VII - CONCLUSIONS

Summary

This study has examined why and how Japanese manufacturing firms have located production in the East Asian economies; it has also assessed the strategic role of government policies in this investment and the implications for global welfare. The conclusions from this study are organized into two parts: conclusions about public policies of home and host governments as factors affecting firms' decisions to invest abroad; and conclusions about firms’ behaviour and the implications of this behaviour.

First, Japanese public policy, although it has become more neutral towards exporting with such changes as deregulation of Japanese capital markets since the late 1970s, still encourages outward FDI. ODA activity in Asia has lowered the cost to MNEs of investment by providing essential infrastructure in host economies. One reason for this positive stance is Japan's labour shortage; while automation is one possible response, moving labour-intensive manufacturing abroad has also been a way to release the labour constraint. A second reason for continued Japanese policy activism towards FDI is the perceived need to deflect pressures from the U.S. congress and administration for reduction of the persistent large bilateral trade surplus. By moving goods production offshore, Japanese firms can maintain export market shares.

Another major policy change that influenced outward FDI, though not in an overtly intentional way, was the decision in 1985 (as in 1971) to allow yen/dollar realignment. Although firms failed to anticipate the realignment, once exchange rate expectations had adjusted to a stronger yen and related increases in production costs, FDI became a channel of real-side adjustment. Location by international businesses of production in economies on both sides of major exchange rate relationships is increasingly employed as a way to manage around exchange rate uncertainties as well as trade barriers.

At the same time, host governments have liberalized their policies towards foreign investors to create comparative advantage in manufacturing activities. For host governments, one of the desirable outcomes of these policies is the introduction of knowledge and creation of skills and employment that would be longer coming in the absence of access to foreign savings and know-how.