Introduction

One of the major economic developments that emerged in Europe during the late 1980s is the sudden growth of Japanese direct investment into the European markets. While Japanese direct investment has grown most spectacularly in the United States during the 1980s, its growth in Europe is equally notable particularly after 1987. The flow of Japanese direct investment into European manufacturing surged from $323 million in 1985 to $852 million in 1987 and further increased to $1,548 million in 1988. Indeed, the investment flow of 1987 and 1988 alone accounted for approximately half of the cumulative flow of Japanese direct investment into Europe between 1965 and 1988.

Just as the growing presence of Japanese direct investment in the United States has generated debates regarding its impact on the US economy, the sudden increase in Japanese direct investment into Europe has sparked policy discussions over its influence on European trade and industry. One of the fundamental questions that is raised by these policy discussions within the European Community (EC) is whether the issue of Japanese direct investment should be considered from the perspective of each member state or from the EC-wide perspective (Stopford, 1990, and Micossi and Viesti, 1991). Despite the importance of this issue that constitutes a reference point for the formulation of a common EC-wide policy towards foreign direct investment, there is a scarcity of systematic analysis of the data that guides the discussion (Dunning and Cantwell, 1989).

Introduction

The completion of the internal market targeted for 1992 has stimulated considerable interest in the corporate strategies that will be developed by corporations to cope with the demands and opportunities presented by the emerging European economy. Since the publication of the White Paper on completing the internal market (CEC, 1985), the Commission has been enthusiastic about the role of external strategies such as joint venture and merger in stimulating and reinforcing the effective operation of the completed market. Elsewhere (Kay, 1991) we have argued that the Commission's view that 1992 will directly stimulate industrial activity such as joint venture is misplaced. In this chapter we consider the parallel question of merger in the context of 1992 and conclude that there is serious cause for concern that the acceleration of the rate of cross-frontier merger activity may be to the detriment of the completed market and may reduce both competition and efficiency.

In this chapter we shall argue that the Commission has adopted too permissive an attitude towards European merger and acquisition activity and that there is a real danger that the emerging Europe-wide merger wave may sacrifice some of the gains in productive efficiency and consumer welfare that 1992 is intended to generate. The Commission's policy proposals are dependent on an obsolete theoretical framework, and it recognises but neglects clear and consistent evidence on merger failure.

Introduction

The purpose of this chapter is to consider the prospects for prosperity and the convergence of economic performance in the European Community (EC). The question of real and nominal convergence has been central to the EC since its formation but has been reiterated recently in both the discussion on 1992 and the gains from the completion of the internal market, and the debate on European Monetary Union. A key question surrounds the distribution of the gains. In order for there to be real convergence of per capita incomes across member states, the benefits of the internal market in terms of higher growth and higher productivity must be positively weighted towards the less prosperous countries (EUR 4: Greece, Ireland, Portugal and Spain). This paper is concerned with the theoretical and empirical conditions that must be met in order to guarantee the convergence of real per capita incomes.

The chapter is structured as follows. Section 9.2 outlines the recent historical record on economic performance and the convergence of real per capita incomes across member countries. Section 9.3 provides a theoretical discussion of the necessary conditions for the convergence to equilibrium characterised by the equality of factor returns across countries. In the light of these conditions the following section considers the empirical prospects for growth and convergence in the EC. It is shown that in respect of two of the four poorer countries of the Community, divergence of per capita incomes away from the EC average is the most likely outcome in the next few years.

Introduction

In this chapter we address a number of issues pertinent to the internationalisation of the economy, related corporate strategies and in particular the extent to which (international) strategic technology alliances are applied by companies from Europe, Japan and the USA. In order to achieve a better understanding of the international setting of strategic technology alliances we will first broaden the picture of our analysis before we come to the main question of our present contribution, i.e., to what extent European companies differ from their major competitors in their strategic technology partnering behaviour as a major force in corporate internationalisation strategies. In that context we will understand strategic technology partnerships as those inter-firm agreements aimed at the long-term perspective of the product-market position of at least one partner through a joint effort of which common innovative activities are at least part of the agreement.

In the next section we will consider the general background for the issue of internationalisation through a brief discussion of key aspects of phenomena such as the international catching-up strategies of Europe and Japan after the Second World War through foreign direct investment, the changes in international trade, the transformations in the international market structure and the internationalisation of technology flows. Section 3 presents some descriptive information on general trends in strategic technology alliances during the eighties and the sectoral breakdown of these agreements and in section 4 we will analyse trends in the internationalisation of strategic technology partnering.

Introduction

In recent years there has been mounting interest in foreign direct investments (FDI) and in cross-border agreements between firms. In view of the completion of the European market, external corporate strategies have attracted attention because of their possible effects in terms of competition and competitiveness, both intra-EC and vis-à-vis the USA and Japan. In this respect, the EC Commission has adopted a basically favourable attitude towards mergers and agreements in most industries.

In this chapter an attempt is made to examine, in the case of Italy, how the main features of the process of internationalisation of production towards OECD countries are in some ways related to the issues of competition and competitiveness. The analysis focuses on possible diversity within controlling holdings and the so-called new forms of international involvement (i.e., joint ventures, minority interests and agreements), in that this diversity possibly displays different outcomes in terms of competition and competitiveness. In fact the choice of the ownership structure of the foreign investment relates in a different way to firm, industry and country characteristics which in turn are linked to various market failures and imperfections. We consider that a focus on non-controlling interests (NCI) may contribute to understanding whether the choice of these forms of ownership is unconstrained or not and therefore if they are a ‘last resort’ strategy for companies that, in servicing foreign markets, face hurdles of different kinds and cannot take control of foreign subsidiaries.

Introduction

Technology is among the determinants of economic competitiveness. It affects a country's performance in several and complex ways, including the degree of research intensity of the economy, the cumulative nature of technological knowledge, the differentiated patterns of sectoral activities, and the characteristics of the national system of innovation. In this chapter, two related topics are addressed: (i) the similarities and differences between the sectoral strengths and weaknesses of national technological activities; (ii) the presence and specialisation of each country in the fields where innovation is more rapid. These issues are addressed using empirical evidence based on patent data at the sectoral level. The next section considers the importance of the specific aspects of national systems of innovation in the context of the increasing globalisation of technological activities. Section 3 describes the distribution of, and the changes in, the technological activities within the OECD area, using as indicators R&D spending and patenting. In section 4 the similarities and differences among the profiles of technological specialisation of advanced countries are examined, developing a measure of ‘technological distance’. In section 5 the rates of growth of total patents in the USA in each class are considered as an indicator of the pace of innovation and of international competition in new fields; the activities of each country in such classes are then mapped, showing how the pattern of national specialisation relates to the sectoral trends of world innovation.

Introduction

That the notion of industrial policy as a mechanism for promoting international competitiveness has enjoyed considerable attention in both the popular press and academic circles is hardly surprising. Along with the increased globalisation of markets has come an increased consciousness about the manner in which market structure and firm conduct is inextricably linked with performance, not only in domestic markets, but also internationally (Caves, 1989; Hughes, 1986 and 1991a).

While the relationship between various instruments of industrial policy and the subsequent impact on international competitiveness has been the focus of research for the most developed nations, such as the United States (Tyson and Zysman, 1983; Baldwin, 1988), the Federal Republic of Germany (Stille, 1990), and Japan (Audretsch, 1988), as well as for Europe as a whole (Geroski, 1990; Neumann, 1990), the case of Eastern Europe remains largely unexplored. In fact, because of the extent of planning and control that was implemented throughout the Eastern European countries, they provide an important example for evaluating the success of certain types of industrial policies. Thus, the purpose of this chapter is to describe the manner in which industrial policies influenced the industrial structure in Eastern Europe during the 1980s and to examine the impact these policies had on the area's subsequent competitiveness in international markets. Based on the economic results from four decades of Eastern European industrial policy, several broad suggestions for the appropriate stance of industrial policy in the newly reformed economies are provided.

Introduction

This chapter analyses the relative international competitiveness of the largest four EC economies compared with their two largest advanced competitors – the USA and Japan. It focuses on international trade performance in manufacturing industry in the period 1980 to 1987. This time scale allows us to assess both levels of relative competitiveness and trends in competitiveness. The chapter aims to provide, firstly, a descriptive analysis of these six economies' trade performance, addressing questions as to the similarity or otherwise of their trade structures, the degree of convergence or divergence in these structures, the patterns of competitiveness and specialisation, and secondly, an econometric analysis aimed at identifying the determinants of the performance of the European economies relative to the USA and Japan.

The analysis also addresses the fairly widely held view, expressed in particular by the European Commission (EC), that the European economies must improve their competitiveness vis-à-vis the USA and Japan and reverse the relative weakening of their competitive position – the ‘eurosclerosis’ – of the 1980s. The completion of the internal market in 1992 and a focus on high technology are seen as two central routes whereby the European economies can become more competitive. In this chapter we consider the basis for this view by analysing the competitiveness of these six largest OECD economies both to assess the nature of their relative competitive positions and to identify what are the key determinants of their relative competitive performance.

Introduction

Most economists probably pay lip service to Weber's thesis in Protestantism and the Spirit of Capitalism and so acknowledge that culture plays some general role in economic performance. However, few economists take the point on board in their own work (Casson, 1991 is a recent rare exception). There may be bar-talk which allows for what has not been explained about say, poor British competitiveness to turn on the British stereotypical ‘bloody-mindedness’. But culture is conspicuous through its absence when it comes to the more serious business of journal-talk. The contrast with management and business studies, where corporate cultures are increasingly included among the prime determinants of business success, could not be more marked (see, for instance, Peters and Waterman, 1982).

This chapter argues that economics needs to follow management and business studies: it needs to recover the intuitions licensed in the bar and grant culture an important role in explaining economic performance. In particular, it will be argued that culture influences performance in a way that affects both the short and long run competitiveness of an economy.

To suggest to economists that they should ‘follow business and management studies’ is, perhaps, not the best way to start the argument. Economists tend to jibe that management and business studies ‘lack a robust theoretical backbone: they are too descriptive’. (Of course, the taunt is typically reciprocated by management and business studies: for them, economics is excessively driven by ‘unrealistic’ theory.)

Introduction

O. E. Williamson has convincingly argued that the organisation of firms should be taken into consideration to explain Japanese and American economic performance (Williamson, 1985). Recent advances in the theory of the firm have also emphasised the role of a number of factors in competitiveness. The presence of these factors is supposed to explain why plant and equipment earn more profits if they are owned by one corporation rather than by another. These factors include particular technological skills, complementary assets and efficient routines (Dosi et al., 1991). It can be argued that the corporate control and its efficiency are central features of organisation and are skills which analysis of competitiveness must take into account.

The protection that surrounded domestic capital markets and the control of foreign investment flows have given specific characteristics to corporate control in the individual European countries. West Germany and France, to quote but two countries, present marked contrasts. The superior postwar performance of German firms has often been attributed to the close relation between banks and industry (Cable, 1985). In France, the existence of ‘groups’ of firms, connecting non-financial and financial companies and benefiting from administrative influences, has given rise to industrial achievement, but has been accused of having weakened smaller businesses (LEREP, 1987).

The aim of this chapter is to analyse the role of corporate control as an intermediation between ownership and management.

Introduction

In a world of increasing interdependency and liberalisation of markets there is naturally a growing concern about the competitiveness and performance of enterprises and national economies. The expansion of the public sector and in particular public services is a prominent candidate among the many possible reasons why competitiveness may deteriorate. The dominant view is that the evolutionary process from the ‘night watchman’ to the welfare state has gone too far. For example, it is argued:

that too many public services are provided due to the lack of costconsciousness among consumers;

that the vested interests of public bureaucracies and the lack of economic incentives for public employees (who do not have to fear unemployment) impede productivity growth;

that public services displace private services;

that the costs of financing public services crowd out private investment.

This list is certainly not exhaustive, yet it leads to the crucial question:

Are states with larger public sectors and a high level of public services at a competitive disadvantage? A survey of this relatively neglected theme in comparative research seems to be extremely interesting, especially in view of the large public service sector in European Community states. Given the breadth and complexity of the issue, our aim in this chapter can only be to present an overview of principal issues and to survey available data and evidence on the role of public services in competitiveness, identifying gaps in existing knowledge and research needs.