2 1 United States General Accaunting Office Fact Sheet for the Chairman, GiO Committee on Commerce, Science, and Transportation, U.S. Senate July 1990 FOREIGN INVESTMENT Aspects of the U.S.- Japan Relationship RESTRIcTE;D --Not to be released outside the General Accountiug Oftice unless specifwally apgmved by the Offke of Congressional . Relations. United States General Accounting Office Washington, D.C. 20548 National Security and International Affairs Division B-2345 11 July 31, 1990 The Honorable Ernest F. Hollings Chairman, Committee on Commerce, Science, and Transportation [Jnited States Senate Dear Mr. Chairman: In response to your request, we are providing information on (1) the extent and sectoral composition of -Japanese investment in the United States and U.S. investment in Japan, (2) the forms of Japanese direct investment in the IJnited States, and (3) barriers to 1J.S.investment in Japan. Foreign investment includes (1) foreign direct investment, defined as purchases of 10 percent or more of a firm’s equity, (2) “portfolio” investments, defined as other purchases of equity or private sector bonds, (3) purchases of government securities, and (4) financial assets (such as U.S. banks’ borrowing from *Japan and dapanese deposits in the 1Tnited States). Japanese investments in the United States during 1980-1988 increased faster than U.S. investments in Japan, with the result that total Japa- nese investments in the IJnited States exceeded total 1J.S.investments in .Japan by $128.5 billion at the end of 1988. Japan made direct invest ments in the United States amounting to $21.7 billion in 1988, while LJ.S. direct investment in .Japan was $2.2 billion. More than half of each country’s cumulative direct investment in the other was in two sec- tors-wholesale trade and manufacturing. Appendix I provides details on the extent and sectoral composition of Japanese investment in the lJnited States and IIS. investment in .Japan. Most Japanese direct, investments are in the form of majority ownership investments, rather than joint ventures or minority ownership. Distin- guishing whether Japanese investments are in sales or production facili- ties is difficult, because official Commerce Department statistics do not always separate these types of investments. Appendix II describes the forms of *Japanese invt%ment in the LJnited States in greater detail. Japanese barriers to I I .S. investment tend to be informal, systemic bar- riers, such as long-term supply relationships, a complex distribution system, and close ties between government and industry. Appendix III Page 1 GAO/NSIAD+O-203FS Foreign Investment Page 3 GAO/NSIAB!B%203FS Foreign Investment Figure 1.5: Total Assets of Japanese Affiliates in the 12 IJnited States Figure 1.6: Total Assets of U.S. Affiliates in Japan 13 Figure 1.7: Total Employment by Japanese Affiliates in 14 the United States Figure 1.8: Total Employment by U.S. Affiliates in Japan 15 Figure 11.1:Forms of .Japanese Foreign Direct Investment 17 in 1J.S.Manufacturing Abbreviations FDI Foreign Direct Investment Page 5 GAO/NSIAD90203FS Foreign Investment Appendix I The Extent of Japanese Investment in the United States and U.S. Investment in Japan Figure 1.1: Japanese Investment Position in the United States (Based on Balance of 300 Dollars in billions Payments Statlstlcs) r 260 260 240 220 200 190 160 140 Note ‘Other” Includes fowgn offlclai assets I” the United States and U S llabilltles to Japanese Inter .^. Sources Bureau of Economic Analysts. Commerce Department, Congressional Research Serwce statls- tics from Treasury Department data the same time period, L.S. direct investment in Japan, although repre- senting a smaller percentage of total investment, grew from $7.9 billion to $16.9 billion (16.4 percent to 10.8 percent of total investment). Figure I.2 shows the size of these different components for the years 1984 to 1988. In 1988 almost half of ,Japan’s $47 billion foreign direct investment (FDI) Direct Investment was invested in the 1Jnited States, while less than one-eighth of U.S. FDI was invested in Japan (see tables I.2 and 1.3). The share of Japanese FDI invested in the ITnited States grew from 33.1 percent in Japan’s fiscal year 1984 to 46.2 percent in fiscal year 1988 (the Japanese fiscal year runs from April 1 to March 31). Similarly, the share of all IJ.S. direct Page 7 GAO/NSIAD-90.203FS Foreign Investment Appendix I The Extent of Japanese Investment ia the United States and U.S. Investment in Japan Table 1.3: U.S. Foreign Direct Investment (Measured r Yearly Flows) Dollars in millions Total In Japan Percent in Japan I 984 $4,277 $275 64 1985 18,268 1,310 72 19sS 30,052 2.226 74 1987 -48,183 3,199 6.6 1988 18917 2 197 11 6 Source Commerce Department The economic significance of foreign direct investment in the United Sectors of Investment States can be measured in several ways. We used three types of statis- tics: (1) balance of payments data, which measure cumulative net cap- ital flows into and out of the United States, (2) data on total assets of affiliates that show the value of U.S. businesses, except banking, in which the foreign investor has an equity share of at least 10 percent, and (3) total employment of these affiliates.’ These statistics indicate that the Japanese position in the [Jnited States has increased substantially. Balance of payments capital flows statistics indicate that the Japanese FDI position more than tripled between 1984 and 1988. Assets of Japanese-affiliated businesses increased fivefold between 1983 and 1987. while their employment increased by more than 70 percent. While not on the same scale, U.S. investment in Japan also increased during these periods. Capital flows and affiliates’ assets statistics both show that the US. foreign direct investment position in Japan more than doubled. However, employment by US. affiliates in .Japan grew by only 10 percent between 1983 and 1987. Foreign Direct Investment Between 1984 and 1988. the Japanese FDI position in the United States Position more than tripled, from $16 billion to $53.4 billion. The top three sec- tors, in order, continued to be wholesale trade, manufacturing, and real estate, although there were some significant changes in shares (see fig. 1.3). ‘For R morr complete dlscusswn of FDI data, SW Foreign Investment. Federal Data Collection on Foregn Investment in the I.mtcd State\ (GAO/NSIAD-90.25BR, Ott 3, 1989) Page 9 GAO/ NSIAD-90.203FS Foreign Investment Appendix 1 The Extent of Japanese Investment in the IJnitcd States and U.S. Investment in Japan Figure 1.4: U.S. FDI Position in Japan (Top Three Industries) (Based on Balance of 60 Dollars in billions Payments Stat~stlcsi 55 50 45 40 35 30 25 1994 1985 1966 1987 1966 v Total FDI position - - - - Manufacturing - Wholesale trade n n n n Petroleum Source Bureau of Economic Analysts Commerce Department Assets of Affiliates Assets of Japanese affiliates in the United States increased fivefold, from $38.9 billion in 1983 to $195.8 billion in 1987,? the most recent year for which these data are available. The sectors with the largest asset value, according to this measure, were finance (except banking), wholesale trade, and manufacturing. In 1983, finance (except banking), accounted for 6.9 percent of all Japanese affiliates’ assets in the United States; this sector grew to 60.7 percent in 1987. Wholesale trade acc*ounted for 64.3 percent in 1983 and 23.2 percent in 1987, while man- ufacturing accounted for 16.5 percent in 1983 and 7.5 percent in 1987. The large increase in the finance (except banking) category was due in part to .Japanese acquisitions of minority interests in a few U.S. finance companies with very large assets. GAO/NSIAlXW203FS Foreign Investment Appendix I The Extent of Japanese Investment in the United States and U.S. Investment in Japan Figure 1.6: Total Assets of U.S. Affiliates in Japan (Top Three Industries) 200 Dollars in billions 160 160 140 120 100 60 60 40 20 0 nmmm~mmmmmmmmmmmmmmmmmmmmmmmmmmmm~mmm~" I rrmgg 1963 1984 1965 1966 1997 - Total assets - - - - Manufacturing - Petoleum n n n n Finance, insurance and real estate Source Bureau of Economic Analysts Commerce Department Employment by Affiliates Employment by Japanese affiliates in the IJnited States Increased by 73 percent, to 284,600, betwer,n 1983 and 1987. At the same time, employ- ment by U.S. affiliates in *Japan increased by 10 percent, to 345,500. The top three industries, by .Japanese affiliates’ employment, were wholesale trade, manufacturing, and finance (except banking) (see fig. 1.7). The share of wholcsalr) trade dropped from 44.8 percent in 1983 to 38.1 percent in 1987; manufacturing dropped from 32.2 percent to 28.7 percent in 1987, while finance (except banking) increased from 1.5 percent to 15.4 percent Page 13 GAO/NSIAb90-203FS Foreign Investment Appendix I The Extent of Japanese Investment in the United States and U.S. Investment in Japan Figure 1.8. Total Employment by U.S. Affiliates in Japan (Top Three Industries) 400 Employment in thousands 350 300 250 --------C--l--.----.---LI-l--l-ll--l--l----------------- 200 150 100 - Total -- - - Manufacturing - Wholesale trade n n mm Finance. ins.uranOeand real estate Source Bureau of Economic Analysts Commerce Department Page 15 GAO/NSIAW90-203FS Foreign Investment Appendix II Forms of Japanese lnvestmems in thr United States Figure 11.1:Forms of Japanese Foreign Direct Investment in U.S. Manufacturing (1980-1989) Majority ownership/new venture Majority ownership/acquired business investment in the United St.ates is in sales activities and how much is in production activities. Commerce data show that m 1987, businesses in wholesale trade accounted for 78./T perwnt of total sales by .Japanese affiliates, while those classified as goods produwrs madc 12.7 percent of sales. Service industries accounted for the remaining 8.8 percent of salts. Table 11.1:Sales by Industry - Nonbank U.S. Affiliates With Ultimate Beneficial Dollars in mullions Owners in Japan, 1987 Sales Percent ortotal Wholesale trade $141,448 785 Other 38.678 21 5 of which ooods 22.855 127 serwces 15,823 88 All lndustrles 180.126 1000 Page 17 MO/NSIAW3@203W Foreign Investment Appendix IIl Barriers to U.S. Investment in Japan 1.National security: arms; gunpowder; atomic energy; aircraft; and space development; 2.Maintenance of public order and protection of safety of the general public: narcotic manufacturing; vaccine manufacturing; and security guard services; and 3,Protection of domestic industries: agriculture; forestry and fisheries; petroleum refining and marketing; leather and leather product manufac- turing; and mining. Before 1980, according to this State Department study, foreign invest- ment in these areas was prohibited. Investment is now allowed, but investment and ownership may be limited under the present law. U.S. investment has taken place in these sectors (particularly in the petro- leum industry), but, according to the State Department report, the cri- teria for defining and controlling these sectors remain unclear because they are not made public. Page 19 GAO/NSIAU90-203FS Foreign Investment Requests for copies of GAO reports should be sent to: U.S. General Accounting Office Post Office Box 6015 Gaithersburg, Maryland 20877 Telephone 202-275-6241 The first five copies of each report are free. Additional copies are $2.00 each. There is a 25% discount on orders for 100 or more copies mailed to a single address. Appendix IV Major Contributors to This Fact Sheet Curtis F. Turnbow, Assistant Director National Security and Virginia Hughes, Project Manager International Affairs Rqjiv Chawla, Evaluator Division, Washington, D.C. (4835.37) Page 20 GAO/NSIAD-SO-PO3FS Foreign Investment Appendix III Barriers to U.S. Investment in Japan Informal barriers are generally considered to be the main reason I1.S. investors have difficulties investing in Japan. .Japanese business culture and practices entail significant differences from those in the 1Jnited States and, therefore, result in informal barriers for foreign invest,ors. These informal barriers include a business environment in which ,Japa- nese companies are rarely sold; there are virtually no hostile takeovers; and cross-shareholding among allied companies lea\,es a low percentage of companies’ common stock available for sale on the st,ock market. In addition, Japan’s long-term supplier relat,ionships, close ties between government and industry, and complex distribution system are consid- ered imposing barriers. particularly to start-up investments. Inadequate protection for companies’ patents, trademarks, and industry secrets due to incffc>ctive registration and legal protection are regarded as an investment barrier and can also alter the types of’ foreign invest- ments that go into .Japan. And, the slowness of the registration process (with some issuanccls of patents taking 10 yc‘ars or longer after filing) and the availability of the application to the public. I,re;rt,e disincentives to invest. A 1989 Treasury Department study listing l’ormal investment restric- tions in the Group of Seven’ countries concluded that Japan has liberal- ized its investment climate by changing or relaxing its legal and regulatory requirements. This study also not,ed 1hat informal barriers still exist, and these can be potentially formidable. ‘I’hr>heinformal bar- riers to investment (noted earlier) were discussed dllting the recent IJ.S.- Japan talks on trade and investment. : Although Japan has liberalized its investment c+rnat C. certain formal restrictions remain on foreign direct investment. Similar to other coun- tries, including the LJnited States, Japan limits foreign direct investment in particular industries. According to a 1988 Stat.e Department report, Investment Climate Statement for .Japan, thr>scli ndustric~s inc*lude the following: Page 18 Appendix II Forms of Japanese Investments in the United States There has been concern over the form that Japanese FM in the ([nited States may taktx. One aspect of this concern is that foreign inter&s may gain control ovw a large valnc of assets through minority ownership in a ,joint venture. A scc,ond aspect is the extent to which such investment,s arc’ in the form of saks activities. whirh may primarily sell imported goods, as opposc~l to prodnction facilities, which provide employment and add to domclst ic, production, Availablr data intltcztc that about 82 percent of ,lapanese IIII in 1J.S. manrtfactrlring. b(,i SYW 1980 and 1989. was through majority owner- ship. C’ommc~rccda! a show that 78 percent of the 1987 sales of .Japancse affiliat cs in 1ht, I ‘nttcd States were made by businesses classified as wholesale 1radcs I’llt> classification, however, is based on the dominant activity- of the tnlsmcsss,and many of these businesses may have signifi- caltt production ac~tivitics. ~ .~__ It is difficult to tktc~rmmc the number of .Japanese investments in the Joint Ventures 1Inited States that ;IW @int ventures. According to a Commerce Depart- mc>ntofficial. t IriB~~~~oblc~is mainly one of definition. For example, a ,joint vuitiur (‘ati I>(*a business agreement that specifies 5Cpcrcent own- erslCp for hot h l)artics or a 90/l 0-percent division. Furthermore, there may be agrccmc~tu~ whc,rcby onr’ partner provides capital or technology but is not invol\,c4 111nranagcrial decisions. Ikausc of this d~~l‘~nitionalproblem, WVdivided the types of .Japancse invc,stmcnt in I ~.S.tnanut’act~~rin~ into four broad categories: minorit? owncrshil), 5O-p~~~~~n1 ownership, majority ownership in a new venture, and majority o~\norshiJ) in an acquired business. Figl1t.c Il. 1 sho\vs t 1Iat Xl .7 percent of all .Japanese investments in Ir.S. manrllacturing I,(\1IVWII 1980 and 1989 was through majority ownership of &her a ncn or ;I n ac,quircd business: 10.9 percent was through minori(y own(A~il~; and 7.3 l)crcent was through a !?(I-percent owtic~txlii~~. Many .Japancsc~;~t’filialc~sin the [*nited States perform both sales and Investments -_ .-. in Sales produc?ion optutions. An affiliate, for c,xamplc. may have 60 percent of Subsidiaries and its sales in M’~~IJ~~s;II~~ trade and 30 percent in manufacturing. In such Production Facilities c'usw, Conunc~tu~Dc~p;rrtment investment statistics would classify the entire‘ a~not~tlt 01’tlit’cLc,tinvcstmcxnt as “wholesale trade.” the dominant acti\,ity. It is. tlrc*rc~t’c~rc~. tlifficrllt to dctcrminc how much .Japancse Page to GAO/NSlAD-90.203FS Foreign Investment Appendix 1 The Extent of Japanese Investment in the United States and U.S. Investment in Japan Figure 1.7: Total Employment by Japanese Affiliates in the United States 400 Employment In Ihousands (Top Three Industries) - Total ---- Wholesale trade - Manufacturing n Hn n Finance, except banking Source Bureau of Econom!c Analyws, Commerce Department The top three industries, measured by employment by U.S. affiliates in Japan, were manufacturing, wholesale trade, and finance, insurance, and real estate (see fig. 1.8). The share for manufacturing dropped slightly, from 69.9 percent in 1983 to 64.4 percent in 1987, while whole- sale trade and finance, insurance, and real estate each increased about 1 percent:) “According to a Commerce Department official, statistics used to determine the amount of employ ment include I!.S. affiliates that have minority ownership in Japanese companies. Page 14 GAO/NSIAB90-203FS Foreign Investment Appendix I The Extent of Japanese Investment in the IJnitcd States and U.S. Investment in Japan Figure 1.5: Total Assets of Japanese Affiliates in the United States (Top Three 200 Dollars in billions Industries) 160 160 140 120 ‘I00 60 60 40 20 1963 1964 1965 1966 1967 - Total assets - - - - Finance, excepr banking - Wholesale trade n . . . Manufacturing Source Bureau of Economic Analysts, Commerce Department Between 1983 and 1987, total assets of 1J.S.affiliates in Japan doubled, from $52.5 billion to $106 billion, and were mostly in the manufacturing, petroleum, and finance, insurance, and real estate sectors in Japan. Figure I.6 shows that the share of total assets in manufacturing was 50.7 percent in 1983 and 49.7 percent in 1987. The share of petroleum declined from 33.1 percent in 1983 to 18.8 percent in 1987, while the share of finance, insurance, and real estate increased from 6.3 percent in 1983 to 16.3 percent in 1987. Page 12 GAO/NSIAD.90-203FS Foreign Investment Appendix I The Extent of Japanese Investment in the United States and U.S. Investment in Japan Figure 1.3: Japanese FDI Position in the United States (Top Three Industries) 60 Dollars In billions (Based on Balance of Payments Statlstlcs) 55 50 45 40 35 30 25 20 ~l.lO---- 15 I-IL-l.--- -11111111-------- ,. aIIIII---CL--------- 1904 1965 1966 1987 1966 - Total FDI posltian - - - - Wholesale trade - Manufacturing . a.. Real estate Source Bureau of Economic Analysis, Commerce Department The U.S. FDI position in Japan more than doubled, from $7.9 billion to $16.9 billion, between 1984 and 1988. Figure I.4 shows that the largest sectors for U.S. investors in Japan are manufacturing, wholesale trade, and petroleum. Manufacturing, as a percentage of US. foreign direct investment in Japan. decreased from 51.9 percent in 1984 to 46.7 per- cent in 1988. Wholesale trade grew from a 15.2 percent share in 1984 to a 20.7 percent share in 1988. Petroleum investments dropped from a 26.6 percent share in 1984 to a 20.7 percent share in 1988. Page 10 GAO/NSIAlMO-203FS Foreign Investment Appendix I The Extent of Japanese Investment in the United States and U.S. Investment in Japan Figure 1.2: U.S. Investment Position in Japan (Based on Balance of Payments 300 Dollars in billions Statlstlcs) 260 260 240 220 260 160 160 140 120 100 60 60 40 20 1965 1966 1997 1966 Other U.S. claims reported by U.S. banks U.S. claims reported by nonbanking concerns Direct imestment U.S. official reserve assets Note “Other” mcludes bonds corporate stocks and U S government assets (other than offlclal K!sewe assets) Source Bureau of Economic Analysts Commerce Department investment abroad that went into *Japan grew from 6.4 percent in 1984 to 11.6 percent in 1988 Table 1.2: Japanese Foreign Direct investment (Measured in Yearly Flows) Dollars I” mullions In the Percent in the Total United States United States 1984 $10,155 $3,360 33 1 1985 12,217 5,395 44.2 1986 22,320 10,165 45 5 1987 33.364 14.704 44 1 1988 47,022 21,701 46 2 Source Japan Economic lnslttuti based on Japan Ministry of Finance data Pa@? 8 GAO/NSIADW203FS Foreign Investment Appendix I The Extent of Jamnese Investment in the United States and U.S. Investment in Japan -- The 1r.S. net investment position with .Japan has changed dramatically since 1980, as shown in table I. 1, In 1980. l~.S. investment in .Japan was $37.4 billion, while .Jal~ncse investment in thr 1Tnited States \\‘iLs $36.3 billion. By 1988. ITS. invcst,ment in *Japan had more than quadrll- pled-to $156.3 billion-while .Japanese investment. in the linited States had increased eightfold-to $284.8 billion-leaving the 1‘5 with a negative net investment position of $128.5 billion. Table 1.1: U.S. Net Investment Position With Japan, Based on Balance of Payments Statistics Japanese U.S. investment investment in Net U.S. investment in the United States position with Japan 1980 $353 $374 $2 1 1981 447 430 -17 1982 434 448 14 1983 501 484 -17 1984 676 483 -193 1985 101 1 56 1 -450 1986 1562 91 9 -643 1987 1977 1134 -843 1988 2848 1563 -1285 All types of Japamv invcstmcnts in the ITnitcd States increased during Types of Japanese the period 1984-1988. 1Iowcver. there were major changes in the shares Investments in the of the types of invtlst ruclnt (see fig. I. 1). Thv direct investment share of United States .Jal)anese invcstmclnt in t hc I Tnited States declined from 23.7 percent in 1984 to 18.7 percent in 1988. .Japancsr investments in I’S, Trxxsw~ sccuritics also dcclinc~d, from 58.6 pvrccnt, in 1984 to 32 percent in 1988. The share of .Japan(~ invvstmcnt placed in 1-S. corporate stocks and bonds. howcvcr. inc~rvascd from 6.2 percvjt to 17.2 percent during the same lx’riod. .Japan‘s “otlrc~‘” invest,ments. consisting mainly of .Jal);l- nose financial assets tIc~pclsit,cdlvith Americxn banks. grclw from an 1 1.5 percent sharc~in 19X-l to 32.1 percent in 1988. The types of lY.S. invcastrrrc,ntin .Japan also changed bcltwccn 1984 and Types of U.S. 1988. I1.S. claims +:lillst .Japan reported by 1Y.S.banks accounted for Investment in Japan $32.9 billion in 1981 and by 1988 had increased to S 135.5 billion (6X. 1 percent and 8li.7 pclrccnt c)f’total inxvstmclnt, rrspectivcQ). During Page 6 Contents Letter 1 Appendix I 6 The Extent of Types of .Japanesc In\ wtmcnts in the I‘nitcd States Types of’ 1T.S.Inrwtnrc~nt in .Japan Japanese Investment Direct Investment in the United States ScYtol3 of InvcstIllc~tll and U.S. Investment in Japan Appendix II lfi Forms of Japanese .Joint Ventuws Ifi Investments in Saks Subsidiaries and Production I(i Investments in the Facilities United States Appendix III 18 Barriers to U.S. Investment in Japan Appendix IV 20 Major Contributors to h’ational Security antI lntt~rnational Affairs Division. ‘0 Washington, D.(’ This Fact Sheet .- Tables ‘l’ablc I. 1: 1l.S. Net In\,cst ment Position With *Japan, Hased (i on 13alance 0I’ Paynit~nts Statistics ‘I’abk 1.2: .JaJ~nesc~Foreign Diwct Inwstment 8 Table 1.3: I’.S. I~‘orc~ignDirwt Investment 9 TabIt, II. 1: Sales by Industry - Konbank 1I.S. Affiliates 17 With I~ltimatc~ llt~ncficial O~vncrs in .Japan, 1987 Figures Figure I. 1: .Japancw Invcstmcnt Position in the 1Tnitcd 7 states Figure 1.2: 1T.S.Invcstmcnt Position in .Japan 8 Figure 1.3: .Japancw H)I I’osition in the lrnitcd States 10 Figure 1.4: CM. FI)I I’osition in .Jal~n 11 Page 4 GAOiNSIAD-90.203FS Foreign Investmrnt B234511 provides a discussion of such informal barriers and a listing of the prin- cipal industries where formal barriers exist. In developing this fact sheet, we compiled data from the Departments of Commerce, State, and the Treasury, the 1J.S.Trade Representative, and t,he Japan Economic Institute. We performed our work between November 1989 and March 1990. As you requested, we did not obtain official agency comments on this report. Unless you publicly announce its contents earlier, no further distribution of this report will be made until 30 days from its issue date. At that time, we will send copies to other interested congressional committees and to the cognizant execu- tive agencies. We will also provide copies to others upon request. Ma@- contributors to this fact sheet are listed in appendix IV. If you have any questions, I can be rtkached on (202) 2754812. Sincerely yours, Allan I. Mendelowitz, Director Trade, Energy, and Finance Issues Page 2 GAO/N&ID-90.203FS Foreign Investment
Foreign Investment: Aspects of the U.S.-Japan Relationship
Published by the Government Accountability Office on 1990-07-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)