The Political Economy of Transition: Japanese Foreign Direct Investments in the 1980s

Abstract

The issue of Japanese foreign direct investment (FDI) has attracted scant attention because of its relative insignificance to the Japanese economy before the 1980s. In the 1970s only a few analysts explained the Japanese FDI behavior from a macroeconomic perspective. This paper argues that there has been a noticeable change in the nature of Japanese FDI in the 1980s, a position that supports the traditional microeconomic explanation based on the oligopolistic market theory. This convergence toward the “Western” style of FDI reflects a fundamental shift of the Japanese economy from a trade-oriented economy to one that is foreign investment—oriented. However, as the experiences of two hegemonic states (Great Britain and the United States) have shown, foreign investment is not the best economic strategy from a long-term perspective. Preliminary evidence in recent years indicates that increasing FDI affects Japan's productivity growth negatively by weakening both the production base and the various sources of Japanese competitiveness.