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A Japanese viewpoint: we're balancing trade.

As early as the 1970s, Japan's main business purposes were to expand sales activities in local markets and to achieve a relatively low unit-labor cost. Consequently, less transfer of technology took place and often the production process turned "screwdriver" in nature, resulting in a vertical division of labor.

But the Plaza Agreement, enacted in 1985, changed the whole picture. The impact of the Agreement's exchange-rate realignment penetrated almost every industry in Japan. Such an abrupt change in the exchange value-a 30-percent drop in just a year, compounded to 46 percent in three years-made it unrealistic for export manufacturers to hang on to mere domestic production and for domestic distributors to procure products from only domestic suppliers. The "Plaza shock" was strong enough to convince industries across the board to globalize their business strategies.

The rate of Japanese export as a proportion of total sales in the country's major industries began declining. In the automobile and automotive parts industries, for instance, the rate dropped from 49 percent in 1985 to 33 percent in 1989. In electric machinery manufacturing, it went from 38 percent to 29 percent. Steel dropped from 35 to 18 percent, and general machinery dropped from 32 to 22 percent. As a whole, the Japanese manufacturing sector experienced an export decline from 26 to 20 percent.

That lost portion of production capacity mostly moved abroad. We measure our horizontal division of labor by comparing the strength of exports against that of imports in any given sector of an industry. During the five years following the Plaza Agreement, Japan, relative to its trade partners in the western Pacific Rim region, has either reduced the level of or lost entirely the superiority of its exports over its imports in eight of 10 major industrial sectors.

In such areas as food stuffs, textiles, and non-metallic mineral products, Japan imports more than it exports. All other segments have more exports than imports but are moving toward a trade balance, with the exception of the auto industry.

The total value of the top six Japanese exports to the U.S.-motor vehicles and parts, electronics, precision instruments, visual and audio apparatus, and iron and steel-grew from $37 billion in 1985 to $47 billion in 1989, only a 25-percent increase in five years. The total value of the top five American exports to Japan-meat, machinery, chemical goods, wood, and grain-grew from $15 billion in 1985 to more than $28 billion in 1989, an 86-percent increase in five years.

So, we're making progress toward the goal of a horizontal division of labor, at least in the manufacturing sectors. But what about the momentum behind other areas that will help to globalize Japanese industry?

According to the Japanese Ministry of Finance, the outstanding balance of Japanese direct investments by the private sector-all non-financial transactions, such as real estate investments-totaled $154 billion at the end of 1989. That places Japan third internationally, with the U.S. first at $325 billion and the U.K. second at $188 billion.

Survey savvy:

Results from a survey conducted in January of 1990 by the Japanese Ministry of International Trade and Industry (MITI) show that most manufacturing companies point to three motivations for direct overseas investment:

To expand or establish a presence in the overseas marketplace.

To benefit from a reduction in product cost.

To avoid trade frictions.

For the U.S. and Europe, the avoidance of trade frictions ranks about the same as the reduction in product cost, suggesting that a fear of these frictions prompts companies to move their production bases to the countries in which their markets exist. Such moves are welcome by the hosting governments for macroeconomic, strategic reasons, of course, but also for other reasons, such as employment advantages. According to the MITI's data, some 1,330,000 jobs have been created by Japanese direct investment overseas.

With those jobs, however, come new frictions over the question of ownership and management. The Japanese are indeed aware of the personnel problems created by some of their acquisitions and arc examining cross-cultural studies to help eliminate the problems.

Multinationals talk about investments abroad.

On a broader scale, the Japan Economic Journal, the Wall Street Journal, and a leading consulting firm recently surveyed 215 multinational companies of various ownership about their investments abroad. Here are some of the results:

The most popular regions today for direct investment are the U.S. and Canada, followed by Japan.

The most enthusiastic investors are Europeans, followed by the Japanese.

European companies are the most advanced in terms of diversification and delegation of authority. Nearly 36 percent of the European companies surveyed have subsidiaries in more than one foreign country, and these companies delegate authority in the areas of research and development and other important managerial functions.

Ninety percent of the Japanese companies say they have made some kind of progress in internationalizing their businesses, while 31 percent list the harmonization of personnel and compensation as the most difficult task that is a part of that internationalization.

Most Japanese companies say that improving their market share and increasing their sales are their top-priority objectives.

Only 46 percent of the Japanese companies think that the recovery of initial costs is important. That attitude contrasts with the opinion of most non-Japanese companies surveyed, 78 percent of which think recovering costs, and measuring the time it takes to do so, is important. Further, 47 percent of the Japanese companies think they should recover their costs within 10 years, while 50 percent of American and European companies think they should do so in five years.
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Title Annotation:Special Global Report
Author:Honda, Keikichi
Publication:Financial Executive
Date:Jan 1, 1991
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