IN THE UNITED
EDWARD M. GRAHAM and PAUL R. KRUGMAN, Washington, DC: Institute for International Economics, 1989, pp. xiii + 161. Reviewed
T. CHOTIGEAT the past few years, the U.S. public and their politicians alike have become increasingly concerned over the alarming rate of foreign investors buying and investing in America, particularly those from Japan. These impressions of alarm have principally resulted from the frightening media hyperbole (Fran& and Collins, 1989; Glichman and Woodward, 1989; Lehner and Murray, 1990). The recent foreign acquisitions of Columbia Pictures and Rockefeller Center have caused even more fear. Although the public has received some explanation about the causes and effects of foreign direct investment (FDI), it has come mainly from anecdotal evidence which sacrificed credibility to favor alarmist tones, and from superficial analyses. This book by Graham and Krugman, however, is a notable exception. The authors have attempted firstly to synthesize the general literature of FDI in the United States and then to debunk the myth circulated by the critics of inward FDI. In other words, the seven chapter book basically asseses the nature and causes of FDI (Chapters 1 & 2), and then analyzes the effects of it on the economy (Chapter 3) and natural security of the U.S. (Chapters 4 & 5) and what Over
Direct all correspondence to: T. Chotigeat, Department of Economics and Finance, P.O. Box 2015, Nicholls State University, Tbibodaux, LA 70310. International Review of Economics and Fmance, 1(1):103-105 Copyright Ca1992 by JAI Press, Inc. MN: 1059-0560 All rights of reproduction in any form reserved. 103
policy measures-domestic and international -should and should not be adopted in response to it (Chapters 6 and 7). In Chapter 1, “Extent and Trends,” various definitions of foreign direct investment (FDI) and their shortcomings were discussed, and only four alternative measures were selected and used in the book. All the measures of FDI show its extent and trend as having increased two- to three-fold from 1977 to 1988, but it is small in percentage relative to the total, regardless of what measure is used. When these measures are grouped by the country of ownership of FDI, Japanese FDI is relatively small although rapidly increasing in all industries in the U.S., and its investment is not ranked number one among foreign countries’ FDI. However, Japan’s patterns are a bit higher in the real estate and banking sectors; in fact, they dominate the latter. Therefore, the authors claim that Japanese FDI has received more attention than it deserves in the news and/or media during the past few years. Sources of growth of FDI are presented in Chapter 2. The growth of FDI in the U.S. was found not to represent a kind of artificial “fire sale” in which nonresidents are acquiring U.S. assets at bargain prices. Instead, the authors see the recent growth of FDI, for the most part as a convergence toward levels of foreign control accepted as normal in other advanced countries; foreign firms enter the U.S. largely because of firm-specific advantages and other industrial-organization considerations rather than because of some financial distortion. Chapter 3 concentrates on the purely economic consequences of FDI in the U.S.-the possible benefits, risks, and costs that FDI could potentially bring about through facilitating trade in goods and services. The authors demonstrate with evidence that FDI in the U.S. does not shift high-value or high-compensation activities to their home countries through their firms, nor do these firms perform less R&D in the U.S. than their U.S. counterparts. Hence, the available facts do not strongly support the “headquarters effect” hypothesis. However, it is known that the affiliates of foreign firms have a high propensity to import large quantities of inputs from their own firms abroad, as well as make less of a contribution to the U.S. economy than do U.S.-owned firms in the same industry. Chapter 4 discusses at length the political role of foreign-owned firms operating in the U.S. and the effects of foreign ownership, especially the worry that a substantial presence of foreign-owned firms will distort the domestic political process. The authors’ shortcomings include their failure to discuss the existing conflicts of interests; i.e., many states and/or regional groups jointly with the foreign firms have been attempting to influence the national policy on FDI for the benefits of their geographical area by lobbying and/or setting their own tax incentives (Tolchin andTolchin, 1988; pp. 45-63). A question of how the operation of foreign-based multinationals in the U.S. threatens U.S. national security is analyzed in Chapter 5. At the present time the authors do not see a potential problem because, until 1987, 91.5% of FDI here was held by nations friendly to the U.S. However, there are some areas where there should be concern, e.g., some erosion of the U.S. defense industrial base, especially within the electronics sector,
and the lack of policy on controlling products of dual-use technologies (developed for and applied to both military and civilian uses, and also produced by foreign firms better than U.S. firms can) from falling into the wrong hands. Chapter 6 gives a good review of present U.S. policy toward FDI (both inward and outward FDI at the federal and state levels) and compares it with other advanced nations’ policies. Finally, the authors evaluate the current U.S. policy based on their findings in the preceding chapters, and give their recommendations in Chapter 7. They believe that although the role of foreign-owned firms in the U.S. economy has increased sharply in the 1980s and is likely to continue to increase, there is nothing sinister about this increased role, and that indeed its general economic effect is beneficial. Thus, there is no need from an economic perspective for new unilateral laws or policies specifically targeted toward greater regulation of foreign-controlled activities in the U.S. However, some current policies need modification, e.g., stronger enforcement of certain antitrust laws related to industrial engagement which involves FDI and weaker regulation on FDI in the banking and defense sectors. Graham and Krugman provide the reader with an enormous comprehensive account of the historical and current records of FDI in the U.S. economy, including the U.S. policy on FDI in general and policy recommendations of their own. The book, therefore, presents frontier knowledge on this topic. They are to be commmended for their careful research, clear writing, and insightful look. In addition, the book is accessible to the layman (a rare occurrence in the literature of economics) and is suitable as essential reading material for trade and finance scholars who are interested in the U.S. economy. It is also appropriate as supplementary reading for a course in international trade and finance.
REFERENCES Frantz, D. and C. Collins. Selling Out: How WeAre LettingJapan Buy Our Land OurIndustries, Our Financial Institutions, and Our Future. Chicago: Contemporary Books, 1989. Glickman, N. and D. Woodward. The New Competitors: How Foreign Investors Are Changing the U.S. Economy. New York: Basic Books, 1989. Lehner, U.C. and A. Murray. “Strained Alliance: ‘Selling of America’ to Japanese Touches Some Very Raw Nerves.” The Wall Street Journal, (June 19,199O); Al & A16. Tolchin, M. and S. Tolchin. Buying into America: How Foreign Money Is Changing the Face of Our Nation. New York: Times Books, 1988.