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Roads to follow: regulating direct foreign investment

Published online by Cambridge University Press:  22 May 2009

Simon Reich
Simon Reich
Affiliation:
Assistant Professor at the Graduate School of Public and International Affairs, University of Pittsburgh, Pennsylvania.
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Abstract

The United States faces a formidable and growing economic challenge from Japan. Over the last decade, the American state has characteristically responded to the loss of domestic market dominance in the manufacturing sector to foreign firms by invoking the principles of free and fair trade in order to delegitimate this foreign competition and legitimate the imposition of trade barriers designed to encourage the investment of multinational corporations (MNCs) in the United States. These tactics have largely succeeded in attracting investment and thus aided domestic employment and the balance of trade. The short-term benefits, however, have been achieved at long-term, unforeseen, undesirable economic and political costs in terms of both the balance of payments and state autonomy. Alternative state responses to the threat posed by Japanese MNCs, while consistent with principles of free trade, challenge the traditional liberal conception of the scope and domain of state behavior and provide more effective policies in achieving both short- and long-term objectives. This article draws on data relating to the treatment of subsidiaries of American automobile manufacturers by European governments with competing indigenous producers in specifying two variables critical to identifying policy alternatives: first, the degree of access granted by the state to foreign firms (limited or unlimited access) and, second, the type of support provided by the state to domestic firms (discriminatory or nondiscriminatory intervention). The analysis suggests that there are four possible policy combinations, which generally reflect the four different postwar state policies pursued by West Germany, France, Britain, and the United States. Of these four, the combination employed by West Germany has proved most effective in pursuing policies consistent with liberal trade principles while reconciling short-term employment and fiscal goals with the broader long-term objectives of sustaining state autonomy and balance-of-payments surpluses in the face of foreign competition. British policies, which have consistently proved the most ineffective, have sacrificed long-term objectives for short-term ones. As a result of structural changes during the 1970s, the American state's chosen policy combination was altered and now replicates the traditional British formula. The United States therefore risks comparable economic and political consequences.

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Articles
Information
International Organization , Volume 43 , Issue 4 , Autumn 1989 , pp. 543 - 584
Copyright
Copyright © The IO Foundation 1989

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References

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3 Specifically, these assumptions stress the hegemony of a Lockean liberal ideology and favor a decentralized state structure reliant on macroeconomic instruments. See Krasner, Stephen, Defending the National Interest: Raw Material Investments and U.S. Foreign Policy (Princeton, N.J.: Princeton University Press, 1978)Google Scholar.

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7 For a discussion of the inherent problem with these policies and how it plays itself out in a number of American industrial sectors that are representative of a variety of stages in the product cycle, see Walters, Robert S., “Industrial Crises and U.S. Public Policy: Patterns in the Steel, Automobile and Semiconductor Experiences”, in Hollist, Ladd and Tullis, Lamond, eds., An International Political Economy (Boulder, Colo.: Westview Press, 1985), pp. 153–74Google Scholar.

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9 The issue of investment by Japanese automobile firms in plants in the United States provides a typical example of short-term considerations predominating over long-term ones. See U.S. Congress, Senate Committee on Finance, Issues Relating to the Domestic Auto Industry: Hearings Before the Subcommittee on International Trade, 97th Congress, 1st sess., 1981, p. 195Google Scholar.

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88 See, for example, The New York Times, 15 May, 25 June, and 6 July 1957. Compare this strategy with that adopted by the British governments of Thatcher over the last decade: before the recent sale of Austin-Rover, the British had been willing to sell the firm to any prospective foreign purchaser.

89 The New York Times, 15 May 1957.

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95 According to a preliminary court decision reached in 1951, VW was not responsible to the 336,000 people who had paid into the Volkswagen Savers Fund between 1938 and 1945. This decision defied precedent in the German and international courts, which dictated that official bodies and companies were accountable for the acts of the authorities in the Third Reich. See The New York Times, 26 January 1951. The CCG felt that if the savers' litigation came to impartial assessment, the company would probably lose the case and face bankruptcy. See the CCG memo entitled “Meeting with Erhard”, 8 October 1949. B115/3377, Bundesarchiv.

96 The close relationship between the BFM and VW was evident in the apparently “coincidental” timing of mutually supportive speeches by BFM and VW officials on major policy issues regarding the company. See, for example, Vereinigte WissenschaftsDienst (VWD), 15 May 1957.

97 On the issue of price rises at VW, see, for example, Bonner Rundschau, 15 February 1962.

98 See Manchester Guardian, 27 June 1957.

99 See, for example, The New York Times, 21 February 1960, 3 June 1960, and 16 January 1975.

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101 The New York Times, 28 July 1964.

102 Wall Street Journal, 24 November 1964.

103 Ibid., 11 April and 25 April 1966.

104 Ibid., 30 June 1966.

105 The New York Times, 10 January 1967.

106 Ibid., 23 August 1966.

107 Government papers reveal that only core firms had regular, formal meetings with officials of Bonn's BFM and BWM. See, for example, Besuch des Herrn Dr. Könnecke beim Herrn Minister (Dr. Könnecke's visit with the Minister), 28 May 1957, B102/5196, Bundesarchiv.

108 Schattschneider, Politics, Pressures and the Tariff.

109 See, for example, U.S. Congress, Senate Committee on Banking, Housing and Urban Affairs, The Chrysler Corporation Loan Guarantee Act of 1979: Hearings Before the Committee on Banking, Housing and Urban Affairs, 96th Congress, 1st sess., 1979Google Scholar; and the Committee's subsequent Finding of the Chrysler Corporation Loan Guarantee Board, May 1980.

110 See “The American Car Industry's Own Goals”, The Economist, 6 February 1988.

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121 Note that there are other, conventional explanations, such as those relating to industrial relations or the quality of management, which might potentially be consistent with the data presented in these cases. The issue of whether these alternative explanations are consistent with the data is beyond the scope of this article. The merits of an explanation emphasizing state policies relative to other possible explanations are, however, systematically addressed in Reich, , “The Fruits of Fascism”, pp. 528–627Google Scholar.

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125 For additional details, see Reich, , “The Fruits of Fascism”, pp. 425–527Google Scholar. In this earlier study, I found that Ford in Britain experienced a period of tremendous growth in investment in the 1950s and early 1960s, only to stagnate from the early 1960s onward. In contrast, Austin, the major British challenger to the American MNCs, experienced limited growth in the early 1950s after a promising start in the immediate postwar period. Austin's limited growth was partially due to limited access to capital for development, a problem that was symptomatic of the company's earlier experiences in the first four decades of the twentieth century. See also Church, Roy, Herbert Austin: The British Motor Car Industry to 1941 (London: Europa Publications, 1979), p. 17Google Scholar.

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128 The fact that the structures of the British and West German automobile industries were so similar prior to the introduction of discriminatory state policies (with American MNCs dominant in both markets) and differed so significantly once these policies were instituted supports the proposition that state policy was the crucial variable. For a detailed discussion, see Reich, , “The Fruits of Fascism”, pp. 557–627Google Scholar.

129 Ibid., pp. 425–527.

130 See, for example, Morse, Edward, “The Transformation of Foreign Policies”, World Politics 22 (04 1970), pp. 371–92CrossRefGoogle Scholar.

131 See Starrels, , “The Dilemmas of Government Intervention”, p. 4Google Scholar.

132 For a systematic examination of this claim and evidence causally linking the decline of indigenous producers to the institution of liberal state policy encouraging American investment, see Reich, “The Fruits of Fascism”.

133 “Motor Industry Survey”, p. 9.

134 For a supporting argument about the tools and beliefs of liberal states in the realm of financial markets, see Zysman, John, Governments, Markets and Growth: Financial Systems and the Politics of Industrial Change (Ithaca, N.Y.: Cornell University Press, 1983), pp. 55–80Google Scholar.

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136 A notable exception to this general trend is the work of I. M. Destler. See, for example, his Making Foreign Economic Policy (Washington, D.C.: Brookings Institute, 1980)Google Scholar.