Introduction

A natural sequence to the analysis of bunching in FDI among Japanese firms in Chapter 6 is the analysis of oligopolistic rivalry among Japanese firms and their foreign rivals in cross-market FDI. Although the Knickerbocker hypothesis suggests oligopolistic interactions among the firms domiciled in the same country, international oligopolists may interact with each other across international boundaries. Several pioneering studies on the incidence and behavior of the MNE pointed out that the local firm is often motivated to invest in the home market of the foreign firm to defend the local firm's home market from competition injected by the foreign firm (Hymer, 1960; Kindleberger, 1969; Caves, 1971; Wilkins, 1974; Vernon, 1977). This notion of defensive FDI was strongly associated with the rapid expansion of foreign direct investment by European firms in the United States during the late 1960s and 1970s (Franko, 1976). Graham (1978) first tested the hypothesis of retaliatory defensive FDI by using time-series data on European investment for a cross-section of U.S. manufacturing industries and provided some evidence that supports this hypothesis. He argued that when the foreign firm enters into the home market of the local firms, a disruption in stable environment occurs in a local oligopoly. This will subsequently stimulate rivalry among the local firms and the foreign entrant, and the local firms would consider an option of entering the home market of the foreign firm for retaliation and defense.