Final Examination Review Notes
D. Foreign direct investment
What is anomalous about Japanese foreign direct investment flows?
The Japanese anomaly.
Beginning in the mid-nineteenth century, Japan needed to industrialize quickly
in order to maintain its independence during the age of colonialism. Its strategy was a close link between the
government and the zaibatsu, large industrial organizations that were the predecessors to today’s keiretsu. The
government ensured high profits to the zaibatsu by excluding foreign competition, by allowing the zaibatsu to
cartelize, to collude with each other to divide up the cartelize the Japanese market, charging high prices in this
uncompetitive atmosphere, by preventing unionization and so keeping wages low. The zaibatsu reinvested the
resulting high profits in their businesses, permitting rapid industrial growth. The price was paid by consumers,
faced with high prices and low wages; they were partially compensated for this by low unemployment levels and
very high job security.
You can see some of this at work when you compare Japanese inward and outward FDI flows with those
of the rest of the developed world. Consider the following table:
Table 9.1: Outward vs. Inward FDI flows, in $ bn (1994)
This chart shows two things. First, in every case the developed countries send more FDI abroad than
they receive. This makes sense: all countries receive investments but large parts of the world, including much of
developing Asia, Latin America, Eastern Europe and Africa, generate very little capital to send to other
countries. The fact that there are relatively few capital exporters means that the capital exporters send more
abroad than they take in.
At the same time, the balance between the inward and outward flows is not totally disproportionate. In
the US, the ratio between outward and inward FDI flows is six to five; in France, nine to seven; in Germany,
eight to five; in Britain, four to three. In Europe, only Sweden, much the smallest country, shows a very
significant imbalance, of five to two. But when you get to Japan, it’s a completely different story, with a ratio
between outward and inward FDI of 16 to 1 in 1994. Moreover, so far from wearing away, this imbalance
actually increased over time: the ratio was five to one in 1960 and nine to one in 1985.