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After a decade of Eurosclerosis the EC is moving with renewed economic growth and increasing multinational investment toward a single European market under the heading "Project 1992". The creation of a single EC market creates dynamic adjustment needs and opens up new opportunities for international business in a period of intensified global competition and dramatic politico-economic changes. Since the mid-1980s Eastern Europe is undergoing a radical shift towards market-based economic systems -a difficult and fragile development so far which is further complicated by economic and political unification of Germany in central Europe. After the era of British and, later, U. S. leadership in multinational investment German and Japanese multinational companies are becoming more influential players worldwide. Firms from Germany playa special role because German unification of 1990 implies a bigger home market, but also the diversion of total investment activities towards the greater German home market. While the political divide of Europe has ceased to exist, the economic division is becoming more apparent, and it could indeed transitorily increase because the EC 1992 project primarily generates growth impulses in Western Europe, while systemic transformations in Eastern Europe reduce output growth in the short term.





The economic and political map of Europe will be dramatically altered by events recently witnessed and by projects soon to be completed. Economic boundaries on the map of the “new” Europe will be more faint as the removal of barriers to trade and factor movements approaches its scheduled completion in 1992. The economic map of the “new” Europe must also include many new countries in the wake of the political events of 1989. The challenge to economic researchers and policymakers is to help draw and understand this new economic and political landscape as well as to study its effects on the rest of the world.
Michael W. Klein, Paul J. J. Welfens

Theoretical and Empirical Issues


A. Internationalization of Production, Investment and European Integration: Free Trade in Goods, Technology and Assets?

Since the second half of the 1980s European developments have generated prime impulses for changes in the world economy and the international economic system. Indeed with the EC 1992 program to create a single market and the unification of Germany on the one hand, and, on the other hand, the opening up of the former centrally planned economies (CPEs) in Eastern Europe a new Europe is emerging.
Paul J. J. Welfens

Comments On: Internationalization of Production, Investment and European Integration

Paul Welfens’ paper successfully tackles a number of the most important questions relating to the internationalization of production and investment, coincidental with the integration of the European economy. It is solidly rooted in the most important historical and recent economic literature and thus provides an up-to-date source for understanding mainstream economic consensus in these areas.
Claude Barfield

B. Multinationals and Pricing to Market Behavior

The amplitude and frequency of fluctuations in currency values since the early 1970s have complicated the pricing decisions of firms exporting to foreign markets. The recent behavior of the dollar vis-à-vis the Deutschemark illustrates the point quite dramatically. In early 1985 the dollar traded at roughly 3.4 DM. By 1987 it had fallen to about 1.7 DM. If German firms exporting to the U.S. market had held DM prices of their goods constant over this period, the dollar price paid by U.S. importers would have doubled in a span of two years. Nearly all of this change would represent relative price change, since the inflation rate in the U.S. was under 5% per year at the time.
Michael M. Knetter

Comments On: Multinationals and Pricing to Market Behavior

Knetter uses an ingenious strategy of having period dummies which capture common effects and country dummies which capture institutional effects so that what remains is a coefficient which captures the country specific exchange rate effects of pricing to market. The idea is that the effects of exchange rates on marginal costs have already been controlled through the common factor in the regression so that what remains are the effects of exchange rates that operate via import demand.
Robert Lawrence

C. Foreign Direct Investment Outflow from the United States: An Empirical Assessment

The correlation between real exchange rates and foreign direct investment (FDI) has encouraged researchers to examine possible macroeconomic motivations for FDI. Previous research has provided empirical support for the exchange rate influencing FDI through its effect on relative wages (Cushman, 1985, 1987; Culem, 1988) and through its effect on relative wealth (Froot and Stein, 1989; Klein and Rosengren 1990). Klein and Rosengren (1990) find evidence that relative wealth rather than relative ages seems to best explain FDI into the United States. If relative wealth is an important determinant of FDI we should find evidence in both inward and outward FDI. This paper tests the relative wage and the relative wealth hypothesis on outward FDI data and concludes that as with inward FDI, there is greater support for the relative wealth hypothesis.
Michael W. Klein, Eric Rosengren

Comments On: Foreign Direct Investment Outflow from the United States: An Empirical Assessment

Drs. Klein and Rosengren’s paper is an extension of work that they did to test the hypothesis of Froot and Stein that correlations between exchange rate changes and foreign direct investment flows into the United States can be accounted for by wealth effects induced by exchange rate changes. They found that such wealth effects are significant in explaining these inflows.
Edward M. Graham

D. Technology-Based Trade and Multinationals’ Investment in Europe: Structural Change and Competition in Schumpeterian Goods

The patterns of international trade between developed and less developed countries are rapidly changing. Especially in high-tech industries, industrial countries are facing intensified competition from abroad, in particular from newly industrializing countries of South-East Asia. The production and export of modern consumer electronics, data processing equipment and sophisticated textiles are no longer an exclusive domain of rich and research-intensive countries (Figure 1).
Henning Klodt

Comments On: Technology-Based Trade and Multinationals’ Investment in Europe: Structural Change and Competition in Schumpeterian Goods

1. This paper addresses an important issue, namely, the rise of newly industrializing countries’ share in world exports of relatively sophisticated (non-standardized) goods, and the inability of traditional models of innovation and trade in accounting for this phenomena. In particular, the composition of these countries’ exports seems to contradict Vernon’s well-known and seminal product cycle story and the conclusions of a rigid technological and trade pecking order derived from both Vernon’s concept and the more formal models which it inspired.
Claudio R. Frischtak

Multinationals in Action


E. Foreign Direct Investments in Reforming CMEA Countries: Facts, Lessons and Perspectives

In recent years, foreign direct investment (FDI) has become the basic avenue of globalization of the international economy. Between 1983 and 1988 FDI worldwide rose by more than 20 percent annually, four times faster than world trade that had been considered for a long time as the basic engine of growth. After two decades of sometimes emotionally loaded discussions and controversial host country policies towards FDI, its contribution to growth, employment, structural change, technological modernization, exports and general economic performance has been widely acknowledged. The overwhelmingly positive attitude of a number of national economies vis-a-vis FDI is a convincing proof of the fundamental changes taking place in the assessment of this vital factor of production. At the same time, the response by FDI to various legal, institutional, economic and political conditions established by potential capital-importing countries is a reliable mirror of how the present and prospective performance of different countries is viewed on the international scale.
Andras Inotai

Comments: Multinational Corporations in the Eastern European Economic Transition

The most important single fact to be noted in discussing the present role of multinational corporations in Eastern Europe (in which I include the Soviet Union) is the insignificance of the activities of these corporations. Full acceptance of multinational activity has come only very recently in this region, of course. For example, the possibility of 100% ownership by foreign companies appeared only in the year of revolutions, 1989, and even then not by every country. Despite this possibility, there is enough equivocation in present legislation and ambivalence of attitude amongst Eastern European politicians that it might be many years before the officials of Western corporations come to believe that Eastern Europe welcomes and protects their investments as much as does, for example, Turkey, Portugal, or Greece.
Peter Murrell

F. German Multinationals in Europe: Patterns and Perspectives

Rising levels of interdependence both economically and politically among the world’s nations have especially since World War n characterized worldwide economic developments. This continuous interdependence is reflected in the phenomenon of multinational enterprises (MNEs) which have come to be one of the most significant integrated strategies for firms to internationalize. This internationalization process has intensified in the 1970s and 1980s when Japanese firms joined the ranks of international investors.1 German firms have responded to this challenge and reinforced FDI in traditional areas of strength.2
Günter Heiduk, Ulrike W. Hodges

Comments On: German Multinationals in Europe: Patterns and Perspectives

Dr. Heiduk has given us a very illuminating and useful paper. It provides excellent empirical support to impressions many of us have held about trends in foreign direct investment by the larger German firms. In my comments on his work, I will be speaking for myself and not for my company.
Anthony Wallace

G. The Effects of Integration on the Structure of Multinational Corporation Activity in the EC

EC industries may be affected in two major ways by the adjustments which multinational corporations (MNCs) make to their operations in response to regional economic integration. Firstly, there is the impact made by “new entrants”, i.e. MNCs based outside the EC which establish new production outlets in EC countries to maintain and improve upon their position in Community markets. Secondly, there is the reorganization of existing MNC activity within the EC, associated with a rationalization of the European networks of MNCs. This paper examines these two issues, with particular reference to the impact of the first phase of integration in the EC on the technological strengths of different MNCs and national industries.
John Cantwell

Comments On: The Effects of Integration on the Structure of Multinational Corporation Activity in the EC

Professor Cantwell has written an impressive paper on the prospects of MNC activity in the European Community in anticipation of and resulting from the completion of the framework for the “internal market” in 1992.
Werner Hasenberg

H. Japanese Multinationals in Europe and the United States: Some Comparisons and Contrasts

Ten years ago, a comparison of the foreign direct investment (fdi) activities of Japanese multinational enterprises (MNEs) in the United States and Western Europe would have appeared somewhat misdirected, if not completely irrelevant: Japan’s export successes, rather than its overseas investments, were far more important indicators of Japan’s growing international competitiveness. Since the late 1980s, however, trade has taken a back seat to fdi as a key indicator of Japan’s increasing involvement in the world economy. The rapidity with which this shift is occurring is remarkable, even as the context against which it is taking place is undergoing unprecedented change.
Michelle Gittelman, John H. Dunning

Comments On: Japanese Multinationals in Europe and the United States: Some Comparisons and Contrasts

The theme of the Dunning/Gittelman paper can be summarized as follows: The competitive advantages of Japanese corporations (O-advantages) in the global market have been built largely within the confines of their national environment (L-advantages at home). Their overseas investments so far have been either of the resource-seeking or of the market-seeking type, all intended to support the continuous upgrading of their export industries. In other words, their competitive base has long been confined to their own economy; exporting has been the main vehicle of exploiting their O-advantages. Yet the very success of Japan’s economic development and the sharp appreciation of the yen are now changing Japan’s industrial landscape. To protect existing share in their export markets, particularly, in the United States and Europe where trade friction is frequent, Japan’s star export industries, notably automobiles, electronics goods, and machinery, are forced to transplant their manufacturing systems overseas.
Terutomo Ozawa


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