foreign takeovers and new investments in the united states
TRANSCRIPT
FOREIGN TAKEOVERS AND NEW INVESTMENTS IN THE UNITED STATES
EDWARD JOHN RAY*
This study is unique in several respects. First, it reviews the characteristics of the top 10 industries targeted for foreign direct investment (FDI) activity in the United States between 1979 and 1987. It analyzes both overall FDI activity and new plant and expansion FDI activity. The study summarizes and tests alternative hypotheses regarding the determinants of FDI in the United States by all countries, by the United Kingdom, by the European Community, by Japan, and by Canada.
Large and growing product markets in an expanding economy have attracted FDI in the United States. Exchange rate movements have prompted opportunistic decisions to invest in U.S. production facilities. Investors’ superior management skills appear to have prompted takemers, while eforts to realize technological advantages of new physical capital and of relatively large operating plants have fostered plant and expansion investments.
Evidence exists that a desire to circumvent current-but not potential-trade restrictions has motivated foreign direct investment. FDI activities are not associated with concentrated or heavily unionized industries. Highly protected industries have attracted heavier equity FDI by Japan and heavier new plant FDI by all sources and Canada. No evidence exists that FDI in the United States by Japan or anyone else is targeted to undercut union-dominated j m s or to arrest the spread of protectionist trade policies.
I. INTRODUCTION
Between 1979 and 1987, foreign direct investment (FDI) in the United States con- sisted largely of takeovers and increases in equity positions. Of the $261 billion in FDI in the United States, only $25 billion-or 9.6 percent-consisted of new investment in plant and expansions. In manufactur- ing, of the $110 billion in FDI in the United
*Department of Economics, The Ohio State Univer- sity, Columbus. The author especially thanks Jami Bray for assistance with empirical work and data collection, the Office of Economic Research at the U.S. Interna- tional Trade Commission for assistance in compiling data, and Drusilla Brown and two anonymous referees for helpful comments. An earlier draft of this paper was presented at the Western Economic Association International 65th Annual Conference, San Diego, June 30, 1990, in a session organized by Catherine Mann on behalf of the International Trade and Finance As- sociation.
Contemporary Policy Issues Vol. IX, April 1991
States, only $21 billion-or 19 percent- took the form of new plant and expan- sions. (The figures above represent amounts that this study accounted for during the 1979-1987 time period.) From a policy standpoint, a natural concern is that FDI in the form of increased equity positions in firms will not contribute to overall growth in the economy as directly and as effectively as would new invest- ments in physical plant. Yet, little or no systematic discussion of evidence has oc- curred regarding the characteristics of in- dustries that are targets of equity or new investment FDI or of the countries that supply the investment funds.
The purpose of this study is to provide evidence regarding alternative explana- tions of FDI activity and to describe the similarities and differences in the charac-
59
@Western Economic Association International
60 CONTEMPORARY POLICY ISSUES
teristics of manufacturing industries in the United States that, since 1979, have been the primary targets of new plant and ex- pansion FDI (PEFDI) versus foreign direct investment in the form of equity acquisi- tions. Specifically, for the period 1979- 1987, this study analyzes manufacturing industries constituting the top 10 recipi- ents of both FDI and PEFDI in the United States from all countries, the United King- dom, the European Community (EC), Canada, and Japan. (Because only 42 per- cent of FDI investments were in manufac- turing between 1979 and 1987, this study is but a modest first step.)
A separate appendix (available upon request) includes estimates for regression models utilizing pooled cross-section and time series data for industry samples rang- ing in size from 2,142 to 2,655. References to those results are used to supplement or qualify the information that one can glean from tables l(a), l(b), and 2.
FDI in the United States tends to be concentrated in a relatively small group of the 1,000 overall four-digit and 489 man- ufacturing four-digit industries for which data are available. Investment in the top 10 industries for all countries accounts for 31.4 percent of total FDI and 40.64 percent of FDI in manufacturing. For the United Kingdom, the top 10 industries account for 41.35 percent of all U.K. FDI in the United States and 52.3 percent of U.K. manufacturing FDI in the United States. For the EC, the top 10 industries account for 40.39 percent of overall EC FDI in the United States and 46.5 percent of EC man- ufacturing FDI in the United States.
Foreign direct investment in the United States from Japan also was quite concen- trated during the period. The top 10 indus- tries accounted for 46.9 percent of overall Japanese FDI in the United States and 65.9 percent of Japanese FDI in manufacturing in the United States. Finally, the top 10 industry targets for FDI accounted for 34.4 percent of overall Canadian FDI in the United States and 65.5 percent of Cana-
dian FDI in manufacturing in the United States. Japan, Canada, and the EC-which includes the United Kingdom-together accounted for $213 billion, or 82 percent, of the $261 billion in FDI in the United States and $92.1 billion, or 84 percent, of the $110 billion in FDI in manufacturing in the United States between 1979 and 1987.
The concentration of PEFDI by industry has been even more dramatic than the concentration of general FDI activity. For all countries, the top 10 industries ac- counted for 51.9 percent of PEFDI in all industries and 51.1 percent of manufactur- ing sector PEFDI. For the United King- dom, the top 10 industries accounted for 74.1 percent of all industry new plant and expansion FDI and 68.2 percent of manu- facturing PEFDI. For the EC, the top 10 industries accounted for 58.7 percent of overall PEFDI in the United States and 55.2 percent of manufacturing PEFDI. The top 10 industries to receive overall PEFDI from Japan accounted for 71.7 percent of the Japanese total and 74.5 percent of the total Japanese PEFDI in manufacturing in the United States. Overall, PEFDI in the top 10 industries from Canada accounted for 84.9 percent of the Canadian total and 90.8 percent of Canadian manufacturing PEFDI in the United States.
The EC, Japan, and Canada together accounted for $22.6 billion of the $25 bil- lion in all industry PEFDI in the United States and $19.4 billion of the $21 billion in manufacturing PEFDI in the United States during 1979-1987. Those figures represent 90 percent of overall PEFDI and 93 percent of manufacturing PEFDI in the United States. One should note that new plant and expansion FDI in the United States accounted for only 9.6 percent of all foreign direct investment activity in the United States and 19 percent of manufac- turing FDI activity in the United States. Japan accounted for 44 percent of all plant and expansion FDI in U.S. manufacturing, which in turn accounted for 83 percent of
RAY FOREIGN TAKEOVERS AND NEW INVESTMENTS IN U.S. 61
all FDI in the form of physical investment activity.
II. EXPLANATIONS OF FDI
Most explanations of FDI activity focus either on the competitive structure of the market that producers of a product face or on the technical aspects of production as key elements in explaining foreign direct investments. Any explanation of FDI must answer one central question: Why do firms choose to hold ownership positions in foreign firms-at least 10 percent to constitute FDI-when they have alterna- tives such as sales through exports or licensing foreign producers as alternative means of reaching foreign markets. Ver- non (1966)) Gruber et al. (1967)) and Caves (1971) provided some of the earliest and most enduring insights regarding factors promoting FDI. (Studies including Dixit and Stiglitz, 1977, Ethier, 1986, Helpman, 1984, and Williamson, 1981, provide ex- plicit models embodying many character- istics of those early works.) The picture emerging from those early studies, based primarily on the characteristics of U.S. FDI in manufacturing abroad during the first two decades after World War 11, is that FDI occurs predominantly in markets for dif- ferentiated products-generally consumer goods-produced by a small group of dominant firms. Presumably, those firms have some special expertise in manage- ment and/or production techniques giv- ing rise to quasi-rents, and such firms can maximize those rents only by directly con- trolling the production process.
The preference for direct control through subsidiary sales rather than ex- ports hinges on factors that make produc- tion within a given country more profit- able than export sales. These factors in- clude the existence of tariffs and non-tariff trade barriers, (NTBs), transport costs, customer service needs, and increased competition from local firms and/or third- country firms in the foreign market. More
recently, Bhagwati (1987) and others argue that FDI might occur in industries facing a threat of future protective trade barriers in markets to which they export. The no- tion is that companies can set up local production facilities in the foreign market partly so as to lobby against future trade restrictions.
Recent national and international eco- nomic experiences suggest two additional factors that may promote FDI. The dra- matic growth in FDI in the United States during the last decade has accompanied the longest peacetime expansion in the U.S. economy during the post-World War I1 period as well as rapid increases and decreases in the value of the U.S. dollar internationally. Therefore, several authors suggest that the rush to invest in the United States was related to economic growth and/or exchange rate movements. Caves (1988)) Mann (1989)) and Ray (1989) are among the growing number of empir- ical attempts to identify the relationships existing among economic growth, ex- change rates, and FDI.
One cannot state simple testable hypotheses for FDI without doing some disservice to the original works. However, simple caricatures can help sort produc- tive from unproductive paths of inquiry for important determinants of FDI activity. Therefore, this study considers three hypotheses regarding the primary causes of foreign direct investment in the United States.
The defensive investment hypothesis pre- sumes that FDI occurs in response to com- petitive threats from new producers within industries characterized by a con- centration of production in the hands of a few firms producing highly differentiated consumer goods. That such industries often are highly unionized reflects labor’s efforts to capture the quasi-rents that oth- erwise would go to owners and manage- ment. For example, in the United States, the average unionization rate for produc- tion workers in manufacturing was 59
62 CONTEMPORARY POLICY ISSUES
percent in 1982. But that same year, the unionization rates in the production of automobiles, aircraft, pre-recorded rec- ords and tapes, radio and TV broadcasting equipment, and household audio and video equipment were 98, 87, 78, 82, and 78 percent, respectively.
The tariff jumping or quid pro quo hypoth- esis suggests that FDI represents an at- tempt by foreign suppliers to the U.S. market to evade existing or pending trade restrictions by developing production fa- cilities within the United States. Having production facilities within the United States allows foreign firms to avoid costs associated with existing trade restrictions and may help foreign firms in their efforts to lobby against future trade restrictions.
The macroeconomic hypothesis has two variants. On the one hand, FDI could reflect the desire of foreigners in a global financial market to take advantage of the great investment opportunities available in the United States. One might call this the Reagan-Bush variant of the macroeco- nomic hypothesis. Alternatively, FDI could reflect efforts by foreigners to buy America cheaply by acquiring U.S. busi- nesses when the U.S. dollar is weak rela- tive to other major currencies. One might call this the Dukakis variant.
Elsewhere, Ray (1989) takes a more eclectic view of the decision to undertake FDI. That study found that during the 1979-1985 period, FDI in the United States was more likely to occur in expanding industries in an expanding national mar- ket and to be timed so as to take advantage of presumed bargain prices for the U.S. dollar. In other words, FDI in the United States tended to be stimulated by a depre- ciation of the U.S. dollar that was not expected to persist. FDI tended to occur in skill-intensive and/ or capital-intensive in- dustries. This reflected the relative impor- tance of specialized human and/or phys- ical capital inputs as sources of quasi-rents for companies to capture through directly controlling production. Furthermore, for-
eign parent firms tended to invest in U.S. firms producing the same products as the parent corporation. Such horizontal in- vestments suggest that the low risk-high profit way for a producer to enter a foreign market is likely with one’s existing prod- uct line. Given the short time interval during which FDI in the United States has expanded dramatically, one may wonder whether those general observations are sustainable when one expands the period of analysis from seven to nine years.
Finally, note the differences in motiva- tion for FDI in the form of increased equity holdings as opposed to actual investment in plant and expansions. Expanding in- dustries in expanding national markets are likely to attract both forms of invest- ment and to be timed so as to take advan- tage of low prices for the currency of the country targeted for investment.
The distinctive feature of new plant and expansion FDI investment is that it implies that a new or expanded interest in a market requires constructing new physical capital, perhaps embodying new technology that one cannot obtain through equity holdings in existing firms. (Horstmann and Markusen, 1987, consider motives for PEFDI versus licensing.) Alternatively, the ability to profit by gaining operating control of existing production facilities suggests that equity FDI is associated with industries in which managerial inputs are an important part of the production process.
Lumpy capital investments embodying new technologies would constitute new plant and expansion FDI. Therefore, new investment FDI may be more highly asso- ciated with industries operating efficiently in relatively large-scale physical plants and less dependent on skilled manage- ment and operating staff. Equity FDI pur- chases, including takeovers, may be asso- ciated with skilled management-intensive industries. This reflects the profitability of organizational efficiency in those indus- tries.
RAY: FOREIGN TAKEOVERS AND NEW INVESTMENTS IN U.S. 63
111. EMPIRICAL EVIDENCE Tables l(a) and l(b) list the 10 manufac-
turing industries associated with the greatest total value of FDI and PEFDI, respectively, in the United States during 1979-1987 for all countries, the United Kingdom, the European Community, Japan, and Canada. Table 2 lists the aver- age values for characteristics of each set of 10 leading FDI and PEFDI manufacturing industries from each country and region discussed. For comparison purposes, table 2 includes summary statistics of industry characteristics for all manufacturing in- dustries for which data are available.
Expenditures in petroleum refining (primarily from the United Kingdom), motor vehicles and car bodies (primarily from Japan), and plastic materials and resins (primarily from the EC and Canada) are among the top 10 industries for both FDI and PEFDI manufacturing activity in the United States. General FDI investment areas also ranking among the top 10 are dry, condensed, and evaporated products (from Switzerland); toilet preparations (from non-U.K. EC countries); non-spe- cific industrial organic chemicals (from non-U.K. EC countries); electronic com- puting equipment (from the EC and Japan); non-specific agricultural chemicals (from the EC); as well as pre-recorded records and tapes, blast furnaces, and steel mills (primarily from Japan).
Top 10 target areas for PEFDI include motor vehicle parts and accessories and rice milling (primarily by Japan); semicon- ductors and related devices (by the EC and Japan); as well as paper mills, pulp mills, carbon and graphite products, and steel pipes and tubes (by Canada). In effect, all major country and region sources of both types of foreign direct investment activity in the United States have tended to be dominant sources of funds in industries in which they traditionally have been major competitors in world markets.
Section I1 identified the defensive in- vestment hypothesis with relatively
highly unionized and concentrated indus- tries producing differentiated consumer goods. Table 2 indicates that FDI and PEFDI activities are not particularly re- lated to market concentration. For each area, however, market concentration does appear to be slightly higher for top 10 industries associated with PEFDI than it is for top 10 industries associated with FDI generally. Unionization rates tend to be higher for both types of investment from all sources except the EC and tend to be particularly high for PEFDI targets from all countries and Canada.
The regression analysis in the appendix includes estimates of the determinants of value of equity FDI and PEFDI within industries over time. The appendix mate- rial confirms that both forms of direct investment in the United States are, if anything, negatively related to consumer goods and unrelated to unionization, and that PEFDI is negatively related to union- ization in the case of Japan. (The regres- sion analysis separates equity and new investment FDI and includes EC', which corresponds to the non-U.K. European Community.) Market concentration does appear to be positively related to PEFDI for all countries and Japan and negatively related to equity FDI activity in the cases of all countries, the United Kingdom, and Canada. In short, insufficient consistent evidence exists to support the standard defensive investment hypothesis.
Table 2 indicates that little or no rela- tionship exists between tariff and/or non- tariff trade barriers and top 10 foreign direct investment in the United States. The appendix material supports the general conclusion that tariff-jumping explana- tions of investment activity are not partic- ularly relevant in explaining the flow of direct investment into the United States. During the past 20 years, protectionist NTB measures in the United States have tended to supplement tariff protection in industries that historically have been po- litically strong and economically vulnera-
TABLE
l(a)
V
alue
of F
orei
gn D
irect
Inve
stm
ent i
n U.S. M
anuf
actu
ring:
1979
-198
7 ($
bill
ions
) A
ll U
nite
d E
urop
ean
SIC
C
ount
ries
K
ingd
om
Com
mod
ity
Japa
n C
anad
a C
ode
Indu
stry
(r
ank)
va
lue
(ran
k) v
alue
(r
ank)
va
lue
(ran
k) v
alue
(r
ank)
val
ue
2911
2023
3711
2821
2844
2869
3573
2879
3652
3312
2084
3679
2834
2816
3353
3822
2621
Petr
oleu
m R
efin
ing
(1)
(3)
Plas
tics M
ater
ials
& R
esin
s (4
)
Toile
t Pre
para
tions
(5
)
Indu
stri
al O
rgan
ic C
hem
ical
sa
(6)
Ele
ctro
nic
Com
putin
g E
quip
men
t (7
)
Pre-
reco
rded
Rec
ords
& T
apes
(9
)
(10)
Win
es, B
rand
y &
Bra
ndy
Spir
its
(17)
Ele
ctro
nic C
ompo
nent
sa
(14)
Phar
mac
eutic
al P
repa
ratio
ns
(13)
Inor
gani
c Pi
gmen
ts
(24)
(12)
Env
iron
men
tal C
ontr
ols
(31)
Pape
r M
ills
(11)
Dry
, Con
dens
ed E
vapo
rate
d Pr
oduc
ts
(2)
Mot
or V
ehic
les
& C
ar B
odie
s
Agr
icul
tura
l Che
mic
alsa
(8)
2.6
Bla
st F
urna
ces &
Ste
el M
ills
Alu
min
um P
late
She
et &
Foi
l
11.5
6.0
5.1
5.0
3.5
3.4
2.6
(2) 2.36
2.35
1.64
1.73
1.78
1.13
1.93
0.90
1.95
9.1 -
-
-
-
-
-
(4) -
-
1.3
1.2
1.0
0.98
0.96
0.88
0.68
10.6
-
-
2.2
3.5
3.3
1.9
- -
-
1.4
1.27
1.28
-
-
-
-
TABLE
l(a)
cont
inue
d V
alue
of F
orei
gn D
irect
Inve
stm
ent in U
.S. M
anuf
actu
ring:
1979
-198
7 ($
bill
ions
) A
ll U
nite
d E
urop
ean
SIC
C
ount
ries
K
ingd
om
Com
mod
ity
Japa
n C
anad
a C
ode
Indu
stry
(r
ank)
val
ue
(ran
k) v
alue
(r
ank)
va
lue
(ran
k) v
alue
(r
ank)
val
ue
2631
2851
3714
3674
2819
2893
2044
3662
2611
3634
2711
3317
2731
3624
3272
Pape
rboa
rd M
ills
Pain
ts a
nd A
llied
Pro
duct
s
Mot
or V
ehic
le P
arts
& A
cces
sori
es
Sem
icon
duct
ors
& R
elat
ed D
evic
es
Indu
stri
al I
norg
anic
Che
mic
ala
Prin
ting
Ink
Ric
e M
illin
g
Rad
io &
TV
Bro
adca
stin
g E
quip
men
t
Pulp
Mill
s
Ele
ctri
c H
ouse
war
es &
Fan
s
New
spap
ers
Stee
l Pip
e &
Tub
es
Book
Pub
lishi
ng
Car
bon
& G
raph
ite P
rodu
cts
Con
cret
e Pr
oduc
tsa
Tota
l FD
I ($
bill
ions
)
Top
10 S
hare
of
Tota
l Are
a FD
I (a
)
(25)
1.
10
(19)
1.
32
(18)
1.
54
(15)
1.
71
(20)
1.
31
(44)
0.
58
(55)
0.
50
(27)
1.
02
(32)
0.
86
(48)
0.
53
(37)
0.
66
(42)
0.
62
(28)
1.
01
(38)
0.
66
(43)
0.
59
109.
6
40.6
4%
-
-
-
-
(4)
1.1
(5)
0.8
(6)
0.66
(8)
0.6
(9)
0.5
(10)
0.
4 -
-
-
-
-
-
-
-
-
-
-
-
-
-
17.5
65.8
8%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4)
0.6
(5)
0.5
(6)
0.45
(7)
0.40
(8)
0.39
(9)
0.38
(10)
0.
35
11.9
65.4
7%
'Not
els
ewhe
re c
ount
ed.
TAB
LE l(
b)
Val
ue of
New
Pla
nt a
nd E
xpan
sion
FDI
in U
.S. M
anuf
actu
ring
: 197
9-19
87
($ b
illio
ns)
All
Uni
ted
Eur
opea
n SIC
Cou
ntri
es
Kin
gdom
C
omm
odity
Ja
pan
Can
ada
Cod
e In
dust
ry
(ran
k)
valu
e (r
ank)
val
ue
(ran
k)
valu
e (r
ank)
va
lue
(ran
k) v
alue
3711
3714
3674
2621
2821
2911
2611
3624
2044
3317
2999
2813
2641
2022
3079
3721
2879
2819
Mot
or V
ehic
les &
Car
Bod
ies
Mot
or V
ehic
le P
arts
& A
cces
sorie
s
Sem
icon
duct
ors &
Rel
ated
Dev
ices
Pape
r M
ills
Plas
tic M
ater
ials
& R
esin
s
Petr
oleu
m R
efin
ing
Pulp
Mill
s
Car
bon
& G
raph
ite P
rodu
cts
Ric
e M
illin
g
Stee
l Pip
es &
Tub
es
Petr
oleu
m &
Coa
l Pro
duct
sa
Indu
stri
al G
ases
Coa
ted
Pape
r &
Gum
med
Pro
duct
s
Che
ese,
Nat
ural
& P
roce
ssed
Mis
cella
neou
s Pla
stic
s Pro
duct
s
Airc
raft
Agr
icul
tura
l Che
mic
alsa
Indu
stri
al
Inor
gani
c C
hem
ical
sa
3.7
1.3
1.0
0.90
2
0.89
9
0.8
0.7
0.51
0.50
0.46
0.43
0.25
0.09
0.06
0.13
0.07
0.30
0.30
-
0.07
-
-
0.39
0.12
-
0.13
-
-
0.24
0.18
0.08
0.06
0.05
9
0.05
5 -
-
0.6 -
0.26
-
0.75
5
0.75
7 -
-
-
-
0.4
0.2 -
-
-
-
0.3
0.25
TABL
E l(b) c
ontin
ued
Val
ue of
New
Pla
nt and E
xpan
sion
FD
I in U.S. M
anuf
actu
ring:
1979
-198
7 ($
bill
ions
) A
ll U
nite
d E
urop
ean
SIC
C
ount
ries
K
ingd
om
Com
mod
ity
Japa
n C
anad
a C
ode
Indu
stry
(r
ank)
va
lue
(ran
k) v
alue
(r
ank)
va
lue
(ran
k) v
alue
(r
ank)
va
lue
2869
2834
3662
3573
3341
2282
3651
3465
3334
3312
3679
3353
3661
Indu
stri
al O
rgan
ic C
hem
ical
sa
Phar
mac
eutic
al P
repa
ratio
ns
Rad
io &
TV
Bro
adca
st E
quip
men
t
Elec
troni
c C
ompu
ting
Equ
ipm
ent
Seco
ndar
y N
on-f
erro
us M
etal
s
Thr
owin
g &
Win
ding
Mill
s
Hou
seho
ld A
udio
& V
ideo
Equ
ipm
ent
Aut
omot
ive
Stam
ping
Prim
ary
Alu
min
um
Bla
st F
urna
ces
& S
teel
Mill
s
Elec
troni
c C
ompo
nent
sa
Alu
min
um S
heet
, Pla
te &
Foi
l
Tele
phon
e &
Tel
egra
ph A
pplia
nces
(9)
(16)
0.
30
-
-
(10)
(19)
0.
28
-
-
(14)
0.
37
-
-
-
(13)
0.
39
-
-
-
(25)
0.
21
-
-
-
(20)
0.
28
-
-
-
(15)
0.
33
-
-
-
(23)
0.
25
-
-
-
(34)
0.
12
-
-
-
-
-
(22)
0.
27
-
-
-
(21)
0.
27
-
-
-
(12)
0.
43
-
-
-
(31)
0.
14
-
-
-
0.36
0.35
0.25
0.21
0.19
0.15
-
-
-
-
-
- - - -
-
-
-
-
0.24
0.23
0.12
0.09
0.05
Tota
l New
Pla
nt &
Exp
ansi
on F
DI
20.8
2.
02
7.0
9.1
3.3
Top
10 S
hare
of
Tota
l Are
a N
ew P
lant
&
Expa
nsio
n FD
I 51
.1%
68
.2%
55
.2%
74
.5%
90
.8%
aNot
else
whe
re c
ount
ed.
TABLE
2 C
hara
cter
istic
s of T
op 1
0 Ind
ustri
es fo
r Ove
rall
and
Plan
t and
Exp
ansi
on F
DI i
n M
anuf
actu
ring
in th
e U
nite
d St
ates
1979
-198
7 U
nite
d E
urop
ean
All
All
Cou
ntri
es
Kin
gdom
C
omm
odity
Ja
pan
Can
ada
Indu
stry
Pl
ant
and
Plan
t an
d Pl
ant
and
Pla
nt a
nd
Plan
t an
d
Cha
ract
eris
tics
Ave
rage
E
xpan
sion
E
xpan
sion
E
xpan
sion
E
xpan
sion
E
xpan
sion
V
alue
" FD
I FD
I FD
I FD
I FD
I FD
I FD
I FD
I FD
I FD
I
Four
-Fir
m C
once
ntra
tion
Rat
io (
X)
39
44
46
Uni
oniz
atio
n (X
) 59
66
78
Cap
i tal
-Lab
or R
atio
(X
) 14
8.75
31
6.34
18
6.18
Man
agem
ent
and
R&D
Pe
rson
nel
(76)
16
.44
22.4
7 16
.67
Mid
poin
t Pl
ant
Ship
men
ts
($ m
illio
ns)
38.7
0 18
4.16
16
6.03
Ave
rage
Tar
iff (
X)
4.36
3.
99
3.06
Non
-tar
iff
Bar
rier
s (1
= 1
00%
) 0.
333
0.66
7 0.
4
40
46
63
63
248.
73
240.
37
21.9
6 19
.03
86.6
5 11
4.95
3.67
4.
31
0.33
3 0.
60
34
46
48
49
35
51
50
57
70
60
75
83
324.
97
312.
35
160.
11
126.
16
148.
51
100.
6
24.5
4 20
.50
25.8
6 22
.18
17.5
5 18
.48
93.6
1 16
3.59
17
6.62
21
7.29
33
.80
105.
10
4.98
4.
30
3.06
2.
79
2.65
2.
99
0.44
4 0.
444
0.3
0.5
0.44
4 0.
25
Not
es: T
he a
ll in
dust
ry a
vera
ges
are
base
d on
ava
ilabl
e in
dust
ry d
ata
at t
he fo
ur-d
igit
SIC
leve
l. Th
e nu
mbe
r of
indu
stri
es is
449
for c
once
ntra
tion
and
the
capi
tal-l
abor
rat
io, 3
30 fo
r uni
oniz
atio
n, m
idpo
int p
lant
shi
pmen
ts an
d no
n-ta
riff
barr
iers
, 440 fo
r man
agem
ent a
nd R
&D
per
sonn
el, a
nd 4
89 f
or ta
riffs
. Th
e fo
ur-f
irm c
once
ntra
tion
ratio
is f
or 1
982.
Uni
oniz
atio
n is
the
perc
enta
ge o
f pr
oduc
tion
wor
kers
uni
oniz
ed i
n an i
ndus
try, 1
972.
The
cap
ital-l
abor
ra
tio is
for
1982
. Man
agem
ent a
nd R
&D
per
sonn
el re
pres
ents
the
perc
enta
ge o
f m
anag
emen
t, sc
ient
ists
, and
eng
inee
rs in
the
wor
kfor
ce in
198
2. M
idpo
int
plan
t sh
ipm
ents
is m
easu
red
by t
he v
alue
of
ship
men
ts by
the
min
imum
num
ber o
f es
tabl
ishm
ent n
eces
sary
to a
ccou
nt f
or 5
0 pe
rcen
t of i
ndus
try o
utpu
t fo
r 1972.
Ave
rage
tarif
f is
the
nom
inal
tar
iff r
ate
for
1986
. Non
-tarif
f ba
rrie
r is
a (
1, 0
) du
mm
y va
riabl
e se
t equ
al to
1 if an i
ndus
try
had
non-
tarif
f tra
de
rest
rictio
ns in
198
4.
RAY FOREIGN TAKEOVERS AND NEW INVESTMENTS IN U.S. 69
ble to competition from imports rather than expand into new industries (Ray, 1981; Marvel and Ray, 1983). The equity investment equation for Japan and the new plant and expansion regressions for all countries and Canada indicate a posi- tive relationship exists between foreign direct investment and the presence of both tariff and NTB restrictions in an industry. This raises the possibility that Japanese equity FDI-as well as Canadian and all- country PEFDI activity-reflects some ef- fort to avoid U.S. trade restrictions. No consistent evidence exists that either FDI or PEFDI in the United States from the United Kingdom or the EC is related to existing protectionist measures in the United States.
FDI activity may have occurred in an- ticipation of future trade restrictions in the United States. To account for this possibil- ity, this study related such investments to changes in bilateral trade balances be- tween the United States and parent com- pany countries between 1979 and 1985. The regression results fail to suggest that FDI activity was targeted toward indus- tries with deteriorating trade balances- i.e., possible candidates for future protec- tionist measures. (Mann, 1989, uses nega- tive trade balances to identify candidates for future protection, while this study uses percentage declines in bilateral trade flows for that purpose.)
The appendix contains evidence re- garding the macroeconomic hypotheses. Both equity FDI and PEFDI activity in the United States appear to be positively re- lated to the exchange rate in that they are timed so as to take advantage of a cheap U.S. dollar. (Exceptions are equity FDI by the United Kingdom and Canada and PEFDI for all countries.) As suggested by Ray (1989), industry growth effects on equity foreign direct investment in the United States tend to be positive and sig- nificant, except for that by Canada and Japan. New plant and expansion FDI is positively related to industry growth-
again, except for that by Canada and Japan. Relative GNP growth in the United States is positively but weakly related to equity FDI in the United States by the United Kingdom and positively related to plant and expansion FDI by all countries, the United Kingdom, and Japan.
One may not be surprised that evidence in this study suggests that neither simple political explanation of FDI activity in the United States is adequate. Foreigners did not invest in the United States simply to take advantage of a cheap dollar so as to buy U.S. firms at bargain basement prices (the Dukakis model). Foreigners did not uniformly invest in fast-growth industries in the United States regardless of their own competitive capabilities and the rela- tive U.S. dollar price of the assets they purchased (the Reagan-Bush model). The evidence suggests that reality is more complex than are the offered explanations for the FDI phenomenon during the 1988 presidential campaign battles.
The regression analysis also indicates that both equity FDI and PEFDI tend to be associated with horizontal investment ac- tivities and with industries facing large markets within the United States. As noted above, the within-industry invest- ment effect suggests that one’s best invest- ment gambles abroad are likely to be as- sociated with product lines in which one already has established a competitive abil- ity within the parent company‘s market. That equity FDI and PEFDI are associated with market size in the investment market may simply reflect that one is likely to find the greatest absolute profits in the largest markets.
This study’s earlier discussion of the determinants of FDI versus PEFDI sug- gests that both forms of investment would be associated with relatively large-scale operating plants in capital-intensive in- dustries and that PEFDI would be associ- ated with larger plants than would FDI. The study also suggests that leading FDI industries may be more skilled and labor
70 CONTEMPORARY POLICY ISSUES
intensive than are leading PEFDI indus- tries. Table 2 provides consistent evidence that for the top 10 industries, general FDI activity is concentrated in industries that are more skilled and labor intensive (ex- cept those for Canada) and that have smaller average size plants (except those for all countries) more so than in indus- tries that are major targets for plant and expansion FDI. The appendix regressions indicate that equity FDI is strongly related to the skill intensity of production for each country and region, while plant and ex- pansion FDI is associated with skill-inten- sive production only in the cases of the United Kingdom and Japan. Plant size and new plant and expansion investment are positively related in the cases of all coun- tries, the United Kingdom, and Japan. Plant size generally is negatively related to equity FDI activity.
IV. CONCLUSION
This study has indicated that foreign direct investment, including new plant and expansion FDI, tends to be associated with horizontal investments in expanding industries with large domestic markets. Both equity and new plant and expansion investments appear to be timed so as to take advantage of temporary low prices for U.S. dollars and relatively strong eco- nomic growth in the United States and/or in particular industries.
No evidence supports the traditional defensive investment hypothesis. A posi- tive association apparently exists between joint tariff and NTB protection in the United States and new plant and expan- sion FDI in the cases of all countries and Canada, and between such protection and equity FDI from Japan. Those cases sup- port the traditional trade barrier jumping argument for foreign direct investment, Subsidiary sales in the U.S. market are not subject to the cost markups that trade restrictions impose on foreign country ex- ports to the United States. Neither equity nor new plant and expansion FDI is iden- tified with industries experiencing deteri- orating trade balances.
As expected, new plant and expansion FDI tends to be associated with industries characterized by less management and skilled labor-intensive methods of produc- tion than is the case for FDI generally. Data from the 10 largest industries and from the regression results suggest that new plant and expansion FDI is associated with industries that have operating plants somewhat larger on average than is the case with equity FDI activity.
No consistent evidence supports the notion that foreign direct investment ac- tivity in the United States by Japan or by any other country or region is targeted systematically to undercut union-domi- nated firms or to stem the spread of pro- tectionist trade policies in the United States-i.e., quid pro quo investment.
RAY FOREIGN TAKEOVERS AND NEW INVESTMENTS IN US. 71
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