INTRODUCTION

THE JAPANESE-EUROPEAN UNION relationship has experienced trade imbalances since the 1970s, alongside consecutive Japanese surpluses. The relationship is now seeing a kind of new imbalance: that is, the imbalance of direct investment. Currently, the volume of Japanese direct investment in the EU is more than ten times that of the EU's investment in Japan. Certainly, the Japan–US relationship has also experienced investment imbalances, but, without doubt, to a lesser degree. The new focal point of economic relations between Japan and the EU, as well as between Japan and the US, seems to be shifting from trade imbalance to investment imbalance. The most decisive reason for the investment imbalances seems to be the ‘underinvestment’ of Western firms in Japan. As a result, there is a growing tendency to consider direct steps which might discourage Japanese investment in Western countries or encourage Western investment in Japan. If it were preferable to discourage Japanese investment, voluntary investment restrictions (VIR) might be introduced following the example of voluntary export restrictions (VER). If the aim is to promote Western investment in Japan, and attain a future balance, then, it is argued, political, social and cultural hurdles need to be removed in Japan; the competitiveness of Western companies needs to be enhanced; or alternatively the strategies of non-Japanese firms with the requisite competitive advantages will have to be reviewed. It is the third option which is most likely able to produce the quickest and most decisive results. In other words, the strategic failures of Western multinationals and their ability to seize opportunities in Japan might have been the key reason for their ‘underinvestment’. The aim of this paper is to provide some evidence to support this proposition, by looking at the inter-war period when Western multinationals could have adopted long-term strategies by which permanently to enter the Japanese market. Yet they failed, for a variety of reasons, to exploit fully the competitive advantages which they possessed.

OVERVIEW

Direct Investment and International Cartels

The inter-war period saw the development of Western multinational companies, which continued to invest globally in spite of the growing difficulties caused by economic nationalism. As Table 6.1 shows, the Japanese market was no exception.