JAPAN'S GIANT TRANSNATIONAL CORPORATIONS HAVE CAUSED THE COUNTRY'S DOMESTIC ECONOMIC CRISIS

Since the early 1980s, Japan's transnational corporations have become dominant players in the global economy. Corporate Japan's foreign direct investment (FDI) is now second only to that of corporate America. And Japanese transnationals have a higher rate of physical investment in new, overseas greenfield sites than any of their international competitors.

But according to a new research report by Professor Keith Cowling and Philip Tomlinson published in the latest issue of the Economic Journal, this pursuit of global, corporate interests has severely damaged Japan's domestic industrial economy. In particular, it has led to a dramatic decline in the profitability of Japanese small businesses and decreasing numbers of small firms. This has led to concerns about the 'hollowing out' of Japan's domestic industry, raising the possibility of long-term industrial decline and the spectre of 'strategic failure'.

Standard interpretations of Japan's current economic problems fail to take account of the changing nature and activities of the country's giant transnational corporations, the economy's central actors. Since the early 1980s, the growth in Japanese FDI has been dramatic. In 1980, corporate Japan was still a marginal player in terms of global FDI flows with a 3% share. By 1997, corporate Japan was a world leader with a 12% share, second only to that of corporate America. More significantly, given that most FDI relates to mergers and acquisitions of existing assets, Japan's transnationals have the highest rate of overseas greenfield physical investment.

Cowling and Tomlinson argue that the pursuit of global, corporate interests by Japan's giant transnationals has had detrimental consequences for the country's domestic economy, particularly for small firms operating in the keiretsu networks. The increase in outward FDI flows not only diverts new investment from Japan, but also enhances the ability of Japan's transnationals to act globally when sourcing from outside suppliers. This reduces demand for intermediate goods supplied by Japan's small businesses.

During the 1990s, there has been a dramatic decline in the profitability of Japanese small businesses and decreasing numbers of small firms. This contrasts with other countries, such as the United States and the UK, where there has been a noted resurgence in small firm activity. Concerns have been raised in Japan about the 'hollowing out' of Japanese industry. These researchers see this as 'strategic failure'.

An economic development policy that relies centrally on cultivating the interests of giant transnational corporations will eventually raise issues of 'strategic failure'. To the extent that the state acts in the public interest by playing a part in shaping corporate strategies, this mode of development may create economic success. But it is an economic success that is unlikely to be sustainable.

In the case of Japan, Cowling and Tomlinson argue that the present economic stagnation primarily reflects a structural change that has occurred because of the activities of the giant transnationals. Other factors have undoubtedly played a significant role - for example, monetary and financial factors, and related exchange rate movements - but these are underpinned by the fundamentals of industrial production. 'Strategic failure' lies in the concentration of strategic decisions within the controlling groups of corporate Japan. There is no reason to suppose that their decisions will serve the wider public interest.

The researchers conclude that Japan should now shape a development path that will, over time, lead the economy progressively away from the outright dominance of the Japanese giants. They advocate the creation of a stronger small firm base with built-in network linkages, augmented with substantial public infrastructure and the development of research and development facilities serving the whole network.

Note for Editors: 'The Japanese Crisis - A Case of Strategic Failure?' by Keith Cowling and Philip Tomlinson is published in the June 2000 issue of the Economic Journal. The authors are at the University of Warwick, and their research was supported by the Economic and Social Research Council (ESRC).

For Further Information: contact Keith Cowling or Philip Tomlinson on 024-7652-3028 (fax: 024-7652-3032; email: K.G.Cowling@warwick.ac.uk, Philip.Tomlinson@warwick.ac.uk); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-7878-2919 (email: nflynn@cepr.org).