t of housing, home ownership i n Japan remains a t a l e v e l s i m i l a r t o t h a t i n the U.S.A. and i s a b a s i c l i f e - s t y l e o b j e c t i v e f o r Japanese people. I t seems l i k e l y t h a t t h i s p r i o r i t y w i l l be continued i n the f u t u r e and t h a t savings and o t h e r consumption p a t t e r n s w i l l r e f l e c t t h i s f a c t . As noted i n the above d i s c u s s i o n of household s a v i n g s , the housing s t a r t s i n the t h i r d q u a r t e r o f f i s c a l 1988 amounted t o an a n n u a l i z e d r a t e of 1.62 m i l l i o n , about 9.3% below the comparable p e r i o d i n 1987. However, the average s i z e of housing i n 1988 was about 3.2% h i g h e r than i n 1987 and t o t a l e xpenditures were about 6.5% h i g h e r than the 20.8 t r i l l i o n yen spent on r e s i d e n t i a l housing i n 1987. For f i s c a l 1989 p r o j e c t e d e x p e n d i t u r e s are about 5% lower than f i s c a l 1988 "The Japanese Economy"; NRI Q u a r t e r l y Economic Review Vol.19. No.2; Tokyo, NRI & NCC Co.Ltd.; May 1989; p.2 - Page 152 - ( ) . In g e n e r a l , f u t u r e r e s i d e n t i a l c o n s t r u c t i o n may be somewhat reduced from the h i g h l e v e l s o f 1987, l a r g e l y because the r e n t a l housing boom has run i t s course. Over the l o n g e r term, the "aging" of t he Japanese p o p u l a t i o n should i n t r o d u c e some s t r u c t u r a l r e d u c t i o n i n the number of new homes r e q u i r e d , but the l a t e n t demand i s such t h a t t h i s s t r u c t u r a l p r o c e s s w i l l occur over an extended p e r i o d . 9.1.1.3. Corporate Savings The c o r p o r a t e p r e - t a x p r o f i t performance of Japanese companies i n f i s c a l 1988 f o r a l l i n d u s t r i e s was 27.4% h i g h e r than i n 1987 and a r e c e n t survey i n d i c a t e d t h a t 79% of companies co n t a c t e d expected f u r t h e r i n c r e a s e s i n 1989. ( 1 5 0) In a d d i t i o n t o s t r o n g c u r r e n t o p e r a t i o n s (due t o robust consumer demand, h i g h l e v e l s of c o r p o r a t e investment and, i n some i n d u s t r i e s , n o t a b l e improvements i n p r o d u c t i v i t y ) , many of the companies have taken advantage of the h i g h market p r i c e s o f t h e i r s t o c k (the average P/E r a t i o f o r the NRI 400 Composite was 59.1, as o f March 1989 1 5 1) . These hi g h p r i c e s , o f t e n supported by the huge i n c r e a s e s i n the v a l u e o f l a n d h o l d i n g s , has enabled companies t o reduce debt loads by i s s u i n g Nomura Q u a r t e r l y Review Vol.19 No. 2; Tokyo: NRI & NCC Co. L t d . , May 1989; p.46. 1 5 0 Q u a r t e r l y Economic Review. May 1989, Nomura Research I n s t i t u t e , Tokyo, p. 19-21. NRI Q u a r t e r l y Economic Review. V o l . 19 No.2; Nomura Research I n s t i t u t e ; Tokyo; May 1989; p.66. - Page 153 - t r e a s u r y s t o c k on advantageous terms. The s t e e l i n d u s t r y i s a good example o f t h i s t r e n d , r a i s i n g 210 b i l l i o n yen i n 1987 ( 1 5 2) . S t r o n g e r e q u i t y p o s i t i o n s and h i g h c u r r e n t e a r n i n g s have enabled companies t o make s i g n i f i c a n t i n c r e a s e s i n t h e i r r e t a i n e d e a r n i n g s . O v e r a l l , the m a j o r i t y of Japanese companies are s t r o n g e r today than they were b e f o r e the r a p i d a p p r e c i a t i o n of the yen, and the r e c e n t round o f e f f i c i e n c y i n c r e a s i n g investments w i l l add t o t h i s s t r e n g t h . F u r t h e r , the p r o f i t motive appears t o be assuming a more dominant r o l e i n the s t r a t e g i c p l a n n i n g of many Japanese companies. Thus i t i s reasonable t o assume t h a t r e t a i n e d e a r n i n g s (corporate savings) w i l l c o n t i n u e t o improve. 9.1.1.4. Corporate investment As noted p r e v i o u s l y , c o r p o r a t e investment has i n the p a s t couple of y e a r s r e v e r s e d the downward t r e n d of the post-1974 p e r i o d . W i t h i n Japan, the m o t i v a t i o n f o r new investment seems t o be s h i f t i n g from i n c r e a s e d c a p a c i t y (to meet f o r e i g n and, r e c e n t l y , s t r o n g domestic demand) t o p r o d u c t i o n e f f i c i e n c y and the development o f new b u s i n e s s e s ( 1 5 3) . The l e v e l o f investment w i l l c o n t i n u e t o be supported by the search f o r p r o d u c t i v i t y and l a b o r s a v i n g improvements and by the r e c e n t c u t i n c o r p o r a t e income tax "Japan's smokestack f i r e - s a l e " ; The Economist; The Economist Newspaper L t d , London; 19-25 August, 1989; p.51-52. "The Japanese Economy"; NRI Q u a r t e r l y Review V o l 19 No.2; Nomura Research I n s t i t u t e , Tokyo; May 1989; p.6. Page 154 - r a t e s . However, the e x p e c t a t i o n i s t h a t the c u r r e n t spending boom w i l l g r a d u a l l y slow down. MITI has a l r e a d y suggested t h a t c a r makers reduce t h e i r investment p l a n s because of p o t e n t i a l over- c a p a c i t y ( 1 5 4) . F i n a l l y , the h i g h e r l e v e l s o f c o r p o r a t e savings w i l l mean h i g h e r e q u i t y shares i n f u t u r e c a p i t a l investments, w i t h a c o r r e s p o n d i n g r e d u c t i o n o f demand on the household savings s u r p l u s e s . 9.1.1.5. Summary o f P r i v a t e S e c t o r B a l a n c e In summary, the P r i v a t e S e c t o r balance can be expected t o co n t i n u e i n s t r o n g s u r p l u s f o r a t l e a s t the next few ye a r s . Household s a v i n g s , d e s p i t e government encouragement t o i n c r e a s e domestic demand, i s not l i k e l y t o decrease s i g n i f i c a n t l y . R e s i d e n t i a l c o n s t r u c t i o n , w i t h pent-up demand t e n d i n g t o be o f f - s e t by h i g h p r i c e s , should remain a t , or near c u r r e n t l e v e l s . There i s a good chance t h a t the t r e n d towards s t r o n g e r p r o f i t s and h i g h e r c o r p o r a t e s a v i n g s w i l l c o n t i n u e . On the o t h e r hand, c o r p o r a t e investments can be expected t o remain s t a b l e , o r g r a d u a l l y d e c l i n e . Much o f the investments which w i l l be made w i l l be i n the area o f improved e f f i c i e n c i e s , which w i l l tend t o support p r o f i t s and c o r p o r a t e l i q u i d i t y . "MITI t o warn carmakers t o go slow"; The Japan Times; Tokyo; August 17, 1989; p.12. - Page 155 - 9.1.2. Government S e c t o r As noted i n s e c t i o n 6.2, the l a t t e r h a l f of the 1970s and e a r l y 1980s e i g h t i e s were c h a r a c t e r i z e d by l a r g e government d e f i c i t s which soaked-up much of the p r i v a t e s e c t o r s u r p l u s e s . S i n c e 1978, the government has implemented f i s c a l a u s t e r i t y measures designed t o a c h i e v e f i s c a l b alance. In the medium term, the most important concerns about Japanese f i s c a l p o l i c y w i l l be the e x t e n t t o which e x p e n d i t u r e s are c o n t r o l l e d , income c o l l e c t i o n improved, and borrowing s t r a t e g y r a t i o n a l i z e d . 9.1.2.1. E x p e n d i t u r e s Given the s t r o n g performance of the Japanese economy, the use o f p u b l i c works spending as a s t i m u l a n t can be expected t o d e c l i n e over the near and l o n g e r term p e r i o d s . Conversely, t h e r e w i l l be a g r a d u a l i n c r e a s e i n spending on s o c i a l w e l f a r e due t o expanded p a r t i c i p a t i o n i n the program of r e t i r e m e n t b e n e f i t s and the need f o r ongoing improvements t o the system. The net e f f e c t should be g r a d u a l and c o n t r o l l e d i n c r e a s e s i n government expenditure, a t growth r a t e s w e l l below those of the p r i v a t e s e c t o r . 9.1.2.2. Income The government income i n Japan has l o n g been plagued w i t h an i n e q u i t a b l e and i n e f f i c i e n t system of tax c o l l e c t i o n . P e r sonal income t a x burdens have been most u n f a i r l y d i s t r i b u t e d , w i t h wage ea r n e r s b e a r i n g a d i s p r o p o r t i o n a t e share of the payments made. - Page 156 - Small b u s i n e s s e s , p r o f e s s i o n a l people and, e s p e c i a l l y , farmers have • • • • 155 not p a i d t h e i r f a i r share because o f income concealment ( ). The 3% consumption tax, i n t r o d u c e d i n A p r i l was i n tended t o be e v a s i o n - p r o o f and t o r a i s e about 10 p e r c e n t o f the r e q u i r e d government budget. P u b l i c o p i n i o n has been s t r o n g l y opposed t o the tax and, g i v e n the r e c e n t d i f f i c u l t i e s o f the LDP p a r t y , i t i s not c l e a r how s t r o n g l y the K a i f u a d m i n i s t r a t i o n w i l l m a i n t a i n the tax's i n t e g r i t y . I f the t a x i s maintained i n i t s p r e s e n t broad form, the government's p r o g r e s s towards a balanced budget should be maintained. In the a l t e r n a t i v e , the government w i l l have t o f i n d o t h e r sources of income or f a c e growing d e f i c i t s . A l l i n d i c a t i o n s , e s p e c i a l l y the r e a c t i o n s of the M i n i s t r y of Finance and Keidanren (the l e a d i n g b u s i n e s s a s s o c i a t i o n ) , suggest t h a t the government w i l l d i s p l a y r e s o l v e i n t h i s matter. In terms o f the mechanics o f r a i s i n g debt funds, the government w i l l move away from longterm bonds towards i n c r e a s e d i s s u e s of t r e a s u r y and f i n a n c i a l b i l l s . T h i s w i l l reduce the problems now b e i n g encountered as l a r g e amounts of 10-year bonds f a l l due and, a t the same time, h e l p t o s a t i s f y f o r e i g n demands t h a t Japan's c a p i t a l markets be f u r t h e r developed. " D e f i c i t - r i d d e n Japan caught between t a x r e v o l t and demographics"; Globe and M a i l ; Toronto; August 22, 1989; p. B7. - Page 157 - 9.1.2.3. Summary o f Government S e c t o r B a l a n c e Based on the a v a i l a b l e evidence, the most prob a b l e s c e n a r i o f o r the Government S e c t o r balance i s one o f g r a d u a l i n c r e a s e s i n e x p e n d i t u r e , l a r g e l y i n the area of s o c i a l s e r v i c e s , and c o n t i n u i n g attempts t o improve the f a i r n e s s and e f f i c i e n c y of the tax c o l l e c t i o n system. The government w i l l move towards a b e t t e r b a l a n c e o f f i n a n c i n g instruments r a t h e r than the p r e v i o u s c o n c e n t r a t i o n on longterm bonds. O v e r a l l , the government posture i s l i k e l y t o be one of f i s c a l r e s p o n s i b i l i t y and an o b j e c t i v e of b a l anced budgets. Thus, i t i s not l i k e l y t h a t the government s e c t o r w i l l resume i t s former r o l e of a b s o r b i n g a l a r g e p a r t of the p r i v a t e s e c t o r s u r p l u s . 9.1.3. Summary o f Macroeconomic B a l a n c e In terms o f the a v a i l a b i l i t y of i n t e r n a l l y generated funds f o r Japanese f o r e i g n investment, the macroeconomic i d e n t i t y i d e n t i f i e s the supply s i d e as being the sum o f the p r i v a t e s e c t o r and government s e c t o r b a l a n c e s . The p r e c e d i n g d i s c u s s i o n suggests t h a t n e i t h e r o f t h e s e b a l a n c e s i s l i k e l y t o e x p e r i e n c e s u f f i c i e n t change t o m a t e r i a l l y a f f e c t t h e a v a i l a b i l i t y o f funds f o r o v e r s e a s i n v e s t m e n t s . Household s a v i n g s , the primary source of s u r p l u s funds, i s not expected t o d i m i n i s h t o any g r e a t extent. R e s i d e n t i a l c o n s t r u c t i o n w i l l remain f a i r l y c o n s t a n t , w i t h a p r o b a b i l i t y o f s l i g h t d e c l i n e s from the 1987 peak. In the c o r p o r a t e s e c t o r , a number of f a c t o r s p o i n t t o s t r o n g p r o f i t - Page 158 - performances, w i t h a consequent improvement i n r e t a i n e d earnings and c o r p o r a t e l i q u i d i t y . Corporate investments should remain buoyant, but i t i s improbable t h a t the c o r p o r a t e s e c t o r balance w i l l d e t e r i o r a t e . In the government s e c t o r , modest i n c r e a s e s i n s o c i a l s e r v i c e s e x p e n d i t u r e s should be o f f s e t by improvements i n the t a x c o l l e c t i o n systems, e s p e c i a l l y w i t h the i n t r o d u c t i o n of the v i s i b l e and u n a v o i d a b l e consumption ta x . 9.1.4. O t h e r F a c t o r s In a d d i t i o n t o the macroeconomic c o n s i d e r a t i o n s , a number of u n d e r l y i n g determinants w i l l impact on the a v a i l a b i l i t y of funds f o r f o r e i g n investment. These f a c t o r s i n c l u d e : a. the h i g h p r i c e s of Japanese r e a l e s t a t e ; b. the huge c a p i t a l e arnings which have accrued from stock market a p p r e c i a t i o n s ; and, c. the e a r n i n g s of o f f - s h o r e investments. 9.1.4.1. R e a l E s t a t e M arket The u n p a r a l l e l e d a p p r e c i a t i o n of Japanese r e a l e s t a t e d u r i n g the p a s t few y e a r s has been e x t e n s i v e l y d i s c u s s e d i n p r i o r s e c t i o n s . T h i s expanded, and un-measured, base o f c o l l a t e r a l a v a i l a b l e t o Japanese i n v e s t o r s has been a s i g n i f i c a n t f a c i l i t a t o r of Japanese f o r e i g n investment i n the p a s t couple of y e a r s . The c o n t i n u i n g Page 159 - d i s p a r i t y between f o r e i g n ( e s p e c i a l l y , North American) and Japanese r e a l e s t a t e p r i c e s and i n t e r e s t r a t e s i s l i k e l y t o encourage more Japanese f o r e i g n investment, both i n f i x e d a s s e t s and i n t e r e s t e a r n i n g s e c u r i t i e s . 9.1.4.2. S t o c k Market E a r n i n g s Very l a r g e p r o f i t s have been earned on the Tokyo Stock Exchange i n r e c e n t y e a r s , w i t h the weighted average s t o c k p r i c e i n the F i r s t S e c t i o n r i s i n g from 528.67 yen i n 1984 t o 1,333.72 yen i n 1988. I t seems prob a b l e t h a t Japanese i n v e s t o r s have used a t l e a s t some of the g a i n s earned on the Tokyo Exchange t o buy more modestly p r i c e d , h i g h e r r e t u r n s t o c k s i n f o r e i g n c o u n t r i e s . 9.1.4.3. O f f - S h o r e E a r n i n g s The l a r g e , and growing, i n v e n t o r y o f d i r e c t f o r e i g n investment a s s e t s owned by Japanese i n v e s t o r s w i l l earn i n c r e a s i n g amounts of p r o f i t s . These p r o f i t s (as w i l l be d i s c u s s e d below) w i l l , i f r e p a t r i a t e d , reduce the s e r v i c e s d e f i c i t o f Japan's Current Account balance, thus p r o v i d i n g an e q u i v a l e n t o f f - s e t t o any decrease which might occur i n the country's Merchandise Trade. To the e x t e n t t h a t these e a r n i n g s are not r e p a t r i a t e d , they w i l l p r o v i d e funds f o r Japanese f o r e i g n investment which are not accounted f o r by the macroeconomic i d e n t i t y . C l e a r l y , s hould Japanese FDI c o n t i n u e a t c u r r e n t r a t e s , a p o i n t c o u l d be reached where the investments are s e l f - s u s t a i n i n g . - Page 160 - 9.2. THE REQUIREMENTS OF THE CURRENT ACCOUNT BALANCE As d i s c u s s e d i n s e c t i o n 5.0, any s u r p l u s i n the domestic economy, i . e . , the sum of the p r i v a t e and government s e c t o r s , must be balanced by a c u r r e n t account s u r p l u s . Under the macroeconomic concept o f Balance of Payments (BOP), the v a l u e o f what l e a v e s the cou n t r y must equal the v a l u e of what e n t e r s the country. Thus any c u r r e n t account s u r p l u s must be balanced by an equal d e f i c i t i n the c a p i t a l account. The c a p i t a l account i s composed of l o n g and s h o r t term f o r e i g n investment, government and p r i v a t e monetary flows p l u s e r r o r s and omissions. As d i s c u s s e d e a r l i e r , we can, f o r the purposes of t h i s d i s c u s s i o n t h i n k o f the c a p i t a l account as the ou t f l o w o f l o n g and s h o r t term investments. The c u r r e n t account s u r p l u s of the BOP i s composed of the Merchandise Trade Balance (MTB) and the S e r v i c e s S e c t o r Balance (SSB) . In the case of Japan, r e c e n t MTBs have been h e a v i l y i n s u r p l u s ; w h i l e SSBs have been i n d e f i c i t . The SSB d e f i c i t e x h i b i t e d a s i g n i f i c a n t i n c r e a s e i n 1988 as a r e s u l t o f g r e a t l y expanded f o r e i g n t r a v e l e xpenditures by the Japanese. Apart from t h i s i n c r e a s e i n f o r e i g n t r a v e l , the SSB d e f i c i t has been d e c l i n i n g i n r e c e n t y e a r s as f o r e i g n e a r n i n g s grew. These e a r n i n g s c o u l d be r e t u r n s on s h o r t term or p o r t f o l i o investments, o r they c o u l d r e f l e c t p r o f i t s earned by f o r e i g n d i r e c t investment a s s e t s . The former type o f e a r n i n g s are l i k e l y t o be r e p a t r i a t e d t o Japan. However, the FDI p r o f i t s may be, and o f t e n are, r e t a i n e d o f f - s h o r e t o expand t h e c a p i t a l base o f the company t h a t produced them, or - Page 161 - t o fund o t h e r f o r e i g n d i r e c t investments. The matter o f r e p a t r i a t e d e a r n i n g s may assume some importance i n Japan's f u t u r e Balance of Payments s t r a t e g i e s . As they grow, such e a r n i n g s may reach a l e v e l whereby Japan can s a t i s f y the wishes of i t s t r a d i n g p a r t n e r s f o r reduced MTB, w h i l e s t i l l r e t a i n i n g a h e a l t h y Current Account Balance because of s u r p l u s S e r v i c e S e c t o r b a l a n c e s . T h i s t r e n d , which i s a l r e a d y underway, w i l l a l l o w Japan t o u t i l i z e i t s c u r r e n t MTB s u r p l u s e s as the " T r o j a n Horse" by which Japanese companies are i n v i t e d t o compete i n the "home" markets of Japan's t r a d i n g p a r t n e r s . 9.3. THE ALLOCATION PRIORITIES OF FOREIGN INVESTMENT FUNDS The a l l o c a t i o n of f o r e i g n investment funds i s fundamentally concerned w i t h net longterm investments. Short term investments c y c l e r a p i d l y and the measurement of the net l e v e l s of such investment are o f l i m i t e d v a l u e . Thus, should any a l l o c a t i o n procedure be r e q u i r e d , i t must s e l e c t between FPI and FDI. The m e r i t of FPI may be judged s o l e l y on the b a s i s o f d i v i d e n d or i n t e r e s t r e t u r n s , w h i l e the m e r i t of FDI r e q u i r e s assessment of a broader range of r e t u r n s . In c o n s i d e r i n g the impact of any a l l o c a t i o n p r o c e s s on e i t h e r type o f longterm investment, i t i s important t o c o n s i d e r the r e l a t i v e s i z e s of the two demands f o r funds. Large amounts of FPI are a phenomenon o f the post-1984 p e r i o d . P r i o r t o 1984, net FPI was o f t e n i n d e f i c i t and seldom exceeded NFDI. However, s i n c e - Page 162 - 1984, FPI has dominated net Japanese f o r e i g n investment and i n 1988 amounted t o about 72% of the t o t a l net longterm investment outflow. Of the US$89 b i l l i o n o f NFPI i n 1988, o n l y US$3 b i l l i o n , o r 3.4%, was a s s o c i a t e d w i t h the purchase of s t o c k s . In terms of t o t a l 1988 purchases, s t o c k s accounted f o r o n l y US$76.6 b i l l i o n , o r 5.3% of the US$1,440.6 b i l l i o n o f t o t a l FPI purchases. Thus, about 70% of a l l t h e 1988 net longterm f o r e i g n investment was a s s o c i a t e d w i t h the purchase of bonds; l a r g e l y i n the U.S.A., and e n t i r e l y m o tivated by the a n t i c i p a t i o n s of h i g h e r r e t u r n s . Performance- r e l a t e d f o r e i g n p o r t f o l i o investments were r e s t r i c t e d t o about 2.5% of t o t a l net longterm investment i n the s t o c k s of f o r e i g n companies and about 28% o f t o t a l net longterm f o r e i g n investment i n the d i r e c t a c q u i s i t i o n o f c o n t r o l , or i n f l u e n c i n g , p o s i t i o n s i n f o r e i g n companies. 9.3.1. The A l l o c a t i o n o f Funds t o D i r e c t F o r e i g n Investment There are f i v e p r i n c i p a l types o f c o n s i d e r a t i o n s which cause funds t o be a l l o c a t e d t o f o r e i g n d i r e c t investment, namely: a. the comparative r e t u r n s on f o r e i g n and Japanese a s s e t s ; b. the comparative p r o d u c t i o n c o s t s of f o r e i g n and Japanese p l a n t l o c a t i o n s ; c. t r a d e f r i c t i o n s and b a r r i e r s t o market e n t r y ; - Page 163 - d. the procurement of r e s o u r c e s which are not a v a i l a b l e i n Japan and f o r which d i r e c t investment o f f e r s advantages o f supply, s e c u r i t y , o r c o s t ; and, e. s t r a t e g i c p l a n n i n g o b j e c t i v e s . 9.3.1.1. Comparative Returns In a number of areas the c o s t of comparable a s s e t s i s v e r y much h i g h e r i n Japan than i t i s i n o t h e r c o u n t r i e s , such as the U.S.A. Comparative r e a l e s t a t e p r i c e s are a good example of t h i s s i t u a t i o n . Japanese i n v e s t o r s are buying f o r e i g n r e a l e s t a t e , e s p e c i a l l y i n North America, because p r i c e s are lower and r e t u r n s v e r y much h i g h e r . The h i g h e r r e t u r n s are p a r t i c u l a r l y a t t r a c t i v e when combined w i t h the lower i n t e r e s t r a t e s o f f e r e d by Japanese f i n a n c i a l i n s t i t u t i o n s , o f t e n w i t h Japanese r e a l e s t a t e h o l d i n g s b e i n g used as c o l l a t e r a l . I n d i v i d u a l Japanese are a l s o f i n d i n g f o r e i g n r e a l e s t a t e t o be v e r y c a p t i v a t i n g . I t was r e c e n t l y r e p o r t e d t h a t wealthy Japanese buyers have s h i f t e d t h e i r t a r g e t s from Hawaii t o southern C a l i f o r n i a , where they are buying showcase homes which c o s t $4 m i l l i o n , o r more, each ( 1 5 6) . The c u r r e n t advantages of o f f - s h o r e a s s e t purchases should p e r s i s t . There are no i n d i c a t i o n s of dramatic r e v e r s a l s i n the Japanese economy, the v a l u e of the yen, or the c o s t o f r e a l e s t a t e i n Japan. Japan Times; Tokyo; August 16, 1989;p.10 - Page 164 - 9.3.1.2. Comparative P r o d u c t i o n Costs This has been one of the c l a s s i c a l j u s t i f i c a t i o n s for foreign d i r e c t investment. In the past, t h i s rationale was used to j u s t i f y the r e l o c a t i o n of labor intensive, modest technology production to low wage areas. More recently, the rapid appreciation of the yen brought dollar-terms wages i n Japan to the North American l e v e l s . This, together with the high cost of other factor inputs, such as energy and land, was thought to make a number of industries (even i n more advanced technology sectors) non-competitive and force the re l o c a t i o n of much of Japan's manufacturing capacity. This so- c a l l e d "hollowing-out" process impacted a wide range of production, from chop-sticks to automobiles. In r e a l i t y , actual experience has been somewhat d i f f e r e n t than the f i r s t gloomy predictions. Many industries have indeed become non-competitive and have re-located. On the other hand, other industries have made very substantial gains i n productivity which have more than o f f - s e t the currency appreciation. Perhaps the best example of t h i s l a t t e r s i t u a t i o n i s the automobile industry. I t has been reported that the Japanese automobile manufacturers could now remain competitive even i f the yen appreciated to a l e v e l of 95 yen to the U.S. d o l l a r . P r o f i t s i n the industry have been at record l e v e l s i n the past couple of years and the companies have enormous reserves of l i q u i d assets. Toyota i s reputed to be holding U.S.$12 b i l l i o n i n such assets. - Page 165 - O v e r a l l , Japan has a l r e a d y shed much o f i t s l a b o r and energy i n t e n s i v e i n d u s t r y . Heavy i n d u s t r i e s such as s h i p - b u i l d i n g and steel - m a k i n g have reduced c a p a c i t y and sought d i v e r s i f i c a t i o n both i n terms o f product and overseas investment. I t i s reasonable t o b e l i e v e t h a t , i n the absence o f any f u r t h e r major changes i n in p u t c o s t s , the surge o f comparative c o s t d r i v e n r e l o c a t i o n spawned by the yen a p p r e c i a t i o n i s over. Comparative c o s t c o n s i d e r a t i o n s w i l l c o n t i n u e t o motivate some r e l o c a t i o n , but i t i s l i k e l y t o be on a g r a d u a l b a s i s . F u r t h e r , the planned c o n c e n t r a t i o n on advanced t e c h n o l o g y and knowledge i n t e n s i v e i n d u s t r i e s w i l l tend t o reduce the problem o f comparative i n p u t c o s t s . 9.3.1.3. Trade F r i c t i o n s and B a r r i e r s t o Mar k e t e n t r y Again, t h i s has been one of the c l a s s i c a l reasons f o r f o r e i g n d i r e c t investment. As b a r r i e r s t o t r a d e a re r a i s e d , o r threate n e d , Japanese companies have r e l o c a t e d p l a n t s i n t h e i r major market c o u n t r i e s . The p r o d u c t i o n o f t e l e v i s i o n s e t s and automobiles i n North America and Europe are p r i n c i p a l examples o f FDI motivated by t h i s c o n s i d e r a t i o n . The r e c e n t spate o f p l a n t development i n North America by the Japanese automobile manufacturers was w i d e l y p e r c e i v e d as a means of a v o i d i n g l e g i s l a t e d b a r r i e r s a g a i n s t Japanese imports. At the time of the investment d e c i s i o n s , the impact of yen a p p r e c i a t i o n was a l s o a s i g n i f i c a n t c o n s i d e r a t i o n but, as d i s c u s s e d above, t h i s - Page 166 - f a c t o r i s p r o b a b l y o f l e s s importance today. As w i l l be d i s c u s s e d below, i t now appears t h a t s t r a t e g i c c o n s i d e r a t i o n s were a l s o i n s t r u m e n t a l i n the c a r makers' d e c i s i o n s . The i n f l u e n c e of t r a d e f r i c t i o n s on the Japanese FDI d e c i s i o n making p r o c e s s i s l i k e l y t o s t r e n g t h e n i n the f u t u r e . Due t o the success o f the e f f i c i e n c y enhancement programs, s t a b i l i z a t i o n of the yen and s t r o n g n o n - p r i c e c o m p e t i t i v e n e s s , Japanese e x p o r t s are p r o j e c t e d t o i n c r e a s e by 11% i n d o l l a r terms, d u r i n g f i s c a l 1989 ( 1 5 7) . Although imports have s u b s t a n t i a l l y i n c r e a s e d , the t r a d e s u r p l u s f o r f i s c a l 1989 i s expected t o amount t o about U.S.$97.3 b i l l i o n , and the c u r r e n t account s u r p l u s t o about U.S.$77.5 b i l l i o n . These c o n t i n u i n g s u r p l u s e s w i l l l e n d f u r t h e r support t o the p r o t e c t i o n i s t groups i n the U n i t e d S t a t e s and Europe. 9.3.1.4. Procurement o f Resources T h i s c o n s i d e r a t i o n was the m o t i v a t i o n f o r investments i n i r o n , c o a l and n o n - f e r r o u s metals b e f o r e 1973; i n o i l and l i q u e f i e d n a t u r a l gas a f t e r 1973; and, c u r r e n t l y , i n p u l p p r o d u c t i o n i n Canada. In r e c e n t y e a r s , t h i s m o t i v a t i o n has a l s o been expressed by FDI aimed a t the a c q u i s i t i o n o f technology and knowledge r e l a t e d r e s o u r c e s . Japanese investment i n American software companies i l l u s t r a t e t h i s approach. Even more r e c e n t l y , Japanese companies are f u n d i n g r e s e a r c h c e n t r e s which are l o c a t e d on, o r c l o s e t o , 'The Japanese Economy"; NRI Q u a r t e r l y Review, Vol.19 No.2; Nomura Research I n s t i t u t e ; Tokyo; May 1989; p.19 - Page 167 - American u n i v e r s i t y campuses such as the U n i v e r s i t y o f C a l i f o r n i a a t I r v i n e and P r i n c e t o n ( 1 5 8) . T h i s use o f f i n a n c i a l power t o a c q u i r e , c o n t r o l , or monitor technology r e s e a r c h and development i s l i k e l y t o p l a y an i n c r e a s i n g r o l e i n f u t u r e Japanese FDI p l a n n i n g . 9.3.1.5. Longterm s t r a t e g i c P l a n s T h i s f a c t o r i s becoming i n c r e a s i n g l y important i n the FDI d e c i s i o n making of Japanese companies; e s p e c i a l l y the l a r g e companies which i n t e n d t o expand t h e i r t r a n s - n a t i o n a l i n f l u e n c e and o p e r a t i o n s . There are s t r o n g i n d i c a t i o n s t h a t l a r g e Japanese companies are moving away from the d e f e n s i v e , r e a c t i v e f o r e i g n d i r e c t investment d e c i s i o n s of the p a s t towards o f f e n s i v e , overseas development s t r a t e g i e s . Banking and f i n a n c i a l s e r v i c e s , automobiles, steel-making and advanced e l e c t r o n i c s appear t o be t a r g e t s e c t o r s f o r the Japanese companies. A l l f i v e major s t e e l p roducers i n Japan, i n c o n c e r t w i t h d i v e r s i f i c a t i o n and r a t i o n a l i z a t i o n o f domestic p r o d u c t i o n c a p a c i t y , have e s t a b l i s h e d j o i n t v e n t u r e o p e r a t i o n s w i t h s t e e l companies w i t h i n the U.S.A. These j o i n t v e n t u r e s , which i n v o l v e both f i n a n c i a l and t e c h n i c a l i n p u t s from Japan, w i l l m i t i g a t e complaints a g a i n s t Japanese imports and e s t a b l i s h a Japanese presence i n the i n t e r n a l s t e e l i n d u s t r y and market of America. "Advanced Bio C l a s s ? That's Over i n H i t a c h i H a l l " ; B usiness Week; New York; August 7, 1989; p.73. - Page 168 - The major Japanese banks, which are the 10 l a r g e s t banks i n the world, have embarked on a program of FDI which i s intended t o e s t a b l i s h t h e i r pre-eminence as g l o b a l f i n a n c i a l i n s t i t u t i o n s . I t has been r e p o r t e d t h a t Japanese i n t e r e s t s now c o n t r o l more than 25% of C a l i f o r n i a ' s banking a s s e t s ( 1 5 9) . In another development, the V i c t o r Company o f Japan (JVC) has i n v e s t e d U.S.$100 m i l l i o n i n a Hollywood based f i l m making j o i n t v e n t u r e . T h i s investment c o u l d s a t i s f y a number o f requirements f o r JVC. I t should be p r o f i t a b l e ; i t w i l l secure a source of f i l m s f o r i t s domestic (Japan) v i d e o c a s s e t t e d i s t r i b u t i o n system; and, above a l l , i t p r o v i d e s JVC w i t h a "window" on the f i l m making c e n t r e o f the world and a base from which i t c o u l d use f i n a n c i a l power t o e s t a b l i s h a major p o s i t i o n i n a g l o b a l , l u c r a t i v e s e r v i c e i n d u s t r y . Sony, which i s JVC's b i g g e s t c o mpetitor i n the v i d e o c a s s e t t e market, bought CBS's r e c o r d d i v i s i o n i n 1987 and i s r e p o r t e d t o be shopping f o r a f i l m s t u d i o . I t i s i n t e r e s t i n g t o s p e c u l a t e t h a t the two Japanese entertainment g i a n t s may f i g h t t h e i r f u t u r e s t r a t e g i c b a t t l e s through American s u b s i d i a r y p r o x i e s . F i n a l l y , the Japanese automakers have e s t a b l i s h e d , o r are b u i l d i n g , 10 p l a n t s i n North America which w i l l have a combined 1994 c a p a c i t y o f over 2.3 m i l l i o n u n i t s per year. In 1989, Japanese p l a n t s w i l l produce about 14.7% o f the North American output. I t i s d i f f i c u l t t o judge whether t h i s Japanese presence i n the North American automobile market i s the r e s u l t o f a s e r i e s Japan Times; Tokyo; August 16, 1989; p.7. - Page 169 - o f ad hoc responses t o American government and union p r e s s u r e s , or i f i t r e f l e c t s a s e t of c a r e f u l l y o r c h e s t r a t e d , s t r a t e g i c p l a n s t o compete w i t h the American automobile companies on t h e i r own ground. The l a t t e r seems t o be the more l o g i c a l c o n c l u s i o n . Toyota e t a l . have f i r m l y e s t a b l i s h e d themselves, a t the i n v i t a t i o n o f the hos t c o u n t r i e s , i n the l a r g e s t automobile market i n the world; and i t has been suggested t h a t every t h r e e c a r s produced i n t h e i r p l a n t s w i l l d i s p l a c e one import and two D e t r o i t c a r s ( 1 6°). 9.3.2. A l l o c a t i o n o f Funds t o F o r e i g n P o r t f o l i o Investment As p r e v i o u s l y s t a t e d , FPI d e c i s i o n s a re based e n t i r e l y on assessments o f the v a r i o u s r e t u r n s o p t i o n s a v a i l a b l e t o the i n v e s t o r s . These assessment take i n t o c o n s i d e r a t i o n the s e c u r i t y o f the investment, the cu r r e n c y exchange r i s k s i n v o l v e d , and the a n t i c i p a t e d , o r d e f i n e d , net r e t u r n . A n a l y s i s o f Japanese investments i n the r e c e n t p a s t c l e a r l y i n d i c a t e s t h a t the p r e f e r e n c e i s f o r low r i s k instruments (bonds), i n a secure host c o u n t r y (e.g., the U.S.A.) where the i n t e r e s t r a t e s a re h i g h and the y e n / d o l l a r r e l a t i o n s h i p i s deemed t o now be r e l a t i v e l y s t a b l e . T h i s t r e n d can be expected t o co n t i n u e . "Shaking Up D e t r o i t " ; Business Week; N.York; August 14, 1989; p.74. - Page 170 9.3.3. A l l o c a t i o n s i n a Competing Environment Given the c u r r e n t p r o j e c t i o n s as t o f u t u r e economic growth i n Japan and the c o u n t r y ' s t r a d e balance, i t appears u n l i k e l y , from a macroeconomic p e r s p e c t i v e , t h a t t h e r e w i l l be r e s t r i c t i o n s of FDI due t o shortages of investment funds. Should the a v a i l a b i l i t y o f investment funds decrease, however, i t i s p r o b a b l e t h a t the r e d u c t i o n would impact FPI, r a t h e r than FDI. The r a t i o n a l e f o r t h i s judgement i s based on f o u r p o i n t s , namely: 1. The volume of FDI i s o n l y a f r a c t i o n o f the t o t a l net f o r e i g n investment. 2. The aggregate of a l l r e t u r n c o n s i d e r a t i o n s ( i . e . , f i n a n c i a l , s t r a t e g i c and p o l i t i c a l ) r e l a t i n g t o a f o r e i g n d i r e c t investment should be c o m p e t i t i v e w i t h bond i n t e r e s t r a t e s . 3. Pre-1984 experience i n d i c a t e d t h a t FDI was the dominant o f f - s h o r e investment p r o c e s s ; NFPI grew o n l y because o f the l a r g e s u r p l u s e s i n the Japanese economy; and, 4. Much o f the Japanese FPI i s c o n t r o l l e d by the country's l a r g e l i f e and g e n e r a l i n s u r a n c e companies which - Page 171 - u s u a l l y have c l o s e k e i r e t s u a f f i l i a t i o n s w i t h the l a r g e companies which w i l l make most o f the FDI investments. To summarize, i t i s u n l i k e l y t h a t t h e r e w i l l be any s i g n i f i c a n t r e d u c t i o n i n the funds a v a i l a b l e f o r Japanese f o r e i g n investment i n g e n e r a l . In the u n l i k e l y event t h a t such a r e d u c t i o n does occur, i t would not be r e f l e c t e d i n an e q u i v a l e n t r e d u c t i o n i n the funds a v a i l a b l e f o r Japanese FDI. 9.4. ACCEPTABILITY The p r e c e d i n g d i s c u s s i o n i n t h i s s e c t i o n has determined t h a t Japanese f o r e i g n d i r e c t investment i s u n l i k e l y t o be impeded by e i t h e r macroeconomic c o n s i d e r a t i o n s , o r by p r e f e r e n t i a l a l l o c a t i o n o f f o r e i g n investment r e s o u r c e s t o o t h e r t y pes o f f o r e i g n investment. I t has a l s o been concluded t h a t FDI w i l l c o n t i n u e t o be an a t t r a c t i v e o p t i o n f o r Japanese companies; indeed, t h a t i t has become, and w i l l c o n t i n u e t o be, a c e n t r a l instrument i n the s t r a t e g i c approach o f many l a r g e companies as they move towards f u l l t r a n s - n a t i o n a l s t a t u s . The remaining q u e s t i o n i s : w i l l t he ho s t c o u n t r i e s and communities c o n t i n u e t o welcome Japanese FDI? The answer t o t h i s q u e s t i o n i s both complex and u n c e r t a i n . I t may be re-phrased as two q u e s t i o n s : w i l l t h e r e be l e g i s l a t e d o p p o s i t i o n t o Japanese FDI? w i l l t h e r e be u n - o f f i c i a l r e s i s t a n c e t o Japanese FDI? - Page 172 - L e g i s l a t e d o p p o s i t i o n t o Japanese investment i s , w i t h i n the North American and European context, l i k e l y t o be r e s t r i c t e d t o s p e c i f i c s e c t o r s . Examples o f such i n t e r v e n t i o n i n c l u d e d efense- s e n s i t i v e i n d u s t r i e s (e.g., the review of F u j i t s u ' s a c q u i s i t i o n of F a i r c h i l d ) , t r a n s p o r t a t i o n ( u s u a l l y s u b j e c t t o l i m i t a t i o n s f o r any f o r e i g n buyer) and, p o s s i b l y , r e s t r i c t i o n s on r e a l e s t a t e h o l d i n g s by n o n - r e s i d e n t s (e.g. Nebraska's law a g a i n s t f o r e i g n ownership of f armland). However, i n most cases, the host c o u n t r y ' s espousal of market-place economics, r e g i o n a l c o m p e t i t i o n f o r j o b - c r e a t i n g investments and the exposure of i t s own i n v e s t o r s t o s i m i l a r r e s t r i c t i o n i n o t h e r c o u n t r i e s , w i l l tend t o a c t as a brake on such d i r e c t l e g i s l a t i o n . N o n - l e g i s l a t e d o p p o s i t i o n t o Japanese FDI i s a broader t o p i c . C l e a r l y , as the i n c r e a s i n g presence of Japanese companies c o u l d r e s u l t i n an e s c a l a t i o n of anti-Japanese sentiment. A g r e a t d e a l w i l l depend on the c o r p o r a t e and community p r a c t i c e s of the Japanese operated companies. To a l a r g e e x t e n t , t h i s problem i s an i n t e g r a l p a r t o f the l a r g e r i s s u e of how Japanese companies w i l l accommodate t o the new r o l e s of t r u e m u l t i - n a t i o n a l c o r p o r a t i o n s . T h i s accommodation w i l l have t o address the c u r r e n t c e n t r a l i z a t i o n o f a u t h o r i t y i n the Japan head o f f i c e s , o r i n the hands of o f f i c i a l s despatched from such head o f f i c e s . The problems a s s o c i a t e d w i t h t h i s adjustment are v e r y complex and w i l l be d i f f i c u l t o f s o l u t i o n . Nonetheless, s o l u t i o n s w i l l have t o be found i f Japanese companies are t o adopt m u l t i - n a t i o n a l i s m and be - Page 173 - accepted i n the ho s t c o u n t r i e s . To-date the s c o r e c a r d i s mixed. In terms o f employee r e l a t i o n s , most Japanese f i r m s have done an e x c e l l e n t j o b . They have, as i n Japan, made g r e a t e f f o r t s t o persuade employees t h a t they have common i n t e r e s t w i t h the company. Most Japanese companies i n Europe and North America appear t o have e s t a b l i s h e d v e r y good employee r e l a t i o n s ; the r e c e n t d e f e a t o f the UAW's attempt t o o r g a n i z e the N i s s a n p l a n t i n Smyrna, Tennessee a t t e s t t o t h i s . On the o t h e r hand, the t a x exemptions and o u t r i g h t g r a n t s e x t r a c t e d by the Japanese automakers have generated s i g n i f i c a n t adverse r e a c t i o n a t both the community and s t a t e l e v e l s i n the U n i t e d S t a t e s . Unions g e n e r a l l y r e s e n t the n o n - e x i s t e n t , o r reduced i n f l u e n c e , r o l e s they p l a y i n Japanese-run auto p l a n t s . S i m i l a r l y , l o c a l p a r t s manufacturers c l e a r l y d i s l i k e the tendency o f the Japanese companies t o i n v i t e Japanese p a r t s s u p p l i e r s t o e s t a b l i s h p l a n t s i n c l o s e p r o x i m i t y t o the automobile p l a n t and then t o favo u r such companies i n t h e i r procurement p o l i c i e s . The p r i n c i p a l b a t t l e g r o u n d on which t h i s i s s u e o f Japanese FDI a c c e p t a b i l i t y w i l l be fought i s , o f course, the U n i t e d S t a t e s . Xenophobic f o r c e s a re a t work i n the U.S.A., and the country's l o n g - h e l d "open-market" p r i n c i p l e s are under a t t a c k . The f a c t s are perhaps not as bad as some of the " r e v i s i o n i s t s " have l e d the American p u b l i c t o b e l i e v e . In 1988, accumulated f o r e i g n d i r e c t investment i n the U.S.A. ($329 b i l l i o n ) d i d surpass accumulated American d i r e c t investment i n ot h e r c o u n t r i e s ($327 b i l l i o n ) . Page 174 However, s i n c e these investments were s t a t e d a t c o s t , the e v a l u a t i o n was weighted towards r e c e n t purchases i n the U.S.A. by f o r e i g n e r s , as compared t o p a s t investments by American buyers of f o r e i g n a s s e t s . F u r t h e r , i t should be noted t h a t , d e s p i t e the r e c e n t buying spree, f o r e i g n e r s o n l y own about 3% o f t o t a l American a s s e t s (which i s much l e s s than i n many European c o u n t r i e s ) and l e s s than 1% of American r e a l e s t a t e . Among the f o r e i g n d i r e c t i n v e s t o r s i n the U.S.A., Japan i s s t i l l a somewhat d i s t a n t second t o B r i t a i n ( 1 6 1) . N e v e r t h e l e s s , i t i s Japanese FDI which i s p e r c e i v e d as the p r i n c i p a l t h r e a t . Compared t o o t h e r sources of FDI, Japan has more money t o i n v e s t ; Japanese economic power i s g r e a t e r and, c u r r e n t l y and p r o s p e c t i v e l y , more c o m p e t i t i v e w i t h American i n d u s t r y and commerce; and Japanese investments i n s t e e l , car-making, e l e c t r o n i c s and banking are more v i s i b l e and are p e r c e i v e d as h a v i n g broader p o t e n t i a l impact on the s t r a t e g i c o p t i o n s o f the American economy. The s i t u a t i o n i s r a t h e r i r o n i c . To r e c t i f y i t s huge merchandise t r a d e d e f i c i t , the U n i t e d S t a t e s must i n c r e a s e i t s exports of manufactured p r o d u c t s . But, t h i s i n c r e a s e cannot be achieved without s i g n i f i c a n t improvements i n p r o d u c t i o n e f f i c i e n c y ; and, s i n c e the c a p i t a l r e q u i r e d t o f i n a n c e such improvements i s not a v a i l a b l e i n the U.S.A., t h i s mandates i n c r e a s e d FDI. The Japanese 1 6 1 "Xenophobia r u l e s " , The Economist. London, August 26 - September 1, 1989, p. 68-70. - Page 175 - companies have both the f i n a n c i a l and t e c h n i c a l s t r e n g t h s needed t o meet the American g o a l s . However, the q u i d pro quo f o r such a s s i s t a n c e w i l l be t o a l l o w Japanese-owned, American-based o p e r a t i o n s t o compete f o r the f u l l American market (not a r e s t r i c t e d import quota) on an equal b a s i s w i t h American companies. The a c c e p t a b i l i t y o f the remedy w i l l l a r g e l y depend on the s e n s i t i v i t y w i t h which i t i s a d m i n i s t e r e d . - Page 176 - 10.0. CONCLUSIONS T h i s study has attempted t o e x p l a i n the f a c t o r s behind the r a p i d a c c e l e r a t i o n o f Japanese f o r e i g n d i r e c t investment i n the 1980s. The approach has been t o combine macro-theory w i t h the a c t u a l developments i n the Japanese economy s i n c e 1973 t o e x p l a i n the c u r r e n t c a p i t a l s u r p l u s p o s i t i o n of Japan. In p a r t i c u l a r , on-going s a v i n g s s u r p l u s e s i n the p r i v a t e s e c t o r , when coupled w i t h the LDP's committment t o balanced budgets a f t e r 1978, have been suggested as a primary determinant behind the growing c a p i t a l o u t f l o w from Japan a f t e r 1983. I t has been contended t h a t these s u r p l u s e s have been generated by s e v e r a l f a c t o r s i n c l u d i n g : 1) the t r a n s i t i o n of Japan from a high-growth t o mature economy and the r e s u l t a n t d e c l i n e i n c o r p o r a t e c a p i t a l formation requirements; 2) r i s i n g r e l a t i v e r e a l wages as a r e s u l t of the 80% a p p r e c i a t i o n of the yen s i n c e 1984; and 3) the dramatic e s c a l a t i o n o f Japanese l a n d p r i c e s . The l a t t e r , w h i l e d e t e r r i n g domestic investment i n l a n d - i n t e n s i v e i n d u s t r y a t home, has a l s o c r e a t e d a huge c o l l a t e r a l base from which p o t e n t i a l Japanese i n v e s t o r s can f i n a n c e o f f s h o r e investments. The study has a l s o attempted t o support i t s macro-economic r a t i o n a l e by d e v e l o p i n g a r e g r e s s i o n model designed t o t e s t the r e l a t i o n s h i p of Japanese net FDI w i t h r e a l wages, r e a l l a n d p r i c e s , the Japanese Yen/U.S. d o l l a r spot exchange r a t e , and the Bank of Japan and U.S. F e d e r a l Reserve d i s c o u n t r a t e s d i f f e r e n t i a l . - Page 177 - Although s u p p o r t i n g the macro-economic c o n t e n t i o n s t o some degree, the r e s u l t s are l i m i t e d by problems w i t h both the methodology and data used t o develop the model. N e v e r t h e l e s s , as an e x p l o r a t o r y examination o f the determinants of Japanese f o r e i g n d i r e c t investment, the model r e t a i n s some m e r i t . F i n a l l y , the study has examined the f u t u r e s u s t a i n a b i l i t y of Japanese f o r e i g n d i r e c t investment. T h i s a n a l y s i s , again, has r e l i e d on macro-economic th e o r y and our a n a l y s i s of c u r r e n t t r e n d s i n the Japanese economy t o conclude t h a t the p r e s e n t l e v e l of Japanese f o r e i g n d i r e c t investment i s s u s t a i n a b l e . T h i s c o n c l u s i o n i s based on the premise t h a t the f a c t o r s which have c r e a t e d Japan's c u r r e n t excess c a p i t a l p o s i t i o n w i l l p r e v a i l i n the medium term. In a d d i t i o n , i n the u n l i k e l y event t h a t f u t u r e s u r p l u s e s are reduced, the study concludes t h a t Japanese f o r e i g n p o r t f o l i o , r a t h e r than f o r e i g n d i r e c t , investment w i l l be impacted. F i n a l l y , i t i s suggested t h a t the s u s t a i n a b i l i t y of Japanese FDI may be determined more by i t s f u t u r e a c c e p t a b i l i t y w i t h r e c i p i e n t c o u n t r i e s . The l a t t e r may r e p r e s e n t the most s e r i o u s impediment t o t h e c o n t i n u i n g d r i v e of Japanese companies o f f s h o r e , although t h i s w i l l be tempered i n most cases by the h o s t c o u n t r i e s ' committments t o u n r e s t r i c t e d c a p i t a l flows and domestic employment c o n s i d e r a t i o n s . Page 178 - BIBLIOGRAPHY BOOKS Abegglen, James C. & Salk, George J r . Kaisha: The Japanese C o r p o r a t i o n . Tokyo: C h a r l e s E. T u t t l e Company, 1985 Berenson, Mark L., & Levine, David M. B a s i c Business S t a t i s t i c s Concepts & A p p l i c a t i o n s , Englewood, N.J.: P r e n t i c e - H a l l Inc., 1979 Bronte, Stephen, e d i t . Japanese f i n a n c e Markets & I n s t i t u t i o n s . London: Euromoney P u b l i c a t i o n s , 1982 Dore, R.P. S t r u c t u r a l Adjustment i n Japan. 1970-1982,. Geneva: I n t e r n a t i o n a l Labour O r g a n i z a t i o n , 1986 E l - A g r a a , A l i M. Japan's Trade F r i c t i o n s . R e a l i t i e s or M i s c o n c e p t i o n s . London: MacMillan Press, 1988 F r e n k e l , Jacob A. " F l e x i b l e Exchange Rates, P r i c e s and the Role o f 'News'," I n t e r n a t i o n a l F i n a n c i a l Management. Donald R. L e s s a r d , e d i t . , New York: John Wiley & Sons, 1985 Hamada, K o i c h i , " Japanese Investment Abroad," i n P. Drysdale, ed, D i r e c t F o r e i g n Investment i n A s i a and the P a c i f i c . Toronto: U n i v e r s i t y o f Toronto Press, 1972 Hayashi, Fumio. " Why i s Japan's Savings Rate So A p p a r e n t l y High?", NBER Macroeconomics Annual. 1986. Cambridge, Ma: N a t i o n a l Bureau o f Economic Research, 1986 H i g a s h i , C h i k a r a and Lauter, G.Peter. The I n t e r n a t i o n a l i z a t i o n of the Japanese Economy. Boston: Kluwer Academic P u b l i s h e r s , 1987 Hollerman, Leon. Japan's Economic S t r a t e g y i n B r a z i l : C hallenge f o r the U n i t e d S t a t e s f Lexington, Ma: Lexington Books, 1988 Inoue. T., " A Comparison of the Emergence of MNC Manufacturing, 1 1 i n Overseas Business A c t i v i t i e s . Tokyo: U n i v e r s i t y of Tokyo, Katano, H i k o j i ; Murakami,Atsushi; Ikemoto, K i y o s h i ; e d i t . , Japan's D i r e c t Investment t o A s i a n C o u n t r i e s . Kobe: Research I n s t i t u t e f o r Economics and Business A d m i n i s t r a t i o n , Kobe U n i v e r s i t y , 1978 Katano, H i k o j i . Japanese E n t e r p r i s e s i n A s i a n C o u n t r i e s . S t a t i s t i c a l Outlook. Kobe, Japan: Research I n s t i t u t e f o r Economics and Business Development, Kobe U n i v e r s i t y , 1981 - Page 179 - L e v i c h , R i c h a r d M. " E v a l u a t i n g the Performance o f the F o r e c a s t e r s , " I n t e r n a t i o n a l F i n a n c i a l Management, Donald R. L e s s a r d , e d i t . , New York: John Wiley and Sons, 1985 L i n c o l n , Edward R. Japan: F a c i n g Economic M a t u r i t y . Washington: The Brockings I n s t i t u t e , 1988 Literman, David K. & S t o n e h i l l , A r t h u r I . " The F o r e i g n Investment D e c i s i o n , " M u l t i n a t i o n a l Business Finance. Reading Ma.: Addison-Wesley P u b l i s h i n g Company, 1986 Madura, J e f f . " D i r e c t and I n d i r e c t F o r e i g n Investment," I n t e r n a t i o n a l F i n a n c i a l Management f S t . P a u l : West P u b l i s h i n g Co., 1986 Noguchi, Yukio. " P u b l i c Finance," The P o l i t i c a l Economy o f Japan. Volume 1 e d i t , by Kozo Yamamura & Y a s u k i c h i Yasuba, S t a n f o r d : S t a n f o r d U n i v e r s i t y Press,1987 Okochi, A k i o , & Inoue, Tadakatsu e d i t . Overseas Business A c t i v i t i e s , Tokyo: U n i v e r s i t y of Tokyo Press,1984 Ozawa, Terutomo. M u l t i n a t i o n a l i s m . Japanese S t y l e . P r i n c e t o n : P r i n c e t o n U n i v e r s i t y Press, 1979 Robinson, R i c h a r d D. D i r e c t F o r e i g n Investment. Costs and B e n e f i t s New York: Rogers P u b l i s h e r s , 1982 Root, F r a n k l i n K. "The Nature and Scope of M u l t i n a t i o n a l E n t e r p r i s e , " I n t e r n a t i o n a l Trade & Investment. 5th E d i t i o n . C i n c i n n a t i : The Warton School o f P e n n s y l v a n i a ; South- west P u b l i s h i n g Co., 1984 S a k i g u c h i , Sueo. A s i a n - Japan R e l a t i o n s . Investment. Proceedings of a Workshop and a Conference Organized by the Japan Center f o r I n t e r n a t i o n a l Exchange, Singapore: Dec. 5-6, 1981. Oise, Japan: May 20-23, 1982. Singapore: I n s t i t u t e of S.E. A s i a n S t u d i e s , 1983 Sato, Kazuo. "Savings and Investment," The P o l i t i c a l Economy of Japan: Volume 1 - The Domestic T r a n s f o r m a t i o n. E d i t e d by Kozo Yamamura and Y a s u k i c h i Yasuba, S t a n f o r d : S t a n f o r d U n i v e r s i t y P r e s s , 1987 Schmiegelow, M i c h e l e . " T h e Reform of Japan's F o r e i g n Exchange and F o r e i g n Trade C o n t r o l Law: A case o f Q u a l i t a t i v e Economic P o l i c y , " Japan's Response t o C r i s i s and Change i n the World Economy, e d i t , by M i c h e l e Shchmiegelow, New York: M. E. Sharpe, Inc. 1986 - page 180 - S c h o f i e l d , Norman e t a l . Advanced S t a t i s t i c a l Methods i n the S o c i a l S c i e n c e s . New York: Praegar P u b l i s h e r s , 1986 Tsumumi, Y o s h i . Soaoshosha. Montreal: I n s t i t u t e f o r Research on P u b l i c P o l i c y , 1984 Uno, Kimio, Japanese I n d u s t r i a l Performance f Amsterdam: E l s e v i e r S c i e n c e P u b l i s h e r s B.V., 1987 V i n e r , Aron. The F i n a n c i a l Samurai. The Emerging Power o f Japanese Money. London: Kogan Page L i m i t e d , 1988 Yoshihara, Kunio, Japanese Investment i n South E a s t A s i a . H onolulu: U n i v e r s i t y Press o f Hawaii, 1978 Yoshihara, Kunio, The Sogo Shosha. Oxford: Oxford U n i v e r s i t y P r e s s , 1983 Yasumuro, K., " The C o n t r i b u t i o n o f Sogo Shosha t o M u l t i n a t i o n a l i z a t i o n , " i n A. Okochi and T. Inoue, e d i t . , Overseas Business A c t i v i t i e s . , Tokyo: U n i v e r s i t y o f Tokyo Press, 1984 M A G A Z I N E S Abegglen, James C. "Going Abroad," TOKYO Business Today. January 1988 Abegglen, James C. "Economics: Stone B r i d g e s , " TOKYO Business Today. A p r i l 1988 "Average Savings Now a t 8.19 M i l l i o n Yen," TOKYO Business Today, May 1988 C u b i t t , Guy. "Tokyo's Real E s t a t e T u r m o i l , " TOKYO Business Today. May 1987 Caplen, B r i a n , e d i t . , " A New Sun R i s i n g i n the E a s t , " A s i a n B u s i n e s s . September 1988 "Challenge and Dilemma f o r Corporate Japan: The EC Gears f o r 1992," TOKYO Business Today. Tokyo: A p r i l 1989 "Corporate P r o f i t Performance," NRI Q u a r t e r l y Review. Nomura Research I n s t i t u t e , Tokyo: August 1989 H i j i k a t a , T a k e s h i . "Need f o r Tax Reform and I t s D i r e c t i o n , " Keidanren Review No. 110. A p r i l 1988 - Page 181 - Hines, Mary A l i c e . " I n v e s t i n g i n Japanese Real E s t a t e , " Real E s t a t e Review V o l . 18 No. 4. Winter 1989 H i r a t a , Ikuo."Overseas Investment," Japan Economic Almanac 1987. Tokyo, 1987 It o h , H. "Japan's B i l l i o n a i r e s , " TOKYO Business Today. October 1987 "Japanese D i r e c t Investment i n U.S. Gains Momentum," K e i d a n r e n Review No. 113. October 1988 "Japanese F i n d i t Tough Abroad," A s i a n Business. October 1988 "Japanese I n v e s t o r s Look t o I t a l y , " World P r o p e r t y . March 1989 "Japan I n v e s t o r s Turn t o F o r e i g n S t o c k s , " The Japan Economic J o u r n a l , June 17, 1989 "Japanese L i k e l y t o D i v e r s i f y US Investment P o r t f o l i o , " World P r o p e r t y . London: RICS J o u r n a l s L t d . , A p r i l 1989 "Japanese Manufacturers Go L o c a l , " TOKYO Business Today. J u l y 1988 Kobayashi, S h i g e r u . " The Shuwa Shogun," TOKYO Business Today. March 1987 Kojima, K i y o s h i , " Japanese - S t y l e D i r e c t F o r e i g n Investment," Japanese Economic S t u d i e s . New York: ME Sharpe Inc., S p r i n g 1986 Ko s a i , Yutaka. "The Japanese Economy In 1989: C o n s t r a i n t s and C h a l l e n g e s , " J o u r n a l o f Japanese Trade & In d u s t r y . No.l 1989, Tokyo, 1989 Krueger, W i l l i a m . "Japanese Real E s t a t e : At Home and Abroad," Tokyo Business Today. December 1988 Krueger, W i l l i a m . "Tokyo," World P r o p e r t y . January 1989 L e v i c h , R i c h a r d M. "Are Forward Exchange Rates Unbiased P r e d i c t o r s o f Future Spot Rates," Columbia J o u r n a l o f World Business 14. No.4. Winter 1979 Maki, A t s u s h i . "Why i s the Japanese Household Savings Rate So High," Keio Business Review. No. 24 1987. Tokyo: Keio U n i v e r s i t y Press, 1987 Page 182 - Murphy, Terence. "The War Between the S t a t e s , " TOKYO Business Today. A p r i l 1987 Namai, To s h i s h i g e . " J a p a n ' s Drug Companies Venture Abroad," TOKYO Business Today. June 1989 Nomura Q u a r t e r l y Economic Review V o l . 19. No . l , Tokyo: NRI & NCC Co. L t d . , February 1989 Nomura Q u a r t e r l y Economic Review V o l 19 No. 3. Nomura Research I n s t i t u t e , Tokyo: August 1989 Oda, T a k e s h i . "Overseas Investment," Japan Economic Almanac. 1986 Ogura, Masao. "A New Stage o f Inventory," TOKYO Business Today, September 1988 "On the Move Agai n , " The Economist. November 5, 1988 Ota, T o s h i k i . "The C o s t l y Takeover o f F i r e s t o n e , " TOKYO Business Today. June 1988 "Rapid I n c r e a s e i n Japanese Overseas M&A," TOKYO Business Today. Tokyo: January, 1989 Robins, B r i a n . " A l l Eyes on the New WorLd Leader," T r i p l e A Banking J o u r n a l . December 1987/January 1988 Rudnitsky, Howard e t a l . "Land o f the R i s i n g S t o c k s , " Forbes, May 18, 1987 Sharp J r . , W i l l i a m E. "EC-Japanese Economic R e l a t i o n s : Trade F r i c t i o n From Europe," TOKYO Business Today, December 1986 Sneider, D a n i e l . " The Maekawa Report: Promises Japan Can't Keep?" TOKYO Business Today. June 1986 S t a t i s t i c s . BOJ Economic S t a t i s t i c s Monthly. Japan: Research St S t a t i s t i c s Dept., December 1988 Takahashi, Masami. " Overseas Investment," Japan Economic Almanac 1988 Takahashi, Y u i c h i . "Japanese Companies Overseas Ventures: Automobile I n d u s t r y Leads Investment i n Developed N a t i o n s , " Japan Economic Almanac. 1986 "The Consumption Boom i n Japan," T o k a i Monthly Economic L e t t e r . June 1989 Page 183 "The Overwhelming Japanese," World P r o p e r t y . London: RICS J o u r n a l s L t d . , May 1989 "The Shuwa Shogun," Tokyo Business Today. Tokyo: March 1987 "Tokyo i n t h e Making," TOKYO Business Today. May 1987 Ungphakorn, P e t e r . "Japanese Eye T h a i l a n d Investments," TOKYO Business Today. A p r i l 1988 W i l l i a m s , David. "Nissan's Great B r i t i s h Experiment," TOKYO Business Today. June 1988 Woronoff, Jon. "End of buy America E r a , " A s i a n B u s i n e s s . December 1988 PAPERS H e l l i w e l l , John F., " Some Comparative Macroeconomics o f the U n i t e d S t a t e s , Japan and Canada." Department o f Economics D i s c u s s i o n Paper No. 87-04 . Vancouver, U n i v e r s i t y o f B.C. March 1987. Japan 1988, An I n t e r n a t i o n a l Comparison, Tokyo: K e i z a i Koho Centre, 1988 J e t r o , White Paper on World and Japanese D i r e c t F o r e i g n Investment, Tokyo 1986 Sazanami, Yoko. " Recent Trends i n Japanese Trade and C a p i t a l Flow - Japan vs Western Europe and A s i a , " Keio Economic S t u d i e s V o l . XXV No. 1 1988 NEWSPAPER ARTICLES "...As b i g Japanese f i r m s attempt t o r e a l l y go g l o b a l , " Globe & M a i l from The Economist. J u l y 1989 "Auto P a r t s Maker Has U.S. P l a n s , " The Japan Times. May 20, 1989 B i a n c h i , Angela. " Home Ownership and E l u s i v e Dream f o r Most," The F i n a n c i a l Post. J u l y 24, 1989 "Brother S e t s Up Mal a y s i a n P l a n t , " Japan Times. May 20, 1989 "Canadian Auto P a r t s Venture Set Up," The Japan Times. Osaka J i j i P r e s s May 17 1989 - Page 184 - "Deadlocked T a l k s Leave U.S., Japan a t Odds Over Trade," The F i n a n c i a l Post. Reuters, June 16, 1989 Done, Kevin. " Car Wars A f t e r the Yen Shock," The F i n a n c i a l Times. London: May 12, 1989 Done, Kevin. " GM, Isuzu t o I n v e s t 70 m i l l i o n pounds i n Four- Wheel D r i v e P r o j e c t , " The F i n a n c i a l Times. May 12, 1989 "Government Says 2.2% Growth Shows Japanese Economy i n on' I d e a l P a t h 1 , " The Globe & M a i l . Reuter, June 20, 1989 "Growth W i l l H i t 4.75% in'89 Then Diminish, OECD Says," Japan Times, May 16,1989 Hudson, R i c h a r d L."Competition from Japan Begins i n the Back Yard," A s i a n Wall S t r e e t J o u r n a l , February 26, 1989 "Japan C o p i e r s Made i n U.S. May Be H i t With EC D u t i e s , " The A s i a n W a l l S t r e e t J o u r n a l . February 8, 1989 "Japanese are B i g g e s t F o r e i g n U.S. I n v e s t o r s , " The F i n a n c i a l Post, June 28, 1989 "Japanese I n t e r n a t i o n a l i z a t i o n : Banking on the Golden S t a t e , " The Japan Times May 22, 1989 "Japanese Investments i n F o r e i g n S t o c k s , " The Japan Times, c o u r t e s y o f The Nomura S e c u r i t i e s Co. L t d . , May 20, 1989 "Japan's G l o b a l Trade Surplus narrows as U.S. Gap S h r i n k s , " The F i n a n c i a l Post. U n i t e d Press I n t e r n a t i o n a l , June 1 5 , 1989 "Japan World's Leading C r e d i t o r , " The P r o v i n c e . May 28, 1989 Kingston, J e f f . " The B r a z i l Problem and Japan's E f f e c t i v e S o l u t i o n t o I t , " Japan Times. May 20, 1989 Lewington, J e n n i f e r . " An U n c e r t a i n Welcome f o r I n v e s t o r s i n U.S.," The Globe & M a i l . ????? Lewington, J e n n i f e r . " F o r e i g n e r s I n v e s t $65 B i l l i o n i n U.S.," Globe & M a i l May 31, 1989 Lewington, J e n n i f e r . " N a t i o n a l S e c u r i t y 1 Can Block F o r e i g n Takeover," The Globe & M a i l . J u l y 3, 1989 Lubin, Joann S. e t a l . "Toyota's Plan Would P r e s s u r e European Firms, The A s i a n Wall S t r e e t J o u r n a l , February 27, 1989 - Page 185 - McCooey, C h r i s t o p h e r . 11 Japanese D i r e c t Investment i n Europe: Why i s the U.K. so A t t r a c t i v e ? " The Japan Times. May 15, 1989 Montagnon, P e t e r . " Buoyant Economy B r i n g s I n f l a t i o n C o n c e r n , " The F i n a n c i a l Post, J u l y 24, 1989 Rodger, Ian. " Many Pr e s s u r e s S t r a i n New E r a , " The F i n a n c i a l Post. J u l y 24, 1989 Rodger, Ian. "Shakeout Seen as F o r e i g n I n v e s t o r s Forsake Japanese Stock," The F i n a n c i a l Times. December 9, 1987 S h i r o u z u , N o r i h i k o . "Toyota Weighing Options on Making Cars n i Europe."The A s i a n Wall S t r e e t J o u r n a l . January 27-28 1989 T e r r y , E d i t h . " H i g h - F l y i n g U.S. D o l l a r Leaves Japan's Buoyancy Up i n the A i r , " The Globe & M a i l . June 20, 1989 T e r r y , E d i t h . " Why the Japanese Can't Relax," The Globe & M a i l Report on Business. August 1989 "Thermos S o l d t o Firm i n Japan," The Globe & M a i l , June 19, 1989 "Though R i c h , Japan i s Poor i n Many Elements," The A s i a n Wall S t r e e t J o u r n a l . March 3, 1989 "TSE's B i g Four S e c u r i t i e s Companies Post Record High O p e r a t i n g Revenues," The Japan Times. May 20, 1989 "U.S.- Japan T a l k s on Trade F r i c t i o n End w i t h L i t t l e Progress Made," The F i n a n c i a l Post. June 15, 1989 Woodruff, John. " Banking on the Golden S t a t e , " The Japan Times. May 22, 1989 "World's 'Top 50" L i s t dominated by Japanese F i n a n c i a l Houses," M a i n i c h i D a i l y News. June 23, 1987 REPORTS & YEARBOOKS Business S t a t i s t i c s . 1986. Washington: U.S. Department of Commerce, Bureau of Economic A n a l y s i s , 1986 IMF. F o r e i g n Exchange Rate Supplement. 1985. IMF, 1985 I n t e r n a t i o n a l F i n a n c i a l S t a s t i c s . 1988. IMF, 1988 Page 186 - Japan Economic Almanac. 1985 M i n i s t r y o f Finance, Japan S t a t i s t i c a l Yearbook. Tokyo: 1965 through 1988 M i t i , Japan's Overseas Investments. 1977 e d i t i o n NECD Economic Surveys. Japan 1987/1988. P a r i s , 1988 Nippon.Business F a c t s and Figures.1989 J e t r o , Tokyo: 1989 OECD Economic Survey o f Japan. 1963 through 1973, 1987 Report prepared by the Gleneagles Group, Japanese D i r e c t F o r e i g n Investment i n North America - A Canadian P e r s p e c t i v e . Vancouver: B.C. Canada, January 1988 The C o m p t r o l l e r General o f the U n i t e d S t a t e s . I n d u s t r i a l P o l i c y : Japan's F l e x i b l e Approach, June 23, 1982 The Japan Economic J o u r n a l . Tokyo: 1985 - Page 187 - APPENDIX 1: DATA USED IN REGRESSION MODELS YEAR D1R POR PRIV GOV UAGE LAND EXCH DISC SPR 1960 -79.37 -22.20 -1492 -1569 38.4 22.9 360 0.219 0.115802 1961 -32.50 11.76 -4321 -144 40.6 45.0 360 0.215 0.124615 1962 -11.36 71.02 -306 1196 41.9 62.2 360 0.188 0.099004 1963 -19.02 146.74 -2226 1389 42.6 70.7 360 0.158 0.063131 1964 -46.88 140.63 -1545 1966 45.1 79.7 360 0.172 0.064732 1965 -30.39 80.11 -91 3762 46.3 72.9 360 0.152 0.032551 1966 -76.32 -18.42 708 4505 48.9 89.7 360 0.145 0.022121 1967 -71.78 -9.90 -1458 4448 52.6 88.1 360 0.144 0.030532 1968 -117.65 296.47 -125 3085 56.8 91.1 360 0.146 0.044101 1969 -112.11 751.12 -2652 5554 62.4 99.8 360 0.141 0.001011 1970 -187.50 187.50 -1065 875 67.8 86.0 360 0.131 -0.002780 1971 -96.65 550.30 1610 3570 73.2 120.1 349.33 0.108 -0.000090 1972 -305.97 44.78 4948 5261 80.8 128.0 303.37 0.093 -0.00307 1973 -935.54 -829.75 1147 892 88.5 149.3 291.7 0.121 -0.000300 1974 -675.79 -347.47 -2613 6156 90.5 146.1 292.08 0.127 -0.014200 1975 -771.28 1306.23 4183 14663 92.9 99.2 396.79 0.083 -0.033530 1976 -667.85 973.90 8888 13713 95.6 117.3 296.55 0.077 -0.012750 1977 -491.03 192.83 10371 8666 96.1 113.7 268.51 0.048 -0.036120 1978 -531.55 -632.09 15038 11985 98.4 111.7 210.44 0.037 -0.070800 1979 -605.40 -280.37 8761 10913 101.7 116.3 219.14 0.065 -0.072040 1980 -478.00 2138.00 8090 10666 100.0 100.0 226.74 0.073 -0.061180 1981 -1006.78 1639.53 9311 9538 101.1 105.1 220.54 0.053 -0.085000 1982 -971.46 198.86 10108 9260 101.8 110.1 249.08 0.048 -0.054920 1983 -717.66 -650.61 13416 9685 104.0 114.5 237.51 0.047 -0.034590 1984 -1322.76 -5308.77 12444 5819 104.8 119.0 237.52 0.047 -0.035060 1985 -1272.73 -9145.09 11782 2391 104.9 125.9 238.54 0.046 -0.023420 1986 -2165.01 -15505.86 19477 3305 107.4 141.2 168.52 0.027 -0.028430 1987 -2434.00 -11874.32 16004 7345 109.7 178.3 144.64 0.023 -0.025480 - Page 188 - R E A D U ) DIR POR PRIV GOV WAGE LAND EXCH DISC SPR S T A T / a l l PCOR O l s PRIV WAGE LAND D I S C / ANOVA LIST au to PRIV WAGE land d i s c / ANOVA LIST OLS PRIV WAGE/ ANOVA LIST OLS PRIV LAND/ ANOVA LIST OLS PRIV D I S C / ANOVA LIST auto PRIV WAGE/ ANOVA LIST au to PRIV l a n d / ANOVA LIST auto PRIV d i s c / ANOVA LIST OLS POR EXCH SPR/ ANOVA LIST au to POR EXCH SPR/ ANOVA LIST OLS DIR WAGE LAND EXCH SPR g o v / ANOVA LIST OLS DIR WAGE LAND EXCH SPR/ ANOVA LIST p l o t d1r wage p l o t d l r l and p l o t d i r exch p l o t d i r s p r sample 1 12 OLS DIR WAGE LAND EXCH SPR/ ANOVA LIST p l o t d i r wage 1 p l o t d i r l a n d ^ p l o t d i r exch a, p l o t d i r s p r CTQ sample 13 28 fi> p l o t d i r wage p l o t d i r l a n d 00 p l o t d i r exch p l o t d i r s p r OLS DIR WAGE LAND EXCH SPR/ ANOVA LIST 1 END > T) T3 PI Z o t—I •x to | _OLS PRIV WAGE LAND D I S C / ANOVA LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = PRIV . . .NOTE . .SAMPLE RANGE SET TO: 1, 28 R-SQUARE = 0 .8654 R-SOUARE ADJUSTED = VARIANCE OF THE ESTIMATE = 0.70725E+07 STANDARD ERROR OF THE ESTIMATE = 2659.4 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -258.376 0 .8485 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.80828E+07 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 15.903 SCHWARZf1978) CRITERION-SC = 16.094 REGRESSION ERROR TOTAL ANALYSIS OF VARIANCE SS 10910E+10 16974E+09 12608E+ 10 DF 3 . 24 . 27. - FROM MEAN MS 0. 36367E + 09 0. 70725E + 07 0. 46695E + 08 F 51.421 REGRESSION ERROR TOTAL ANALYSIS OF VARIANCE SS 17750E+10 16974E+09 19448E+10 DF 4 . 24 . 28 . - FROM ZERO MS 0.44376E+09 0. 70725E*07 0.69456E+08 F 62.744 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD T-RATIO ERROR 24 DF WAGE - 7 . 0 4 9 3 65 .703 -0 .10729 LAND -49 .478 26.176 -1 .8902 DISC -0.13300E+06 27517. -4 .8333 CONSTANT 24561. 7751.5 3.1686 PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS -0 .0219 -0 .26339E-01 -0 .11180 -0 .3600 -0 .23476 - 1.0379 -0 .7023 -1 .1230 -2 .8197 0.5431 O.OOOOOE+OO 4.9693 H e l l o / B o n j o u r -PNPN Welcome to i SHAZAM - V e r s i o n 6.1 - OCT 1988 SYSTEM=G PAR= 40 |_READ(4) DIR POR PRIV GOV WAGE LAND EXCH DISC SPR . . . S A M P L E RANGE IS NOW SET TO: 1 28 I S T A T / ALL PCOR NAME N MEAN S T . DEV VARIANCE MINIMUM MAXIMUM DIR 28 -579 .79 630.08 0. 39700E + 06 -2434 .0 - 11.360 POR 28 - 1282.0 4 127.5 0 . 1 7 0 3 6 E » 0 8 - 15506. 2138.0 PRIV 28 4942.6 6833.4 0.46695E+08 - 4321 .0 19477 . GOV 28 5674.8 4355.1 0.18967E+08 - 1569.0 14663. WAGE 28 78.386 25 532 651 .89 38.400 109.70 LAND 28 103.67 32.423 1051 . 2 22.900 178.30 EXCH 28 296 .82 70.477 4967 .0 144.64 396 . 79 DISC 28 0.10479 0 .57701E-01 0 .33294E-02 0 .23000E-01 0.21900 SPR 28 0 .13379E-03 0 .55371E-01 0 .30659E-02 -0 .85003E-01 0.12462 CORRELATION MATRIX OF VARIABLES - 28 OBSERVATIONS DIR 1.0000 POR 0 .81828 1.0000 PRIV -0 .79668 -0 .60430 1.0000 GOV -0 '.28174 0 .15525 0.54537 1 .0000 WAGE -0 .77732 -0 .40860 0.84943 0.66819 1.0000 LAND -0 .74031 -0 .50618 0.60793 0.40339 0.79624 1 .0000 EXCH 0.81846 0.60326 -0.88974 -0 .41175 -0 .83544 -0 .68226 1.0000 . DISC 0.75416 0.45591 -0 .91757 -0 .67748 -0 .94627 -0 .76905 0. •83314 1 .0000 SPR 0.54244 0.15175 -0 . 71657 -0.76141 -0 .89098 -0 .69886 0 . 69691 0 . 904 19 1.0000 DIR POR PRIV GOV WAGE LAND EXCH DISC SPR |_AUTO PRIV WAGE LAND DISC/ ANOVA LIST REQUIRED MEMORY IS PAR= 5 CURRENT PAR= 40 DEPENDENT VARIABLE = PRIV . .NOTE. .R-SQUARE,ANOVA,RESIDUALS DONE ON ORIGINAL VARS LEAST SQUARES ESTIMATION 28 OBSERVATIONS BY COCHRANE-ORCUTT TYPE PROCEDURE WITH CONVERGENCE = 0.00100 ITERATION RHO LOG L . F . SSE 1 0.00000 -258.376 0.16974E+09 2 0.39454 -255.829 0.14065E+09 3 0.43018 -255.768 0.13986E+09 4 0.43428 -255.763 0.13979E+09 5 0.43477 -255.763 0. 13978E + 09 LOG L . F . •255.763 AT RHO 0.43477 RHO ESTIMATE 0.43477 ASYMPTOTIC VARIANCE 0.02896 ASYMPTOTIC ST.ERROR 0.17019 ASYMPTOTIC T-RATIO 2.55466 R - SQUARE = 0.8891 R-SQUARE ADJUSTED = 0.8753 VARIANCE OF THE ESTIMATE = 0.58243E+07 STANDARD ERROR OF THE ESTIMATE = 2413.4 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -255.763 MODEL SELECTION TESTS - SEE JUDGE E T . A L . ( 1985. P.242) AKA'IKE ( 1969) FINAL PREDICTION ERROR - FPE = 0.66564E+07 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC =' 15.709 SCHWARZI 1978) CRITERION-SC = 15.899 REGRESSION ERROR TOTAL ANALYSIS SS 1 1210E+ 10 13978E+09 12608E+10 OF VARIANCE DF 3 . 24 . 27 . • FROM MEAN MS 0.37366E+09 0.58243E+07 0.46695E+08 REGRESSION ERROR TOTAL ANALYSIS OF SS 18050E+10 13978E+09 19448E+10 VARIANCE DF 4 . 24. 28 . • FROM ZERO MS 0.45125E+09 0.58243E+07 0.69456E+08 VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR 24 DF CORR. COEFFICIENT AT MEANS WAGE 5.8604 77.296 0.75818E-01 0.0155 0.21897E-01 0.92942E- LAND -37.283 28.665 -1.3006 -0.2566 -0.17690 -0.78205 DISC -0.12069E+06 28854. -4.1826 -0.6493 -1.0191 -2.5586 CONSTANT 21213. 8342.6 2.5427 0.4607 O.OOOOOE+00 4.2918 RVATION OBSERVED PREDICTED CALCULATED NO . VALUE VALUE RESIDUAL 1 - 1492.0 -5969 .3 4477.3 2 -4321 .0 - 6546 .3 2225.3 3 -306 .00 -3815 .5 3509.5 4 -2226 .0 -251 .04 - 1975.0 5 - 1545.0 -2575 .9 1030.9 6 -91 .000 412.02 -503 .02 7 708 .00 493.44 214.56 8 - 1458.0 679.52 -2137 . 5 9 - 125.00 235.49 -360 .49 10 -2652 .0 430.54 -3082 .5 1 1 - 1065.0 2405.3 -3470 .3 12 1610.0 3739 .0 -2129 .0 13 4948.0 5289.5 -34 1.48 14 1147.0 4 57.35 689.65 15 -2613 .0 - 196.41 -2416.6 16 4183.0 8008.6 -3825.6 17 8888.0 7842.5 1045.5 18 10371 . 1 1874. - 1503.1 19 15038. 13420. 1618.2 20 876 1 .0 9445.0 -684 .00 21 ' 8 0 9 0 . 0 9199.5 -1109 .5 22 9311.0 1 1599. -2288 .4 23 10108. 12012. - 1904 .0 24 13416. 11912. 1504.2 25 12444 . 1 1684. 760.47 26 11782. 11474. 307.58 27 19477 . 13227 . 6250.2 28 16004. 1 1907 . 4097 . 1 DURBIN-WATSON = 1.0720 VON NEUMAN RATIO = 1.1117 RHO = 0.39454 RESIDUAL SUM = 0 .63665E-11 RESIDUAL VARIANCE = 0.70725E+07 SUM OF ABSOLUTE ERRORS= 55461. R-SOUARE BETWEEN OBSERVED AND PREDICTED = 0.8654 RUNS T E S T : 13 RUNS, 13 POSIT IVE, 15 NEGATIVE, NORMAL STATISTIC = -0 .7468 COEFFICIENT OF SKEWNESS = 0.6962 WITH STANDARD DEVIATION OF 0.4405 COEFFICIENT OF EXCESS KURTOSIS = 0.1341 WITH STANDARD DEVIATION OF 0.8583 GOODNESS OF F IT TEST FOR NORMALITY OF RESIDUALS - 10 GROUPS OBSERVED 0 .0 0 .0 2.0 7.0 6.0 7.0 2.0 3.0 1.0 0 .0 EXPECTED 0 . 2 0 .8 2 .2 4 . 5 6 .3 6 .3 4 . 5 2.2 0 .8 0 .2 CHI-SQUARE = 4.4915 WITH 4 DEGREES OF FREEDOM | _OLS PR IV WAGE/ ANOVA LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = PRIV . . .NOTE . .SAMPLE RANGE SET TO: 1, 28 R-SQUARE = 0 .7215 R-SQUARE ADJUSTED = 0.7108 VARIANCE OF THE ESTIMATE = 0.13503E+08 STANDARD ERROR OF THE ESTIMATE = 3674.6 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -268.551 MODEL SELECTION TESTS - SEE JUDGE E T . A L . U 9 8 5 , P.242) AKAIKE ( 1969) FINAL PREDICTION ERROR - FPE = 0.14468E+0B (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 16.487 SCHWARZ( 1978) CRITERION-SC = 16.582 4> ANALYSIS OF VARIANCE - FROM MEAN SS OF MS F REGRESSION 0. 90968E+09 1 . 0.90968E+09 67, , 369 ERROR 0. ,35108E+09 26. 0. 13503E + 08 TOTAL 0. 12608E+10 27 . 0.46695E+08 ANALYSIS OF VARIANCE - FROM ZERO SS DF MS F REGRESSION 0. 1 5937E+10 2. 0.79685E+09 59 .013 ERROR 0. 35108E+09 26 . 0.13503E+08 TOTAL 0. 19448E+10 28 . 0.69456E+08 VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR 26 DF CORR. COEFFICIENT AT MEANS WAGE 227.34 27.698 8.2078 0.8494 0.84943 3.6055 CONSTANT -12878. 2279.5 -5 .6494 -0 .7423 O.OOOOOE+OO -2 .6055 RVATION ' OBSERVED NO. VALUE 1 - 1492 .0 2 -4321 .0 3 - 306.00 4 -2226 .0 5 - 1545 .0 6 -91 .000 7 708.00 8 - 1458.0 9 - 125.00 10 -2652 .0 1 1 - 1065.0 12 1610.0 13 4948 .0 14 1147.0 15 -2613 .0 16 4183.0 17 8888.0 18 10371 . 19 15038. 20 876 1 .0 21 8090.0 22 9311.0 23 10108. 24 13416. 25 12444. 26 11782. 27 19477. 28 16004. PREDICTED CALCULATED VALUE RESIDUAL -5846 .6 4354.6 -4281 .7 -39 .308 -2744 .0 2438.0 1 168 . 2 -3394.2 -3115 .2 1570.2 729.25 -820 .25 432.38 275.62 880. 19 -2338 .2 -477 .96 352.96 556.34 -3208 .3 1075. 1 -2140. 1 2539.0 -929.01 4594.5 353.52 1239.1 -92 .122 .788.30 -3401 . 3 6521.6 -2338 .6 6412.8 2475.2 12083. - 1712.4 12562. 2475.5 10445. - 1683.7 8883.2 -793.24 10981 . - 1670.4 10964 . -855.86 1 1097 . 2319 . 2 12385. 58.815 1 1898. - 115.51 13406. 6070.9 15109. 894.66 DURBIN-WATSON = 2.0393 VON NEUMAN RATIO = 2.1148 RHO = -0 .08905 RESIDUAL SUM = -1893 .3 RESIDUAL VARIANCE = 0.59737E+07 SUM OF ABSOLUTE ERRORS= 49172. R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8874 RUNS TEST: 19 RUNS, 12 POSIT IVE, 16 NEGATIVE, NORMAL STATISTIC | _OLS PRIV LAND/ ANOVA LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = PRIV . . . N O T E . . S A M P L E RANGE SET TO: 1. 28 R-SQUARE = 0 .3696 R- SQUARE ADJUSTED = 0.3453 VARIANCE OF THE ESTIMATE = 0.30569E+08 STANDARD ERROR OF THE ESTIMATE = 5529.0 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -279.990 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.32753E+08 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 17.304 SCHWARZf1978) CRITERION-SC = 17.399 (D REGRESSION ERROR TOTAL REGRESSION ERROR TOTAL VARIABLE NAME SS 0.46596E+09 0.79480E+09 0.12608E+10 SS 11500E+10 79480E+09 19448E+10 ESTIMATED COEFFICIENT STANDARD ERROR VARIANCE FROM MEAN DF MS F 1 . 0.46596E+09 15.243 26 . 0. 30569E + 08 •2 7 . 0.46695E+08 VARIANCE FROM ZERO OF MS F 2 . 0. 57498E + 09 18.809 26 . 0.30569E+08 28 . 0.69456E+08 T-RATIO PARTIAL STANDARDIZED ELASTICITY 26 DF CORR. COEFFICIENT AT MEANS LAND 128.13 CONSTANT -8341.1 32.818 3559.2 3.9042 -2 .3435 0.6079 0.60793 2.6876 -0 .4176 O.OOOOOE+OO -1 .6876 RVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 - 1492 .0 -5407 .0 3915.0 2 - 4321 .0 -2575 .3 - 1745.7 3 -306 .00 -371 .53 65 .533 4 -2226 .0 717.55 -2943.6 5 - 1545.0 1870.7 -3415 .7 6 -91 .000 999.44 - 1090.4 7 708.00 3152.0 -2444 .0 8 - 1458.0 2947.0 -4405 .0 9 - 125.00 3331 .4 -3456.4 10 -2652 .0 4446 . 1 -7098. 1 1 1 - 1065.0 2677 .9 -3742 .9 12 1610.0 7047 . 1 -5437. 1 13 4948.0 8059.3 -3111 .3 14 1147.0 10788. -964 1 .4 15 -2613 .0 10378. - 12991 . 16 4183.0 4241 . 1 -58.071 17 8888.0 6688.3 2199.7 18 10371 . 6227.1 4143.9 19 15038. 5970.8 9067.2 20 876 1 .0 6560.2 2200.8 21 8090.0 4471.7 3618. 3 22 9311.0 5125.2 4185.8 23 10108. 5765.8 4342.2 24 13416 . 6329.6 7086.4 25 12444 . 6906. 1 5537.9 26 11782. 7790.2 3991 .8 27 19477 . 9750.6 9726.4 28 16004. 14504. 1499.9 DURBIN-WATSON = 0.6367 VON NEUMAN RATIO = 0.6602 RHO = 0.67252 RESIDUAL SUM = 0 .72760E-11 RESIDUAL VARIANCE = 0.30569E+08 SUM OF ABSOLUTE ERR0RS= 0.12316E+06 R- SQUARE BETWEEN OBSERVED AND PREDICTED = 0.3696 RUNS TEST: 5 RUNS, 14 POSIT IVE, 14 NEGATIVE, NORMAL STATISTIC = -3 .8516 COEFFICIENT OF SKEWNESS = -0.3221 WITH STANDARD DEVIATION OF 0.4405 COEFFICIENT OF EXCESS KURTOSIS = -0 .0304 WITH STANDARD DEVIATION OF 0.8583 GOODNESS OF FIT TEST FOR NORMALITY OF RESIDUALS - 6 GROUPS OBSERVED 1.0 2.0 11.0 10.0 4 .0 0 .0 EXPECTED 0 .6 3.8 9.6 9 .6 3.8 0 .6 CHI-SQUARE = 1.9482 WITH 2 DEGREES OF FREEDOM | _OLS PRIV D I S C / ANOVA LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = PRIV . . . N O T E . . S A M P L E RANGE SET TO: 1. 28 R-SQUARE = 0.8419 R-SQUARE ADJUSTED = 0.8359 VARIANCE OF THE ESTIMATE = 0.76649E+07 STANDARD ERROR OF THE ESTIMATE = 2768.6 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -260 .623 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 . P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.82124E+07 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 15.921 SCHWARZf1978) CRITERION-SC = 16.016 ANALYSIS OF VARIANCE - FROM MEAN SS DF MS F REGRESSION 0. 10615E+10 1 . 0.10615E+10 138. 484 1 ERROR 0. 19929E+09 26. 0.76649E+07 "0 TOTAL 0. 12608E+10 27 . 0.46695E+08 03 OQ ANALYSIS OF VARIANCE - FROM ZERO CD SS DF MS F REGRESSION 0. 17455E+10 2. 0.87274E+09 113. 862 ERROR 0. 19929E+09 26. 0.76649E+07 co TOTAL 0. 19448E*10 28. 0.69456E+08 I VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR 26 DF CORR. COEFFICIENT AT MEANS DISC -0.10867E+06 9234.0 CONSTANT 16329. 1100.0 - 1 1 . 768 14.845 -0 .9176 -0 .91757 -2 .3038 0.9458 O.OOOOOE+OO 3.3038 RVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 - 1492.0 -7468.6 5976.6 2 -4321 .0 -7033 .9 2712.9 3 -306 .00 -4100 .0 3794.0 4 -2226 .0 -839 .99 - 1386.0 5 - 1545.0 -236 1 .3 816.31 6 . -91 .000 - 187.99 96.995 7 708.00 572.66 135.34 8 - 1458 .0 681.33 -2139.3 9 - 125.00 464.00 -589 .00 10 -2652 .0 1007.3 -3659 .3 1 1 -1065 .0 - 2094.0 -3159.0 12 1610.0 4593.3 -2983 .3 13 4948 .0 6223.3 - 1275.3 14 1147.0 3180.6 -2033.6 15 - -2613 .0 2528.6 -5141.6 16 4183.0 7309 .9 -3126.9 17 8888.0 7961 .9 926.08 18 1037 1 . 11113. -742.22 19 15038. 12309. 2729.5 20 876 1 .0 9265.9 -504.91 21 8090.0 8396.6 -306.58 22 9311.0 10570. - 1258.9 23 10108. 11113. - 1005.2 24 13416. 1 1222. 2194. 1 25 12444. 11222. 1222. 1 26 11782. 11331 . 451.45 27 19477 . 13395. 6081.8 28 16004 . 13830. 2174.1 DURBIN-WATSON = 0.9032 VON NEUMAN RATIO = 0.9367 RHO = 0.45778 RESIDUAL SUM = - 0 . 7 7 3 0 7 E - 1 0 RESIDUAL VARIANCE = 0.76649E+07 SUM OF ABSOLUTE ERRORS= 58622. R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8419 RUNS T E S T : 9 RUNS, 13 POSIT IVE, 15 NEGATIVE, NORMAL STATISTIC = -2 .2956 COEFFICIENT OF SKEWNESS = 0.5115 WITH STANDARD DEVIATION OF 0 .4405 COEFFICIENT OF EXCESS KURTOSIS = 0 .2115 WITH STANDARD DEVIATION OF 0.8583 GOODNESS OF FIT TEST FOR NORMALITY OF RESIDUALS - 6.GROUPS OBSERVED 0 .0 5.0 10.0 10.0 1.0 2 .0 EXPECTED 0 .6 3.8 9 .6 9.6 3.8 0 .6 CHI-SQUARE = 6.0268 WITH 2 DEGREES OF FREEDOM I_ A U T O PRIV WAGE/ ANOVA LIST REQUIRED MEMORY IS PAR= 5 CURRENT PAR= 40 DEPENDENT VARIABLE = PRIV . . N O T E . . R - S Q U A R E , A N O V A , R E S I D U A L S DONE ON ORIGINAL VARS LEAST SQUARES ESTIMATION 28 OBSERVATIONS BY COCHRANE-ORCUTT TYPE PROCEDURE WITH CONVERGENCE = 0.00100 ITERATION 1 2 3 4 RHO 0 .00000 0.55096 0.55668 0.55688 LOG L . F . -268.551 -263.787 -263.789 -263.789 SSE 0. 35108E + 09 0 . 2466 1E + 09 0.24656E+09 0.24656E+09 LOG L . F . = •263. 789 AT RHO 0.55688 l T3 Co OQ (T> NJ O o RHO ESTIMATE 0. 55688 ASYMPTOTIC VARIANCE 0.02464 ASYMPTOTIC ST.ERROR 0.15697 R-SQUARE = 0 .8044 R-SQUARE ADJUSTED = VARIANCE OF THE ESTIMATE = 0.94832E+07 STANDARD ERROR OF THE ESTIMATE = 3079.5 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -263.789 MODEL SELECTION TESTS - SEE JUOGE E T . A L . M 9 8 5 , AKAIKE (1969) FINAL PREDICTION ERROR- FPE = ASYMPTOTIC T-RATIO 3.54773 0.7969 P.242) 0.10161E+08 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC SCHWARZI 1978) CRITERION-SC = 16.229 16.134 ANALYSIS OF VARIANCE - FROM MEAN SS DF MS REGRESSION 0. 10142E+10 1 . 0 . 10142E+10 ERROR 0. 24656E+09 26. 0.94832E+07 TOTAL 0. 12608E+10 27 . 0.46695E+08 ANALYSIS OF VARIANCE - FROM ZERO SS DF MS REGRESSION 0 . 16982E+10 2 . 0.84910E+09 ERROR 0. 24656E*09 26 . 0 .94832E*07 TOTAL 0 . 19448E+ 10 28. 0 .69456E*08 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD ERROR T-RATIO 26 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS WAGE CONSTANT 224 . 19 • 12360. 47.143 3887 .7 4.7556 3.1793 0.6821 -0.5291 0.83767 O.OOOOOE+OO 3.5555 •2 .5008 00 O OBSERVATION NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 OBSERVED VALUE - 1492.0 -4321.0 •306.00 - 2226 .0 - 1545 .0 -91.000 708.00 - 1458 .0 - 125.00 -2652.0 PREDICTED VALUE - 375 1 .2 - 1065. 1610. 4948 . 1147 -2613. 4183. 8888. 10371. 15038. 8761 .0 8090.0 9311.0 10108. 13416 . 12444 . 11782. 19477 . 16004 . - 1999 - 3558 - 1328 - 1924 - 1588 -345.22 604.63 - 121.90 1351 .5 455.79 1876 .0 4395 . 3 7031 .6 4402 .0 2596.5 6686.7 9081.8 10361 . 13413. 9123.9 9209.1 9908 .6 10758. 12505. 11886. 12066. 16554. CALCULATED RESIDUAL 2259.2 -2321.1 3252.5 -897.98 379. 15 1497.0 1053.2 -2062.6 -3.1017 -4003.5 - 1520.8 -266.01 552.66 -5884.6 -7015.0 1586.5 2201.3 1289.2 4677 . 1 -4651 .5 • 1033.9 101.91 199.36 2657.7 -61.136 -104.39 7411.3 •550.43 DURBIN-WATSON = 1.9135 VON NEUMAN RATIO = 1.9844 RHO = 0.03240 RESIDUAL SUM = -1258.1 RESIDUAL VARIANCE = 0.95440E+07 SUM OF ABSOLUTE ERR0RS= 59494. R-SOUARE BETWEEN OBSERVED AND PREDICTED = 0.8039 RUNS TEST: 14 RUNS, 14 POSITIVE, 14 NEGATIVE, NORMAL STATISTIC = -0.3852 |_AUTO PRIV LAND/ ANOVA LIST REQUIRED MEMORY IS PAR= 5 CURRENT PAR= 40 DEPENDENT VARIABLE = PRIV . .NOTE. .R-SQUARE,ANOVA,RESIDUALS DONE ON ORIGINAL VARS LEAST SOUARES ESTIMATION 28 OBSERVATIONS BY COCHRANE-ORCUTT TYPE PROCEDURE WITH CONVERGENCE = 0.00)00 ITERATION RHO LOG L . F . SSE 1 0.00000 -279.990 0.79480E+09 2 0.67252 -269.046 0.35599E+09 3 . 0.83467 -267.663 0.31576E+09 4 0.88346 -267.493 0.30836E+09 5 . 0.89334 -267.481 0.30719E+09 6 0.89496 -267.480 0.30701E+09 7 0.89521 -267.480 0.30698E+09 LOG L . F . = -267.480 AT RHO = 0.89521 ASYMPTOTIC ASYMPTOTIC ASYMPTOTIC ESTIMATE VARIANCE ST.ERROR T-RATIO RHO 0.89521 0.00709 0.08422 10.62936 R- SQUARE = 0.7565 R- SQUARE ADJUSTED = 0.747 1 VARIANCE OF THE ESTIMATE = 0 . 1 1 8 0 7 E » 0 8 STANDARD ERROR OF THE ESTIMATE = 3436.1 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -267.480 MOOEL SELECTION TESTS - SEE JUDGE E T . A L . U 9 8 5 . P.242) AKAIKE (1969) FINAL PREDICTION ERROR - FPE = 0.12650E*08 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 16.353 SCHWARZl1978) CRITERION-SC = 16.448 ANALYSIS OF VARIANCE - FROM MEAN SS DF MS REGRESSION 0. 95378E+09 1 . 0.95378E+09 ERROR 0. 30698E+09 26 . 0. 1 1807E + 08 TOTAL 0. 12608E+10 27 . 0.46695E+08 ANALYSIS OF VARIANCE - FROM ZERO SS DF MS REGRESSION 0. 16378E+10 2. 0.81889E*09 ERROR 0. 30698E+09 26. 0. 1 1807E + 08 TOTAL 0. 19448E+ 10 28. 0.69456E+08 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD T-RATIO ERROR 26 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS LAND CONSTANT •6.8307 6519.5 37. 145 6192.4 -0.18389 1.0528 -0.0360 -0.32410E-01 -0.14328 0.2022 O.OOOOOE+OO 1.3190 I_ A U T O PRIV D I S C / ANOVA LIST REQUIRED MEMORY IS PARr 5 CURRENT PAR= 40 DEPENDENT VARIABLE = PRIV . . N O T E . . R - S Q U A R E , A N O V A , R E S I D U A L S DONE ON ORIGINAL VARS LEAST SQUARES ESTIMATION 28 OBSERVATIONS BY COCHRANE-ORCUTT TYPE PROCEDURE WITH CONVERGENCE = 0.00100 ITERATION 1 2 3 4 RHO 0.00000 0.45778 0.47391 0.47490 LOG L . F . -260 .623 -256 .806 -256 . 767 -256 .765 SSE 19929E+09 15046E+09 14994E+09 14991E+09 LOG L . F . = •256.765 AT RHO = 0.47490 l CO fD ro o u> RHO ESTIMATE 0 .47490 ASYMPTOTIC VARIANCE 0.02766 ASYMPTOTIC ST.ERROR 0. 16631 R- SQUARE = 0.8811 R- SQUARE ADJUSTED = VARIANCE OF THE ESTIMATE = 0.57659E+07 STANDARD ERROR OF THE ESTIMATE = 2401.2 MEAN OF DEPENDENT VARIABLE = 4942.6 LOG OF THE LIKELIHOOD FUNCTION = -256 .765 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , AKAIKE (1969) FINAL PREDICTION ERROR- FPE = ASYMPTOTIC T-RATIO 2.85547 = 0 .8765 P.242) 0.61777E+07 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC SCHWARZI1978) CRITERION-SC = 15.731 15.636 ANALYSIS OF VARIANCE - FROM MEAN SS DF MS REGRESSION 0 . 1 1 108E+ 10 1 . 0.11108E+ 10 ERROR 0 . 14991E+09 26 . 0. 57659E + 07 TOTAL 0. 12608E+10 27 . 0.46695E+08 ANALYSIS OF VARIANCE - FROM ZERO SS DF MS REGRESSION 0. 17949E+ 10 2. 0.89743E+09 ERROR 0 . 14991E+09 26 . 0.57659E+07 TOTAL 0 . 19448E+10 28. 0.69456E+08 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD T-RATIO- ERROR 26 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS DISC CONSTANT • 0 . 10693E+06 16393. 13066. 1616.0 - 8 . 1838 10.144 -0 .8487 -0 .90290 0 .8935 O.OOOOOE+OO -2 .2670 3.3166 OBSERVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 - 1492.0 -7024 .6 5532.6 2 - 4321 .0 -3969 .5 - 351.52 3 - 306.00 -2629 .0 2323.0 4 -2226 .0 1114.5 -3340 .5 5 - 1545.0 -2817 . 7 1272.7 6 -91 .000 355. 19 -446 . 19 7 708 .00 778.58 -70 .583 8 - 1458.0 909.49 -2367 .5 9 - 125.00 - 383.78 258.78 10 -2652 .0 885.47 -3537 .5 1 1 -1065 .0 500. 78 - 1565.8 12 1610.0 3206.0 - 1596.0 13 4948.0 4912.3 35.652 14 1147.0 •* 2741.8 - 1594.8 15 • -2613 .0 1717.0 -4330 .0 16 ' 4183.0 4941 .0 -757.97 17 8888.0 6575.6 2312.4 18 10371 . 1 1606 . - 1235.3 19 15038. 12014. 3023.9 20 8761 .0 10678. - 1916.9 21 8090.0 8263.4 -173.37 22 9311.0 10490. -1178 .5 23 10108. 10588. -480 .42 24 13416. 10820. 2596. 1 25 12444. 12340. 103.87 26 1 1782 . 1 1985. -203 .46 27 19477 . 13652. 5825. 1 28 16004. 16769. -765 . 18 DURBIN-WATSON = 2.0337 VON NEUMAN RATIO = 2.1090 RHO = -0 .11673 RESIDUAL SUM = -2627 .5 RESIDUAL VARIANCE = 0.60314E+07 SUM OF ABSOLUTE ERR0RS= 49196. R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8764 RUNS TEST: 18 RUNS, 10 POSIT IVE. 18 NEGATIVE, NORMAL STATISTIC = 1.7435 |_01S POR EXCH SPR/ ANOVA LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = POR . . .NOTE . .SAMPLE RANGE SET TO: 1, 28 R-SQUARE = 0 .5043 R-SOUARE ADJUSTED = 0.4646 VARIANCE OF THE ESTIMATE = O.91210E+O7 STANDARD ERROR OF THE ESTIMATE = 3020.1 MEAN OF DEPENDENT VARIABLE = -1282 .0 LOG OF THE LIKELIHOOD FUNCTION = -262 .509 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.10098E+08 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 16.127 SCHWARZ(1978) CRITERION-SC = 16.270 l T3 Co 0°. ft) to o REGRESSION ERROR TOTAL REGRESSION ERROR TOTAL ANALYSIS OF VARIANCE SS DF 0.23195E+09 2. 0 .22803E*09 25. 0.4599.8E + 09 27. ANALYSIS OF VARIANCE SS 27797E+09 22803E+09 0.50599E+09 DF 3. 25. 28 . - FROM MEAN MS 0.11598E+09 0.91210E+07 0.17036E+08 - FROM ZERO MS 0.92656E+08 0.91210E+07 0.18071E+08 F 12.715 F 10.159 VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR 25 DF CORR. COEFFICIENT AT MEANS EXCH 56 .650 11.499 4.9264 0.7018 0.96730 -13 .117 SPR -38939 . 14637. -2 .6604 -0 .4697 -0 .52237 0 .40638E-02 CONSTANT -18092 . 3459.3 -5 .2299 -0 .7228 0.OOOOOE+00 14.113 I <D Ol OQ fD O RVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 -22 .220 -2206 .9 2184.7 2 11 . 760 -2550.1 2561 .8 3 7 1 .020 - 1552.8 1623.8 4 146.74 - 155.95 302.69 5 140.62 -218 .25 358.87 6 80.110 1034.8 -954 .70 7 - 18.420 144 1.0 - 1459.4 8 -9 .9000 1113.4 -1123 .3 9 296.47 585.09 -288 .62 10 751.12 2262.9 -1511 .8 1 1 187.50 2410.7 -2223.2 12 550.30 1701 .5 -1151.2 13 44.780 -786 .00 830.78 14 -829 .75 - 1554.9 725. 19 15 -347.47 -992 .43 644.96 16 1306.2 5692.5 -4386 .3 17 973.90 -795 .63 1769.5 18 192.83 - 1473.9 1666.7 19 -632.09 -3413 .2 2781 . 1 20 -280.37 -2872 .0 2591.7 21 2138.0 -2864 . 3 5002.3 22 1639.5 -2288 .2 3927.8 23 198.86 - 1842.6 2041 .4 24 -650.61 -3289 .7 2639. 1 25 -5308 .8 -3270 .7 -2038 .0 26 -9145.1 -3666 .2 -5478.9 27 - 15506. -7437 .8 -8068 .0 28 - 1 1874. -8905 .6 -2968.7 DURBIN-WATSON = 0.6774 VON NEUMAN RATIO = 0.7025 RHO = 0.65692 RESIDUAL SUM = - 0 . 3 1 8 3 2 E - 1 0 RESIDUAL VARIANCE = 0.91210E+07 SUM OF ABSOLUTE ERR0RS= 63305. R-SOUARE BETWEEN OBSERVEO AND PREDICTED = 0.5043 RUNS TEST: 6 RUNS, 16 POSIT IVE, 12 NEGATIVE, NORMAL STATISTIC = -3.4291 COEFFICIENT OF SKEWNESS = -0 .8703 WITH STANDARD DEVIATION OF 0.4405 COEFFICIENT OF EXCESS KURTOSIS = 1.0257 WITH STANDARD DEVIATION OF 0.8583 GOODNESS OF FIT TEST FOR NORMALITY OF RESIDUALS - 6 GROUPS OBSERVED 1.0 2 .0 9 .0 14.0 2 .0 0 .0 EXPECTED 0 .6 3.8 9 .6 9.6 3.8 0.6 CHI - SQUARE = 4 .6546 WITH 1 DEGREES OF FREEDOM I_AUTO POR EXCH SPR/ ANOVA LIST REQUIRED MEMORY IS PAR= 5 CURRENT PAR= 40 DEPENDENT VARIABLE = POR . .NOTE..R-SQUARE,ANOVA,RESIDUALS DONE ON ORIGINAL VARS LEAST SQUARES ESTIMATION 28 OBSERVATIONS BY COCHRANE-ORCUTT TYPE PROCEDURE WITH CONVERGENCE = 0.00100 ITERATION RHO LOG L . F . SSE 1 0.00000 -262.509 0.22803E+09 2 0.65692 -251.901 0.10475E+09 3 0.85839 -250.374 0.91378E+08 '4 0.90181 -250.424 0.90589E+08 5' 0.90871 -250.452 0.90545E+08 6 0.90982 -250.457 0.90540E+08 7 0.91001 -250.458 0.90540E+08 LOG L . F . = -250.458 AT RHO = 0.91001 ASYMPTOTIC ASYMPTOTIC ASYMPTOTIC ESTIMATE VARIANCE ST.ERROR T-RATIO RHO 0.91001 0.00614 0.07835 11.61447 R-SQUARE = 0.8032 R-SQUARE ADJUSTED = 0.7874 VARIANCE OF THE ESTIMATE = 0. 36216E+07 STANDARD ERROR OF THE ESTIMATE = 1903.0 MEAN OF DEPENDENT VARIABLE = -1282.0 LOG OF THE LIKELIHOOD FUNCTION = -250.458 MODEL SELECTION TESTS - SEE JUDGE E T . A L . U 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR - FPE = 0.40096E + 07 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 15.203 SCHWARZt1978) CRITERION-SC = 15.346 ANALYSIS OF VARIANCE - FROM MEAN SS DF MS REGRESSION 0. 36944E+09 2 . 0.18472E+09 ERROR 0. 90540E+08 25. 0.36216E+07 TOTAL 0. 45998E+09 27 . 0.17036E+08 ANALYSIS OF VARIANCE - FROM ZERO SS DF MS REGRESSION 0. .41545E+09 3. 0.13848E+09 ERROR 0 .90540E+08 25. 0.36216E+07 TOTAL 0. . 50599E + 09 28 . 0.18071E+08 VARIABLE ESTIMATED STANDARD T-RATIO PARTIAL STANDARDIZED ELASTICITY NAME COEFFICIENT ERROR 25 DF CORR. COEFFICIENT AT MEANS EXCH 22.168 10.314 2.1493 0.3949 0.37852 -5.1327 SPR - 737.86 18196. - 0.40551E-01-0.0081 -0.98984E-02 0.77005E- CONSTANT -9391.1 4180.5 -2.2464 -0.4098 O.OOOOOE+OO 7.3256 Co OO (b to o OO RVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 -22 .220 - 1496.0 1473.8 2 11 .760 - 161.36 173.12 3 71 .020 - 105.62 176 .64 4 146.74 -42 .420 189 . 16 5 140.62 1.2179 139.40 6 80.1 10 20.468 59.642 7 - 18.420 -48 .508 30.088 8 -9 .9000 - 151.38 141.48 9 296.47 - 147.99 444.46 10 751.12 171.71 579.41 1 1 187.50 559.31 -371 .81 12 550.30 - 194.65 744.95 13 44.780 -664. 10 708.88 14 -829 .75 -459.71 -370 .04 15 - 347.47 -999 .58 652.11 16 1306.2 1757 .8 -451 .58 17 973.90 - 1100. 1 2074.0 18 192.83 29.225 163.60 19 -632 .09 - 1393.3 761 .22 20 -280 .37 -802.04 521.67 21 2138.0 -497 .85 2635.8 22 1639.5 1437.0 202.54 23 198.86 1702.9 - 1504. 1 24 -650.61 -435.1 1 -215 .50 25 -5308 .8 -960 .50 -4348 .3 26 -9145 . 1 -5186 .0 -3959 . 1 27 - 15506. - 10238. -5267 .5 28 -11874. - 15149. 3274 . 7 DURBIN-WATSON = 1.3507 VON NEUMAN RATIO = 1.4008 RHO = 0.28829 RESIDUAL SUM = -1341 .2 RESIDUAL VARIANCE = 0.36935E+07 SUM OF ABSOLUTE ERRORS= 31635. R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8010 RUNS TEST: 9 RUNS, 20 POSIT IVE, 8 NEGATIVE, NORMAL STATISTIC = 1.6319 I _ O L S DIR WAGE LAND EXCH SPR GOV/ ANOVA LIST REQUIRED MEMORY IS PAR= 5 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = DIR . . .NOTE. .SAMPLE RANGE SET TO: 1, 28 R-SQUARE = 0.8102 R-SQUARE ADJUSTED = 0.7671 VARIANCE OF THE ESTIMATE = 92457. STANDARD ERROR OF THE ESTIMATE = 304.07 MEAN OF DEPENDENT VARIABLE = -579 .79 LOG OF THE LIKELIHOOD FUNCTION = -196.437 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.11227E+06 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 11.622 SCHWARZt 1978) CRITERION-SC = 11.907 ANALYSIS OF VARIANCE T3 Co K> O REGRESSION ERROR TOTAL REGRESSION ERROR TOTAL SS 0.86850E+07 0:20340E+07 0 . 10719E + 08 DF 5. 22. 27 . ANALYSIS OF VARIANCE SS 0 . 18097E+08 0.20340E+07 0.20131E+08 DF 6. 22. 28. - FROM MEAN MS 0. 17370E+07 92457. 0.39700E+06 - FROM ZERO MS 0.30162E+07 92457. 0.71898E+06 F 18.787 F 32.623 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD ERROR -RATIO 22 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS WAGE -19 .010 7.6969 -2 .4698 -0 .4659 -0 .77033 2.5701 LAND -5 .1087 3.1415 -1 .6262 -0 .3276 -0 .26288 0.91351 EXCH 3.6925 1.6209 2.2780 0.4369 0.41302 -1 .8903 SPR -6169 .2 2693.2 -2 .2906 -0 .4388 -0 .54214 0 .14236E-02 GOV 0 .13932E-01 0 .22929E-01 0.60760 0.1285 0 .96295E-01 -0 .13636 CONSTANT 265.74 907.83 0.29272 0.0623 0.OOOOOE+00 -0 .45833 I TJ CD- ffO ft) O I RVATION 08SERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 -79 .370 11 . 783 -91 .153 2 - 32 .350 - 177.46 145. 1 1 3 - 1 1 .360 - 113.37 102.01 4 - 19 .020 53.889 - 72 .909 5 - 46 .870 -41 .447 -5 .4229 6 - 30.390 194.03 -224 .42 7 - 76.320 133.47 - 209.79 8 -71 .780 18.626 -90 .406 g -117 .65 -179.24 61 .590 10 -112.11 -29 .919 -82 . 191 11 - 187.50 - 103.85 -83 .650 12 -96 .650 - 399. 16 302.51 13 - 305.97 -711.74 405.77 14 -935 .54 - 1088.0 152.43 15 -675 .79 -949 .20 273.41 16 -771 .28 - 125.65 -645 .63 17 -667 .85 -786 . 17 118.32 18 -491 .03 -806 .93 315.90 19 -531 .55 -794.67 26 3. 12 20 -605 .40 -856 .06 250.66 21 -478 .00 -782.84 304.84 22 - 1006 . 8 -721 .50 -285 .28 23 -971 . 46 -844 .39 - 127.07 24 -717 .66 - 1070.9 353.26 25 - 1322.8 - 1160.0 - 162.74 26 -1272 .7 - 1313.0 40.238 27 -2165 .0 - 1653.6 -51 1 .44 28 -2434 .0 - 1936.9 -497 .07 DURBIN-WATSON = 1.5372 VON NEUMAN RATIO = 1.5942 RHO = 0 .19193 RESIDUAL SUM = -0 .12506E-11 RESIDUAL VARIANCE = 92457. SUM OF ABSOLUTE ERR0RS= 6178.3 R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8102 RUNS T E S T : 13 RUNS, 14 POSIT IVE. 14 NEGATIVE, NORMAL STATISTIC = COEFFICIENT OF SKEWNESS = -0 .6103 WITH STANDARD DEVIATION OF 0.4405 COEFFICIENT OF EXCESS KURTOSIS = -0 .0970 WITH STANDARD DEVIATION OF 0. - 0 . 7703 8583 GOODNESS OF FIT TEST FOR NORMALITY OF RESIDUALS - 10 GROUPS OBSERVED 0 .0 1.0 2 .0 3.0 8.0 6.0 7.0 1.0 0 .0 0 .0 EXPECTED 0 .2 0 .8 2.2 4 .5 6 .3 6 .3 4 .5 2.2 0 .8 0.2 CHI-SQUARE = 4.3793 WITH 2 DEGREES OF FREEDOM I _ O L S DIR WAGE LAND EXCH SPR/ ANOVA LIST REQUIRED MEMORY IS PAR= 5 CURRENT PAR= 40 OLS ESTIMATION 28 OBSERVATIONS DEPENDENT VARIABLE = DIR . . . N O T E . . S A M P L E RANGE SET TO: 1, 28 R-SQUARE = 0.8071 R-SQUARE ADJUSTED = 0.7735 VARIANCE OF THE ESTIMATE = 89921. STANDARD ERROR OF THE ESTIMATE = 299.87 MEAN OF DEPENDENT VARIABLE = -579 .79 LOG OF THE LIKELIHOOD FUNCTION = -196 .670 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 . P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.10598E+06 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 11.567 SCHWARZt 1978) CRITERION-SC = 11.805 REGRESSION ERROR TOTAL ANALYSIS OF VARIANCE SS 0.86508E+07 0. 20682E + 07 0 . 10719E + 08 DF 4. 23. 27. • FROM MEAN MS 0.21627E+07 89921 . 0.39700E+06 F 24.051 REGRESSION ERROR TOTAL ANALYSIS OF VARIANCE - FROM ZERO SS DF MS 0.18063E+08 5. 0.36127E+07 0.20682E+07 23. 89921. 0.20131E+08 28. 0.71898E+06 F 40. 176 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD T-RATIO ERROR 23 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS WAGE LAND EXCH SPR CONSTANT -17 .618 -5 .6972 3.9990 -6944 . 4 205.81 7.2466 2.9472 1.5191 2339. 1 890.00 -2 .4312 - 1 .9330 2.6324 -2 .9688 0.23125 -0 .4522 -0 .3738 0.4812 -0 .5264 0.0482 -0 .71393 -0 .29316 0.44731 -0.61026 2. 3819 1 .0187 -2 .0473 0. 16024E-C O.OOOOOE+00 -0 .35498 I 09 fD RVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 1 - 79.370 34.278 - 113.65 2 -32 .350 - 191.59 159.24 3 - 1 1 .360 - 134.63 123.27 4 - 19.020 53.722 -72 .742 5 -46 .870 -52 .709 5.8395 6 - 30.390 188. 36 -218 .75 7 -76 .320 119.28 - 195.60 8 -71 .780 4.7931 -76 .573 9 - 1 17 .65 - 180.52 62.872 10 -112.11 -29 .520 -82 .590 1 1 - 187.50 - 19.685 - 167.81 12 -96 .650 -370 .45 273.80 13 -305.97 -712 .43 406.46 14 -935.54 - 1035.3 99.801 15 -675 .79 -954 .35 278.56 16 - 771.28 - 170.70 -600 .58 17 -667 .85 -872.31 204.46 18 -491 .03 -810.41 319.38 19 -531 .55 -830 .93 299.38 20 -605 .40 -871 .87 266.47 21 - 4 78-.00 -794 .07 316.07 22 - 1006.8 -701 .93 - 304.85 23 -971.46 -837 .48 - 133.98 24 -717 .66 - 1088.8 371 . 10 25 - 1322.8 - 1125.2 - 197.59 26 - 1272. 7 - 1243.0 -29 .737 27 -2165 .0 - 1619.4 -545 .57 28 -2434 .0 - 1987 . 3 -446 .68 DURBIN-WATSON = 1.5992 VON NEUMAN RATIO = 1.6584 RHO = 0.16496 RESIDUAL SUM = - 0 . 9 6 6 3 4 E - 1 2 RESIDUAL VARIANCE = 89921. SUM OF ABSOLUTE ERRORS= 6373.4 R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8071 RUNS TEST: 13 RUNS, 14 POSIT IVE, 14 NEGATIVE, NORMAL STATISTIC = -0 .7703 COEFFICIENT OF SKEWNESS = -0.4631 WITH STANDARD DEVIATION OF 0 .4405 COEFFICIENT OF EXCESS KURTOSIS = -0 .4634 WITH STANDARD DEVIATION OF 0 .8583 GOODNESS OF F IT TEST FOR NORMALITY OF RESIDUALS - 10 GROUPS OBSERVED 0 .0 2 .0 1.0 4 .0 7.0 5.0 7.0 2.0 0 .0 0 .0 EXPECTED 0 .2 0 .8 2.2 4 .5 6 .3 6 .3 4 .5 2.2 0 .8 0 .2 CHI-SQUARE = 5.7034 WITH 3 DEGREES OF FREEDOM I _ P L O T DIR WAGE REQUIRED MEMORY IS PAR= 3 CURRENT PAR= 40 FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 3 28 OBSERVATIONS *=DIR M=MULTIPLE POINT 400 .00 317 .95 235 .90 153.85 71 . 795 - 10.256 - 9 2 . 3 0 8 - 1 7 4 . 3 6 -256 .41 - 3 3 8 . 4 6 -420 .51 - 5 0 2 . 5 6 -584 .62 - 6 6 6 . 6 7 - 7 4 8 . 7 2 - 1405 1 -1487 2 - 1569 2 - 1651 3 -1733 3 -1815 4 -1897 4 -1979 5 -2061 5 -2143 6 -2225 6 -2307 7 -2389 7 - 247 1 8 -2553 8 -2635 9 -2717 9 -2800 .0 fD ho CO - 8 3 0 . 7 7 - 9 1 2 . 8 2 - 9 9 4 . 8 7 - 1076.9 - 1 159 .0 - 1241 .0 - 1 323. 1 M 30.000 40.000 50.000 60.000 70.000 80.000 90.000 100.000 110.000 WAGE |_PLOT DIR LAND REQUIRED MEMORY IS PAR= 3 CURRENT PAR= 40 FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 3 28 OBSERVATIONS •=DIR M=MULTIPLE POINT 400 .00 317.95 235 .90 153.85 71 .795 - 10.256 -92 .308 * . . . . - 174.36 -256 .41 -338 .46 -420 .51 -502 .56 - 5 8 4 . 6 2 - 6 6 6 . 6 7 - 7 4 8 . 7 2 - 1241 .0 - 1323. 1 - 1405. 1 - 1487.2 - 1569.2 - 1651 . 3 - 1733.3 -1815 .4 - 1897 . 4 - 1979 . 5 -2061 .5 -2143 .6 -2225 .6 - 2307 .7 -2389 . 7 -2471 .8 - 2 5 5 3 . 8 -2635 .9 -2717 .9 - 2800 .0 oo fD - 830 .77 \ - 9 1 2 . 8 2 ' v 994. 87 >1076 .9 - 1 1 5 9 . 0 60.000 80.000 100.000 120.000 140.000 160.000 180.000 20.000 40.000 LAND | _PLOT DIR EXCH 00 fD N> i—1 Ln I REQUIRED MEMORY IS PAR= 3 CURRENT PAR= FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 28 OBSERVATIONS *=DIR M=MULTIPLE POINT 400 .00 317 .95 235 .90 153.85 71 . 795 - 10.256 -92 .308 - 174.36 -256 .41 -338 .46 • -420 .51 -502 .56 - 5 8 4 . 6 2 -666 .67 - 7 4 8 . 7 2 -830 .77 -912 .82 - 9 9 4 . 8 7 - 1076.9 - 1 159.0 - 1241 .0 - 1 323. 1 - 1405. 1 - 1487.2 - 1569.2 - 1651 . 3 - 1733. 3 - 1815 .4 - 1897 . 4 - 1979.5 -2061 .5 - 2143 .6 -2225 .6 -2307 .7 -2389 .7 -2471 .8 - 2553 .8 -2635 .9 -2717 .9 - 2 8 0 0 . 0 40 3 M M 120.000 160.000 200.000 240.000 280.000 320.000 360.000 400.000 440.000 EXCH I _ P L O T DIR SPR REQUIRED MEMORY IS PAR= 3 CURRENT PAR= 40 FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 3 28 OBSERVATIONS •=DIR M=MULTIPLE POINT 400 .00 317 .95 235 .90 153.85 7 1 . 795 - 10.256 - 9 2 . 3 0 8 - 174.36 -256 .41 . - 338 .46 -420 .51 - 5 0 2 . 5 6 - 5 8 4 . 6 2 -666 .67 -748 . 72 -830 .77 -912 .82 -994 .87 - 1076.9 - 1 159.0 - 1241 .0 - 1323. 1 - 1405. 1 - 1487 . 2 - 1569.2 - 1651 .3 - 1733. 3 - 1815.4 - 1897 . 4 - 1979 . 5 -2061 .5 -2143 .6 - 2 2 2 5 . 6 -2307 .7 -2389 .7 -247 1 . 8 - 2553 .8 - 2 6 3 5 . 9 -2717 .9 - 2 8 0 0 . 0 - 0 . 0 9 0 -0 .060 -0 .030 0.000 0.030 0 .060 0 .090 0. 120 0. 150 SAMPLE SPR 12 I _ O L S DIR WAGE LAND EXCH SPR/ ANOV*A LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 12 OBSERVATIONS DEPENDENT VARIABLE = DIR . . . N O T E . . S A M P L E RANGE SET TO: 1, 12 R-SQUARE = 0 .8886 R-SQUARE ADJUSTED = 0.8249 VARIANCE OF THE ESTIMATE = 447.40 STANDARD ERROR OF THE ESTIMATE = 21.152 MEAN OF DEPENDENT VARIABLE = -73 .447 LOG OF THE LIKELIHOOD FUNCTION = -50 .4140 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 633.82 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 6.3978 SCHWARZI1978) CRITERION-SC = 6.5998 CD CO fD ho I REGRESSION ERROR TOTAL REGRESSION ERROR TOTAL ANALYSIS OF VARIANCE SS DF 24976. 4. 3131.8 7. 28108. 11. ANALYSIS OF VARIANCE SS 89710. 3131.8 92842. DF 5. 7 . 12. FROM MEAN MS 6244 .0 447.40 2555.2 FROM ZERO MS 17942. 447.40 7736.8 F 13.956 F 40.103 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD T-RATIO ERROR 7 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS WAGE LAND EXCH SPR CONSTANT -6 .8838 1 .4295 - 7.3348 118.28 2797 . 8 1.3482 0.60897 3.0645 398.57 1170.7 -5 .1058 2.3474 -2 .3934 0 . 29677 2.3900 -0 .8879 0.6637 -0 .6709 0.1115 0 .6703 - 1.5478 0.72221 -0 .44694 0.10435 O.OOOOOE+OO 4.8159 - 1 .5055 35.862 -0 .79813E-01 -38 .093 . OBSERVATION NO. OBSERVED VALUE PREDICTED VALUE CALCULATED RESIDUAL 2 3 4 5 6 7 8 9 10 1 1 12 •79 .370 -32 .350 - 1 1 . 360 - 19.020 -46 . 870 -30 .390 -76 .320 -71 .780 - 1 17 .65 -112.11 - 187 .50 -96 .650 60.597 43.107 30.497 27.408 31 . 562 53.350 48.465 75.228 98.246 129 .46 186.80 96.650 - 18.773 10.757 19.137 8. 3875 - 15.308 22.960 -27 .855 3.4478 - 19.404 17.346 0.69530 - 0 . 1 3 8 5 6 E - 12 DURBIN-WATSON = 2.8240 VON NEUMAN RATIO = 3.0807 RHO = -0 .46827 RESIDUAL SUM = -0 .32994E-11 RESIDUAL VARIANCE = 447.40 SUM OF ABSOLUTE ERRORS= 164.07 R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8886 , RUNS TEST: 9 RUNS. 6 POSIT IVE, 6 NEGATIVE, NORMAL STATISTIC = 1.2111 COEFFICIENT OF SKEWNESS = -0 .2933 WITH STANDARD DEVIATION OF 0.6373 T) COEFFICIENT OF EXCESS KURTOSIS = -1 .2265 WITH STANDARD DEVIATION OF 1.2322 CD CD GOODNESS OF F IT TEST FOR NORMALITY OF RESIDUALS - 10 GROUPS OBSERVED 0 .0 0 .0 1.0 3.0 2.0 3.0 3.0 0 .0 0 .0 0 .0 EXPECTED 0.1 0 .3 1.0 1.9 2.7 2.7 1.9 1.0 0 .3 0.1 CHI-SQUARE = 3.2742 WITH 3 DEGREES OF FREEDOM ro 00 |_PLOT DIR WAGE l •n CD OQ fD hO REQUIRED MEMORY IS PAR= 3 CURRENT PAR; FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 12 OBSERVATIONS *=DIR M=MULTIPLE POINT 30.000 23 .846 17 .692 1 1 .538 5. 3846 • 0 . 7 6 9 2 3 -6 .9231 - 13.077 -19.231 • - 2 5 . 3 8 5 ' - 31.538 - 3 7 . 6 9 2 -43 .846 - 5 0 . 0 0 0 -56 .154 -62 .308 -68 .462 - 7 4 . 6 1 5 - 8 0 . 769 - 8 6 . 9 2 3 -93 .077 -99 .231 - 105.38 - 1 1 1 .54 - 117.69 - 123.85 - 130.00 - 136. 15 -142.31 - 148 . 46 - 154.62 - 160.77 - 166.92 - 173.08 - 179.23 - 1 8 5 . 3 8 - 191.54 - 197.69 - 2 0 3 . 8 5 - 2 1 0 . 0 0 40 3 35 .000 40.000 45.000 WAGE 50.000 55.000 60.000 65.000 70.000 75.000 |_PLOT DIR EXCH REQUIRED MEMORY IS PAR= 3 CURRENT PAR= 40 FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 3 12 OBSERVATIONS •=DIR M=MULTIPLE POINT 30.000 23.846 17.692 1 1 . 538 5.3846 -0 . 76923 -6 .9231 - 13.077 -19 .231 - 2 5 . 3 8 5 - 3 1 . 5 3 8 -37 .692 -43 .846 I - 50 .000 -56 . 154 ^ ' - 62 .308 -68 .462 fD - 74 .615 -80 .769 5 s? - 86 .923 -130 .00 - 136 . 15 -.142. 31 - 148.46 - 154.62 - 160.77 - 166.92 -173 .08 - 1 7 9 . 2 3 - 185.38 - 191.54 - 197.69 -203 .85 - 210 .00 348.000 349.500 351.000 352.500 354.000 355.500 357.000 358.500 360.000 O -93.1 - 9 9 . ; - 105 -111 -117 - 123 077 231 i .38 .54 .69 I. 85 M EXCH |_PLOT DIR LAND l T> CO OO CD REQUIRED MEMORY IS PAR= 3 CURRENT PAR: FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 12 OBSERVATIONS •=DIR M=MULTIPLE POINT 30 .000 23 .846 17.692 1 1 . 538 5 .3846 - 0 . 7 6 9 2 3 -6 .9231 - 13.077 - 19.231 - 2 5 . 3 8 5 -31 .538 - 3 7 . 6 9 2 - 43 .846 - 5 0 . 0 0 0 -56 .154 - 6 2 . 3 0 8 - 6 8 . 4 6 2 - 7 4 . 6 1 5 - 8 0 . 7 6 9 - 8 6 . 9 2 3 - 9 3 . 0 7 7 -99 .231 - 105.38 - 1 1 1 . 54 -117 .69 - 123.85 - 130.00 - 136. 15 -142 .31 - 148.46 - 154.62 - 160.77 - 166.92 - 173.08 - 179 . 23 - 185.38 - 191 .54 - 197.69 - 2 0 3 . 8 5 - 2 1 0 . 0 0 40 3 15.000 30.000 45.000 LAND 60.000 75.000 90.000 105.000 120.000 135.000 |_PLOT DIR SPR 03 09 fD K) REQUIRED MEMORY IS PAR= 3 CURRENT PAR: FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 12 OBSERVATIONS •=DIR M=MULTIPLE POINT 30.000 23.846 17.692 11.538 5.3846 -0.76923 -6.9231 -13.077 - 19.231 -25.385 -31.538 -37.692 -43.846 -50.000 -56.154 -62.308 -68.462 -74.615 -80.769 -86.923 -93.077 -99.231 -105.38 -111.54 -117.69 -123.85 - 130.00 -136. 15 - 142.31 - 148.46 -154.62 - 160.77 - 166.92 - 173.08 - 179.23 -185.38 - 191.54 -197.69 -203.85 -210.00 40 3 -0.020 0.000 0.020 0.040 0.060 0.080 0. 100 0. 120 0. 140 SPR SAMPLE 13 28 PLOT DIR WAGE T3 Cu QQ fD K> CO REQUIRED MEMORY IS PAR= 3 CURRENT PAR FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 16 OBSERVATIONS •=DIR M=MULTIPLE POINT - 3 0 0 . 0 0 -361 .54 - 4 2 3 . 0 8 - 4 8 4 . 6 2 - 546. 15 - 6 0 7 . 6 9 - 6 6 9 . 2 3 -730 .77 -792 .31 - 8 5 3 . 8 5 -915 .38 -976 .92 - 1038.5 - 1 100.0 - 1 1 6 1 . 5 - 1223. 1 - 1284.6 - 1346.2 - 1407 . 7 - 1469.2 - 1530.8 - 1592.3 - 1653. 8 - 1715.4 - 1 776 .9 - 1838. 5 - 1900.0 - 1961.5 -2023.1 -2084 .6 - 2146 .2 -2207 .7 -2269 . 2 -2330 . 8 -2392 . 3 - 2453 .8 -2515 .4 -2576 .9 - 2 6 3 8 . 5 - 2 7 0 0 . 0 80.000 84.000 88.000 WAGE I ..PLOT DIR LAND •D Co 09 fi> K> REQUIRED MEMORY IS PAR= 3 CURRENT PAR= FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 16 OBSERVATIONS •=DIR M=MUL TI PL E POINT -300 .00 - 361.54 - 423 .08 - 484 .62 -546 .15 -607 . 69 -669 .23 -730 .77 -792 .31 - 8 5 3 . 8 5 -915 .38 -976 .92 - 1038.5 - 1100 .0 - 1 1 6 1 . 5 - 1223.1 -1284 .6 - 1 346.2 - 1407 . 7 - 1469 . 2 - 1530.8 • 1592.3 -1653 .8 - 1715.4 - 1 776 .9 - 1838 . 5 - 1900.0 - 1961 .5 -2023 . 1 -2084 .6 -2146 .2 - 2207 . 7 - 2269 . 2 - 2330 .8 -2392 . 3 - 2453 .8 -2515 .4 -2576 .9 - 2638 .5 -2700 .0 40 3 87 .500 100.000 112.500 125.000 137.500 150.000 162.500 175.000 187.500 LAND I_.PLOT DIR LAND REQUIRED MEMORY IS PAR = 3 CURRENT PAR= 40 FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 3 16 OBSERVATIONS •=DIR M=MUL TIPLE POINT - 300.00 • 361.54 -423.08 -484.62 -546.15 -607.69 -669.23 -730.77 -792.31 -853.85 -915.38 -976.92 -1038.5 -1100.0 -1161.5 1 -1223.1 n 3 -1284.6 03 - 1346.2 0? -1407.7 ro -1469.2 N3 -1530.8 -1592.3 - 1653.8 -1715.4 -1776.9 - 1838.5 - 1900.0 - 1961 .5 -2023 . 1 -2084.6 -2146 . 2 -2207 . 7 -2269.2 -2330.8 -2392.3 -2453.8 -2515.4 -2576.9 -2638.5 -2700.0 87.500 100.000 112.500 125.000 137.500 150.000 162.500 175.000 187.500 LAND PLOT OIR EXCH 0) 00 fD REQUIRED MEMORY IS PAR= 3 CURRENT PAR = FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 16 OBSERVATIONS •=DIR M=MULTIPLE POINT 40 3 -300.00 -361 .54 -423 -484 -546 -607 -669 -730 -792 -853 -915 -976 - 1038 - 1 100 - 1 161 - 1223 - 1284 - 1346 - 1407 . 7 - 1469 . 2 - 1530 - 1592 - 1653 - 1715 - 1776 - 1838 - 1900 - 1961 -2023 -2084.6 -2146.2 -2207 -2269 -2330 -2392 -2453 -2515 - 2576 -2638 - 2700 .08 .62 . 15 .69 . 23 . 77 .31 .85 . 38 .92 .5 .0 .5 . 1 .6 . 2 120.000 160.000 200.000 240.000 280.000 320.000 360.000 400.000 440.000 EXCH I..PLOT DIR SPR Co OO fD fo REQUIRED MEMORY IS PAR= 3 CURRENT PAR= 40 FOR MAXIMUM EFFICIENCY USE AT LEAST PAR= 3 16 OBSERVATIONS •=DIR M=MUL TIPLE POINT -300 .00 - 361.54 -423 .08 -484 .62 -546 . 15 -607 .69 -669 . 23 -730 .77 -792.31 -853 .85 -915 .38 -976 .92 - 1 0 3 8 . 5 - 1 100.0 -116 1.5 - 1223 . 1 - 1284 .6 - 1 346.2 - 1407 . 7 - 1469 . 2 - 1530.8 - 1592. 3 -16 5 3.8 - 1715.4 -1776 .9 - 1838 . 5 - 1900.0 - 1 9 6 1 . 5 -2023 . 1 -2084 .6 -2146 .2 - 2207 .7 - 2269 .2 - 2330 .8 - 2392 . 3 - 2453 .8 -2515 .4 - 2 5 7 6 . 9 -2638 .5 - 2700 .0 - 0 . 0 8 8 -0 .075 -0 .063 -0 .050 -0 .038 SPR .025 -0 .013 -0 .000 0.012 | _OLS DIR WAGE LAND EXCH SPR/ ANOVA LIST REQUIRED MEMORY IS PAR= 4 CURRENT PAR= 40 OLS ESTIMATION 16 OBSERVATIONS DEPENDENT VARIABLE = OIR . . . N O T E . . S A M P L E RANGE SET TO: 13, 28 R-SOUARE = 0 .8239 R-SQUARE ADJUSTED = 0.7598 VARIANCE OF THE ESTIMATE = 84976. STANDARD ERROR OF THE ESTIMATE = 291.51 MEAN OF DEPENDENT VARIABLE = -959 .55 LOG OF THE LIKELIHOOD FUNCTION = -110.506 MODEL SELECTION TESTS - SEE JUDGE E T . A L . M 9 8 5 , P.242) AKAIKE (1969) FINAL PREDICTION ERROR- FPE = 0.11153E+06 (FPE ALSO KNOWN AS AMEMIYA PREDICTION CRITERION -PC) AKAIKE (1973) INFORMATION CRITERION- AIC = 11.600 SCHWARZ(1978)"CRITERION-SC = 11.842 ANALYSIS OF VARIANCE I CD 00 CD N) K> tsj oo I I REGRESSION ERROR TOTAL REGRESSION ERROR TOTAL SS 0 . 4 3 7 2 1 E ' 0 7 0.93473E+06 0.53068E+07 DF 4 . 1 1 . 15. ANALYSIS OF VARIANCE SS 0 . 19104E+0B 0.93473E+06 0.2OO39E+08 DF 5. 1 1 . 16 . - FROM MEAN MS 0. 10930E*07 84976 . 0.35379E+06 - FROM ZERO MS 1 0. 38208E + 07 84976. 0.12524E+07 F 12.863 F 44.963 VARIABLE NAME ESTIMATED COEFFICIENT STANDARD ERROR T-RATIO 1 1 DF PARTIAL STANDARDIZED ELASTICITY CORR. COEFFICIENT AT MEANS WAGE LAND EXCH SPR CONSTANT •62.145 • 18.316 •2 .2909 •698.92 7978.0 15.643 6.8857 2.7 180 5589 . 1 2581.8 -3 .9727 - 2.6600 -0 .84288 -0 .12505 3.0901 -0 .7676 -0 .6257 -0 .2463 -0 .0377 0.6817 -0.79489 -0 .64866 -0 .22792 6.3883 2.3558 0.597 1 3 -0 .29726E-01 -0 .26904E-01 O.OOOOOE+OO -8 .3143 RVATION OBSERVED PREDICTED CALCULATED NO. VALUE VALUE RESIDUAL 13 -305.97 -80.638 -225.33 14 -935.54 -924.49 - 11.050 15 -675 . 79 -981 .33 305.54 16 - 771.28 -479.51 -291 .77 17 -667 .85 -782.02 114.17 18 -491 .03 -666.58 175.55 19 -531.55 -615.61 84.058 20 -605.40 -924.01 318.61 21 -478.00 -544.81 66.807 22 - 1006.8 -675.73 - 331.05 23 -971 .46 -897 . 22 -74.242 24 -717.66 - 1102.2 384.57 25 - 1322.8 - 1234. 1 -88.697 26 - 1272.7 - 1377. 1 104.40 27 -2165.0 -1648.8 -516.19 28 -2434 .0 -2418.6 -15.366 DURBIN-WATSON = 2.2790 VON NEUMAN RATIO = 2.4309 RHO = -0.16683 RESIDUAL SUM = -0.21032E-11 RESIDUAL VARIANCE = 84976. SUM OF ABSOLUTE ERRORS= 3107.4 R-SQUARE BETWEEN OBSERVED AND PREDICTED = 0.8239 RUNS TEST: 9 RUNS. 8 POSITIVE, 8 NEGATIVE. NORMAL STATISTIC COEFFICIENT OF SKEWNESS = -0.4141 WITH STANDARD DEVIATION OF 0.5643 COEFFICIENT OF EXCESS KURTOSIS = -0.2418 WITH STANDARD DEVIATION OF GOODNESS OF FIT TEST FOR NORMALITY OF RESIDUALS - 10 GROUPS OBSERVED 0.0 0.0 1.0 3.0 4.0 4.0 3.0 1.0 0.0 0.0 EXPECTED 0.1 0.4 1.3 2.5 3.6 3.6 2.5 1.3 0.4 0.1 CHI-SQUARE = 1.5062 WITH 3 DEGREES OF FREEDOM | _END 0.0000 .0908

Cite

Citation Scheme:

    

Usage Statistics

Country Views Downloads
China 24 0
United States 8 0
Japan 4 0
United Kingdom 3 0
City Views Downloads
Beijing 24 0
Tokyo 4 0
Clarks Summit 4 0
Unknown 3 7
Ashburn 2 0
Mountain View 2 0

{[{ mDataHeader[type] }]} {[{ month[type] }]} {[{ tData[type] }]}

Share

Share to:

Comment

Related Items