(GATALOG NO. 153 :!AID 'A This paper is preparedSW 1 3v r for staff use and is

not for publicaticn. Theviews are those of theauthor and not necessarilythose of the Bank.

INWERNAXIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEW

Economics Staff Working Paper No. 134

August 1972

LABOR RESOURCE ORIENTET) MXDRATION OF JAPANESE INIDUSTRIESTo TAIWAN, SINGAPORE AND SOUTH KOREA

This paper discusses the current trends in labororiented Japanese manufacturing investment in Taiwan,Singapore and South Korea. It takes into account the slowevolution of such investment in relat4on to the growth ofUnited States investment, and distinguishes between thesituation of small scale and large scale investors. Presentpolitical influences are considered, and the paper concludeswith a discussion of the likely effects of Japan's grantingpreferences to developing countries on manufactured imports.

Professor Ozawa is an Associate Professor of Economicsat the Colorado State University; he prepared the paper as aConsultant to the IBRD.

Economics of industry DIvision

Prepared by: Terutomo Ozawa

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'TABLE OF OONIEWIXS

Page No.

SITMC.Y AND OONC(J.a'ONS i

IWi RODUCTION iii

I. JAPA,N's PRIVA'iE INVESTM{EN¶V ABROAD IN THE POs'I74WAR PERIOD 1

Overall Perspective IInvestment in Southeast AsiaNew State of Japan's Industrial Migration 3Motives and Growth of Japan's Multinationalism in Asia 5

,-. THX REPUBLIC OF CHI NA (TAIXAN) 9

Small Scale Investment 9From Local to Export Markets 11Attraction of Abundant Labor Supply 13Backward-Linkage-Induced Investment 15lhird-Country Market Exnort Orietntation 16Profitability 19Future Investment 20

III. 3I:VAPORE 23

The "Electronics Stage" of Foreign Investment 2L

IV. THE REPUBLIC OF KOHEA (SOTrF'H KORFA) 26

Recent Political Settlement 26Masan Free Export Zone 27Fut',re Investment 29

V. JAPAN'S PREFERENTIAL TARIFF3 30

VI. CONCLUSIONS 33

APPE'DIX A: TRANSMTCRATI'OJ .ND DISPERSIO'i OF INDUSTRY

APPENDIX 8: JAPAN'a 'SECHNICAL ASSISTANCE CONTRACTS IN TADIAN 9

APPENDIX C: PROPORTION OF YOUN3-AGE POPULATION Irl SELECTMASLiN fTablRIES L

List of Tables.

LIST OF TLABLES

1. Cumulative Value of Japan's Private Capital Investment: 1951-1969.

2. Japan's Overseas Manufacturing Investment by Small and Medium-SizedEnterprise.

'. Overseas Chinese and Foreign Investment in Taiwan: 1952-1970.

4. Overseas Chinese and Foreign Investment by Industry: 1952-1970.

Ratios of Job Offers to Job Seekers by Age Group in Japan.

6. Labor Force by Age Group in Japan.

7. High School Graduates Entering the Labor Force in Japan.

8. Labor Force by Age Group in Taiwan.

9. Approved Investment by KEPZ by Nationality.

10. Export Orientation of Japan's Investment in L'aiwan.

11. Japanese Investment in Singapore.

12. Japan's Preferential Tariff System.

SULMARY AND OONCLUSIONS

i. Japan's labor-resource induced overseas investment in manufacturingis of relatively recent origin, and it is largely concentrated in neighboringcountries. A tight labor market at home and competition from developingcountries, which has threatened Japan's traditional ccmpetitiveness inlabor-intensive products,initially in Western countries' markets, but nowincreasingly at home with the introduction of the preferential tRriff system,have motivated many Japanese manufacturers of labor-intensive products tostart production in other Asian countries. Japan's overseas manufacturi.ginvestments in Asia are therefore largely supportive of its efforts to maintaingains fro), trande in standardized, conventional products in which it has longenjoyed a comparative advantage in world trade.

ii. To be sure, many large manufacturing firms, notably in electrichousehold appliances, were initially induced to set up overseas factoriesto circumvent trade barriers. But, being pressed by high labor cost at home,they have come to utilize low cost labor more actively by expanding theirproductive facilities in other Asian countries and have become, at the sametime, more export oriented. As they moved into new technological productlines, such as electronics, their activities in labor abundant countries havebecome more and more complementary to their overall production structure.They moved the labor-intensive and routine-type portion of the productionprocesses of their new products (e.g. production of semi-conductors) tooverseas factories, and the entire production of the conventional lines ofelectrical appliances such as electric fans, vacuum cleaners, irons and ricecookers, so that they could concentrate on more sophisticated and high-valueproducts at home.

iii. Japan's recent manufacturing investments ii Asia are thus now stronglylabor-resource induced. Since utilization of foreign labor requires anunderstanding of intricate sociocultural factors:, Taiwan and South Korea haveproved to be especially attractive for Japan's overseas manufacturing becauseof many similarities in their life styles. The extent to which the Japanesefeel At home in these two countries is well illustrated by an often-heardremark that "the Japanese need to think of the Taiwanese and the Koreans as'foreigners'". Needless to say, these countries' positive policy measures toattract foreign capital and technology are equally important.

iv. Although some large Japanese companies in heavy and chemical industries,which have their eyes on mainland China, are withholding their advance in, oreven withdrawing from, Taiwan and South Korea, there is still a definite needfor Japanese industries to make labor resource-oriented investments overseas.A recent recession has only slightly reduced pressure on Japan's labor market.

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The Ministry of Labor indicates that., on the average, there are still 5.3job0s available for each junior high school graduate and 2.8 for eachsenior high school graduate.

v. The three countries briefly surveyed in this paper and most otherA3ian countries are highly populated and have unusually high proportions ofyoung people. With the exception of India, Pakistan, Bangladesh and MainlandChina, they have a relatively small. population base and hence, only limiteddomestic markets. Many also have a meager natural resource base. Hence,unless regional cooperation materializes, either a "high" or "moderatecapital inflow" strategy with a high degree of dependence on advanced countries'markets for their exports appears to be promising. They are tVherefore mostlikely to be amicable, rather than hostile, toward foreign capital investment,especially in marnufacturing industries. In this respect, the establishmentof export processing zones is a useful approach since it opens um smploymentopportunities with foreign capital and technology, yet simultaneouslyeliminates possible foreign domination of domestic industry and markets sincethe goods produced in such zones are required to be exported.

vi. Yet once the basis of light manufacturing industries is laid out withthe help of fe-eign capital, and the pressing problem of unemployment iseased, developing countries will naturally strive to upgrade their industrialstructure by emphasizing nore technology-intensive heavy and chemicalindustries. Thus Taiwon initially welcomed Japan's manufacturing investmentsin relatively small-scale and labor-intensive ventures, but has recentlyshiftad the priority of foreign investrant toward l- ger-scale, more capital-ircensive, and longer-term investment projects. Since foreign capitalinvestments are a means to industrialization in the host, country, the veryLuccess in economic development Pasisted by foreign capital chsnges theclimate for foreign investment. As employment opportunities improve in ahost country, there is less need to encourage the development of labor-intensive industries which are in general less technology-intensive andwhich require at best only semi-skilled labor. Few countries would like tospecialize in low technology industries permanently.

vii. In this respect, it may not be long before Japanese investments inlow technology manufacturing reach a saturation point in Taiwan and SouthKorea. Other Asian countries, however, including Thailand, Malaysiap thePhilippines and Indonesia, and even South Vietnam, are emerging as hostcountries for Japan's labor-resource oriented investments.. Industrialmigration of conventional industries from Japan to other Asian countriesis likely to continue as the Japanese econoaW reorganizes itself for higherlevels of technological and industrial sophistication.

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INSTRODUC~T !,"

viii. Over the past few years there has occurred a rapidly growingoutflow of direct investments in manufacturing from Japan to developingcountries, particularly its neighboring countries in Asia, where the supplyof factory workers is relatively abundant. This study focuses on this newtrend of industrial migration with a survey of Japan's manufacturing investmentsin Taiwan, South Korea and Singapore. This paper examines the present statusof Japanese companies' manufacturing investments in these countries, and theoutlook for further shifts of manufacturing operations, particularly inconnection with Japan's preferential tariff program for imports from developingcountries. In this paper primary attention is focused on the motives ofJapanese companies for export manufacturing.

ix. The pace of Japan's labor-resource induced industrial migration ismost likely to be accelerated in the years to come as Japan further trinsformsits industrial structure to higher levels of technolog-cal sophisticaiion.Overseas manufacturing investments in relatively labor-abundant countries arelargely a manifestation of Japan's effort to retain control over the incomeearning opportunities of conventional and labor-intensive industries in whichit has long enjoyed a comparative advantage in world trade. As will bediscussed in detail, this is a unique feature of Japan's overseas investments.

x. During the process of revising the present paper, the author hashad a chance to read The Economic Survey of Asia and the Far East, 1970 (alsois3ued as Vol. XXI, No. i of The Economi^ Bulletin for Asia and the Far Eastby the United Nations at the end of 1971), which contain; a study on the roleof foreign private investment in the ECAFE region. The present paper is alsohighly complementary to this type of a general survey since it focuses on,and analyzes in greater depth, the motives of Japanese companies' labor-resource-oriented investments in Asia.

xi. The analysis is presented in six sections and three appendices. InSection I, after Japan's manufacturing investments in Asia are contrastedwith those in other parts of the world, their motives and recent rapid growthare hypothesized. The subsequent Sections, II, III and IV, are devoted toa survey of Japanese companies' operations in Taiwan, Singapore and SouthKorea respectively, which provides some evidence to the conceptual analysespresented in Section I. In Section V a review is made of Japan's preferentialtariff program and its implications for overseas manufacturing investments.And finally, conclusions are presented in Section VI.

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xii. In gathering inforr7tion and collect'ng data in Tokyo during theSimier of 1971, the author became indebted to many corporations and individuala.He is particularly grateful to the followiing Japanese corporations for allowinr,him to have interviews with their executives and managers incharge of overseasventures: Mitsui & Co., Mitsubishi Corporation, Marubeni-Iida Co., Kanematsu-Gosho Co., Nissho-Iwai Co., Ataka Co., Hitachi Co., Toshiba Electric Co.,Sanyo Electric Co., Toray Industries, Nippon Gakki (Yamaha) Co., D-li NipponPrinting Co., Takasago Kohryo Co. and Snow Brand Milk Products Co. Specialthanks go to Mr. Mitsuaki Sato of the Ministry of International Trade an-]Industry and Mr. S.W. Sanders and Miss Kaziiko Kano of World Bank's Tokyooffice for their kind a5sistance.

xiii. The author is also grateful to Dr. Jack Baransorn for his continuousencouragerBnt and support. The author has benefited from the corulent3 ofDr. E. Agulanna Anyanwu of World Bank on an earlier draft of this paper.Finally, thanks go to Mr. Robert Carbaugh for his editorial assistance.

I. JAPAW'S PRI7ATE INVESTMENT ABROAD IN THE POSTWAR PERIOD

Overall Perspective

1. It was in 1951 that Japan resumed its overseas direct inve9tmentfor the first time in the postwa;: period. Initially, major efforts weremade to secure the supplies of vital industrial resources such as ironore and to re-establish sales networks of tradi. companies. Then, startingaround 1956, Latin American countries, particularly Brazil, began to attractJapanese capital to build plants for relatively large-scale operations in avariety of manufactvring industries, including iron and steel and shipbuilding.Inflation, political instability and rising nationalism in Latin Americancountries, however, have somewhat abated the pace of Japan's advance in the:egion.

2. During the early 1960s, neighboring countries, notably Taiwan,Thailand and Hong Kong became the host countries for Japan s investment inmanufacturing operations. Compared with those in Latin America, Japan'sinvestments in Asia are mainly in labor-intensive industries with muchsmaller-scale operations. The increasing importancfE of Asian countries isclearly reflected in a recent rise in their share of Japan's direct foreigninvestments. 1/

3. As shown in Table 1, North America absorbed the largest share ofJapan's capital during the 1950s and 1960s. However, about 31 per cent ofit is- invested in commercial activities incidental to Japan's exports, suchas the establishment of branch offices and distribution facilities. TheJapanese government statistics which classify the timber and pulp industryas "manufacturing" makes the amount of Japan's manufactuting investment inNorth America appear unusually large. But about 78 per cent of it isaccounted by the investment made for the development of Alaskan timber andpulp. This particular industry being excluded, Japan's manufacturing investmentsare concentrated in Latin America and Asia.

4. So far as the number of Japanese manufacturing investment projects areconcerned, Asia is, not unexpcctedly, a more important region than LatinAmerz;:. As shown in Table 2, by the end of September, 1970, the former hadaccepted 804 manufacturing projects (or 7h.0 per cent) while the latter had127 prcjects (or 11.7 per cent). This reflects the attractiveness of Asiancountries for the offshore production of small-scale manufacturing op23rations inrelatively labor-intensive industries. Moreover, Asia has a high concentraticnof manufacturing investments made by small and medium-sized Japanese companies(i.e., enterprises with paid-in capital worth E 50 million and less). Indeed,

1/ For example, it increased from 19.1 per cent in 1967 to 22.5 per centin 1969.

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87.6 per cent of Japan's investments of this category are located in Asia,and the proportion of smiall and medium-sized firms' investments is noticeabl)high, particularly in Japan's neighboring countries; b6.7 per cent in Taiwan,48.1 per cent in South Korea and h2.6 per cgnt in Hong r:ong.

5. Placed in perspective, interesting differences emerge in Japan'sinvestment patterns in the three regions. North America attracted the largestsum of Japan's capital investment for trade-related operations. On the otherland, Latin American countries absorbed a relatively large amount of capitalin heavy manufacturing industries, whereas Asian countries attracted investmentslargely in light manufacturing industries. These differences attest to Japan'sflexible adaptations to different market conditions. North America has pursuedthe most Liberal trade policy, and Japan's manufactured exports have expandedvery rapidly. A rise in its exports of consuror durables, such as autos andTV sets particularly, required the establishment of marketing and servicefacili.tles. South American countries have employed an import-substitutionpolicy for industrialization. Consequently Japan's investments-are mostly"tariff-induced" and intended to supply local markets. By contrast, Asiancountries have attracted foreign capital and technology to create employmentopportunities for their relatively abundant labor forces and to build exportcapacities. Accordingly, Japan's manufacturing investments in Asia, initiallydesigned to circumvent trade barriers, are now largely aimed at utilizinglocal labor tc retain its competitiveness in relatively labor-intensiveproducts.

Investment in Southeast Asia

6. Indeed, it is remarkable that during the 1960s, particularly duringthe latter half, Japan's private investments were accepted so rapidly by otherAsian countries where the fcrmer's past military occupation and colonialismpu.sued under the banner of "Greater East Asia Go-Prosperity Sphere" hadleft sitter memories and animosities against Japan among the peoples.

7. A number of events which contributed to a sudden return of its economicinfluence in Asia took place both inside and outside Japan. Throughout the1950s Japan was totally preoccupied with th, recovery of its own economY andwas heavily dependent upon Western countries, especially the United States, forcapital., technology and markets. It was only after Japan had a continuouseconomic expansion in the early 1960s that the Japanese began to look seriouslyto Southeast Asia as an additional market, supplementary to Western markets,upon which they had been so much dependent. Japan's aggressive export drivealso created some conflict in Western markets. and there arose a need to seeknew markets for exports, as well as supply sources of industrial raw materials.Furthermore, Japan had succeeded, by the end of the 1950s, in settling the problemof reparations and began to restore normal relations with other Asian countries.No doubt, Japan's quick rise to the status of a major economic power gained itsneighboring countries' admiration and respect and they began to take a morepragmatic view in their economic -- if not political -- rflationship with Japan.The latter's foreign diplomacy of a "low posture" was alsa highly instrumentalin taking the political sting cut of its economic thrust in 'sia.

8. At the same time,, other Asian countries themselves became trulydetermined to embark on a path of industrialization. As partly reflectedin the United Nations' resolution of making the 1960s the "First DevelopmentDecade," there was an Dii of optimism and a high degree of rationalisrn(rather than nationalism) in their development programs. Some o untriesadopted an outward-looking" strategy for industrialization by encouragingexports and the inflow of foreign private investment. 1/ Various types ofinducements were providcd to attract foreign capital. The principal incentiv?cconsisted of export subsidies of variouis types, and these were followed by atax-free expcrt processing zone established by the government of China(Taiwan)in Kaohsiung in 1965. As will be examined below, it attracted a large numberof manufacturing firms from Japan. The Republic of Korea opened a similarzone in Mazan, and the Philippines is establishing such a zone in Mariveles.Thailand and Malaysia are planning similar zones.

'. One interesting aspect of Japan's postwar investment in Asia isthat the governments of the host countries were active, providing incentivesby legislating a variety of positive measures for foreign capital investment aspart of their indulstrialization prograris, while the Japanese government didcomparatively little planning or coordinating the outflow of private manufacturinginvestz,ent. To be sure, each overseas investment p0oject had to be approvedby the government because of foreign exchange controls. Yet, as foreignexchange reserves improved, overseas investments even came to be looked upon asa way of reducing the rising pressure for the yen's revaluation. In fact,there are many reported cases of "excessive competition" among Japanese firmsmanufacturing in Taiwan, South Korea and Thailani, and these finms even lamenta lack of government coordination in overseas operations. A sudden rise inJapan's overseps investment in Asia has so far been largely the work of themarket force spun off from a rapid econor,ic expansion and transformation ofthe Japane,e economy. For instance, Japan is the leading investor in Thailand,accounting for about 32 per cent of the total foreign capital investment. TheUnited States, the second largest investor, trails with a share of 16 per cent. 2/One may safely speculate that Japan would never have been allowed to take sucha large share if its overseas manufacturing investnents were part of somepolitically agreed-upon scheme of economic cooperation.

A. New State or Japan's Industrial aigration

10. Japan's overseas manufacturing investment in Asia is at a new cross-road. The host countrips, particularly Taiwan, Thailand and South Korea,

1/ For a theoretical elaboration of this strategy, 5s:< Donald B. Keesing,"Outward-Looking Policies and Economic Development," The Economic Journal,June 1967.

2/ "'Thailand Seeks More Foreign Investment", BRsiness Asia, January 1, 1971,p. 3. This percentage is based on total approvals of foreign investmi!ntbetween 1959 and 1969. In recent years Japanese investment has beenaccelerating faster than that of other countries; between 1966 and 1970it represented hL per cent of total foreign inflows.

where Japan has invested mostly in light manufacturing industries, aredemanding a greater share of ownership, and shifting investmert prioritiesfrom labor-intensive consumer goods industries to large-scale basic capitalgoods industries. As will be shown in Section V, the Japanese goverrvnent nowseems increasingly involved in guiding Japanr;se firms' overseas investmentinto labor-intensive industries in connection with its recently-introducedprogram of tariff preference on imports from the developing countries.Furthermore, the political pressure of Premier Chou En-Lai's "four principles",which imposes a prohibition of investment il Taiwan and South Korea, and theNixon-Chou communique which explicitly stated that Taiuian was part of China,are clearly affecting Japanese firms' investment decisions in Asia.

11. Nevertheless, these newly emerging political constraints seem toscarcely stem the rising outflows of Japanese manufacturing capital as muchstrongcr economic inducements are in the making. For example, the recentrevaluation of the Japanese yen is an important factor which will no doubtacce: 'rate the migration of labor-intonsive industries from Japan to ctherAsian countries. The undervalued yen had the effect of "subsidizing"Japanese exports and "protecting" import-competing industries at home, butparticularly those industries for i:bich price, rather than technicalcharacteristics, was the primary i.curce of competitiveness. The disappearanceof this "hidden" price advantage will make Japan's exports of conventionalproducts vulnerable to the rising competition froym developing countries bothat home and in third-country markets. Hencc tbhose industries which must stilldepend upon the intensive use of labor will migrate to relatively labor-abundantcountries. Besides, the revalued yen will provide an additional financialstrength to Japanese firms since they now can invest overseas with theirappreciated currency under less restrictive foreign exchange controls.

12. Furthermore, the Japanese government has announced a significantchange in its economic growth plan in the 1971 White Paper on InternationalTrade and Industry. Confronted by rising social costs of economic development,such as pollution, congest.on and environment-al decay, which have been all themore aggravated by Japan's po-3twar industrial concentration on heavy andchemical industries, the government now emphasizes a reorientation of theeconomy away from "pollution-prone" and "natural.-resource-consurting" industriestoward "clean" and "brain-intensive" industries. On the international front,it stresses a greater reliance on exporils which can compete on quality,variety and sophisticated design rather than on price. This "house cleaning"operation implies an encouragemer. of the migration of not only labor-intensiveconventional industries but also heavy and chemical industries. In fact Ja anhas already statted to assist the setting up of an integrated steel co iex inSouth Korea -- a project which had been, only a few years before, judged as"premature" for the Korean econonW and hence turned down by a consortium ofU..<. and European conpanies. The Japanese government and its Export-ImportBank are partly financing the project, and Nippon Steel is providi1,gconstruction and engineering services. 1/ Admittedly, the Korean project

1/ Business Asia, February 12, 1971.

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might have been influenced by a separate political consideration rather thenby the recently announced policy consideration. But the Japanese Ministry ofInternational Trade and Industry (MITI) is seriously considering the possibilityof a regional industrial develcpment plan which envisages the establishmentof heavy and chemical industries, specifically petrochemicals and steel, inother Asian countries. A formal proposal is expected to be presented at theMinis`terial Conference for Economic Development of Southeast Asia to be heldin Saigon in June 1972. 1/

Motives and Growth of Japan's Multinationalism in Asia

13. Viewed in this light, strong forces are at worK for inducing avariety of industrial operations to be transplanted from Japan to otherAsian countries. The future pattern of Japanese companies' investments andtheir motives will thus become ino:-e complex and diversified.

11 . Japan's past investmaents may be classified according to the motives ofinvestment, into three basic type3; natural-resource-oriented, market-orientedand labor-resource-oriented investment. 2/ The first is a classic cap whichhas its long history dating back to the mercantilist era. The latter two,and the last one in particular, are of relatively recent origin.

15. Japan's industrial expcision has led to a phenomenal rise in itsdemand for natural resources; as a result, natural-resource-oriented investmentshave been made throughout the world. Its effort to capture world markets hasnecessitated market-oriented investments in many developing countries to circunventtariffs and other protective barriers and, also now increasingly, in Westerncountries, specifically in the United States, to mitigate anti-import feelings.As indicated throughout this paper, labor s;icrtage at home has recently fosteredlabor-resource-oriented investments in neighboring Asian countries. This lasttype of investment wao certain'Ly not anticipated in such a heavily populatedcountry as Japan.

16. Japanese marufacturing firms, which set up labor-resource-orientedventures overseas, can in turn be clas3ified into two broad categories,depending on the level of technological sophistication of their products;the first are those manufacturers of high technology and short- (but continuouslyrenewed) product-cycle goods such as electronics ')ho produce standa, zed rmponentso' their modern products normally at their wholly-o-mned overseas subsldiaries 3/.

1/ Nippon Keizai Shinbun, February 29, 1972.

2/ Koichi Hamada, for example, also uses this classifiration to discuss Japaneseinvestments in Asia: "R-ole of Foreign Inve.tment in Asian-Pacific EconomicDevelopment," paper presented at the Third Pacific 1rade and DevelopmentConfe.ence h.eld in Sydney in Aupgst 1970 (in course of publication).

3/ Wr.,Mlly-owned subsidiaries are in part necessitated to maintain high techniicalstandards. 3ee Jack Baranson, "Technology Transfer Through the InternationalFirm," American Economic Review, Vol.LX, No.2, May 197n, ppJbl3-4h0.

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The other are those manufacturers of low technology and long (or stabilized) -product-cycle goods, such as textiles who set up overseas plants, mostly underjoint venture arrangements with local interest, to produce end-products byusing materials and components initially supplied from home but. later to beprodiuced locally because of the host countries' local production requirements.Japan's labor-resource-oriented investments in its neighboring countries areat present dominated by the latter type. In Korea and Taiwan this is in sharpcontrast with the predominant pattern of Western companies' manufacturingoperations in labor abundant countries which is largely characterized by thesourcing of components of modern products rather than the production ofconventional end-products.

17. It is generally accented in the theory of direct investment bymultinational enterprises that for a manufactur.r to undertake overseasproduction he must have an advantage over existing or potentially competitivelo:al firms. 1/ Many interesting questions will then arise with respectto Japan's labor-resource-oriented investments in Asia: What advantage do theJapanese firms hive in manufacturing conventional products in other Asiancountries? Sin(e the entry into conventional industries is relatively easy bothtechnically and financially, this is the very area which developing countriesnormally cultivate and develop in their '.nitial stages of industrialization.Hence the local market is expected to become highly competitive and to precludeany prolonged monopolistic exploitation. Why is it, then, that Japanese invest-ments are attracted to such an unpromising industrial sector?

18. In this connection, note the following observations made by RaymondVernon and Charles P. Kindleberger respe.!tively:

II. . . multinational enterprises are not identified with themanufacture of such standardized products as steel bars androds, gray cloth, or plywood; but they are identified withproducts whose .specifications are in flux. The dichotciy isnot all that clear, of course. A few seemingly standardizedproducts, sue.h as antooobi7es, appear to enlarge their scaleeconomies of production or distribution with such regularityand persistence that the advantages of the rultinationalenterprises are maintained" /

"The product differentiation breeds direct investment is indicatedby its prevalence in branded products such as pharmaceuticals,cosmetics, soft drinks, and specialty foodstuffs, and in concentratedindustries such as automobiles , tires, chemicals, electricalappliances, electronic components, farm machinery, office equipment.It does not occur in standardized goods produced by competitiveindustries such as textiles, clothing, flour milling, and distribution(except for Sears, Roebuck in Latin America). 3/

1/ Charles P. Kindleberger, AneWrican Business Abroad,Yale University Press, 1969, p.12

2/ Raymond Vernon, "Future of the Multinational Enterprise", in Charles P.Kindleberger(ed.), The International Corporation, MIT Press, 1970, p.3 8 3.

3/ rharles P. F:indleberger, A43rican Business Abroad, oP.cit. p.l.

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But Japan,ese firms' investments in Asia are centered around standardizedconventional products such as plywood, textiles and sundries, and areparticipated in by a large number of small and medium-sized firms. As aconsequence, they are relatively small-scale operations,and there i1 notmuch possibility of scale economies in production or product differentiation.To be sure, there is an emerging pattern of big Japanese companies' overseasinvestments which fits the above characteristics of multinational enterprises,but which does not yet predominate the scene of Japan's overseas manufacturingoperations.

19. One possible explanation of this seemingly enigmatic pattern ofJapanese overseas investments is that, even though Japanese manufacturersof conventional products individually do not have significant advantages,they are in one way or another related, especially in their overseas ventures,to the Zaibatsu groups, notably their powerful trading companies, which lendmanagerial, technical and marketing capabilities. In fact, overseas investmentis generally locally owned in a developing country, 20-30 per cent owned bythe Japanese manufacturer involved, and the balance is financed by a tradingcompany. 1/ Under this tripartite arrangement, which is the most prevalentpattern Of overseas ventures by small and medium-sized manufacturers, thetrading company will supply and ship the required machinery, equipment,materials and components from Japan and export the overseas venture's products.Since standardized conventional products, when exported, are mostly marketedthrough the intermediary of traders and distributors and often under theirbrand names, there is still room for monopolistic power to prevail in marketing& tivit'es, if not in production, based upon distributicn scale economies. 2/Indeed, the lack of marketing skills and networks in world markets is one of thecrucial weaknesses of developing countries in undertaking, by themselves, theproduction and export of standardized goods in which they have a strongpossibility of developing a comparative advantage in international trade. 3/

1/ For the partic4Dation of trading companies in overseas ventures, seeTerutomo Ozawa, Transfer of Technology from Japan to Developing Countries,UNITAR Research Report No.7, New York, 1971. If a Japanese manufacturerinvesting overseas has no tie-up with any trading firms, it must havealready developed its own sales networks and expects no-difficulty selling itsoverseas output.

2/ It is said, for example, that Japanese trading firms were responsible forexporting about $85 million worth of exports from the Republic of Korea toother countries, including Japan, in 1968, thereby contributing significantlyt. Ile $350 million export target set by the Korean government for the sameyear. Sekai Shuhoh, Nihon Kigyoh n_ Kaigai Shinshitsu: Azia Ban (OverseasExpansion of Japanese Corporations in Asia), Tokyo, 19 9, p.15. The originalfigures are from the Japan Chamber of Commerce in Seoul.

3' This point is stressed by Jack Barar3on: "Clearing the Way for Exports",Finance and Development, Vol.8, No.1, March 1971, pp. 7-13.

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20. Another important factor behind this pattern of Japaneseinvestments is the government's guidance and assistance to small and medium-sized firms in co,.ventional industries which are interested in overseasventures. These industries are losing their comparative advantage ofproduction in Japan as a result of labor shortages and the rising competitionfrom developing countries, but are struggling to retain control over theconventionai industries by Joining local interests in developing countries.A survey of Japan's manufacturing investments in Taiwan, Singapore and SouthKorea, and an examination of tariff preferences for developing countries, whichare presented in the following sections,are intended to provide sane eviderceto the hypothesis developed above.

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II. THE REPUBLIC OF CHINA (TAIWAN)

Small Scale Investment

21. Admittedly, the future of Taiwan is uncertain as a result ofchanging international relations, that is, its expulsion from the UnitedNations and the political rapprochement between the United States and thePeople's Republic of China. Nevertheless, over the past several yearsTaiwan has been the most popular country for Japanese manufacturing investment.In 1969, for example, 79 out of the total 568 overseas investment projectsapproved by the Japanese government went to Taiwan.

22. Geographical proximity (hence, a low transport cost) and an abundantsupply of low wage labor are two major economic attractions. Perhaps moreimportant, however,-are close sociocultural similarities which serve as apsyc 5togical inducement for the Japanese. One businessman interviewed in Tokyoremarked; 'In my mind Taiwan is no different. from Kyushu or Shikoku (Japan'smajor southern islands)." His statement epitomizes the general mental attitudeef most Japanese businessmen toward Taiwan. By and large, they feel psychologicallymLch cloeer to Taiwan than to Hong Kong, Singapore, or any other country inAsia. As a legacy of Japan's colonialism, there are a large number of peoplewho speak Japanese and who are familiar with the Japanese way of runningbusinecs. It is said that Japanese specifications for technically complicatedproducts, such as'e'lectronics, can usually be handed over to Taiwanese engineerswithout translation. In most cases technical oral instructions can also becornveyed in Japanese. This constitutes a substantial saving of time and energyfor the Japanese who in general are notoriously poor linguists. 1/ Consequently,when the Japanese economy began to suffer a shortage of factory workers, Taiwanwas a logical place to secure needed labor. The country has become popularparticularly among small and medium-sized Japanese enterprises which, thoughinexperienced in direct overseas investmeits, have found it comfortable tooperate there because of the relative ease of communication. 2/

23. A variety of positive measuras adopted by the government of theRepublic of China to encourage foreign capital inflows were also importaijtattractions. These measures included legislation such as the Statute for

1/ The ease of communication is a'so particularly important for efficienttransfer of technology in Taiwan. See T. Ozawa, Transfer of Techinology fromjapan to Developing Countries, op.cit.

2/ It is reported that local businessmen often complain about a relatively low"quality" level of Japanese representatives despatched to Taiwan as comparedto those sent to Western countries. The fact that a large number of smallJapanese enterprises operate in Taiwan mayv partially explain this alleged low"qua:ity'; level of Japanese businessmen there.

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Encouragement cf Investment of 1960 and its subsequent major amendment in1965, the gradual simplification of procedural matters relating to investmentapplica+ions, and the establishment of an export processing zone in Kaoshiungin 1965. 1/

24. Table 3 shows the past trend of foreign capital investment approvedby the Taiwan government over the 1953-1970 period. Taiwan obviously encouraged

the inflows of overseas Chinese capital 2/ for both political and economic reasons.

Although the recent develooments on the international political scene mayreverse the inflow, a large amournt of investment has so far been attracted fromthis source. Indeed, in term.s of the number of investment projects approved,oversoas Chinese capital ranks first with 701 cases accounting for 5h.5 per centof the total, however, it represents only 29.1 per cent of the total valueof approved foreign investment, ranking second to the United States. The perunit investment of overseas Chinese capital average $233,000 compared to$1,260,500 for the United States. As indicated in Table X, overseas Chineseinvestments are largely found in lceeal-market-oriented industries such asservices, food and beverage processing, construction and textiles.

25. In contrast, U.S. and Japanese investment is concentrated inrelatively more technology-intensive industries, notably electronics andelectric products and chemicals. Japan's per unit investment is however alsomuch smaller than that of the United States. For example, Japan's investmentaverages $339,000 and $417,575 in electroniics and electric products andchemicals, compared to the U.S. investment of $3,975,676 and $2,3U44h78respectively. Industrial classification also masks differences in the tech-nological level of goods produced. To some extent Japan's smaller scale ofoperation even in relati7ely technology-intensive industriss means investmentin the "low" end of technology, although it is also due to joint venture typeinvestment which the United States has not made to a significant degree.Moreover, Japan invested more than the United States in such ralatively labor-intensive industries as textiles, garments and footwear, lumber, and bambooproducts, plastic and rubber products, basic metals, machinery and instruments.

26. Many Japanese eompanies, well aware of mainland China's territorialclaim to Taiwan, and fearful of losing potential business opportunities withthe People's Republic of China, kept the size of their capital investment inTaiwan at a minimum. In fact, they were more willing to sell technologythan to make large capital commitments. The small scale of Japan's investment

1/ These measures are described by Mo-Huan Hsing, in J.H. Power, O.P. Sicat,and J.H Hsing, The Philippines: Taiwan, (Oxford University Press, 1971),pp. 217-222.

2/ The S4atute for Investment by Overseas Chinese followed the Statute forInvestment by Foreign Nationals of 1954 specifically for this purpose,Ibid., p. 217.

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in Taiwan is alsc) due partly to the fact that many small and mediun-sizeJapanese enterprises actively invested there. They account for about h8

per cent of the total number of Japanese ventures in Taiwan, 1/ and they

produce mostly labor-intensive products.

From Local to Export Markets

27. For analytical Durposes the past trend of Japan's manufacturing

investments in Taiwan can be divided into two major periods; 1953-65 and

196 6-present. During the first period qome major manufacturers of consumer

goods, notably electric household appliances and pharmaceuticals, went into

joint, venturer in "tariff-induced" investments. Their brand names hadalready been known in Taiwan. They moved into local productiui when theircxports began to be impeded by high tariffs. Although some of them have cometo export part of their output, production was initially aimed mainly atlocal markets. 2/ Their investments inundated Taiwanese consumer marketswith advertising, and their aggressive sales efforts often antagonized local

producers. The so-called "excessive competition" prevalent in Japaneseindustries at home is often similarly reflected in their pattern of overseasinvestments. This is due largely to a highly oligopolistic market st?ucture

of Japanese electric and pharmaceutical industries which make their o erseasinvestment activities equally oligopolistic: To illustrate:

Electric Household Appliances

Japanese Total Capital Japanese Share YearCompanies (in U.S. $1,000) ( Der cent ) ADproved

Matsushita Electric 37T 60 1958

Tokyo Shibaura Electric 2,500 12.5 1961

Mitsubishi Electric 625 25 1962

Sanyo Electric 750 h9 1963

1/ See Table 2 in Section 1.

2/ For example, Matsushita Electric (Taiwan) Co., which was initially a

smtll business venture' aimed at the local market, has grown to one oftl. largest electric manufacturers in Taiwan with increasing exportsales -- so much so that it received a medal from the Board of Foreign

Trade of the Republic of China in 1970 for its achievement in export.promotion.

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Pharmaceuticals

Japahese Total Capital Japanese Share YearCompanies (in U.S. $1,000) ( per cent ) Approved

Daiichi Pharmaceutical 125 75 1962

Takeda Pharmaceutical 300 87.5 1962

Fjuisawa Pharmaceutical 175 75 1962

Tanabe Pharmaceutical 500 75 1962

Yamanouchi Pharmaceutical 150 75 1962

Dainippon Pharmaceutical 120 75 1963

Thus there is a strong "band wagon" effect in the overseas investment activitiesof Japanese manufacturers. If one company decides to invest in a particularforeign country, other companies tend to follow in a short period of time. 1/To be sure, Taiwan also encouraged the entry of several Japanese firms atone time so as to strengthen the bargaining position of local firms which wereinterested to form joint ventures.

28. It is said that the market st.are of the Japanese investment companiesin electric household appliances is approximately 30 per cent of the localmarket in total sales. But it is much higher for some specific items such asTV sets (90 per cent). In pharmaceuticals the Japanese investment companiesaccount for about 15 per cent of the local market. 2/

1/ Raymond Vernon describes this type of investment as a variant of thedefensive investment: "Picture a U.S. businessman in a carefully balanceddomestic industry whose business horizon stops at the water's edge.Suddenly, one of his domestic rivals makes a move beyond his ken, setting upa local prodtv.ing subsidiary in Turkey or Peru. For the U.S. firm that hasnot yet made a move, the problem is to determine the intent of the innovator.Can it be to preeiw?t a market hitherto unknown to the laggard firm, one thatwill soon be perceived as highly attractive; or can it be to generate a newsupply of the product, on a cost basis that can undercut U.S. sources?...And if our defensive businessman ..as little faith in any investigatoryprocess for so large and uncertain a decision, if he believes principallyin learning by doing where initial information is limited, then an obviousresponse is to match the investment morve of his innovating rival". SeeRaymond Vernon, "Future of the Multinational Enterprised', op.cit., p.377.

2/ Sekai Shuho, Nihon Kigyo no Kaigai Shinshutsu in Asia (Overseas Expansionof Japanese Business in Asia), TokTo, 1969, P. 39.

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29. After 1966 there was a sudden rise in Japan's investment in Taiwan,accompanied by a substantial change in the nature of investment. Indeed,86 per cent of the total number of Japanese postwar investment in Taiwanbefore 1971 was made during the second period. In contrast to the precedingpe nod, a large number of relatively unknown and small and medium-sizedenterprises moved in. S-..ae of them had never exported to Taiwan before.Furthermore, a majority of investments during the second period were not somuch directed at local markets, but intended mainly to increase their exportccmpetitiveness by taking advantage of relatively low cost labor and productivefacilities in Taiwan. Thus the investment during the 19 6 6-present period maybe identified as "export-oriente-i and labor-resource-induced" investments, asopposed to that of the preceding period which were "local-market-orientedand tariff-induced".

Attraction of Abundant Labor Supply

30. The above trend was created by separate but concurrent developmentsin Taiwan and Japan. Anticipating the cessation of U.S. economic aid in 1965,Taiwan began to place grerter emphasis on expcrt promoticn through absorptionof foreign capital and technology as an alternative to earn foreign exchangethan on the path of import substitution policies theretofore pursued. Thiswas a total reversal of its traditionally conservative attitude toward foreigncapital. In 1963 the Council on U.S. Aid was transformed into the Council onInternational Economic Co-operation and Development (CIECD), and the IndistrialDevelopment and Investment Center was established for the specific purpose ofcreating a better climate for foreign capital investment. 1/ This new policyalso led to the opening of an export processing zone, which combined theattractions of a free trade zone and an industrial park, in Kaohsiung in1965. 2/

31. The favorable climate thus created in Taiwan turned out to be allthe more attractive for Japanese manufacturers who then happened to beconfronted by rising wages and, above all, a shortage of factory workers athome. T- the latter half of the 1960s there appeared an acute shortage ofyoung workers, particularly high school graduates, who were willing to beemployed as blue-collar workers for a variety of assembly line operations inmodern factories, not to speak of labor-intensive conventional works in smallshops. As shown in Table 5, there were shortages of workers in all age groupsexcept in those of 51 years old and aver,but the shortage is most pronouncedin the group of 19 years old and under.

32. Many factors on both the supply and demand sides of industriallabor markets contributed to this development. First of all, Japan's overall

1/ Hsing, Taiwan, p. 189, OD.Ct.

2/ The zone was specifically designed to serve four primary purposes; (1) toattract investment from overseas Chinese and foreign nations; (2) to expandexport capacity; (3) to create new employment opportunities; and (b) toabsorb industrial technology.

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demographic structure had become older with a decline in the absolute size oflabor force in the 15-12 years old bracket. This is indicated in Table 6. Thisdecreased supply of young workers is due in psrt to the aging of the so-called"baby boom" generation born in the early postwar period. Also, rising incomesand Japan's traditional 3ystem of corporate promotion based on educationalbackgrounds encouraged an ever increasing number of young people, especiallyjunior high school graduates, to seek higher education- This trend is clearlydiscernible in Table 7. Thus there was a steady decline in the supply ofhigh school graduates to the labor market. At the same time, there was a surgein the demand for young workers who were highly adaptable, both physicallyand mentally, to modern assembly-type operations. Consequently, the supplyand demand relations of this segment of Japan's labor mnarket inevitably cameto be strained, and the wage rate for young workers increased more thanproportionately than those for other age groups.

33. This tight labor market for the young-age labor force affected smalland medium-sized firms more adversely than large ones. The latter were moresuccessful in holding down the rise of total corporate wage payments bynarrowing the wage differentials between age groups based on the traditionalseniority system. By contrast., small and medium-sized firms had narrow wagedifferentials to manipulate. 1/ Furthernore, they had to pay higher moneywages to attract new school graduates than large firms which were in a positionto offer larger fringe benefits and greater *ob security.

3!t. It is thus easy to understand that Taiwan's policy to induce foreigncapital and technology for the purpose of creating employment opportunitiesproved to be highly complement.ry with the Japanese labor market. It is note-worthy that Taiwan has a rel.Dively young-age demographic structuire: in 1970;for example,51.6 per cent of its people were under 20 years old. 2/ Reflectingthis demographic structure, the 15-19 age group accounted for 18.7 per cent ofTaiwan's total labor force in 1968, as show i in Table 8. This is in markedcontrast to the age composition of Japan's iaboi force as indicated in Table 6.Moreover, although there are variations am,long industries,. industrial wages inTaiwan are approximately one-third of those in Japan. 3/ But needless to say,this apparent attractiveness of lower wages in Taiwan needs to he discounted tosome extent by lower labor productivity, which is due in no small part to

1/ Japanese Economic Planning Agency, Economic Surve o an (1970-1971),pp. 103-106: "As a result, wages of employees in the.r 50s in rna.jorcorporations decreased markedly in relation to those of younger employees.In 1955, these older workers earned three times as much as did workers aged20-2it but in 1970, slightly over two times as much".

2/ Carputed fram data published in Council for International EconomicCooperation and Developnent, Republic of China, Taiwani Statistical Data Book,1971.

3/ Jack Baranson, International Transfer of Automotive Technolof, toDevelapingCountries, UINITAR 'cesearch Report No. 5, p. L3.

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less capital-intensive methods of production and the small scale ofoperations. In this regard it should be stressed that it was riot so muchlow wages per se, but the availability of factory workers in Taiwan thatattracted Japanese manufacturers, and particularly small and medium-sizedfirms.

35. It may therefore be safely suggested that Kaosiung Export ProcessingZone (KEPZ) had a timely opninng, and that had it not been for the "push"effect of Japan's labor shortage on its overseas investments, KEPZ might nothave been as successful as it is. For the importance of Japan's investmentsin the Zone is clearly shown in Table 9. It accounted for no less than 25 percent of both the total number of factories set up and the total value of capitalinvested in the Zone. If local and overseas Chinese capital is excluded,Japan's share looms even greater- it is about 74 per cent of the total numberof factories and 47 per cent of the total capital invested by foreign national3.Besides, a rise in Japan's export competitiveness during the 1960s alsoinduced, in no small part, many Western companies to take advantage of low costlabor in Taiwan to stay competitive. Thus Japan's industrial surge stimulatednot only its own investment in Taiwan, but also those by Western c-untries.

36. The fact that "labor-resource-induced" Japanese investments alsobecame more oriented towards export markets during the second period isrevealed in the findings of a survey conducted by the Japani Chamber of Commercein Taiwan in September, 1969 (Table 10). During the period of '953-1965,investments with more than 50 per cent of their sales for local markets were aboutfive times as many as those with more than 50 per cent of their sales forexports. During the -'eriod of 1966-1969, however, this pattern is reversed:the latter became about twice as numerous as the former. It is particularlyworth noting that 3? out of the 71 investments surveyed were 100 per centexport-oriented.

Backward-Linkage-Induced Investment

37. After 1966 there also appeared other types of investment beside the"labor-resource-induced" type above discussad. B g Japanese producers ofsynthetic fibers, i.e., Toray Industries (Toyo Rayon), Mitsubishi Rayon,Kanebo, Teijin, and Daitobo, all started to produce intermediate products, suchas polyester and rayon fiber locally, for Taiwan's booming textile industry. 1/Similarly, producers of machine tools and allied metals also invested tocultivate the expanding local markets. Although these investments certainlybenefitted from an abundant supply of factory workers, they were primarilyattracted by Taiwan's expanding industries which began to have a demand forvarious intermediate g:!xds large enough to be supplied by local pr-duction

1/ Their entry also r"veals an oligopolistic pattern of overseas investmentdiscussed earlier. TheY all rushed to apply for investment approval inTaiwan Luring the two-year period of 1966-67.

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instead of by imports. 1/ No doubt, the local production requirement imponedDy t,he Taiwan government also accelerated this trend. These types of invest-ments may be classified as "backward-linkage-induced" investments. 2/

Third-Country Market Export Orientation

38. Needless to say, the firns operating in KEPZ are obliged to exporttheir products. A majority of JaDanese firms are mainly concentrating theirexport efforts on third-country markets, although there are some which export backto Japan. For examplo, acc!tding to the survey of the Japan Chamber of Commercein Taiwan referred to earlier, 57 per cent of the responding firms export tothird-ccuntry markets, whereas only 11 per cent of them ship products back toJapan. Unfortunately, there are no detailed statistics available concerning thedestination and volume of exports from Japan's overseas r oduction. But the factthat exports from Japan's overseas procuction are, at present, geared more stronglyto third-country markets than to home markets can easily be explained. First ofall, some Japanese manufacturers, notably of textiles and TV sets, resorted towhbt may be described as a "circular export strategy"; as they gained sizeablema-ket shares in Western countries. they increasingly encountered restrictivemeasures and threats on their rapidly expianding exports. Hence, as a way tocircumvent this trend, they shifted part of their export production from Japan toTaiwan and started to export "made-in-Taiwan" products. Secondly, many small andmedium-sized manufacturers of textiles and sundries moved to Taiwan to retain andprolong their competitiveness both at home and overseas in the face of risingcompetition from developing countries such as Hong Kong, Singapore, South Korea,and Taiwan itself. Japan's export shares of many labor-intensive products inWestern countries' markets have drastically declined while those of other .--,ancountries have expanded sharply. In cotton fabrics, for example, Japan's sharein the U.S. market declined from 34.8 per cent to 26.5 per cent over the fiveyear period of 1962-1967 whereas Hong Kong's share rose from 14.8 per cent to20.8 per cent. 3/ This phenomenon is usually described as the "chasing-up"competition of developing countries.

39. By and large, those small and medium-s..zed manufacturers whoseproducts are aimed at export markets tend to migrate overseas more rap4 aythan those who produce entirely for domsstic markets since the former are morelikzly to gain international perspective and managerial skills necessary for

1/ Similarly, DU Pont opened a plant to supply the U.S. electronic companiesoperating in Taiwan wi'th plastic film used in electronics in Yay, 1971. Itsproject engineer is quoted as stating; '.;e're third generation. First youhad the assemblers come to Taiwan, then the component manufactnrers, andnow the raw material manufacturers for the component makers are zoving in".See "Taiwan: Where Nixon's Peking visit casts a chill", Business Week,July 24, 1971.

2/ For the concept of linkage effect, see Albert C. Hirschman, The Strategyof Economic Development (New Haven: Yale University Press, ME37.

3/ Tsusho Hakusho (White Paper on International Trade), 1969.

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overseas operations. A recent survey reveals that one of the major reasonswhy some small arid medium-sized enterprises are currently not interested in over-seas production is their inability to communicate (i.e., the lacking knowledgeof English) and -.. familiarity with o-rerseas conditions. 1/ Those manufacturers,who are managerially as well as financially not capable of migrating overseas,will fall victim to the "chasing-up" competition unless they enhancecompetitiveness with other means such as adoption of labor-saving equipment,corporate merger, or innovg.tion of high quality and new products.

ho. A third reason for the third-country market export orientation isrelated to the Japanese government's policy of assisting the remaining segmentof relatively small companics in conventional industries at home. Small andmedium-sized firms in the textile industry and a host of other convention,Llindustries are ec'-;nomically inefficient, but still retain substantial politicalinfluence. Consequentlr, the Japanese government is providing a variety ofprotective, measures, overtly and covertly, against imports from developingcountries. 2/ An execuLive of a trading company active in overseas venturesstated in ain interview with the author that they were informally instructed bythe Japanese government to refrain from such overseas manufacturing projects*hick, r;ay be directly competitive with and g.'eatly detrimental to small and

medi.um-sized enterprises at home. As will be noted later in connection withpreferential tariffs on imports from developing countries, th%. Japaneseigovernment appears to be extremely sensitive to the interests of small aridmedium-sized enterprises at home. In fact, the government is t'orried about thedeveloping countries' competition at thome and, more importantly, in WIesterncountries' markets so much so that it has asked the U.S. government informallyto exclude more than 20 coimodities from a list of preferential tariffs thelatter is expected to extend to developing countries. 3/ More positively the

1/ This survey on the degree of interest of Japanese manufacturers in overseasventures was commissioned to the Japan Chamber of Commerce by the JapaneseMinistry of Foreign Affairs in 1971.

2/ Jack Baranson describes ho-w the Japanese government has been reluctant tosanction automotive parts plant expansions in Taiwan because of their fear ofpossible omployment displacing effect in Japan: "3everal other proposals toshift manufacturing operations to Taiwan have been coneidered by MITCI, but fewhave been approved. MITI has approved one projer?t to manufacture wire harnessesin raiwan for the Japanese and other export markets. Before permission wasgranted, there was a prolonged negotiation with other firms in this industryto assure that imports from Taiwan would not be an undue burden... The insistenceuDoii 100 per cent concensus among firms as a precondi tion for approvalconstitutes a maior obstacle to export expansion from Taiwan to Japan. In thewire-harness case, it was relatively simple to reach agreement among the smallnumber of involved firms. If all five companies it) the wire-harness case hadfailed to agree, approval would not have been granted to MITI. A similar proposalto produce engine valves in Taiwan for-export was turned down". InternationalTransfer of Automotive Technology to Developing Countries, UNITAR ResearchReports No. 8, 1971, pp. 44-45.

3/ "Foreign Trade: Preferential Tariffs Inaugurated", The Oriental Economist,3eptember, 1971, p. 36.

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Japanese government has also begun co take measures to encouragethe migration of labor-intensive conventional industries to developingcountries by providirg financial assistance to small and medium-sizedenterprises which do so. 1/ These firms will then be in a position to gainnot only from Japan's tarTff preferet.ces but also eventVially from otherindustrialized countries' similar programs. The future schedule of Japan'stariff preference program is, therefore, most likely to be synchronized withits effort to modernize the domestic industries with the minimum possibledisturbance to those fIrms still remaining in tha contracting sector.

41. There are, however, a number of manufacturers who do ship productsback to Japan. They are mostly large corporations which produce conponentsoverseas for technology-intensive products of relatively recent origin, suchas electronics products. For example Hitachi Co. ships back to Japan memoryplarss for computars made at its wholly-owned subsidiary in Taiwan. NipponSakki (Yamaha) Co. also brings back components for electron organs from itsTaiw1an factory. In general, if a product is of relatively recent origin,its comoonents are in most cases still produced by the firm which needs thembecause of technological requirements; or if subcontracted, they ,' producedby the firm's own subsidiaries. Hence, overseas migration of comp,.6entsproduction can be accomplished with least conflict at home. Such a firm bringsback home intermediate products to be used by itself; these types of importswill have no immediately disruptive effect on the domestic market unlikeimports ef finished products to be marketed at large, such as textiles andsundries.

42. This does not mean, however, that any overseas manufacturing operationswhich are in direct competition with relatively small domestic producers aresuccessfully avoided. There is a case in which a large electrical appliancecompany purposely shifted a segment of its subcontracted production of partsfrom Japan to Taiwan to enhance its bargaining position vis a vis domesticsuppliers. Also, some trading firms are already engagedTii overseas manufacturingof consumer goods, such as knitted goods, which are sold in direct competitionwith their compatriot firms at home. Nevertheless, it appears at present thatthose companies which most actively ship products back to Japan are largemanufacturers of technology-based products who produce components at theiroverseas factories; small and medium-sized conventional manufactarers exportfinished products from their overseas facilities mainly to third-country markets,although there is no doubt that their exports back to Japan are on the riseslowly, but nevertheless steadily. The recent emergence of supermarkets andlarge ch3in stores is also responsible for this new trend.

1/ Shohkoh Chukin Bank, a semi-governmental bank designed to assist smalland medium-sized enterprises financially, is already active in extendingloans to those firrn' interested in overseas ventures.

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Profitability

4L. The satisfactory performance of Japanese investments i, TaLwan isalso revealed by the 1969 survey of the Japan Chamber of Commerce in Taiwanas shown nelow:

e. Investments making profits

The year frorm wnich operations becameprofitable:

From the first year 22From the second year lhFrom the third year 3From the fourth year 2Beyond the fourth year I

b. Investments making losses 22

c. Investments uncertain of profitabi-lityat the moment ?

d. No information (mostly those investmentbwhich are still in the first year ofoperation) 2h

Total nbmmer offirms surveyed 94

It is remarkable that l5 out of those 70 firms which provided information -,eredefinitely making profits and that h2lf cf those L5 profitable ventures managedto operate profitably from the very first year of their operations.

4. MWny explanations are conceivable for this sa 4 isfactory overal'performance. For exanple, the small-scale and labor-intensive features ofJapanese investments are no doubt i-jstriunental in enabling them to minimizefixed costs and to economize on varinble co3ts by making the best use oflosis ost labor. Thus they could shorten their gestation period and attaina break-even point at relatively early stages of operations. Geographicalpropinquity is another favorable factcr for reducing transport costs for rawmaterials and intermediate produc-s shipped from Japan to Taiwan and for theexport of processed products to third--country markets or back to Japan.Furthermore, the investing firms had already well-established markets to whichthey could r-eadily marke' their products. In fact, as stressed earlier, theirstrong desire tj retain market positions was an important inducement for themto transplant corporate production in Taiwan.

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Future Investment

h5. It is well knawn that, first emphasizing the development of efficienta-riuulture, Taiwan became a significant exporter of primary and proce3sed farmproducts *n the early 196 0s, and earned a large amount of foreign reserves.Then, throughout the 160s, the policy was cdirected to the steady buildup oflight industry to create e=ployment opportunities for the country's low cost,relatively efficient labor force. 'Well aware of the difficulties of attractinglarge-scale and long-term foreign investmen,ts in the early stages ofindustriaLization, Taiwan's development sLrategy was to foster, fiirst, thesmaller industries and count on their success to bring in the bigger ones. 1/Indeed, this strategy has so 'ar proved extremely successful: manufacturingoutpUt has expanded at a fas- rate, Job opportunities have become plentiful,and manufacturing exports thve multiplied.

46. Now the Republic of Ciina is determined to move the economy toits third stage of industrialization with emphasis on large-scale heavyindustries. 'This shift in policy -was made in a recent statement made byMinister of Economic Affairs, Y.S. Sun:

"Ir: the sventi'<, our emphaser will be placea on the expansionof infrastructures and buildup of heavy and key inrdustries whichwill call for large a-z-cnts of investment In order to meet suchdemand, a vworous canfaign has been wagecl to encourage savingsacross the nation so as to accelerate the finance of domesticcapital formation. Aside from projected gross savings, theinflou: of exter-nal capital from. overseas Chinese and foreignnationals will certainly provide another source ef investmentfinarcing. The--efore, the Government has recently revised the"Statute for Investmer.t by Overseas Chinese and Foreign Nationa3s"to further encoarage and attract overseas Chinese and foreigninvestment in TaiNan". 2/

In fact, as reported in The Ckina News, May 31, 1971, priority has alreadyshifted -o large-scale foreign carital investments:

"In the selection of overseas capital investment projects inTaiwan, prTiori'y has been given to those which would involvelarger capital or 4tlay and are of larger scale. Depending onthe requirements cf the time, minimum amount of capital investmentor minimum production scale is sometimes regulated by thegovernment. To 1970, h9.3 per cent of the foreign investmentcases approved woilid individually involve a capitalization ofless than U.S. $200,000. Compared with the record of 73.3 c:rcent of 1969, there was a considerable reduction of 24 per cent."

I/ "Taiwan: 'Where Nixon's Peking visit casts a chill," Business Week, July 24,1971

2/ Y.S. Sun, Economic Development In The Republic of Chira, Ministry ofEconomic Affairs, Taiwan, 1971.

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This change in priority is '.ell reflected in recent increases in the averagevalue of Japan's investment projects approved 'oy the government of C.ina(TTiwan):$15,739 in 1968, $231,72C in 1969, and $559,411 in 1970.

47. In general, the larger the scale of investment, the longer will bethe gestation period for profitahle operations and, consequently, the greaterwill be the risks involved. It is indeed unfortunate that Tniwan's politicalposition has deteriorated at the very moment when the country needs longer-term foreign capital investments.

8. Although, at tle end of 'iovenber 1971, Taiwan had already approved$152 million in investment applications for 1971, well above $139 million for1970, 1/ all approved projects were not necessarily implemented. For example,the actual arrival of approved foreign capital investment amounted to$L3,730,000 in 1969, equivalent to about 40 per cent of the total approvedcapital of $109,L37,000, and in 1970, $59,570,000 corresponding to about 42per cent of the total approved capital of $138,896,7)0. 2/ Besides, despitea rise in the total value of approved investment, there was a 39 per centdecline in foreign investment applications in the first half of 1971 mainlybecause of the U..S. recession and tighter investment controls in Taiwan. 3/Uncertainties about the future of Taiwan may further reduce both the numberof applications ar.d the rate of investment implementation.

h9. The major factor deterring Japanese manufacturers from furtheradvance in Taiwan is Premier Chou En-Lai's imposition of the so-called "fourprinciples" which include the prohibition of investment in Taiwan and SouthKorea as a necessary condition for tracle with the People's Repuiblic of China.Even prior to Taiwan's expulsion from the U.il. some Japanese industrialistsstarted to turn away from Taiwan. It is said that at least 32 leading Japanesecompanies cancelled plans to attend the meeting O.- the Japan-the Republic ofChina Cocperative Committee held in Taiwan on October 7, 1971, and that, bycontrast, a record number of Japanese companies attended the 1971 Canton TradeFair. 4/

50. Immediately after the Republic of China had lost the U.N. seat,several major Japane9f manufacturers of chemicals and synthetic fibers announcedtheir Taiwan policies: (a) to stop any additional investment to their jointventures; (b) to reconsider the implementation of new technical assistancecontracts; (c) to momentarily disapprove any renewal of existing technical

1/ "Taiwan On the-, ropes, but no K.O.," Business Week, November 6, 1971.

2/ "Overseas Capital Investment in China", The China News, May 31, 1971.

3/ "U.N. Expulsion May Slow Taiwan's Growth In Short Rnin -- fsut BolsterEcononm Later", The Wall Street Journal, October 27,1971.

[a! "International outlook: Japanese Industry Embraces Red China," BusinessWee], October 2, 1971.

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assistance contracts. 1/ Hitachi Co., which operates five ventures (threewholly-owned subsidiaries) in Taiwan, will not make any additional capit.alinvestment. Scme companies are alreacdy in the process of selling theirownership interest to their Taiwanese partners, and others may soon followsuit. For example, Nippon Paint Co., Japan's largest in its field, is sellingits 27 per cent interest in the $250,000 venture, and Kansai Paint Go. m.ytake similar action. 2/ Japan's largest investor in Tai..1an, Teijin (amanufacturer of synthetic fibers) will start to sell its ownership intereststarting in 1972 as a measure to phase out of Taiwan. 3/ Another new trendis to transfer planned investment from Taiwan to other Asian countries;Tsurumi Seisakusho Co., which has a joint venture to produce water pumps,is planning to set up another venture in Thailand instead of expanding itsTaiwan factory. hi

51. Judging from the recent developments, Japan's new investment inTaiwan will decline sharply. Large Japanese corporations Will-phase out ofTaiwan more q -tl:'2Y *han small enterprises engaged in labor-intensivemanufacturing, i.-<--.use Japan's large capital-intensive industries have a muchgreater stake it, -.ading with the People's Republin of China than its labor-intensive industries, which are likely to be direct competitors with mainlandChina.

1/ Nippon Keizai Shinbun, October 27, 1971.

2/ Business Week, October 2, 1971.

3/ Mainichi Shinbun, October 27, 1971.

4/ Nippon Keizai Shinbun, October 27, 1971.

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III. SINGAPORE

52. WVith the establi3hment of the Economic Development Board in 1961the Republic of Singapore began to transform its entrepot econonm into anindustrial society. If a manufacturing operation, whether foreign-ownedor locally-owned, is designated by the Board as a "pioneer" industeycontributing to Singapore's industrialization and export, it is givenpreferential tax treatments, including tax exemption on corporate income,tax reduction on export profits, and tax credit for interest paid on foreignloans and for royalties and technical assistance fees. The Employment Actand the Industrial Relations Acts of 1968, were designed tp improve the laborclimate. The government's industrialization effort also includes the provisionof industr.al estates, including one in Jurong where a majority of Japaneseinvestment is located.

53. JaDan's investment in Singapo-e, as of March 31, 1971, is shown inTable 11. It is of interest to note that, as compared to Taiwan and SouthKorea, Japanese electric and electronic producers have so far made littleadvance in manufacturing operations in Singapore, and that chemicals, textiles,and metal products are the major industries in which more than half of Japan'sinvestment projects are concentrated. In other industries, however, there aresome individually significant investments such as Jurong Shipyard Ltd.,established by Ishikawajima-Harima Heavy Industries in a joint venture with theSingapore government; Jurong Shipbuilding Ltd., another recent Ishikawajima-Harima venture; 2ridgestone Malaysia (tire manufacturing), a 50 per cent jointventure of Bridgestone Tire Co., Singapore Cement Manufacturing Co., a 66 percent joint venture set up by Onoda Cement and Mitsui Busan; and Pan MalaysiaPaint, a h0 per cent joint venture of Nippon Plant.

5L. There was a sudden rush to Singapore in 1963 when 12 joint ventureswere established. 1/ These investments were mainly import substituting andthey were induced by the formation of the Malaysian Common Market which theyintended to penetrate from Singapore as their production base, as well as bythe Singapore government's protective measures adoptefd from the previous year. 2/Hence, Singapore's decision to secede from the Federation of Malaysia in 1.965was a serious blow to those companies which had already established relatively

1/ Yoshiaki Shimabukuro, "The Economy of Singapore," lhe Oriental Economist,March 1971, p. 20.

2/ "They did not appear to be much affected by the provisions of the PioneerOrdinance... The anticipated formation of the Federation of Malaysia during1962-3, on the other hand, was a very important motivating factor, not onlyin bringing manufacturers to Singapore but al o in increasing the size ofplant and equipment investment." See Ryokichi Hirono, "Japanese Investment",Helen Hughes and You Poh Seng (editors), Foreign Investment and Industrializaticnin Singapore (Madison: University of Wisconsin Press, 1969), pp. 93-9h.

- 21J -

large-scale facilities aimed at the entire Malaysian market. As a result, someprojects such as oil refining (a vontur e of Maruzen Oil, and Toyo Menka) andmanufacturing of diesel engiries (a venture of Yammar Diesel, Nichimeni, and MitsuiBusan) were forced to close down. Subsequently the pace of Japanese investmentsomewhat slowed down, but again there apFpears to have been a rising trend inthe number of investment projects in recent years.

55. In contrast to earlier Japanese investors who "were clearly mostinterested either in protecting or in expanding their existing export market inand around Singapore", 1/ firms which have invested recentlr appear to bcmore interested in utilizing local labor and in exporting to a much widerpart of the world market than the Malaysian region proper. Notable examplesare two joint ventures of printing and book-binding set up by leading Japaneseprinting companies, Dai Nippon and Toppan. There are also textile investmentssuch as Malaysian Textile Industry (a subsidiary of Teijin), Singapore TextileIndustry (a joint venture of Tomen, Teijin, and local interests), and SingaporeTowels Manufacturing Co. (a joint venture of Misubishi Shoji, a group ofJapanese textile firms and local interests), which export their products toadvanced countries.

The "Electronics Stage" of Foreign Investment

56. As a result of an overseas promotional effort to attract eiectronicsmanufacturers to provide employnient, opportunities for school leavers, Singaporeia the late 1960s succeeded in encouraging large companies such as Fairchild,Texas Instruments, National and RCA to locate in Singapore. 2/ Japaneseelectrical and electronic producers have not participated except for a $134,OOOjoin,; venture set up by Sanyo Electric to produce electric household applianceswhich dates back to the "import substitution" phase.

57. There are several reasons for the slow advance of Japan's electronicsindustry in Singapore. First of all, Japan is a newcomer in this modernindustry- The industry was established from a small base by assimilatingforeign technology throughout the 1950s and gradually developing its owntechniques through research and development during the 1960s. 3/ It hasonly recently reached such a stage as to experiment with overseas operationsin Japan's neighboring countries, mainly Taiwan, Korea and Hong iong. I4 It

1/ Ibid.

2/ Y.S. Chang, The Transfer of Technologr: Economics of Off-shore Assembly, TheCase of Semiconductor Industry, UNITAR Researich Reprt . 11, New York ,.97l,p.L9.

3/ Johr E. Tilton, International Diffusion of Technolo: 'The Case of Semiconductors,(Washington: Brookings Institution, 1971), pp. 139-h40.

4l/ So far as Japan's overseas production of electron ' components is concerned,Taiwan ranks first with 35 approved projects of i; .tment worth $10,233,0CO,South Korea second with 6 projects worth $6,lol,o( and Hong Kong third withh projects worth $371,000 in February, 1971. T:eF s,et1stics(unpublished) arecompiled by the Javanese Ministry of Internacion. Trade and Commerce.

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is possible that Japanese firms' technology purchase contracts with Westernfirms may include some agreement of regional restrictions on their export andinvestment activities. Sinre the Japanese government has banned foreignsubsidiaries and joint ventures controlled by foreign interests in the 'emi-conductor industry, Japanese manufacturers have enjoyed a rela'ively securedomestic market and have not been driven by foreign competition to scramblefor overseas rioduction in low cost countries as much as Western firms. Itis true that industrial wages in Singapore are lower than in Japan, but theyare more thin twica as high as those in Taiwan, and their ratio to Japanesewages is anproximately l:l.5, as compared to their ratio to U.S. wages, 1:11.1. 1/Consequently, low cost labor in Singapore is not so attractive for the Japaneseas it is for U.S. manufacturers. Besides, although Singapore is equally asattractive for Western firms as any other Asian cauntry as a manufacturing anddistr'bution center in Asia because they are so far from the region,.this is'ertainly not the case with Japan. 2/ Singapore is geographically much fartheraway from Japan than Taiwan, South Rorea and Hong Kong. A greater distancemeans, in addition to a rise in transport costs, an equally greater socioculturaldistance which imposes a psychological barrier for many Japanese businessmenwho have only recently begun *.o experience overseas manufacturing in countriesother than Japan's former colonies.

58. The reasons stated above also apply to the generally low level ofJapan's investment activities _n Singapore compared to Taiwan. To be sure,recent political developments in Asia may induce some Japanese companies toshift their overseas ventures to Singapore. Yet small Japanese 'ompanies whichmake overseas investments in labor-intensive manufacturing operations arenot likely to move such a long distance unless they are assisted by big Japanesemanufacturers or trading coi,,panies. As already noted oecause their interestin the People's Republic of China is generally small, they may continub tooperate in Taiwan and South Korea. Furthermore, the Singapore government'spolicy of encouraging overseas Chinese capital investments, which tend to beconcentrated in small-scale light manufacturing industries, may create a directcompetitive relationship with Japanese investors. Singapore, moreover, hasrecently revised its investment policy and now stresses mainly those foreigninvestments which can help develop local technological progress in return for theincentives it offers.

59. Future Japanese advance will probably be made by large Japanesemanufacturers of high technology products with world-wide marketing ability,or by a group of small an.d medium-sized firms in relatively skill-intensiveindustries, such as engineering and specialized machine producers, with largeJapanese trading firms as their partners. As seen recently in Taiwan, Singaporemay also soon attract "lirkage-effect-induced" investments (i.e. suppliers ofintermediate goods) as its industry expands and deepens in vertical specialization.

l/ U.S. Tariff Commission, Economic Factors Affecting the use of items 807.00and 806.30 of the tariff schedule of the U.S., Wdashington, 197(, p.A-90,quoted by Y.S. Chang, in Economics of Offshore Assembly, p.-ciL., p.27.

2/ Yoshiaki Shimabukuro, "The Economy of Singapore," op.cit., p.20. He alsopoints out that, although Western petroleum companies use Singapore as a supply

depot for exploration and drilling projects, Japanese companies so farhave preferred to work directly from Japan.

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IV. THE REPUBLIC OF KOREA (SOUTH KOREA)

Recent Political Settlement

60. South Korea is in many ways similar to Taiwan. The country is denselypopulated with a relat4.vely well educated and disciplined labor force. Since1962 it has been following an export-oriented policy of economic developmentby encouraging the inflows of foreign capital and technology -- a policyadopted, as in Taiwan, at the prospect of the cessation of U.S. economic aid.South Kcrea's geographical proximity and socio6iiltural similarities are asmuch assets for Japan's manufacturing operations as for Taiwan. Yet thereis a major difference because of Korea's recent history of strained politicalrelations with Japan.

61. Understandably, strong anti-Jananese feelings wert openly expressedafter the end of 'World War II which liberated Korea from 35 years of Japanesecolonialism. It was also Syngman Rhee's policy deliberately to sustainantagonism against Japan "through textbooks, constant reminders of Japanesecolonial rule in speeches and declarations". 1/ Throughout his presidencyduring the 1950s, little diplomatic contact wZs initiated, although trade wasreopened.

62. It was only after the need for economic development was recognizedby the later administrations as a maJor national priority in the early 1960sthat serious efforts were made to settle the Japanese issue. By then, Japanwas already emerging as a world economic power, and it was clearly in Korea'sinterest to restore normal relations. Yet there was a strong opposition amongpolitical opponents, intellectuals and students to what they considered a"sellout" attempt to come to terms with Japan. Hence, as is well known, afinal settlement had to be pushed through by President Park with the use ofmilitary power to suppress domestic opposition in August 1965.

63. When normal diplomatic relations had been established, and the grotndwork for Japan's direct capital investment had been laid, 2/ Japanese compa ieswere eager to apply for approval for investment projects in 1968. The firstproject implemented was a joint venture formed by Dainichi Kinzoku Kogyo toproduce lathes for the local market. Its manufacturing operation started il.March, 1969, marking a new economic relation between the two countries.

1/ David C. Cole and Princeton N. Lyman, Korean Devel2pmwent (Harvard UniversityPress, 1971) p. 99. This book.provides an excellent analysis of South Korea'spostwar relations, both political and economic, with Japan.

2/ The problem of double taxation and tax "sparing" which prevented Japaneseinvestors from the benefits of the tax holidays provided by South Korea'sForeign Capital Inducement Law, and protection of industrial property weresolved at the second Japan-Republic of Korea Ministerial Conference inAugust, 1968.

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64. As of the end of May, 1970, Japan's equity investments approvedby the Japanese government had amounted to 35 cases totalling an investmentof $13,534,000; t,.o loans of $3,168,000; and three branch investments of$149,000. 1/ The per unit direct investment averages $386,685, and this isagain relatively small as in Taiwan. Japan's direct investment is concentratedin textiles (mainly sewn and knitted goods) and electric and electronicproducts, the former accounting for about 2L ner cent and the lat.-.;er 18 per centof the total number of Drojects. The balance is widely dispersed over manyindustries s,ch as transport equipment, pharmaceuticals, industrial gelatin,musical instr ments, food processing, office equipment, sporting goods,synthetic rubb.ir, piston rings, asbestos products, cast-iron products,chemical shoes, plastic products, and kerosene stoves. 2/ Since Japan's directinvestments in South Korea began to be made only very recently, detailedstudies are yet to be made, and official statistics in this area are stillscanty.

Mesan Free RVort Zone

65. To creaTe .Bb opportunities at home and promote exports and industrialgrowth, the Korean government opened an export processing zone in Masan, knownas the Masan Free Export Zone (MAFEZ). As of May, 1971, six foreign firmswere given approval to operate within the zone, but five were either wnollyor partly owned by Japanese companies. 3/

Comipanies to be Total Japan'sset up Products Capital share Employment

Sinwa Denko Electronics products $2569000 100% 210Dreameut New Korea Sewn textile goods 336,000 50%Korea Minami Sangyo Christmas tree bulbs 160,000 80% 350Korea Tokyo Electronic coils 390,000 100% 500Matsubara Denki /a Metallic molds 151,000

/a owned by a Korean resident in Japan

Thus there is some danger that Korea's export proces3ing zone will be dominatedby Japanese interests, and the Korean government is naturally concerned about

1/ Japan, Ministry of International Trade and Industry, Keizai Kyoiyoku no Genjoto Mondaiten (The CurrenT Status and Problems of Economic Cooperation),1970,p. 254. No breakdown by industry is available for investment in South Koreain the report.

2/ Tohyo Keizai: 'Xohkei Geppo, April, 1971, pp. 20-22.

3/ "Japanese Enclave Taking Shape at Korea's MAFE&", Business Asia, May 7,1971.

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the prospect of turning MAFL into a Japanese enclave rather than an internationalindustrial park.

66. There was indeea a strong fear of the possible Japanese dom-nation ofKorean industries which corstituted an important element of the public'sopposition to the Koreai government's endeavor to sign a treaty of normalizationwith Japan. This feelinp as well represented by an editorial in the semi-governmental Seoul Sinrur. of JL2y 29, 1965:

" The way for Japanese economic infiltration is opened widelyWith this huge financial power and advanced experience asa backdrop, the Japanese are clandestinely but concretelyand correctly surveying our situation to find our weak points.4hen the time comes for them, they will jump on them toexploit maximum profits. As ink permeates blotting paper,so does Japan soak into Korea...." 1/

With their subsequent phenomenal economic upsurge, however, a rational outlookbegan to supersede emotional views. Five years later, an editorial inChosun Ilbo (November 29, 1970), accepting the influx of Japanese investment,discussed the formulation of policy toward it.

" In this period when a great number of Japanese enterprisesare expected to advance into our country, we have toseriously re-study the point up to which foreign capitalcan be used to our industry's advantage and the pointfrri which foreign capital can become inimical to oureconomy. We thus have to make careful qualitative andquantitative evaluation of foreign ^apital and takemeasures to introduce "good foreign capital" and, at the samn"time, employ strong measures to repel bad and excessiveforeign capital."2/

*;7. In general, once a favorable climate is provided, Japan's investmentin a given foreign country has a strong tendency to accumulate very quickly.As noted in Section II, an oligopolistic market structure is responsible forthis trend in some types of industries. Perhaps more importantly, since manyJapanese firms, particularly the small and medium-sized, are inexperienced inoverseas manufacturing, they naturally feel secure in following the path ofothers. Japan's overseas ventures are often organized in groups by bigJapanese trading firms. For example, Mitsui Bussan, Mitsubishi Shoji, andMarubeni-lida have been recruiting and organizing small firms for investmentsin MAFEZ. 3/ "Group investments" are designed to gain economies of scale for

1/ Quoted by Cole and Lyman, Korean Development, a-cit., p. 107.

2/ Quoted by Teruo Komaki, "ROK Economy in a Slurpn, The Oriental Economist,April 1971, p. 29.

3/ Nippon Keizai Shinbun, June 29, 1970.

trading companies' operations and to strengthen their bargaining power vis-a vis the host country. All in all, since there are strong intercompanyrelations among Japanese firm.", particularly within zaibatsu groups, theirtendency to conglomerate in overseas ventares is equally strong.

Future Investment

68. Large Japanese companies are now taking a wait-and-see attitudefrom South Kore. under the pressure of Chou En-Lai's four principles. Inthe past, several large manufacturers of automobile, cement and syntheticfiber extended loans, with technical assistance to Korean manufacturersinstead of equity investment. Notable exam?les are assembly of knockeddown passenger cars by Toyota Motors; cement manufacturing by a Mitsubishigroup syndicate; production of synthetic fiber by Toyo Msnka. Large companiesmay continue to provide loans and technical assistance rather than to beinvolved in equity ownership. Hance South Korea is likely to attract thedirect investments of small and medium-sized enterprises which are labor-intensive, and therefore, are less affected by the pressure of mainland China.Since South Korea desires to attract more tech.olugy-based industries, animbalancs seems to exist between the Japanese outlook and Korea's hopes.

69. The recent turn of events seems to have changed South Korea'sfear from po.3sible Japanese industrial domination of Korean industry topossible withdrawal of Japanese economic cooperation. Thus despite the viewof opposition parties and some industrial leaders that Japan should refrainfrom building closer ties with the Repuolic of Korea, the Japanese governmentreaffirmed its position to strengthen economic cooperation at the recentJapan-ROK Ministerial Conf-erence held in August 1971. The governm?ntexplained that Japanese econonic aid to South Korea would: (a) enhance itsliving standard and the peace and security of the Korean Peninsula:(b) have no ill effect on normalization of Sino-Japanese relations. Amongthe agreements. re, -1led a' the conference was the Japanese government'sassurance to promote private Japanese investment in the Republic of Korea.

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V. JAPAN'S PREFERENTIAL TARIFFS

70. On August 1, 1971, Japan introduced a tariff preference program onimports from 96 developing countries. It is built upon tha so-called"ceiling formula" uhich zets an upper limit on the value or quantity ofimpcrts for each group of products every year. The progian is illustratedin Table 12. The initial tariff costs are not applicable to imports frcm theprotectorates of alvanced countries such as Hong Kong dui-ing the first year.Thoise countries which maintain discriminatory trac'e practices against Japanunder Article 35 of the GC..TT vill lose their beneficiary status unless theyrepeal such actions within the next three years.

71. Although Japan has attained the third highest GNP in the world,its industrial structure is still "middle-advanced". with a large sector oflight manufacturing industries which are small-scale and labor-intensive inoperation. Because it is precisely the light industry that developingcountries build up in the early stages of industrialization, and lightproducts which they strive to export, there is unavoidable friction betweendevaloping countries and Japan's traditional sector which struggles toremain competitive. Fully aware of the problems of the "chasing-up"competition discussed earlier, the Japanese government has encouraged thedevelopment of heavy and chemical industries, but has been rather reluctantto force the traditional sector to contrac:. ae rapidly as desired. Japan'seconomic expansion has led to rising wages and a shortage of factory workers,which are, as seen in Section II, niw affecting the traditional labor-inter.sivesector more adversely than the modern industrlal sector. Aggressive firTns inthe former have moved to low-cost labor countries, but there are still alarge number of small and medium-sized enterprises which are caught by thetight labor market at home and the "chasing-up" competition. Under thesecircumatances it is politically difficult for the Japanese government to granttariff preferences on those imports which directly threaten the existenceof domestic firms in the traditional sector. 1/

72. As a result, many items are either excluded or given specialtreatment from the application of tariff preferences. For example, sevenmanufactured items (i.e., raw silk, silk fabrics, plywood; glue-gelatin,rubber and plastic footwear, footwear parts, and ,.eather garments) arecompletely excluded and designated as "exceptional" products, together withthree petroleum products. Fifty-seven other manufactared products ateclassified as "sensitive" items, receiving the maximum 50 per cent tariff cutsfrom the present levels. These items consist of, among others, seven items of

1/ As noted in Section II, the government is providing adjustment assistancenot only to' shift resources toward higher technology industries but alsoto encourage the overseas migration of small and medium-sized firms.

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leather product,, 27 items of textiles and apparel, and 2 items of electronicscomponents (components for computers and semi-conductors). All these items arelabor-intensive products manufactured mostly by small and r.editn-sized firms.

73. These exception- have been criticized particularly by South Koreaand Taiwan. The former ranks first as a supplier for Japan's .mports offour "exceptional" oroducts, i.e., plywood, raw silk, silk fabrics,and rubberar. pTa2tic footwear. It also ranks either first or. second in Japan'simports of cotton fabrics, apvarel, electric batteries and other productsclassified as "ser:sitive" items. Taiwan is similarly the first major exporterto Japan in leather garments and footwear parts, both "exceptional" items.It is also one of the top exporters in refined oil, cotton fahrics, apparel,electronics components and electric batteries, which are all treated as"sensitive:' items. 1/

7l . Due to these exceptions, the benefits of Japan's tariff preferencesfor the developing cuun'ries are disappointingly small at the moment. Moreover,the benefits arc further reduced by the extremely low levels of ceiling3 set byadding a lr per cent increase to the 1968 levels of imports. It is said thatwithin 2L hours after the implementation of preferential tariffs, two items(men's underwear and canvas shoes) imported from Taiwan reached their ceilings,and that within two months those items which had exhausted the overall quotasamounted to 26, and within three months they reached 29. 2/ The fact thatthe Japanese government set extremely restrictive ceilings is also reflectedin the inactive use of funds earmarked by the Preferential Tariff Counter-measures Emergency Act of Apr-"I, 1971, supposedly to be used as aid to import-injured firms as a result of the preferArtial tariffs. 3/

75. Realizing that its approach to the new program of tarifS preferenceswas too .-autious, the government is moving to relax restrictions. Yet therecent U.S. New Economic Policy and the announced revaluation of the Japaneseyen have caused hardship to small and medium-sized firms in light manufacturingindustries. In fact, the unused "Preferential Tariff Countermeasures" funds arenow being used to aid those firms which were injured by the recent "dollarshock". h/ Since it is the government's basic policy to make a major reviewof the detailed operations of the preferential tariff pri)gram every threeyears, it may be a few years before the government liberalizes the programsubstantially, although minor revisions are likely to be made to allay the presentdissatisfaction voiced by developing countries.

1/ Kimiyoshi Nl8hizawa, Tokkei Kanzei No Zenboh (The Full Outlines of PreferentialTariffs), Tokyo, 1971, pp. 126-129.

2/ Nippon Keizai Shinbun, November 8, 1971.

3/ Nippon Keizai Shinbun, October 17, 1971.

4/ Ibid.

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76. In the meantime, small and m-edium-sized firms threatened bycompetition from develoring countries idill be assisted to migrate to laborabundant countries. Japan's manufactur.ng investments in developing countrinsmay thus have an effc, of "plowing back" part of the benefits of its tariffpreferences to be conferred on developing ccamntries. This is an interesting(and perhaps efficiernt) variant of "adjustment assistance" to ixv-ort-injured firms in this age of multinationalism.

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APPENDEX A. TRANSMIGRATION AND DISPERSION OF InDUSTRY

77. It is often suggested that varicus types of industries (or products)first transplanted fron Western countries to Japan are now in turn trans-migrated fran Japan to other Asian countries. Needless to say, there is adirect migration of new industries front Westc:n countries to other Asiancountries, as is the case with the electronics industry in recent years.This pattern of industrial m-igration is illustrated below. It is well kno-wrthat Japan has absorbed Western technologies rapidly mostly under licensingagreements or in joint ventures since the end of Wgorld War II (route A). 1,And, as has been discussed in this study, there is a rising outflow ofmanufacturing investments from Japan to other Asian cou;ntries (route B). Theso-called multinctional corporations based in 'Western cou:tries, particularlythe United States, are now transferring some of the labor-in'ensive and routine-type portion of their production operations to low-wage countr:es, notablyHong Kong, Taiwan, South Korea, and Singapore (route C).

|WSERNI COUNTRIES

ROU'1E A /

E 3 ~~~~~~~~~~~RO UtF,r,

ROUEE B

tAIWAN, SOUTH KOREA, HDWG KO.G, SIT`.APORE, anaother ).sian countries

1/ For Japan's postvar assimilation of Western technology, ice Terutomo Ozawa,"Imitation, Innovation, and Japanese Exports", in P.B. YKnen and R. Lawrence(ed.) The Opn Econ2ir: Essays on Trade and Finance (New 'ork: ColumbiaUniversity Press, 1968), pp. 190-?12: and "Japan's Technology Now Challengesthe West", Colu.mbia Journal of World Business, Mar.-Apr. 1972.

78. Interestingly enough, although its wages are lower than its Wdesterncounterparts, Japan has not really served as a host country by offering lowwage labor for the production of electronics components, such as semi-conductors, for Western concerns under wholly-foreign-owned or foreign-majority-ownership arrangenents. For example, in the semiconductor industry no wholly-o--nes foreign subsidiaries exist, and there are only a few major jointventires, such as Matsushita Electroni s (Philips, Netherlands), New JapanRadio (Raytheon, U.S.), and the Interr:ational Rectifier Corporntion of Japan(Ir.t_rnational Rectifier, U.S.). Government policy has ensured that foreignna.tners do not hold a controlling int3rest. 1/

j9. Japan also had an industrial base to develc- the semiconductorindustry very quickly. Ma3or lectrical concerns such as Hitachi, Toshiba,Matsushita El6ctric, Nippon Electric, Mitsubishi Electric, and Sony werecapabJe of assimilating znd applying to commercial uses imported technologywithout the managerial and marketing directions of Western firnm9. Similarlyin other industries, whenever a new technology product is developed by a'estern firm, the Japanese, a3 a rule, try to acquire pr.duction techniquesand to market the product themselves. Hence, so far as the transmigration ofmodern technology-based industries is concerned, basic production techniquesare first tran-ferred to Japar. from Western countries mostly under licensingagreements or in joint ventures dominated by Japanese interests (route A)and, after some period of time, these techniques are transplanted to otherAsian countries, with some modifications or in applied form, together withJaDanese capital and management (route B). 2/ In other words, what hasmigrated from Western countries to Japan is industrial technology , whereaswhat is now migrating to other Asian countries is mostly enterprises.

80. A d rect migration of Western industries to Asian countries (routeC) which also iniolves a "transfer of enterprises" rather than a "transfer oftechnology" is in no smail part motivated to counteract.rising Japanese exportcompetitiveness, whish they themselves have helped to foster -- indirectly --in the postwar period through route A.

cl. In addition co the migration of the labor-intensive portions oftechnology-based industrios which are generally characterized by short product-life cycles and short pay-off periods, there is also a migration of con entionalindustries with much longer -^oduzt-life cycles. In fact route B is dominatedby this tyne of migration as discussed in connectJon with the "1chasing-up"competition and Japan's "join them" strategy. Route C also covers the migration

1/ John E. Tilton, International Diffusion of Techno1ogy (Washington, D.C.Brookings Institution, 1971), pp. 136-139.

2/ Terutomo Ozawa, "Japan's Exports Technology to Asian LDCs", ColuwbiaJournal of World Business, Jan.-Feb., 1971, See alsc, TransfOero'Technology from Japan to eveloping Countries, op.cit.

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of conventional industries which are technologically mature and haverelatively well developed markets around the world. Conventional industries,once rnigrated, appear tc be more firmly implanted in the industrial soil ofthe host countries than the investments of highly ol'atile technology-basedindustries which are most2y wholly-foreign-ownod and controlled because oftechnological requirements.

82. Aside from the investment activities of manufacturing firms, bigdiversiified distributors, such as discount stores, and department stores,in advanced countries also play an important role in encouraging, and insome instances, actually creating, the migration of consumer goods industries.'-Then the merchandise they purchase in a particu;nr country starts to rise inprice or becomes unavailable, they usually seek other supply sources indifferent countries. If they cannot find suiftable suppli. rs, they may evenestablish new ones by providing product specifications and other necessaryassistance.l/ In general, however, the role of foreign distributors seemsto 'e less appreciated than foreign manufacturers by the developing ccantrieswhich definitely need production as well as marketing skills.

83. It is also important to stres!i that there are many cases oftransmigration of skills from one developing ccuntry to another. For example,Taiwan is very actively imparting skills relating to the agricultural andfood processing industries to other countriec. Overseas Chinese capitalinvestment is no doubt another important force in-luencing the pattern ofindustrial migration in Asia.

1/ Sears, Roebuck's activities in Latin America are a classic example.

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APPENDIX B. JAPAN'S T'ECHNICAL ASSISTANCE CONTRACTS IN TAIWTAN

84. Despite its small-scale manufacturing investmen, Japan surpassedlthe United States in .hie number of technical assistance contracts extendedto Taiwan in all indust.ries, as shown in Table B-i. 'This partiallyreflects the fact that Japanese firms have been more willing to selltechnology than to make large capital commitments in Taiwan.

Table 3-1

APPROVED TECHNICAL COOPERA'.ION PROJECTS BY IDI'TSTRY AND BY AREA1952-'970

Industry Japan United States Others Total

Food processing 16 3 --

Textiles 12 3 1 21Garments and footwear a 3 1 8Lumber and bamboo products 2 -- -- 2Pulp, paper and products 3 -- 6Plastic and rubber products 29 -- -- 29Leather and fur pr'oducts 1 -- -- 1Chemicals 67 11 1l 89Non-metallic minerals 22 -- 26Basic metals and metal products 57 6 b 67Machinery and instruments 5l) 10 79Electric and electronic

products 115 23 10 148Construction 4 -- -- 4Services 6 1 1 8Others 22 1 1 2h

TOTAL Ws9 73 39 531

Source: Industrial Development and Investment Center, The Repub1ic ofChina, Overseas Investment in the Republic of China, 1971.

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APPENDIX C

Table C-1

PROPORTION OF YOUNG-AGE POPULATION IN SELEC1ED ASIAN COUNTRIES

Year of (A) Total (B) 19 years B/ACountry Census Population Old and Under (Percentage)

Burma 1954 2,677,719 1,301,787 u8.6Cambodia 1962 ,728,771 3,013,535 53.1China (Taiwan) 1968 0j,073,671 7,298,638 54.2Hong Kong 1969 3,990,400 1,950,200 h8.9India 1970 550,376,000 284,038,000 51.6Indonesia 1965 97,634,000 50,350,000 51.6Japan 1969 102,608,000 34,309,000 33.4South Korea 1970 31,793,000 16,199,800 50.9West Malaysia 1968 9,030,236 4,925,779 54.6Pakistan 1961 90,282,674 47,617,446 52.7Philippinas 1968 35,883,000 20,609,000 57.43Singapore 1970 2,074,507 1,051,273 50.68Thailand 1960 26,257,916 13,818,635 52.63

Source: U.N. Demographic Yearbook, 1970.

Table 1. CUNMLATIVE VALUE OF JAPAN'S PRIVATE CAPITAL INVESTMENT: 1951-1969 /a

(in thousands of dollars)

North Central- South-EastAmerica South America Asia Europe Middle-East Africa Oceania Total

I. Manufacturing 160,153 248,910 232,684 15.441 2,768 20,456 41,092 721,506

a. Foods 1,817 6,441 27,195 5,514 --- ' ,734 2,350 45,052

b. Textiles 3,000 50,106 70,602 892 ___ 14,443 Fa3 139,895

c. Timber 4 Pulp 125,287 22 5,662 --- --- 2,568 133,539

d. Chemicals 9,890 5,605 15,085 1,444 -_- 1,419 720 34,163

e. Ferrous andNonferrous 870 63,758 31,468 16 --- 2,206 30,500 128,,i8

f. NonelectricalMachinery 2,678 37,423 8,843 2,208 --- --- 454 a1,606

g. ElectricalMSachinery 339 13,580 29,933 566 1,373 652 2,561 49,005

h. TransportEquipment 15,000 67,453 12,373 3,200 1,000 --- 656 99,682

i. Uthers 1,273 4,521 31,521 1,598 395 ___ 430 39,738

II. Agriculture & Forestry 3,841 5,600 34,971 494 --- --- 3,220 48,127

III. Fishing 1,990 7,645 4,302 115 143 1,310 3,259 18,764

IV. Mining 123,347 82,605 226,537 366 301,901 55,921 101,109 891,786

V. Construction 4,570 26,465 1,767 --- --- --- --- 32,801

VI. Commerce 226,304 13,994 11,309 22,961 46c. 141 7,490 322,662

VII. Banking & Insurance 89,641 64,472 64,479 8,945 934 201 1,120 229,791

VIII. Other 62,995 62,131 12,95 251,875 --- 182 656 390,S31

IX. Branch Offices 7,581 727 14,910 2,761 111 358 123 26,571

TOTAL 720,424 512,554 604,019 302,895 306,323 78,570 15S,070 2,6S2,S>4

/a On the basis of approval by the Japanese Government.

Source: Japan, Ministry of International Tradc and Industry, Keizaikyoryokii No Genjo lo Mondaiten (Tho Currenit

Status and Problems of Economic Coopcration), 1970, p. 150.

Table 2. JAPAN'S OVERSEAS MANUFACTURING INVESTMENT BY SMALL AND MEDIUM-SIZED ENTERPRISE(as of the end of September 1970)

AS IA

No.,-th Latin Hong MiddleAmerica America Total Taiwan S. Korea Kong Others Europe East Oceania Africa Total

A 48 127 804 325 59 54 367 31 8 26 42 1,086

(4.4%) (11.7) (74.0) (2.9) (0.7) (2.4) (3.9) (100)

9 14 303 152 29 23 100 2 2 5 11 346

B (2.6%) (4.0) (87.6) (0.6) (0.6) (1.4) (3.2) (100)

B/A (%) 18.7 11.0 37.6 46.7 48.1 42.6 27.2 6.4 25.0 19.2 26.2 31.9

A: The number of manufacturing investment projects approved by the Japanese Government.Figures in parenthesis indicate the regional distribution in percentage.

B: The number of approved manufacturing investment projects by small and medium.i-sized enterprises (i.e., enterpriseswith capital worth VS0 million or less). It also includes the number of joint ventures nadc by small and mccitLm-sized enterprises with large corporations. Figures in parenthesis indicate the regional distribution inpercentage.

Source: Adopted from Mlinistry of Small and Medium-Sized Enterprises, Japan, 1970 Chusho Kigyo Hakusho (1970 h7hito

Paper on Small and Medium-Sized Enterprises).

Table 3. OVERSEAS CHINESE3 AND FOREIGN INVESN1ENT .N -1AIWAN, 1952-1970

(in thousands of U. S. dollars)

Overseas Chinesc United States Japan Others Total

A B A B A B A B A B

1952 5 1,067 .-- 3 1,067

1953 12 1,654 1 1,881 1 160 1 50 14 3,695

1954 3 128 3 2,028 1 14 -_ ___ 8 2,220

1955 3 176 2 4,423 --- --- -- --- 5 4,599

1956 13 2,484 2 1,009 --- --- -- -i- 15 3,493

1957 10 1,574 1 11 3-- --- 14 1,622

1958 6 1,402 --- --- 3 1,116 -- --- 9 2,518

1959 -- 820 1 100 1 45 -- --- 2 965

1960 6 1,135 5 14,029 3 309 -- --- 14 15,473

1961 24 8,340 1 4,288 3 1,301 1 375 29 14,304

1962 10 1,660 8 738 16 2,664 2 141 36 5,203

1963 22 7,703 9 8,734 6 1,397 1 216 38 18,050

1964 28 8,007 7 10,196 2 728 4 916 41 19,847

1965 30 6,470 17 31,104 14 2,081 5 1,955 66 41,610

-1966 S1 8,377 is 17,711 35 2,447 2 746 103 29,281

1967 105 18,340 18 IS,714 76 15,947 13 7,005 212 57,00'-

1968 203 36,449 20 34,555 96 14,855 6 4,035 325 89,894

1969 90 27,499 30 27,862 75 17,379 6 36,697 201 109,43i,

1970 80 29,31 16 67,816 51 28.530 4 12.819 1S1 13S1.8s96

TOTAL 701 163,016 156 242,199 386 89,010 45 64,955 1,288 559,lsO

A = Approved number of projectsB = Approved value of investmentSource: Industrial Development & Investment Center, The Republic of China, Overseas Investment in the Rcpublic of

China, 1971.

Table 4. OVERSEAS CHINESE AND FOREIGN INVESTMENT BY INDUSTRY: 1952-1970(in thousands of U. S. dollars)

Overseas Chinesc United States Japan Others Total

A B A B A B A B A B

1. Agriculture & forestry 10 1,574 --- --- -- --- 10 1,574

2. Fishery 4 animal husbandry 16 3,051 3 428 --- -1 1,000 20 4,479

3. Mining 1 310 --- --- 1 73 -_ --- 2 383

4. Food processing 54 14,489 14 4,050 9 1.526 4 990 81 21,055

5. Textiles 32 13,359 1 1,743 22 7,276 -- --- 55 22,379

6. Garn:ents t footwoar 69 10,143 7 914 32 3,661 8 3,192 116 17,910

7. Lumiber & bamboo products 22 2,451 3 160 7 245 1 200 33 3,056

8.. Pulp paper 6 products 13 2,376 1 361 7 1,120 -- --- 21 3,857

9. Lcather 6 fur products 12 1,160 4 546 7 4S2 -- --- 23 2,15S8

10. Plastic 8 rubber products 54 5,203 7 2,024 38 4,919 S 214 104 12,360

11. Chemiicals 43 4,432 23 53,923 45 18,751 7 3,813 118 80,959

12. Non-metallic minorals 47 7,792 6 4,501 12 2,973 2 282 67 15,548

13. Basic metals 33 3,774 10 5,757 58 6,961 5 884 106 17,376

14. Machinery 8 instruments 12 3,163 9 2,900 23 5,118 4 4,4S4 48 15,665

IS. Electric & clectronic products 29 4,924 34 t35,173 93 31,527 6 49,499 162 221,123

16. Construetion 65 14,448 3 8,240 2 428 1 297 71 23,413

17. *Trade 28 1,900 2 570 --- --- -- --- 30 2,470

18. Banking 4 insurance 8 9,409 4 1,278 --- --- 12 10.686

19. Transportation 20 7,827 3 5,322 1 325 -- --- 24 13,474

20. Services 42 40,390 10 7,053 2 625 -- --- 54 48,063

21. Others 91 10,841 12 7,256 27 2,990 1 100 131 21,187

TOTAL 701 163,016 156 '42,199 386 89,010 45 64,955 1,288 SS".ISO

A a Approved nurber of projectsB = Approved valuc of .nvestmentSource: Industrial Development 4 Investment Center, The Republic of China, Overseas Investment in the Rcpublic of China, 1971.

Table S. RATIOS OF JOB OFFERS TO JOB SEEKERS BY AGE GROUP IN JAPAN

(percentage)

19 and 56 andYear under 20-25 26-30 31-35 36-40 41-50 51-55 over

1965 157 S9 63 63 57 47 12 05

1966 200 92 107 106 101 80 20 08

1967 257 110 143 156 158 107 38 12

1968 311 115 153 177 169 119 48 15

1969 452 142 195 219 207 142 58 17

1970 506 131 183 214 194 131 57 15

Source: Japanese Economic Planning Agency, Economic Survey of Japan (1970-1971)

Table 6. LABOR FORCE BY AGE GROUP IN JAPAN

Age Group 1955 1960 1965 1970

1S - 19 5,230 12.4 4,530 9.9 4,050 8.4 2,950 5.7

20 - 29 11,870 26.2 13,180 27.4 14,600 28.220,210 47.8

30 - 39 10,620 23.4 11,860 *24.6 12,400 23.9

40 - 64 14,740 34.8 16,020 35.3 1(,800 34.9 19,450 37.6

65 and over 2,120 5.1 2,320 5.1 2,290 4.6 2,300 4.4

Total 42,300 (100.0) 45,360 (100.0) 48,180 (100.0) 51,700 (100.0)

Source: Japan Economic Planning Agency, Economic Survey of Japan (1970-71).

TabS 7. HIGH SCHOOL GRADUATES ENTFRING THE LAEOR FORCM IN JAPAN

Junior High School Senior High School

B C 4 B0'4O persons per cent 000 per3oRs per sent

1960 1,770 683 38.6 934 573 61.3

1965 2,360 625 26.5 1,160 700 60.3

1966 2,134 523 24.5 1,537 903 57.9

1967 1,947 446 22.9 1,603 941 58.7

1968 1,847 386 20.9 1,601 947 58.9

1J69 1,737 324 18.7 1,497 SS' 58.9

Notes: A = The number of school graduates

B = The number of school graduates entering employment

C = B/A

Source: Japan Economic Planning Agency, 1971-Keizai Yohran (1971 Mar.ualcn Economic Statistics). The originaltdata are from the Minis-try of Education.

Table 8. LABOR FORCE BY AGE GROUP IN TAIWAN

(as of October, 1968)

Age Group Laoor Force (1,000) Percentage

is - 19 788 18.3:

20 - 29 992 23.0

30 - 39 1,128 26.2

40 - 64 1,367 31.7

65 32 0.8

TOTAL 4,307 100.0

Source: Japan Chamber of Commerce, Taiwan no Rohdoh Jijohto Kogyoyohchi no Genj (Present Concticars of

Labor and ln rial Land in Ti"iwan), No. 4, 1969.

Table 9. APPROVED INVESTMENT BY KEPZ BY NAT:IO ALITY /a

Number cf Approved Value ofProjects Approved Investment

Taiwan 40 $ 5,368,150

Overseas Chinese 29 5,852,439

Foreign Nationals 55 19,835,419a. Japan 41 9,502,600b. United States 10 7,249,429c. United Kingdow 2 750,940d. Holland 1 2,150,000e. Others 1 170,000

Joint Ventures 42 6,294,211a. Taiwan-Japan 20 2,100,551b. Taiwan-Overseas Chinese 6 1,026,250c. Taiwan-U. S. 6 1,210.841d. Others 10 1,956,569

TOTAL 166 37,350,129

/A A, of the end of January, 1970.

Source: Administration of the Republic of China.

Table 10. EXPORT ORIENTATION OF JAPAN'SINVESlTE;iT IN TAIWAN

Export Orientation

Investments /a Greater Lessmade during 100% than 50% than 50% No export Total

1953 - 1965 1 3 7 1' 23

1966 - 1969 37 10 12 12 71

38 13 19 24 94

/a The number of investments is t-. imnuer of those Japanese affiliatedcompanies which responded to a suri;, conducrted by the Taipo_ officeof Japan Chamber of Commerce in Septenrber, 1969.

Source: Japan Chamber of Commerce, Kaigai Kigyo to Gijitsu (Oversea_Enterprise and Technology), No. 2, 1970.

Table U. JAPANESE INVESTMENT IN SINGApORE /a(as of March 31, 1970)

A. Number of VentL_:es by Industrf

1. Manufacturing 44

a. Food processIng 1

b. Textiles 7

c. Timber & pulp 1

d. Chemicals 10

e. Metal products,ferrous andnonferrous 7

f. Nonelectricmachinery 2

g. Electricmachinery 2

h. Transportmachinery 3

i. Other 11

II. Nonmanufacturing 9

TOTAL 53

B. Value of Investuent

Equity investhient $15,780,000 (53 projects)

Loem.s 6,245,CoO ( 4 cases)

Branch Investment 1,684,000 (21 cases)

TOTAL $21,709,000

/a On the basis of approval hy the Japanese Government.

Source: Japan, Ministry of International Trade and Industry,Keizai Kyoryoku no Genjo.to Mondaiten (The CurrentSitus and Probiem of Ecoromic C--:ooperation), 1970.

Table 12.La JAPAN'S PREFERENTIAL TARIFF .51L5

BTNJ Tariff Conditions forClassification No. of Items Reduction Ceilin Enforcement

1-24(agricultural 20-100%

processed 59 of the present Application ofproducts) "positivF items" leivel none escape clause

780 No tariffs 10% of the If a certain developing1 . nation accounts for 50.25-99 * 50% of tmports in percent of the import5-9 57 theebasesyearceiling, Japan will(uazr.ifacturing "sensitive items" le v e l (1968) stop iving prefereitial

prn ucts) treatments to thatprooucts 10 country (applicable to"exceptional" all import commodities)

items present level

/;Adopted, with modifications, from a table shown in "Foreign Trade: Preferc.-i :. Tar fss Inaugurated,"The Oriental Economist, September 1971, p. 36.