Question from Student:

Were MNCs seen as apolitical until the 1970s or did their motives begin to show through in the late 1960s?

Because the literature on MNCs has always been influenced strongly by economic theories–and liberal theories in particular–observers were slow to wake to the political significance of these relatively new actors. This has been a two part problem: 1. politics in the era in question were understood in narrow, essentially Realist terms, privileging activities by and for states and thus downplaying the significance of nonstate actors; 2. politics was divorced from anything other than traditional conceptions of power, meaning that concepts like wealth were ignored (or left to economics) and that MNCs were noticed only when they threatened, or acted like, states. MNC motives and behaviour do change and evolve over time. Extractive firms, for example, are more overtly political in the traditional sense, and such firms still routinely find themselves in the spotlight of critics, but do not dominate markets the way they did in the 1950s and 1960s. But it is not that MNCs suddenly became more political after the 1970s so much as the way politics was understood evolved. Susan Strange was one of the few writers of the period to understand that MNCs were always deeply political. The rest of the field is still catching up.

Question from Student:

I was wondering if we are expected to know about the last lecture on Japan because we didn’t cover this in class

The short answer is yes, because you have my lecture slides in lieu of a lecture under the Course Materials tab in this blog. But let me emphasize some key points here.

The Japanese experience with MNCs is highly distinctive both in terms of Japan’s status as a “host” and “home” for FDI. Briefly, Japan post World War II was a very reluctant host for inward foreign direct investment (IFDI), much to the dismay of many countries but especially the US. This reality, combined with Japan’s aggressive pursuit of a bundle of neomercantilist policies in support of its own trade and MNCs led to strains in its relationship with Washington by the 1980s, tensions that only began to subside with Japanese capital liberalization initiatives in the 1990s. The optics were bad: Japan saying no to US FDI, while Japanese MNCs made major inroads into the US market (the 1980s saw a six-fold increase in Japanese FDI).

Predictably, politicians looked to put pressure on Japan to change (in Japan, this was called “giatsu,” which translates into external pressure). The problem with this approach, however, is its failure to recognize that Japan was trying to cooperate with the US, but constrained by the distinctive history and culture of its industries & business. Sometimes nicknamed “Japan Inc.,” economic activity in Japan is oriented toward the interest and logic of producers and not, as in the US, the interest and logic of consumers. Only restructuring the state as a whole could yield reforms, which arguably eventually began to occur in the 1990s and continues to unfold. In other words, made-in-America policies and theories do not work well for Japanese policy, or the behaviour of its MNCs.

After its defeat in World War II, the Japanese state was under an occupation government led by General Douglas MacArthur (Supreme Command of Allied Powers) who undertook widespread military, political, economic, and social reforms. A core part of the effort to transform the economy into a free market capitalist system involved an attempt to break up the large Japanese business conglomerates called zaibatsu. The effort ultimately failed with zaibatsu reconstituting as keiretsu, as decentralized network organization of monolithic conglomerates unique to Japan. While no longer based in kinship ties, Japanese business remains a closed network that privileges insiders and keeps “outsiders” at bay. Unlike their counterparts in Korea called chaebols, loyalty in a keiretsu based strictly on business.

A keiretsu might consist of 30 or so companies spanning a wide range of industries interconnected to benefit each other (food companies, automotive manufactures, movie studios, camera makers, mining companies, real estate, pharmaceuticals, breweries, distilleries, ironworks, railways, shipping lines, retail stores, nuclear power plants, textiles makers, television broadcasters, computer parts, life insurance…. you get the point!). Such arrangements are alien to American business culture, illegal under US antitrust law, and have been core obstacles to free trade and friendly relations between the US and Japan.

There are two basic types of Keiretsu: 1. vertical keiretsu organized around a parent manufacturer (e.g. Toyota Group) and; 2. horizontal keiretsu that revolve around a central bank instead of a parent company cross-shareholding with the other companies. (note: there is a bank in all keiretsu but it is only in horizontal keiretsu that the bank owns pieces of the companies and the companies that hold pieces of it).

The interlinked nature of Japanese industry confers great advantages on component companies, many of whom are small to medium sized companies that could not have gone abroad as MNCs without being subsidized by the web liked linkages of a Keiretsu system in which one owns a piece of ones supplier, and ones supplier owns a piece of oneself. The mutually beneficial nature of this relationship is reinforced at the state level, and actively encouraged by the recently restructured, massive Japanese central bureaucracy of the Ministry of International Trade and Industry (MITI). MITI has presided over a full blown Japanese industrial policy in the post World War II period, at the core of which is a highly organized strategy of import substitution industrialization. Simply put, the Japanese state has been deeply involved in the “miracle” of Japanese postwar recovery, something that was made possible by the US occupation government’s pragmatic shift away from reform and toward recovery in the reality that containing Soviet communism was priority one by the 1950s, and Japan was seen as a key part of that effort. As a result, the were allowed to emerge Keiretsu from the remains of the zaibatsu, and—until the Cold War ended—Japanese neomercantilism was more or less tolerated.