August 13, 1974
Page 28032
JAPANESE DIRECT INVESTMENT IN THE UNITED STATES
Mr. MUSKIE. Mr. President, in March 1973 the Boston Consulting Group was commissioned by the Government of Japan to "study the opportunity for Japanese capital investment in the United States, including the economic and political factors which are likely to affect the viability of such investments over time." The study was commissioned at the instance of Prime Minister Tanaka, and the project was directed by Mr. William Givens of the Boston Consulting Group, a former State Department expert on Japan. The report, entitled "The Prospect for Japanese Direct Investment in the United States, 1974-80," was submitted to the Japanese Government in January 1974. It has just recently been published for the interest of the general public.
In a period of capital shortage, increased foreign direct investment in the United States under appropriate conditions can create significant opportunities for new jobs and further growth in our own economy. The Boston Consulting Group's study is the most thorough and up-to-date evaluation of the prospects for Japanese investment and some of the problems associated with it, and I ask unanimous consent therefore that the summary findings of this report be printed in the RECORD.
There being no objection, the summary of findings was ordered to be printed in the RECORD, as follows:
SUMMARY OF FINDINGS
HIGHLIGHTS
Japanese direct investment in the U.S. is projected to rise to some $6-7 billion asset value, by 1980, exclusive of private securities purchases and banking assets (estimated at $1.5-2 billion and $12-16 billion, respectively).
Investment levels will be limited by market economics, competitive dynamics, and the availability of alternative opportunities in other countries, rather than by the availability of capital. The possibility of "runaway" Japanese investment in the U.S. appears remote.
The climate for Japanese investment in the U.S. is currently stable and benign, based in large measure on the successful integration of existing Japanese investment activities into the U.S. economy. Assuming competent planning and management of future investment activities, the levels of investments projected to 1980 are not likely to cause serious political problems.
Planning will become increasingly complex as investment levels rise, however.
The principal areas of potential friction are:
Investments in Japanese tourism based real estate activities, particularly in Hawaii, the U.S. West Coast, and possibly Alaska; and
Local over-concentrations of Japanese activity, owing to the tendency of Japanese businesses to "cluster" near one another.
Both of these problems can be held within manageable bounds through skillful planning.
The major trading companies will be the dominant force in shaping the investment pattern.
OBJECTIVES AND CONDUCT OF THE WORK
In March 1973, The Boston Consulting Group was commissioned by the Government of Japan to "study the opportunity for Japanese capital investment in the United States, including the economic and political factors which are likely to affect the viability of such investments over time." This report has been prepared in fulfillment of that assignment.
In light of the magnitude and complexity of the issues involved, the interests and perspective of the client, and the time and resources allotted to the project, the following objectives were adopted for the work
To provide the Government of Japan with an overview of the probable pattern of Japanese investment in the U.S. over the next five to seven years, including the order of magnitude and composition of such investments and their probable impact in the U.S.;
To identify the economic and political issues which these investments are likely to create which may require policy action by the Japanese Government; and
To provide an analytical framework for planning and policy formulation with respect to Japanese capital investment in the U.S.
The evaluation involved two principal tasks:
Identification of the probable pattern of Japanese investment in the U.S. in 1980; and
Evaluation of the likely U.S. reaction to this pattern.
The first of these tasks was accomplished through statistical research and analysis and extensive interviews with Japanese business executives and government officials in both Japan and the U.S. The second was accomplished through a series of direct interviews and telephone and mail surveys in the 50 U.S. states and Puerto Rico. The conduct of the work is described in detail in the section, "Conduct of the Study: Approach and Methodology".
PRINCIPAL FINDINGS AND OBSERVATIONS
THE CHARACTER OF JAPANESE FOREIGN INVESTMENT
Japanese direct foreign investment will be almost entirely private in nature and will not be centrally planned or controlled. It will be comprised of hundreds of independent investment decisions and actions, ranging from very small (family vacation homesites) to very large (industrial parks, steel mills, hotels).
It will not, contrary to a common U.S. view, be primarily the result of a capital surplus; the picture of dollar-rich Japanese industry avidly "shopping" for profitable outlets for excess cash is highly oversimplified and misleading. In practice, Japanese overseas investment will be a response to specific economic and political forces, creating outward pressures on Japanese industrial and business activity across a wide range of enterprises.
The volume, rate of growth, and composition of Japanese capital investment in the U.S. will be determined by the interaction of several variable factors:
The action of the economic and political forces noted above;
The reactions of individual Japanese firms and private investors to those pressures;
The availability of comparable or superior alternative investment opportunities in other countries; and
Japan's international balance of payments position and competing demands on available capital.
THE PRESSURES AND MOTIVES FOR JAPANESE INVESTMENT IN THE UNITED STATES
In the broadest sense, Japan's economic capabilities have expanded over the past two decades from those of a second-rank exporter of labor intensive manufactured products to those of a major industrial power. During this period, and, indeed, historically, Japan's external economic activity has been centered almost exclusively on its export-import trade. The central objective of Japanese economic policy has been to industrialize on the pattern of the U.S. and Western Europe, systematically reallocating human and capital resources forward as rapidly as possible into increasingly higher levels of technology, capital intensity and productivity. Effort has been concentrated largely in industries in which Japan could most readily develop and maintain international comparative advantage. The essential pattern has been one of concentrating production almost entirely in the domestic economy, producing not only for rapidly rising domestic demand, but also for export, in order to generate the foreign exchange necessary to satisfy Japan's critical import needs, most notably, food, raw materials, energy, and technology.
Virtually without natural resources, Japan has functioned essentially as an increasingly sophisticated and efficient factory, trading finished goods abroad for the resources and technology needed to continue the program of economic development and industrialization in Japan itself.
Japan now appears to be entering a new period of its economic development in which the Japanese homeland will be less exclusively a production center and will begin to function as the headquarters of a global economic system. Foreign investment will be the principal vehicle for this transition, and will flow in a general pattern dictated by Japan's changing needs, specifically:
The need to shift a part of production offshore in response to mounting domestic shortages, a growing trade surplus, and protectionist pressures in principal overseas markets;
The need to maintain a secure base for the long-term sourcing of critical resources in the face of prospective worldwide shortages;
The need to establish an independent position in the development of advanced technologies; and
The need to expand and diversify Japanese external economic activity beyond the existing pattern of export-import trade.
Prospective Japanese investments in the U.S. can be classified into four broad categories, based on the needs, or motivations, listed above:
Category 1: Export Substitution Manufacturing Investments.
Category 2: Resource Acquisition Investments.
Category 3: Technology Acquisition Investments.
Category 4: Diversified Investments.
It is important to note that the principal criterion for this categorization is not the type of activity concerned (e.g., manufacturing, mining, agriculture), but rather the underlying objective for which the investment is made. This classification system facilitates both the projection of likely investment patterns and the evaluation of probable U.S. reaction to them. It should also be noted that these categories will exhibit markedly different characteristics, both economic and political.
Since they are based on fundamentally different aspects of Japanese economic activity (i.e., exports, imports, technology, and diversification), their value to Japan (in terms of their contributions to the Japanese economy and to Japanese economic policy objectives) will differ widely, as will their impact and acceptance within the U.S. The four categories and their principal characteristics, are as follows.
Category 1: Export Substitution Manufacturing. This category includes only investments in establishing or acquiring manufacturing facilities in the U.S. to produce or assemble for the U.S. market items currently being exported from Japan. The objective of these investments is to shift production from Japan into the export marketplace in order to achieve lower factor costs, circumvent domestic shortages in Japan, or relieve protectionist pressures. Examples of Category I investments are the Y.K.K. slide fastener factory in Macon, Georgia; the Sony and Matsushita television assembly plants in San Diego, California and Puerto Rico, respectively; the Ataka-Kyoei steel mill in Auburn, New York; and the Kikkoman soy sauce factory in Wisconsin.
From the Japanese point of view, these investments will tend to relieve domestic pressures created by labor, energy, and land shortages, and by the mounting pollution crisis. They will also tend to reduce Japan's tendency toward trade surplus (and the resultant political pressures) by shifting production offshore into Japan's principal overseas market. From the U.S. viewpoint, these investments will create new jobs and public revenues, increase productivity through the introduction of new technology, and replace unpopular levels of imports with domestic production. In the broadest sense, the value to Japan of Category 1 investments will be high, and the risk of adverse reaction in the U.S. will be low.
Category 2: Resource Acquisition for Export to Japan. This category encompasses all investments made for the purpose of acquiring raw materials and energy specifically for export to Japan. "Resources" means all natural resources, including agricultural, forest, mineral, marine and energy. By type of activity, Category 2 includes exploration for, and development, extraction, and processing of, mineral resources; production, harvesting, or processing of agricultural, marine, or forest products; cattle or poultry raising, meat processing and meat packing; and any manufacturing activity in which the U.S. site is selected solely or principally as a source of energy. The most prominent examples of existing resource acquisition investments are the extensive Japanese holdings in timber and canneries in Alaska. However additional investments may be anticipated in any of the resources listed, particularly in specialty agricultural products (citrus fruits, nuts, grapes, and wine), or in the processing of raw materials purchased from U.S. producers.
Investments in the development and processing of U.S. natural resources for export to Japan will provide improved access to critical raw materials. To the extent that U.S. processing is involved, they will increase the value added to these products in the United States, relieving a chronic source of friction. Finally, insofar as these investments result in increased U.S. exports to Japan, they will tend to reduce the U.S. trade deficit with Japan. All of these results will tend to be beneficial to Japan. From the U.S. point of view, however, Japanese investments in this category will not be seen as an unadulterated blessing. In some cases they will intensify competition for scarce resources, elevate prices and exacerbate shortages. These investments will tend to be more capital intensive than Category 1 activities, and will have a less tangible effect on the creation of new jobs. They will be highly controversial from the environmental point of view. Generally speaking, the value of Category 2 investments to Japan will be high, but the political risk in the United States will also be substantial.
Category 3: Technology Acquisition. Category 3 includes all investments made for the purpose of acquiring technology or facilities for its development. Such investments will include equity participation in, or acquisition of smaller U.S. firms with promising technologies under development (e.g., pollution control devices, biomedical technologies, computer peripherals), and joint development projects, joint ventures, or consortia with technologically advanced American corporations to develop major technological resources for application in both economies (surface transportation systems, uranium enrichment, oceanography). Thus far few investments in this category have come to public attention. However, our investigation indicated that Japanese interest in investments of this type is rising, and a number of negotiations are underway.
The potential benefits to Japan of an established presence in the U.S. technological sector are both substantial and evident. Investments in this category will tend to be unobtrusive, with limited public impact.. To the extent that they are visible, it seems likely they will be seen as an improvement over licensing, a technique often viewed as a development has been taken. The value to Japan of investments in this category is high; the risk in the United States will be low.
Category 4: Diversified Investments. Superficially, this appears to be an arbitrary "catch all" category, since it covers all investments not included in Categories 1-3, and since it encompasses a variety of activities. However, with investments related to exports, imports, and the acquisition of technology covered elsewhere, Category 4 consists, for practical purposes, of the expansion and diversification of Japanese economic activity into new fields and markets. Specifically, it will include the following kinds of investments.
Real estate;
Banking and finance;
Retailing and commercial activities;
Transportation, warehousing, and distribution; and
Acquisition of "new" business; i.e., unrelated to existing Japanese import-export trade with the United States.
Despite the disparate nature of the various activities in Category 4, investments in this category have several significant features in common. Since, by definition, they represent expansion by Japanese business interests into new areas of activity, they are areas in which the investors will be less experienced in the U.S. environment, where business risks will be somewhat greater, and where American resistance is likely to be higher than in sectors where a Japanese presence is already established. With the exception of individual investments in U.S. securities, Category 4
activities will tend to be highly visible and often controversial, particularly in real estate and tourist-oriented investments. At the same time, Category 4 investments will, in general, tend to make little immediate contribution to the Japanese domestic economy, and will have limited effect on the U.S.-Japan trade balance. Accordingly, their value to Japan will be limited and the political risk in the U.S. relatively high.
The value and risk characteristics of the four categories are summarized in the table on the following page.
[Table not reproduced in the RECORD]
CHARACTERISTICS AND IMPLICATIONS OF THE TOTAL INVESTMENT PATTERN
The pattern of Japanese investment in the U.S. at any given time can be represented by a simple bar graph:
(Graph not printed in the RECORD.)
Obviously, a wide variety of patterns is possible, each with different value and risk characteristics. It is apparent that both the viability of the overall investment pattern and its value in terms of Japan's economic interests will be determined not only by the total volume of investment, but also by the allocation of the whole into the four categories. It becomes a matter of some importance to determine what the likely profile of Japanese investment will be.
A number of other points should be noted with respect to the pattern of Japanese investment and its risk-value characteristics:
The potential for Japanese investment in the U.S. is not infinite; practical limits can be imposed in four ways:
By the availability of capital for this purpose;
By the accomplishment of underlying investment objectives;
By the capacity of the U.S. environment to absorb large volumes of Japanese investment; and
By the number of investment opportunities in the U.S. which are potentially attractive to Japanese investors.
As the level of investment in a given category rises, the underlying need will be satisfied and the incremental value of additional investment will be reduced. (Japan will not, for example, wish to shift all of its export production from Japan into its overseas markets; the Japanese demand for foreign-sourced raw materials, while large, also has finite limits.). At the same time, the political risk will tend to increase with rising investment levels. At some point the incremental risk may well outweigh the incremental value of further investment in the category, and a natural ceiling will be reached. This ceiling will not necessarily be apparent, particularly to the individual investor.
Adverse reaction to Japanese investment in one category will raise risk levels for other categories, as well. Excessive concentration of investments in high-risk categories will raise risk levels throughout the entire pattern.
Accordingly, no single Japanese investment, or category of investments, can be considered in isolation. Each will affect both the potential value and the viability of others. Individual investments can be evaluated effectively only in the context of the pattern as a whole. A random pattern of investments will almost certainly be inefficient, and will possibly become a political liability.
As the pattern grows in size, visibility, and impact, its profile will become increasingly important and difficult to influence.
VIABILITY AND SUCCESS: THE CLIMATE FOR JAPANESE INVESTMENT IN THE UNITED STATES
In our program of interviews, we found actual American attitudes toward Japan to be considerably more moderate and pragmatic than they are generally thought to be. Outright, expressions of antipathy or opposition to Japanese investment were extremely rare; on the contrary, the prevalent attitude was one of positive receptivity, reflecting both a realistic awareness of the potential benefits of such investments and a consequent willingness to meet prospective investors more than halfway in resolving adjustment problems and minimizing frictions.
A second encouraging finding was that existing Japanese investment in the U.S., of which there is already a large volume and variety, has displayed very little of the abrasiveness and volatility which might have been expected. With the single exception of Hawaii, where Japanese investments in hotels have been subject to controversy and friction, we found no significant instance of maladjustment or adverse reaction. Numerically, of course, most existing Japanese investments are sales offices and other small, service-oriented activities. However, they also include a long and rapidly growing list of manufacturing and resource development operations, including textile and steel mills, consumer electronics plants, a truck assembly plant, food processing operations, fisheries, mineral extraction, timber, machinery, and others in virtually every part of the United States. The general pattern to date has, been one of smooth integration and acknowledged beneficial impact.
We believe the climate for Japanese investment in the United States has reached a point where such investments will be received less emotionally than pragmatically, on the basis of their perceived value to the communities in which they locate. There does remain evident throughout the country a subtle but unmistakable undercurrent of anti-Japanese sentiment, a predisposition to see Japanese business as monolithic, overly aggressive, and insensitive to Western values and practices. This, in turn, will tend to catalyze and aggravate routine competitive friction, labor problems, and other grievances, making Japanese investments somewhat more vulnerable to adverse reaction than comparable U.S. owned enterprises. However, the strength and importance of this phenomenon should not be exaggerated.
But the climate is not static; it is a constantly evolving mixture of positive and negative factors. Currently, it is benign and stable because:
The political relationship between Japan and the United States has been relatively trouble free;
Adverse reaction in the U.S. to foreign investment in general has thus far been limited; and
The level of investment is still quite low, and the balance between Japanese investments creating positive impact in the U.S. and those having negative impact has been extremely favorable.
This situation, obviously, could be adversely affected by negative developments in any of the three:
Serious political differences between Japan and the U.S. in which Japanese economic success might come to be seen in the popular U.S. view as contrary to the U.S. interest;
A deterioration of the U.S. economic position and decline in the dollar relative to the yen, deutsche mark, and other currencies, leading to a substantial foreign economic presence in the U.S. The concept of affluent, aggressive foreign interests "buying the United States" could inspire jealousy, resentment, and ill-will against foreign investment generally, including (but not directed specifically toward) investments from Japan; and
A qualitative shift in the balance of Japanese investments in the U.S. from favorable to unfavorable as new investments are made and the total volume of Japanese investment in the U.S. grows to major proportions.
EVALUATING SPECIFIC INVESTMENTS
The U.S. political and economic environment will absorb a very substantial volume of Japanese capital investment, provided only that the individual investments comprising the whole are competently selected, planned, and managed. However, many, perhaps most, of the Japanese investments in the United States to date appear to have been based on instinct, chance, and ad hoc advice, rather than systematic evaluation. Some investments (particularly in real estate) have been made virtually without regard to their political consequences, with predictably adverse results. In other instances, a preoccupation with the avoidance of any friction whatever has led to excessive caution and opportunity loss. As a general pattern, we a find that prospective Japanese investors, both large and small, are acting (or failing to act) on the basis of hearsay and simplistic generalities when hard analysis is both possible and essential. To the extent that this pattern continues as the volume and concentration of Japanese investment in the U.S. increases, the probability of serious political difficulty also rises.
No Japanese investment will be entirely without friction. To some extent, conflicts of economic interest, misunderstandings, and resentments will occur in virtually every Japanese investment made in the US. Accordingly, long-range acceptance and viability in each case will depend not on the absence of friction, but rather on achieving and maintaining a favorable balance between positive and negative factors. The focus of planning and evaluation must be on this balance.
Positive factors will for the most part consist of tangible economic contributions: employment, taxes, community economic benefits, increased exports, decreased imports, and the like. The political value of these factors will depend entirely on the extent to which the affected U.S. interests are aware of them and perceive them as beneficial.
The principal negative factors and sources of friction will also be economic, and will be those competitive activities which conflict with domestic interests:
Competition for market and market share;
Competition for raw materials and scarce natural resources, including land and energy;
Competition for labor in locations or industries where it is scarce; and other activities which tend to raise prices or factor costs in the affected communities. These competitive frictions, as noted above, are subject to aggravation by differences in cultural patterns, managerial styles, and competitive practices, including:
Relations with organized labor;
Inter-company relationships, both cooperative and competitive;
Debt policies and pricing strategies; and
Social customs and difficulties in communication.
Attention must be given not simply to the type of investment activity in question, but also to the character of the specific investment and its probable impact on the several communities of interest it will affect. The critical elements are:
The economic and political impact of the activity on the community where it is located;
Its impact on the industry concerned; and
Its economic impact at the national level.
It is our contention that virtually all of the serious controversies which are likely to arise with respect to Japanese investment in the U.S. can be anticipated, and that most can be avoided, by the systematic evaluation of the foregoing elements in advance of the final decision to invest. A recommended procedure for such evaluation is described in detail in the section, "Success and Viability: The Climate for Japanese Investment in the United States", page 85.
THE PROJECTED PATTERN OF JAPANESE INVESTMENT AND ITS LIKELY IMPACT IN THE UNITED STATES
We anticipate that Japanese investment assets in the U.S. will rise by 1980 to a total of $6-$7 billion, excluding banking assets ($12-15 billion) and portfolio investments ($1.5-2.0 billion).
We estimate that at least half of the total asset figure will represent debt undertaken in the U.S., the remainder being capital from Japan.
The projected breakdown by category is as follows:
[In billions]
Category 1 (export substitution manufacturing) $2.7
Category 2 (resource acquisition) 1.6
Category 3 (technology acquisition) 0.9
Category 4 (diversified Investments) 1.6
Total assets 6.8
Thus, displayed graphically, the profile of Japanese investment in the U.S. would appear as shown on the following page:
[Bar graph not reproduced in the RECORD]
The purpose of the foregoing projection has not been to predict the precise level or composition of Japanese investments in the U.S. in 1980, but rather to assign some quantitative order-of- magnitude values to the probable pattern of such investments in order to judge their likely impact in the U.S. Assuming the projected levels of investment are properly dispersed geographically (a questionable assumption discussed further below), the impact in the U.S. should be generally favorable. The effect, in addition to the initial capital input of some $3-4 billion into the U.S. economy will be the creation of several billion in assets, thousands of American jobs, millions of dollars in public revenues, and an annual positive contribution of several billions of dollars to the chronically deficit U.S. balance of payments.
The projected 1980 level of export substitution manufacturing investments in some $2.7 billion, asset value. At typical U.S. sales-to-asset ratios, these assets would represent annual value added of approximately $3 billion, or 15 percent of projected Japanese exports to the U.S. for 1980 (assuming a 10 percent annual export growth rate through the decade). Provided the individual investments comprising this total are completely planned and managed, this level of investment should be readily absorbed into the U.S. economy. In most quarters in the U.S. it will be justifiably seen as an asset, creating employment and revenues and stimulating competition. The most likely source of resistance will be competing American firms in the affected industries: e.g.., steel, automobiles, consumer electronics, textiles. However, we do not expect this opposition to reach critical proportions or to attract substantial popular support, provided only that the public is made aware of the benefits to the U.S. economy which this type of investment represents. Serious problems with US. labor also appear unlikely provided Japanese management continues to adhere to established U.S. practice in its relations with labor.
Barring large-scale Japanese investments in U.S. shale oil production or uranium enrichment – developments whose prospects are yet unclear – the potential for Japanese investment in resource development in the U.S. appears distinctly limited, particularly by comparison with opportunities available elsewhere. Unlike the situation in many less developed economies (where there is little or no competing domestic demand for the resources), ownership of U.S. resources would not, in most instances, be effective as a means of assuring exportability and would typically involve substantial political and economic risks. Further, most of the raw materials which Japan imports in quantity from the U.S. promise to be sufficiently available that long-term purchase agreements will provide adequate stable supplies. Accordingly, the greater part of Category 2 Japanese investments in the U.S. seems likely to be in the processing of U.S.-sourced raw materials for export to Japan – the milling of food grains, canning of fish and other marine products, processing of fruits and vegetables, crushing of soybeans, milling and pulping of wood, and the like. These investments are likely to be motivated largely by the desire to transfer these activities offshore for energy, pollution, land availability, and, over the longer term, balance of payments reasons rather than as a means of acquiring control of the resources themselves. This level of investment, per se, should not cause undue political problems in the U.S., and could, in conjunction with a well planned program of purchase agreements, prove an economic and political asset. The viability of these investments will depend essentially on (1) the quality of planning and management which goes into them, and (2) the impact of Japanese investments in the other three categories.
Although the prospect for technology acquisition investments is still unclear, their political impact will probably be limited. In most instances they will be small and unobtrusive; if large, they will almost certainly be joint ventures or consortia undertaken in cooperation with American firms. Local characteristics will be similar to export substitution investments, hence generally favorable. Further, to the extent that investments of this kind are seen at the U.S. industry level as alternatives to the previous pattern of licensing and purchase, they are apt to be viewed as improvements.
In Category 4, the most important single activity will be the purchase and development of U.S. real estate. This investment will center around resort hotels and related operations based on the rapidly rising Japanese tourist market in the U.S., but will also encompass a variety of other forms: industrial parks and developments, commercial buildings and shopping centers, residential developments, and recreational facilities (golf courses, tennis clubs, ski resorts).
Commercially oriented investments (retail and wholesale) are likely to be next in terms of volume and visibility, but will be fragmented into smaller investment units, will be dispersed across a range of activities (department stores, restaurants, travel services; etc.) and will not have a major economic impact. Their principal effect will be to make more Americans aware of the Japanese presence and perhaps to call attention to Japanese investments in other categories.
Most of the predictable controversy and political friction are likely to be associated with diversified investments, notably those in real estate. The most sensitive single area of investment will be in Japanese tourism oriented hotels, resorts, and recreational facilities, where frictions already exist and growth and concentration are continuing. Other real estate developments could generate political problems, particularly with environmentalist groups and civic organizations, if they are not carefully planned and coordinated with local authorities. These activities promise to be a chronic source of annoyance for the indefinite future.
The potential for local conflict is always present in all types and categories of investments. The actual levels of such conflicts and, more broadly, the climate for Japanese investment in the U.S. as a whole will be determined by the quality of planning and management which goes into these activities. Thus far these have been competent and thorough, and we see no reason to anticipate a departure from this general pattern. Some individual lapses, leading to local problems, are inevitable, however.
There are some major variables in the future prospect for Japanese banking in the U.S., notably in possible legislative limitations on the scope of these activities and as to the source of funds for them. However, we expect neither spectacular growth nor drastic curtailment of these activities, and have assumed as a working estimate a 10 percent annual growth for the remainder of this decade. This would mean 1980 assets of $12-$16 billion, with accumulated equity of $300-$500 million. The impact of this level of investment and activity will be moderate in the context of both the U.S. banking industry and the political environment.
IMPACT OF OIL SHORTAGE
We anticipate both export substitution manufacturing and raw materials processing investments are likely to be accelerated by a petroleum shortfall, particularly over the shorter term.
The longer term prospect is more complex, made so by uncertainties in both the price and availability of oil over the remainder of the decade, by the price trends of other commodities, and by a host of other factors outside the scope of this survey. On balance, however, we do not anticipate a major restraining effect on Japan's overseas investment. We have assumed for the purposes of this analysis that (1) there will be no long term shortfall of oil sufficient to cause a serious slowing of Japan's economic growth (we still anticipate real GNP growth of 8-10 percent over the decade), and (2) petroleum price increases will not be sufficient to put Japan's balance of payments into critical red, constraining the manufacturing and materials processing investment flows discussed above. To the extent that short-term overseas investment constraints are called for, other activities (e.g., tourism, portfolio investment, real estate) are far more likely targets for limitation.
STRATEGY ISSUES
At the policy level it is useful to consider the pattern of Japanese investment projected above in terms of its strategic implications: What are its overall value-risk characteristics? What problems can be foreseen, and how might they be avoided? How might the pattern be strengthened to reduce political risk or enhance its contribution to Japan's economic interests? Our own observations follow:
GENERAL CHARACTERISTICS
The pattern is more modest in scale than we had anticipated, and shows surprising balance. No. category of investment appears to be seriously out of proportion, to the whole.
In general, the value of the pattern to Japan, in terms of its probable contribution to Japanese policy objectives, will be substantial, and the political risk relatively low. No dramatic political issues are apparent.
The capital requirements for the probable levels of investment are well within the capability of the Japanese economy to supply. However, investment levels in all categories will be essentially self-limiting; that is, market economics, financial risk levels, competitive dynamics, and alternative investment opportunities in other countries will put effective ceilings on likely investments in the U.S. The chance of "runaway" investments in one or more of the categories seems remote.
CATEGORY-SPECIFIC ISSUES
No policy action seems indicated with respect to export substitution investments. Investment rates and levels in this category will be determined largely by the economics, growth, and competitive pressures of the marketplace. There appears little the Japanese Government could do to accelerate this flow, and no reason to wish to inhibit it.
In resource acquisition investments, the near-term prospect is for moderate levels of investment, largely in processing activities. Political risk in the U.S. appears low, and the investments seem likely to contribute significantly to Japanese economic policy objectives. However, a thorough, systematic examination of longer term prospects in this category might well indicate major opportunities for investment in the joint development of U.S. mineral, marine, and other natural resources to the mutual benefit of bath Japan and the U.S.
Similarly, technology acquisitions seem unlikely to exceed moderate levels or to have seriously adverse impact in the U.S. The level and pattern of investment in smaller scale (fragmented or component) technology development projects for commercial application will be shaped essentially by competition and market farces in the private sector; no policy issue arises.
However, there may well be a role for government stimulation of, or participation in, larger scale (unit or system technology) projects. The potential for broad-scale, long-term cooperation between Japan and the U.S. in the development of technology merits far more careful and specific consideration than it has been possible to accord it in this general survey.
Diversified investments will benefit the Japanese economy substantially less than those in the three preceding categories; political risk will be high, especially in real estate activities, and some degree of chronic difficulty is virtually inevitable. The potential for serious political problems (that is, of sufficient magnitude to became issues at the government-to-government level) in this category is relatively low, but does exist. Control of these activities can by exercised in three ways: (1) through self control, planning, and discretion by the investors themselves; (2) through controls administered by the Japanese Government; and (3) by means of restrictions and prohibitions imposed by U.S. authorities. Of these, the first is clearly the preferable alternative.
Any restrictive actions by the U.S. side (presumably after frictions had grown to unacceptable proportions) would affect the climate in the U.S. for other types of Japanese investments, as well.
Accordingly, from the standpoint of overall pattern strength and viability, an important immediate objective should be to apprise the Japanese private sector of the character of this issue, and to seek the cooperation of prospective investors in the careful and systematic planning and management of these politically sensitive activities.
GENERAL ISSUES
Although the projected levels of Japanese investment, per se, are moderate in terms of the U.S. economy overall, excessive concentration in a few locations could have greater adverse impact than a much larger investment pattern, skillfully dispersed. Thus, dispersion is a critical variable.
Geographic proximity and established trade and social patterns will tend to cause the most rapid and heavy buildups in the western U.S. – Hawaii, Alaska, California, Washington, and Oregon.
Other concentrations are likely to form around the existing Japanese investments in other states: Texas, South Carolina, and Georgia. There is no valid reason for excessive concentration; there is a wide selection of suitable locations for most kinds of investments, both among and within the states. The development of this pattern of geographic distribution should be monitored closely by both the Japanese Government and the private sector, and private investors should place major emphasis an this aspect of their pre-investment planning.
All of the foregoing would indicate the desirability of a close and continuous monitoring by the Japanese Government of the overall pattern of Japanese investment in the U.S. as it develops.
This will allow early recognition of potential problems, facilitate coordination with the Japanese private sector (and in some instances with U.S. authorities) to minimize them, and provide an adequate information base on which to make policy decisions with respect to these issues. It will also facilitate essential public information activities designed to apprise American interests of the magnitude, nature, and effect of Japanese capital investment in the U.S.
The central force in the development of the Japanese investment pattern in the U.S. will be the major trading companies. They will be active in all four investment categories, and will literally dominate Categories 2 (resource acquisition) and 4 (diversified investments). Their performance will in large measure determine the magnitude, character, and viability of the overall Japanese pattern. Yet it is our observation that few of these firms have yet developed systematic plans or strategies for the allocation of their U.S. investment resources. In some of these cases, extremely large corporate resources will be involved, and exposure to political risk could be considerable.
The trading company itself will frequently have its own pattern of U.S. investments (within the larger Japanese pattern) with its own set of risk and value characteristics. The criteria for measuring value will, of course, vary from company to company, but the political risk and the need for sophisticated planning and management will be universal. The need will grow as the pattern of Japanese investment in the U.S. grows in scale, complexity, and public impact. Thus, a final key issue is the skill with which these companies deal with the strategy question.