Japanese Exports and Foreign Direct Investment: Imperfect Competition in International Markets (review)

Autos, cameras, televisions, steel, ships—Japanese firms have been significant players in the global markets for these goods, initially through trade and more recently through foreign direct investment (FDI) in overseas production. Such markets differ in a fundamental dimension from textiles, toys, and tea, industries that mattered earlier in Japan’s history. Those industries were comprised of atomistic producers and their output was sold through a wide array of distributors to final consumers. In such markets, no single participant was large enough to affect prices. Trade was thus in line with the “classical” theory of comparative advantage developed by David Ricardo almost two centuries ago: Japan as a developing country exported labor-intensive goods and imported capital- and resource-intensive ones.

The industries that Yamawaki considers are different as they are dominated by a handful of firms that interact strategically, engaging in what economists call imperfect competition. In the extreme, the handful of incumbent players succeed in coordinating their behavior to limit output and thus to keep prices—and profits—high. However, cartels are inherently unstable: high profits tempt additional firms to enter, and coordination breaks down. Unfortunately for consumers, that process can take decades, as in the postwar automotive industry. But in both theory and in the historical record, entry occurs.

One route new players can pursue is to use trade, an avenue made all the easier as lower transport and information costs allowed existing firms to jump over oceans. Alongside the lowering of tariff and other trade barriers, we thus might expect to find European, American, and Japanese firms entering each others’ oligopolistic markets in increasing numbers since the early 1980s. Has that in fact happened?

That and similar questions are the subject of Yamawaki’s book. At the time he undertook them, such studies were relatively novel, building upon the “new trade” theory developed in the late 1970s and 1980s, to which Paul Krugman, the 2008 Nobel laureate, and Jagdish Bhagwati of Columbia University made seminal contributions. Yamawaki’s work in this area is well known among trade economists; while most of his studies focus on the Japan-U.S. dyad, it is the underlying economics on which the book focuses, not on Japan issues per se.

After an introductory chapter, Yamawaki first turns in chapter 2 to a model of oligopoly and exports. Do we find high levels of trade in oligopolistic industries, which might reasonably be thought (or empirically shown) to have high profits? In a word, yes. In chapter 3 he adds a dynamic element, including a “learning curve” whereby cumulative production experience helps firms lower costs. These are generalized in chapter 4 to look at cost-price margins (which in his data are the only available proxy for “profits”). Chapter 5 then looks at the U.S. end, trying to explain Japanese market shares. Here as elsewhere he draws upon empirical practice in industrial organization in the 1960s and 1970s. For example, he uses data on research and development expenditures and advertising expenditures, alongside measures of market concentration, because in the broader literature these are a convenient way to distinguish markets whose products are bought by consumers from those in which the purchasers are more pricesensitive businesses.

In subsequent chapters, he covers a range of related topics. One is the pattern of FDI: do firms in the same industry enter at the same time? Another is whether entry is symmetric: if Japanese firms enter the U.S. market, then do we find European firms doing the same? There he finds that no, entry by Japanese firms into ventures in the United States and European Union is not associated with similar entry into Japan, though there is a tendency for symmetrical entry by EU and U.S. firms into each others’ markets.

The above studies are workaday (though not always straightforward) extensions of standard empirical work to address questions that have an international dimension. One of the studies the book...