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A Cheap Buck Won't Work

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When President Clinton's long-awaited Japan trade policy is announced in the next few weeks, officials likely will stress import targets for supercomputers, auto parts, financial services, and other industries to curb Japan's $50 billion trade surplus with the U. S. But a potentially more potent remedymore foreign investment in Japanprobably will get only passing notice.

That could be a mistake. On both sides of the Pacific, evidence is mounting that the country that builds abroad wins the markets. By that measure, Japan is the winner. "The root of trade is investment," says William Attridge, chairman of the American Chamber of Commerce in Japan's investment committee.

FEW OUTSIDERS. Foreigners' investment record in Japan is dismal. Japan is the world's second-largest economy, but it "has the lowest level of per capita foreign direct investment and foreign corporate participation in the industrialized world," charges the House Wednesday Group, a congressional Republican caucus. Meanwhile, from Toyota Motor Corp.'s car plant in Kentucky to NEC Corp.'s computer factory in Massachusetts, Japan has invested billions to produce goods in the U. S. Purchases by the factories of everything from machine tools to spare parts have bolstered Japanese exports as the yen has strengthened. The Commerce Dept. says that 73% of Japanese imports into the U. S. go through plants and distribution networks owned by Japanese.

The same should be true for Japan. But it isn't. In his 1992

book, Rivals Beyond Trade, Harvard business school professor Dennis J. Encarnation asserted that 65% of America's exports since 1957 have gone from U. S.-based companies to overseas operations. He also found foreign-owned businesses in Japan and the U. S. import more from parents than they buy locally. "Trade is tightly linked to investment," says Encarnation. "Ownership matters." That's in contrast to Labor Secretary Robert B. Reich, who is more concerned with jobs.

Outside such early entrants as IBM and Texas Instruments Inc., few U. S. corporations seem to be able to get a leg up in Japan. Among the few U. S. companies that are cashing in is Compaq Computer Corp. Since last July, Compaq has put $4 million in capital into a Japanese subsidiary. That move allowed Compaq to come from nowhere in the Japanese PC market to a share of nearly 1%, worth about $40 million a year.

Compaq imports computers from its factories in Singapore and the U. S. Toys 'R' Us Inc. is another example of investment paying off. Over the last year, it built six stores in Japan that are drumming up an estimated $100 million in annual sales. "We're the conduit for toy manufacturers in the U. S. and all over the world to enter Japan," says Vice-Chairman Robert C. Nakasone.

But these companies are rare exceptions. Most foreign companies don't invest in Japan because it costs too much. Japanese land prices are the stuff of legend. A plant can cost several times more than in the U. S. And Compaq says it could put up a building a year in Houston with the $230,000 monthly rent it pays for its 5,000-square-foot Tokyo office. In the land of the 107-yen dollar, expatriate help also is dear.

One company that chooses not to brave Japan's high costs is Colgate-Palmolive Co. The company is a booming success story all over the globe, with a huge 65% of its sales outside the U. S. But it has a meager 2% of its sales in Japan. Chief Executive Reuben Mark says a beachhead in Japan would cost Colgate several hundred million dollars, so he is focusing on other countries on the Pacific rim, where investing is cheaper and more efficient. In Japan, he says, "it's very costly to set up your distribution system. Advertising costs are extremely high. And people costs are also very high."

Even after the Tokyo stock market crash, Japanese corporate assets also remain out of reach. Tokyo stocks fetch an astronomical price-earnings ratio of 65, three times those in the U. S. The rising yen, up 12% since Jan. 1 (page ufref2814), only exacerbates matters. "It raises the hurdle," says Kiyotaka Fujii, an investment banker at CS First Boston (Japan) Ltd. "The higher stock market and the higher yen are a double punch."

Fujii says a client just nixed a planned major equity stake in a Japanese food company because of price. Indeed, Harvard's Encarnation says the high yen "has the same effect as capital controls." But Encarnation and others say this barrier can be eased. The Wednesday Group, for instance, wants Japan to offer subsidized loans and tax breaks to foreign investors. And Encarnation suggests Tokyo encourage prefectures to vie for foreign money, as American states do. If that happened, "you might find land prices would come down rather quickly," he says.

"SCARED SILLY." Yet the Clinton Administration seems happy with a strong yen and is widely viewed as talking it up. When Commerce Secretary Ronald H. Brown visited Tokyo in April, Americans who pressed the importance of investment and the folly of a rising yen got nowhere. "He seemed scared silly of exporting jobs," says the American Chamber's Attridge.

Brown's not alone. In a May 26 meeting in Trade Representative Mickey Kantor's office, Clinton officials agreed to give higher priority to helping foreign-owned companies expand production in the U. S. than helping domestic companies expand overseas. The decision is a victory for Reich, who maintains that Washington should help any corporation, regardless of ownership, that hires Americans.

This policy might be one-dimensional. "If you don't have plants, design centers, and a sales force in Japan, it's hard to establish credibility," says Tatsuya Terazawa, deputy director of the Americas Div. at the Ministry of International Trade & Industry. "You can't see what customers need and competitors are doing."

Mindful of that hurdle, General Motors Corp. built a technical center in western Tokyo, hoping to get closer to Japanese carmakers who might buy its parts. But companies willing to take such a plunge are getting rarer. "The more expensive it is to buy assets, the less likely we'll be predisposed to buy our own plants and distribution networks," says General Motors Japan Ltd. President J. Michael Durrie.

The U. S. can ill afford to see such sentiments spread. Until Washington gets a clear fix on how direct investment influences trade flows, America's lingering trade problem with Japan may remain unsolved.Robert Neff in Tokyo, with Peter Burrows in Dallas and William J. Holstein and Larry Holyoke in New York

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