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Good for the gander? foreign direct investment in the United States

Published online by Cambridge University Press:  22 May 2009

Robert T. Kudrle
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International Organization , Volume 45 , Issue 3 , Summer 1991 , pp. 369 - 424
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Copyright © The IO Foundation 1991

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References

1. Bergsten, C. Fred, Horst, Thomas, and Moran, Theodore H., American Multinationals and American Interests (Washington, D.C.: Brookings Institution, 1978).Google Scholar

2. In Foreign Direct Investment, pp. 10–16Google Scholar, Graham and Krugman present several alternative measures of the foreign role and explain their strengths and limitations.

3. See Eisner, Robert and Pieper, Paul, “The World's Greatest Debtor Nation?” North American Review of Economics and Finance 1 (Spring 1990), pp. 9–32CrossRefGoogle Scholar. Eisner and Pieper object strongly to the use of the term “debtor” to describe a negative net investment position overall. Only indirect (portfolio) investment involves debt. Moreover, published statistics that show the United States behind in direct investment mislead because they employ historical book values, and U.S. assets abroad are older than foreign holdings in the United States.

4. Krugman, Paul, quoted in “Foreign Firms Build U.S. Factories, Vex American Rivals,” Wall Street Journal, 24 07 1987, p. A6.Google Scholar

5. A good account of current U.S. political activity is Earl Fry's “Foreign Direct Investment in the United States: Public Policy Options,” paper presented at the 31st Annual Convention of the International Studies Association, Washington, D.C., 13 April 1990.

6. Official data assign to foreigners any investment that is owned 10 percent or more by a single foreign interest; this interest is typically a corporation. While the percentage seems low, it is usually enough for control, and the data apparently would change little even if it were raised to 20 or 50 percent. See Graham and Krugman's discussion in Foreign Direct Investment, pp. 8–10.Google Scholar

7. Hymer is credited with several of the original insights that were later refined and expanded by Kindleberger and Caves. See Hymer, Stephen H., “The International Operations of National Firms: A Study of Direct Foreign Investment,” Ph.D. diss., Massachusetts Institute of Technology, 1960 (published in 1976 by MIT Press, Cambridge, Mass.)Google Scholar; Kindleberger, Charles P., American Business Abroad: Six Lectures on Direct Investment (New Haven, Conn.: Yale University Press, 1969)Google Scholar; and Caves, Richard E., “International Corporations: The Industrial Economics of Foreign Investment,” Economica 38 (02 1971), pp. 1–27CrossRefGoogle Scholar. Much of the foreign activity of U.S. firms since World War II can be interpreted in terms of the diffusion of U.S. innovations. See the following works by Vernon, Raymond: “International Investment and International Trade in the Product Cycle,” Quarterly Journal of Economics 80 (05 1966), pp. 190–207CrossRefGoogle Scholar; and Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York: Basic Books, 1971)Google Scholar. For a concise account of the growth of direct investment in the context of international relations, see Gilpin, Robert, The Political Economy of International Relations (Princeton, N.J.: Princeton University Press, 1987), chap. 6.CrossRefGoogle Scholar

8. A fourth motive, to escape or hide, also generates some nominal multinationality. Foreign investment in so-called tax havens, such as the Netherlands Antilles, developed almost entirely because of the territory's legal and tax structure and had little if anything to do with the rest of its economy. In general, the strategy pursued by a firm will obviously be partly driven by the behavior of competitors and often by the pressures of source and host country governments.

9. Richardson, J. David, “The Political Economy of Strategic Trade Policy,” International Organization 44 (Winter 1990), p. 112.CrossRefGoogle Scholar

10. The three goals are employed by Strange, Keohane and Nye, and Kudrle and Bobrow. See Strange, Susan, “Transnational Relations,” International Affairs 52 (07 1976), pp. 333–45CrossRefGoogle Scholar; Keohane, Robert O. and Nye, Joseph S., Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 1977)Google Scholar; and Kudrle, Robert T. and Bobrow, Davis B., “U.S. Policy Toward Foreign Direct Investment,” World Politics 34 (04 1982), pp. 353–79CrossRefGoogle Scholar. A fourth goal, “national assertion,” may also motivate behavior. See Keohane, and Nye, , Power and Independence, p. 45Google Scholar; the concept is further explored in Kudrle, Robert T. and Lenway, Stefanie A., “Progress for the Rich: The Canada-U.S. Free Trade Agreement,” in Adler, Emanuel and Crawford, Beverly, eds., Progress in Post-War International Relations (New York: Columbia University Press, 1991), pp. 235–72Google Scholar. Following Johnson, some writers refer to autonomy and security as “noneconomic” goals because they do not involve privately consumable goods and services. See Johnson, Harry G., “The Efficiency and Welfare Implications of the Multinational Corporation,” in Kindle-berger, Charles P., ed., The International Corporation: A Symposium (Cambridge, Mass.: MIT Press, 1970), pp. 35–56Google Scholar. In fact, economists have long used national defense as an archetype of a collective good. See Bator, Francis M., “The Anatomy of Market Failure,” Quarterly Journal of Economics 72 (08 1958), p. 370CrossRefGoogle Scholar. Usage turns largely on the writer's relative emphasis on economics as the study of a particular set of human activities rather than as a methodology.

11. The Tolchins' account of Bridgestone's acquisition of failing Firestone facilities is compelling. But their interpretations are sometimes not only incomplete but also economically incoherent. They observe, for example, that the “slow pace of foreign reciprocity in encouraging U.S. outward investment further diminishes the hope of offsetting the current account deficit with more extensive overseas investments in foreign markets.” They also offer the following argument: “Although it is not blamed as often as the budget deficit, the trade deficit—as excess of imports over exports—should also take some of the blame for contributing to America's new status as a debtor nation.” Both quotes are from p. 181 of Buying Into America.

12. Outgoing investment is discussed by Glickman and Woodward in chap. 6 of The New Competitors.

13. Graham, and Krugman, , Foreign Direct Investment, p. 116.Google Scholar

14. Comparative advantage retains central importance in modern trade theory albeit “comple mented and to some extent supplemented” by newer approaches based on increasing returns. See Helpman, Elhanan and Krugman, Paul, Trade Policy and Market Structure (Cambridge, Mass.: MIT Press, 1989), p. xiGoogle Scholar. Krugman is one of the major figures in the development of the modern theory upon which some writers have based new arguments for government intervention. Krugman, however, takes pains to distinguish theoretical possibilities from real situations and endorses an essentially free trade policy. See Krugman, Paul, “Is Free Trade Passe?” Journal of Economic Perspectives 1 (Winter 1987), pp. 131–44CrossRefGoogle Scholar. This scarcely settles the issue, of course. For a fair, complete, and recent account, see Richardson, , “The Political Economy of Strategic Trade Policy.”Google Scholar

15. It might be useful to differentiate at least four types of challenge to autonomy from increasing international economic interdependence. First, economic interdependence diminishes the sense of being “master of one's own house” almost mechanically through the increasingly powerful web of market connections. The widely lamented inability of countries to pursue their own monetary policies is an example. When Glickman and Woodward observe that “direct investment has made nations more interdependent and allowed them less control of their own destinies” (The New Competitors, p. 276Google Scholar), they could just as well have been writing of trade or indirect investment. Such market linkages do not imply purposive foreign manipulation. Second, market penetration alone may alter tastes and values in ways that threaten national autonomy. Third, autonomy can be diminished by external manipulation of prices and quantities for specific foreign—usually state—purposes. Schacht's binding of several Balkan states to the Third Reich through trade leverage provides perhaps the most vivid historical example. And, fourth, autonomy can be lost from purposive foreign influence on culture or politics. IFDI contributes uniquely only to this fourth threat, although it can clearly magnify the impact of the other three. The second and fourth categories may affect not only autonomy of action but also autonomy of thought by altering the perspective with which issues are viewed.

16. Tolchin, and Tolchin, , Buying Into America, p. 24.Google Scholar

17. Less than complete editorial independence by the Korean-owned Washington Times, cited by the Tolchins on p. 23 of Buying Into America, led to extremely damaging publicity.

18. See Graham, and Krugman, , Foreign Direct Investment, pp. 95–107Google Scholar. For a more detailed account of U.S. controls, see Bale, Harvey Jr., “United States Policy Toward Inward Foreign Direct Investment,” Vanderbilt Journal of Transnational Law 24 (Spring 1985), pp. 199–222.Google Scholar

19. See Graham, and Krugman, , Foreign Direct Investment, pp. 24–26Google Scholar. When I undertook a static forecast based on only the time trend since 1978 as an independent variable, I found the current 11 percent foreign ownership of U.S. nonfinancial corporate assets climbing to over 20 percent by 2005. Such an extrapolation is useful mainly as the starting point for discussion, however. Data were taken from the Board of Governors, Federal Reserve System, Balance Sheets for the U.S. Economy, 1945–89, Washington, D.C., mimeograph, 10 1990.Google Scholar

20. Tolchin, and Tolchin, , Buying Into America, p. 244.Google Scholar

21. Ibid., p. 261.

22. In The New Competitors, pp. 280–81Google Scholar, Glickman and Woodward complain about the inaccuracy of some of the data from the Bureau of Economic Analysis, but they give only one example of the kind of information they would like to be made public: the number of new jobs created by all foreign-owned firms by industry and state during a given year.

23. In Foreign Direct Investment, pp. 113–15Google Scholar, Graham and Krugman suggest a possible international agreement on disclosure, which would probably be necessary to get complete parent firm information. Nonetheless, if the basic idea was accepted, nothing would inhibit unilateral U.S. action on both foreign subsidiaries and closely held domestic firms except a desire to trade U.S. reform for foreign concessions.

24. Other things constant, a shift of foreign profits to domestic wages would raise national income.

25. In Buying Into America, the Tolchins discuss at great length the successful campaign by foreign firms against various states' unitary tax laws, which effectively taxed firms for activity completely outside of the United States. The tale makes a poor example, however, because foreign (and domestic) multinationals' efforts were paralleled by strenuous executive attempts to control the practice in the name of federal supremacy in foreign affairs.

26. Glickman, and Woodward, , The New Competitors, p. 272.Google Scholar

27. Ibid.

28. For an insightful account of the general problem, see Crawford, Beverly, “Export Controls in an Interdependent World,”Google Scholar Institute of International Studies, University of California, Berkeley, mimeograph, 1989. Even the Tolchins note that excessive political pressure can backfire (see Buying Into America, pp. 262–63Google Scholar). “Foreign influence” is viewed with alarm in every country; this point is developed in greater length in Kudrle, Robert T., “The Several Faces of the Multinational Corporation,” in Hollist, Ladd and Tullis, F. Lamond, eds., An International Political Economy, vol. 1 of the International Political Economy Yearbook (Boulder, Colo.: Westview Press, 1983), pp. 175–97.Google Scholar

29. See Tolchin, and Tolchin, , Buying Into America, p. 17Google Scholar. American employees of the firms (the only ones eligible to contribute) understandably regard such a restriction as an abridgment of their rights. And, as Glickman and Woodward note in The New Competitors, p. 273Google Scholar, the average PAC contribution of a foreign-owned firm in 1985–86 was only $796, which was less than the $1,000 ceiling on an individual contribution. The maximum PAC contribution per candidate was $25,000 per election.

30. Tolchin, and Tolchin, , Buying Into America, pp. 18–19.Google Scholar

31. Ibid., p. 258.

32. Ibid., pp. 131–41.

33. Choate's recent documentation of lavish expenditures by the Japanese for a variety of purposes comes much closer to making a general case for foreign influence than anything presented in the books under review. In addition to the PAC activities and federal lobbying on a massive scale, he records the considerable contributions from Japanese sources to sympathetic university voices and to other causes designed to gain a hearing for the Japanese position. But most of this activity aims at the trade relation, and its magnitude and effectiveness depend little on IFDI. See Choate, Pat, Agents of Influence: How Japan's Lobbyists in the United States Manipulate America's Political and Economic System (New York: Knopf, 1990).Google Scholar

34. Specific cases in which security threats were connected with IFDI tend to be few in number and sometimes admit to alternative interpretations. Hence, the postwar years offer at best only a few cautionary episodes, rather than a continuous record. Attempts to expand the number of observations require the examination of earlier periods in which technological conditions relevant to both security and business activity differed dramatically from those of the present. In Foreign Direct Investment, pp. 73–85Google Scholar, Graham and Krugman explore some material from earlier in the century in their security discussion, but they wisely refrain from drawing strong inferences from it.

35. Glickman, and Woodward, , The New Competitors, p. 275.Google Scholar

36. Tolchin and Tolchin, Buying Into America, p. 10.Google Scholar

37. Moran, Theodore H., “The Globalization of America's Defense Industries: What Is the Threat? How Can It Be Managed? Guidelines for a New Generation of Defense Industrial Strategists,”Google Scholar Georgetown School of Foreign Service, Washington, D.C., mimeograph, 1989.

38. See ibid., p. 39. Moran establishes the dangers of excessive determination to “go it alone” with a detailed history of the British “Nimrod” surveillance aircraft. The project continued for several years at high cost and marginal performance by contrast with available alternatives. Much of Moran's excellent study warns the U.S. military against “Nimrodization.”

39. The threat of using monopoly power can be real, as General DeGaulle found out when the United States prevented IBM and Control Data from cooperating in the French nuclear program. See Moran, , “The Globalization of America's Defense Industries,” p. 5.Google Scholar

40. Gordon, and Lees, , Foreign Multinational Investment, p. 200.Google Scholar

41. See Moran, , “The Globalization of America's Defense Industries,” p. 45Google Scholar; and Graham, and Krugman, , Foreign Direct Investment, p. 83.Google Scholar

42. See Gordon, and Lees, , Foreign Multinational Investment, pp. 202–3 and 225Google Scholar. In eleven “military surge demand” sectors, Gordon and Lees suggest that foreign ownership should be subject to scrutiny, but they counsel only that “the relative merits” of domestic and foreign ownership should be considered. The reader is left hanging about how much “surge” might be needed and what criteria might be used to decide the degree (if any) of permitted foreign ownership. For a book that performs its policy analysis “not so much for domestic economic considerations but for strategic military reasons” (p. 198), this is a serious limitation.

43. For details, see Graham, and Krugman, , Foreign Direct Investment, pp. 81–85.Google Scholar

44. Ibid., p. 86; emphasis added. Although Graham and Krugman skillfully attack a range of proposals to increase control over IFDI, they seldom address relaxation of current restrictions.

45. Before the passage of the Exon-Florio amendment, there was merely interdepartmental executive consultation by the Committee on Foreign Investment in the United States (CFIUS, established in 1975) concerning some acquisitions, although an executive expression of displeasure did prevent some takeovers. Legislation formally blocking a foreign acquisition would need to have been passed after the fact.

46. See Moran, , “The Globalization of America's Defense Industries,” pp. 44–46.Google Scholar

47. This review concerns the impact of IFDI on a country that is highly developed economically. Evaluation for less developed countries can be vastly more complex. The classic statement on both political and economic issues remains Biersteker, Thomas J.'s Distortion or Development: Contend ing Perspectives on the Multinational Corporation (Cambridge, Mass.: MIT Press, 1978)Google Scholar. Developments in economic theory and measurement through about 1980 are definitively examined by Caves, Richard E. in Multinational Enterprise and Economic Analysis (Cambridge: Cambridge University Press, 1982).Google Scholar

48. Partial equilibrium simply means that changes occur in one market and are confined there. The cost competitiveness of foreign products may result from partial importation, which in turn may be driven by comparative advantage or economies of scope and scale.

49. The term “rent” is generally used in economics to refer to payments to a factor of production over and above those necessary to bring that factor to the economy or to a specific use. If, for example, a person who was willing to perform any forty-hour-a-week job for a minimum of $4 an hour is in fact employed at $5 an hour, that person earns $1 of rent per hour worked. Once an economic innovation has been made, all earnings that can be assigned to it are rent when no payment is necessary to sustain it.

50. In Foreign Multinational Investment, Gordon and Lees suggest that expenditures on plant and equipment per employee can be used to compare the performance of foreign firms and domestic firms in the same industry. Although acquisition is the chief mode of entry for the overwhelming majority of new participants, most entrants intend to employ their specific assets to expand U.S. market share. It is hard to see why this expansion and the new plant and equipment expenditures that it implies necessarily yield superior social performance. Still more questionable is the relative profitability measure that Gordon and Lees also employ. Why should high profits be a sign of an unusually large social contribution? They could instead reflect monopoly power or rewards from gullible state and local officials. Another strong possibility is that foreigners are drawn to specific subsectors that are generally profitable to begin with.

51. See Tolchin, and Tolchin, , Buying Into America, p. 9Google Scholar. On p. 21, the Tolchins repeat the complaint of a Tennessee politician that his state's top officials enticed Illinois-based Caterpillar's chief Japanese rival, Komatsu, to set up American manufacturing operations. On pp. 119–30, they also conclude that foreign banks have certain cost advantages over their U.S. competitors, but they do not explain why this leads to economic losses for the United States.

52. In The New Competitors, p. 85Google Scholar, Glickman and Woodward point out that firms with government shareholders accounted for only 2.5 percent of total IFDI transactions between 1974 and 1981 and indicate that the percentage may be declining. They do acknowledge that state-related firms not only may enjoy subsidies but also may be particularly likely to be protected in their home markets.

53. Graham, and Krugman, , Foreign Direct Investment, p. 121.Google Scholar

54. In The New Competitors, pp. 294–95Google Scholar, Glickman and Woodward also urge a close look at such international joint ventures as the Fremont, Calif., project involving General Motors and Toyota. They repeat Reich and Mankin's question, “Would [the U.S. government] also have approved a GM-Ford deal?” but they make no attempt at an answer. See Reich, Robert B. and Mankin, Eric D., “Joint Ventures with Japan Give Away Our Future,” Harvard Business Review 64 (03–04 1986), pp. 78–86Google Scholar. In fact, the extremely different strengths of the participating firms in various strata of the “automobile market” provided grounds for government approval, as pointed out by Ordover, Janusz and Shapiro, Carl in “The General Motors-Toyota Joint Venture: An Economic Assessment,” Wayne Law Review, vol. 31, 1985, pp. 1167–94Google Scholar. In Foreign Direct Investment, pp. 122–23Google Scholar, Graham and Krugman argue for especially stringent antitrust standards for both foreign and domestic defense suppliers.

55. Ease of entry and ease of exit join concentration as pivotal concerns. See the following contributions to a symposium in The Journal of Economic Perspectives 1 (Fall 1987), pp. 3–54Google Scholar: Salop, Steven C., “Symposium on Mergers and Antitrust”Google Scholar; White, Lawrence J., “Antitrust and Merger Policy: Review and Critique”Google Scholar; Fisher, Franklin M., “Horizontal Mergers: Triage and Treatment”Google Scholar; and Schmalensee, Richard, “Horizontal Merger Policy: Problems and Changes.”Google Scholar

56. Porter, Michael E., The Competitive Advantage of Nations (New York: Free Press, 1990).CrossRefGoogle Scholar

57. Graham, and Krugman, , Foreign Direct Investment, p. 120; see also pp. 130–31.Google Scholar

58. For a discussion of this issue in the context of the celebrated Matsushita case involving the decline of the U.S. television industry, see Scherer, F. M. and Ross, David, Industrial Market Structure and Economic Performance, 3d ed. (Boston: Houghton Mifflin, 1990), pp. 468–72Google Scholar. For an account that concludes that the Japanese action was definitely aimed at market power, see Yamamura, Kozo and VanDenBerg, Jeanette: “Japan's Rapid Growth on Trial: The Television Case,” in Yamamura, K. and Saxonhouse, G., eds., Law and Trade Issues of the Japanese Economy (Seattle: University of Washington Press, 1986), pp. 238–83.Google Scholar

59. Externalities are unmarketed costs and benefits to others from the action of an economic unit.

60. Recent work by Reich favors foreign investment largely for this reason. See Reich, Robert, “Who Is Us?” Harvard Business Review 66 (01–02 1990), pp. 53–64.Google Scholar

61. Glickman, and Woodward, , The New Competitors, pp. 136–37.Google Scholar

62. Graham, and Krugman, , Foreign Direct Investment, pp. 54–62.Google Scholar

63. For a recent discussion of this and related issues, see Frank Press, “Scientific and Technological Relations Between the United States and Japan: Issues and Recommendations,” paper prepared for the Commission on U.S.-Japan Relations for the Twenty-First Century, Washington, D.C., November 1990.

64. See Hatsopoulos, George N., Krugman, Paul R., and Summers, Lawrence H., “U.S. Competitiveness: Beyond the Trade Deficit,” Science 241 (07 1988), p. 307.CrossRefGoogle ScholarPubMed

65. See Press, “Scientific and Technological Relations Between the United States and Japan,” p. 3.Google Scholar

66. Glickman, and Woodward, , The New Competitors, p. 135.Google Scholar

67. See ibid. Although Glickman and Woodward cite with disdain “Engine Charlie” Wilson's famous identification of the welfare of General Motors with that of the United States, they seem to equate national welfare with that of organized labor. For example, in their discussion of the impact of Japanese innovation on the automobile industry, they note without evaluation the traditional insistence of the United Automobile Workers on strict work rules as well as high wages. The Japanese are given considerable credit for innovation, but only when organized labor approved.

68. Glickman, and Woodward, , The New Competitors, p. 162.Google Scholar

69. See ibid., pp. 135–39, in which Glickman and Woodward voice concern about pay levels and not just employment. U.S. income inequality increased substantially during the 1980s, partly as the result of a loss of rent that organized labor had been able to wrest directly from firm owners and indirectly from product purchasers in less competitive times and partly from a decline in the employment of unionized labor. The most careful recent research, however, assigns far more of the explanation to increased demand relative to supply of skilled workers. See Burtless, Gary, ed., A Future of Lousy Jobs? (Washington, D.C.: Brookings Institution, 1990).Google Scholar An alternative explanation for the loss of high-paying jobs focuses not on rent but instead on unique environments in which labor can actually perform more work. Contributors to this “efficiency wage” literature offer a wide range of theoretical possibilities and empirical findings. See, for example, Groshen, Erica L., “Why Do Wages Vary Among Employers?”Google Scholar in Federal Reserve Bank of Cleveland, Economic Review, vol. 24, 1988, pp. 19–38Google Scholar; and Thaler, Richard H., “Interindustry Wage Differentials,” Journal of Economic Perspectives 3 (Spring 1989), pp. 181–93.CrossRefGoogle Scholar If the uniquely propitious environments could be identified, they might provide a basis for policy, but many economists believe that they are only mirages resulting from inappropriately controlled observation. See Bhagwati, Jagdish, “U.S. Trade Policy Today,” Columbia University, New York, mimeograph, 1989, pp. 24–27.Google Scholar In Foreign Multinational Investment, p. 4Google Scholar, Gordon and Lees claim that basic industries such as those producing steel and motor vehicles “provide an income for a large part of the population” and that without them there would be a “serious reduction in the standard of living.” But they do not rest their case on literature of the kind just cited. They never explain how the decline of these specific industries affects general U.S. living standards.

70. Glickman, and Woodward, , The New Competitors, p. 49.Google Scholar

71. While any new business (including start-up or “greenfield” IFDI) affects the result most directly, the same outcome can develop in many ways. For example, if plant and management are lured away from more normal areas in the domestic economy, the interaction of macropolicy and the workings of the labor market will restore employment there to the previous level.

72. See MacDougall, G. D. A., “The Benefits and Costs of Private Investment from Abroad: A Theoretical Approach,” Economic Record 36 (03 1960), pp. 13–35CrossRefGoogle Scholar; and Musgrave, P. B., Direct Investment Abroad and the Multinationals: Effects on the United States Economy (Washington, D.C.: Government Printing Office, 1975).Google Scholar

73. For example, if the dollar's fall in the late 1980s created increased demand for U.S. real assets based on money illusion, an exchange of financial for real assets between a foreigner and an American could take place with no tax impact whatsoever.

74. Richard, Caves, Multinational Enterprise and Economic Analysis, p. 226.Google Scholar

75. In Foreign Multinational Investment, p. 221Google Scholar, Gordon and Lees' Table 7.9 combines tax shifts and tax increases to an unknown extent.

76. In ibid., pp. 170–71, the authors claim, but do not demonstrate, that Japanese automobile sales in the United States in the mid-1980s were based on inappropriately high import prices.

77. “Can Uncle Sam Mend This Hole in His Pocket?” Business Week, 10 09 1990, pp. 48–50.Google Scholar

78. Glickman, and Woodward, , The New Competitors, pp. 246–51.Google Scholar

79. Graham, and Krugman, , Foreign Direct Investment, p. 119.Google Scholar

80. See Tolchin, and Tolchin, , Buying Into America, p. 21.Google Scholar In a recent discussion with Robert Hudec, he pointed out that federal action to block incentives for foreign firms alone could be justified as regulating foreign affairs, but such action would violate bilateral treaties ensuring national treatment.

81. For an account that stresses such effects without attempting to estimate them, see Makin, John H., “The Effects of Japanese Investment in the United States,” in Yamamura, Kozo, ed., Japanese Investment in the United States: Should We Be Concerned? (Seattle: Society for Japanese Studies, 1989), pp. 41–62.Google Scholar

82. One issue related to the U.S. current account imbalance is discussed in the three most recent books reviewed here. The Tolchins and Glickman and Woodward make much of the “debt-for-equity swap” at “fire sale” prices caused by the fall in the dollar's value after 1985. Glickman and Woodward also note and attribute to “observers” the view that “the Reagan legacy is ‘America for Sale’ at bargain basement prices.” Graham and Krugman take sharp exception to that view. They use price and exchange rate comparisons to suggest that while U.S. assets may have been overpriced in the mid-1980s, there is little evidence that they have been underpriced since the dollar's fall. They concede that the surge of direct investment in the late 1980s could be linked to the level of the dollar, but only because of its previous overvaluation. They agree with Glickman and Woodward that exchange rate changes affect the timing of IFDI but have little effect otherwise. Compare Graham, and Krugman, , Foreign Direct Investment, pp. 35–37Google Scholar, with Glickman, and Woodward, , The New Competitors, p. 117.Google Scholar

83. Tolchin, and Tolchin, , Buying Into America, p. 252.Google Scholar

84. Gordon, and Lees, , Foreign Multinational Investment, p. 225.Google Scholar

85. The relations between the superpowers have changed dramatically since the book was written, but the same criticism could have been made in 1986.

86. See footnote 45.

87. See Glickman, and Woodward, , The New Competitors, pp. 294–302.Google Scholar The authors also favor an extension of plant closing notification to 120 days. This provision would apply both to foreign firms and domestic firms, however, and is logically unconnected with foreign economic policy as such, despite the 60-day provisions that were attached to the 1988 Trade Act.

88. Ibid., p. 283.

89. See Bergsten, C. Fred, “Coming Investment Wars?” Foreign Affairs 53 (10 1974), pp. 135–51.CrossRefGoogle Scholar

90. In Foreign Direct Investment, pp. 121–25Google Scholar, Graham and Krugman decry the exclusion of foreign-owned firms from government-subsidized research consortia such as Sematech.

91. U.S. practice would almost certainly make necessary a detailed and public account of the reasons for refusal. Even if reasons for rejection were not given, however, as during the era of the Canadian Foreign Investment Review Agency (1974–84), firms could make reasonable guesses on the basis of predecision discussions with officials and could then prepare and submit more attractive proposals.

92. Some of the measures used by Gordon, and Lees, in Foreign Multinational InvestmentGoogle Scholar could be important, but they offer no defense of their approach. A compensation per employee comparison, for example, could be used to counter the argument that foreign affiliates tend to preserve their heaviest human capital expenditures for “headquarters,” although this interpretation is not offered.

93. See Graham, and Krugman, , Foreign Direct Investment, p. 130.Google Scholar In his excellent comparative study of the automobile industry in four countries, Simon Reich argues that IFDI may “result in a reduction of domestic economic competitiveness.” Those who claim that domestic firms offer superior economic performance must identify how much of this outcome rests on domestic ownership and how much on domestic production. Would a domestically owned firm engaging in substantial importation be preferred to a foreign-owned firm with greater domestic content? An understanding of the sources of superior performance takes on special urgency in automobile manufacturing and other industries in which multinational sourcing casts increasing doubt on the meaning of figures claiming to capture domestic unit output by country. More fundamentally, Reich's discussion does not really deal with competitiveness as usually defined, since the quantitative role of overt protection and other forms of discrimination in preserving market share for domestic firms is not estimated. See Reich, Simon, “Roads to Follow: Regulating Direct Foreign Investment,” International Organization 43 (Autumn 1989), pp. 543–84.CrossRefGoogle Scholar

94. In “Who Is Us,” Robert Reich provides a particularly persuasive statement of this view and also cites estimates that a quarter of U.S. pension funds will be invested in foreign-owned companies within ten years. In Foreign Direct Investment, pp. 65–68Google Scholar, Graham and Krugman treat IFDI stockholders as completely foreign and thus miss the chance to stress the growing complexities of ownership. Although Simon Reich argues in “Roads to Follow,” p. 581Google Scholar, that an autonomy threat is posed by IFDI because “foreign producers face a more realistic choice between exit or loyalty than do their domestic counterparts,” exceptions are not hard to find in the United States. The American value added in the case of color televisions for sale in the United States is generally higher from foreign-owned than from U.S.-owned production. Reich's point may remain true for Japan, but one wonders how strongly national loyalties will persist in Europe after 1992. Moreover, as a general proposition, the argument implies that the domestic firms are not as “global” in Porter's sense as their foreign-owned competitors are. This raises some doubts about their economic performance prior to the testing of their loyalty. On firm typology, see Porter, Michael E., “Competition in Global Industries: A Conceptual Framework,” in Porter, Michael E., ed., Competition in Global Industries (Boston: Harvard Business School Press, 1986), pp. 15–60.Google Scholar

95. Various possible meanings of the term “reciprocity” are examined by Keohane, Robert O. in “Reciprocity in International Relations,” International Organization 40 (Winter 1986), pp. 1–27.CrossRefGoogle Scholar For the term's use in international trade matters, see Cline, William R., “Reciprocity”: A New Approach to World Trade Policy? (Washington, D.C.: Institute for International Economics, 1982).Google Scholar

96. Tolchin, and Tolchin, , Buying Into America, p. 228.Google Scholar

97. Graham, and Krugman, , Foreign Direct Investment, pp. 117–18.Google Scholar

98. Kudrle, and Lenway, , “Progress for the Rich.”Google Scholar

99. In Buying Into America, the Tolchins note that Section 301 of the Trade Act of 1974 was expressly amended in 1984 to include action by the President to combat barriers to incoming investment. The same section in the 1988 legislation—“Super 301”—has concentrated world attention on unilateral U.S. measures. Japan continues to insist on reciprocity in the banking and financial industries (Office of the United States Trade Representative, 1989 National Trade Estimate Report on Foreign Trade Barriers, Washington, D.C., mimeograph), and the United States should certainly press for national treatment. Contrary to the tone of the accounts of the Tolchins and Gordon and Lees, however, one must search hard for other major targets for unilateral pressure within the developed countries. Gordon, and Lees, ' Foreign Multinational InvestmentGoogle Scholar was prepared in the early to mid 1980s, however, when asymmetries such as that presented by the Canadian Foreign Investment Review Agency stood out more clearly. The efficacy of “Super 301” approaches to investment restrictions in non-OECD countries lies beyond the scope of this review.

100. The U.S. position is well explained by Graham, Edward M. and Krugman, Paul R. in “Trade-Related Investment Measures,” in Schott, Jeffrey, ed., Completing the Uruguay Round (Washington, D.C.: Institute for International Economics, 1990), pp. 147–63.Google Scholar

101. In Foreign Multinational Investment, Gordon and Lees cite the proposal made by Bergsten in his “Prepared Statement” for the U.S. Senate. See U.S. Congress, Senate Committee on Foreign Relations, Hearings Before the Subcommittee on International Economic Policy, 97th Congress, 1st sess., 1981, pp. 13–21.Google Scholar

102. Gordon, and Lees, , Foreign Multinational Investment, p. 255.Google Scholar

103. Tolchin, and Tolchin, , Buying Into America, p. 251.Google Scholar

104. In addition to the difficulties of establishing distribution, foreign investors in Japan almost completely lack the entry mode generally favored elsewhere: acquisition. Japanese firms are not easy to buy, either by foreigners or other Japanese. On the evolution of Japanese policy, see Encarnation, Dennis J. and Mason, Mark, “Neither MITI nor America: The Political Economy of Capital Liberalization in Japan,” International Organization 44 (Winter 1990), pp. 25–54.CrossRefGoogle Scholar

105. On the EC and the United States, see Rosenthal, Douglas, “Competition Policy,” in Hufbauer, Gary C., ed., Europe 1992: An American Perspective (Washington, D.C.: Brookings Institution, 1990), pp. 293–343.Google Scholar On North American similarities, see the following contributions to the “Symposium on North American Competition Policy,” Antitrust Law Journal, vol. 57, 1988, pp. 397–445Google Scholar: Goldman, Calvin S., “Bilateral Aspects of Canadian Competition Policy”Google Scholar; Rule, Charles F., “Claims of Predation in a Competitive Marketplace: When Is an Antitrust Response Appropriate?”Google Scholar; and Griffin, Joseph P., “The Impact on Canada of the Extraterritorial Application of the U.S. Antitrust Laws.”Google Scholar The considerably different Japanese case is discussed by Uekusa, Masu in “Industrial Organization: The 1970s to the Present,” in Yamamura, K. and Yusauba, Y., eds., The Domestic Transformation, vol. 1 of The Political Economy of Japan (Stanford, Calif.: Stanford University Press, 1987), pp. 477–79.Google Scholar

106. Performance requirements would be limited to industries with a direct national security connection. Most of these goals are familiar and echo previous suggestions; see, for example, Bergsten, , “Prepared Statement.”Google Scholar

107. Graham, and Krugman, , Foreign Direct Investment, pp. 125–31.Google Scholar

108. For a thorough discussion of these treaties, see Gann, Pamela B., “The U.S. Bilateral Investment Treaty Program,” Stanford Journal of International Law 21 (Fall 1985), pp. 373–459.Google Scholar

109. Perhaps the best single source for country-specific studies is Dunning, John H., ed., Multinational Enterprises, Economic Structure and international Competitiveness (New York: Wiley, 1987).Google Scholar