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The United States export and foreign direct investment linkage in Canadian manufacturing industries
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The United States Export and Foreign Direct Investment Linkage in Canadian Manufacturing Industries Lindsay Dennis
N. Meredith R. Maki
Simon Fraser University
The objectives of this article are to: 1) explore the linkage between export penetration of a host country’s markets and foreign direct investment activity in those markets, and 2) provide a possible rationale for the direct investment-cumexport penetration linkage. Results indicate that the U.S. originating foreign direct investment market share and U.S. export market share in Canada are mutually good “predictors” of each other. Results also support the arguments that the direct investment-export profile may be dependent to some degree upon: the amount of processing intensity rhat characterizes a particular industry’s production systems; the occupational orientation of its research and development staff; the advertising media usage profile that characterizes the industry; and the size of the firms that typify the given industry.
Introduction The objectives of this research are to: 1) introduce evidence regarding the linkage between U.S. foreign direct investment (hereafter FDI) and American export penetration of Canadian manufacturing industries. (Please note that licensing and joint venture agreements between the two countries are excluded from the scope of this study.), and 2) test the applicability of processing intensity, technological specialization, media usage, and firm size variables as determinants of FDI and/or U.S. based export penetration.
Hypotheses The interaction between direct investment and export penetration (foreign trade) of Canadian manufacturing industries has been argued to occur in a number of ways. The earlier work of Gruber et al. (1967) hypothesized a dynamic sequential
Address correspondence Burnaby, British Columbia,
to Lindsay Meredith, Canada V5A 1S6.
Journal of Business Research 24, 73-88 (1992) 0 1992 Elsevier Science Publishing Co., Inc. 655 Avenue of the Americas, New York, NY 10010
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University,
0148-2963/92/$3.50
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relationship whereby foreign trade preceded (and was subsequently replaced by) FDI. Subsequent research ,by Horst (1972) and by Baumann (1973) used a static analysis to explore the determinants of exporting versus direct investment decisions by U.S. firms. Conclusions of relevance from Horst’s study were that “ . . . exporting and subsidiary production represent alternative means (emphasis added) by which U.S. firms exploit technological advantages over their foreign competitors. ..” (1972, p. 43). Baumann supported Horst “. . . with the additional refinement that the comparative advantage of U.S. exports is largely based on product innovating while the comparative advantage of U.S. subsidiaries may be based on process innovating” (1973, p. 1010). In the interests of completeness however, it should be noted that Orr’s (1975) results, based on disaggregated data (3-digit versus 2digit S.I.C. information) raised questions regarding Horst’s conclusions. More current work by Lipsey and Weiss (1984) and by Williamson (1985) is also of relevance. Lipsey and Weiss (1984) using a cross-sectional analysis concluded that the FDI-foreign trade relationship was not substitutional in nature. In fact, they concluded that “the higher the level of output by a U.S. firm in a foreign area, the higher in general were that firm’s exports from the United States to that area” (1984, p. 308). Williamson (1985) in a working paper analysis of 36 Australian manufacturing industries investigated the reactions of resident multinationals versus domestic suppliers to changes in-the price of imports. Support was found for the hypothesis subsidiaries with established investments that “. . . the existence of multinational in local market information, marketing, and distribution channels may provide a ready conduit for imports to flow into a domestic market in response to an increase in the competitiveness of offshore supply” (1985, p. 20). The hypotheses of interest for this study are structured in an attempt to: 1) tie together the stated objectives delineated at the outset of this paper, and 2) create a theoretical construct that is consistent with the results of the previously discussed research while introducing an essentially static empirical analysis of what could arguably be considered the dynamic interaction of FDI and foreign trade.
Foreign
Trade - FDI Lirikages
(Variable
Names:
UMNE
& UEX)
The Gruber et al. (1967) theory, that U.S. firms exploit their comparative technological advantage initially by exportation followed subsequently by FDI for purposes of producing in the host country, offers an intuitively appealing dynamic scenario. Inherent in their hypothesis is the idea that ultimately, FDI becomes the successor to, and substitute for, export servicing of the host country market. The interaction of foreign trade and foreign direct investment suggested in this study is complementary rather than substitutional in orientation. This is not meant in the least to imply that the Gruber et al. (1967) hypothesis is incorrect. Rationalization of their approach with that suggested in this research can be found in the static versus dynamic approaches that underlie the respective analyses. Once the process defined by Gruber et al. (1967) has been completed, however, it also seems quite reasonable to suggest that the parent organization can use its multinational enterprise (hereafter MNE) subsidiary as a conduit for the introduction of subsequent technologically innovative products or processes to
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the host country market. This kind of scenario relies in part on the findings of Lipsey and Weiss (1984), Williamson (1985), and Aharoni (1966), since these authors to varying degrees appear to collectively support the notion that FDI and exports are coexistent (rather than mutually exclusive) modes of host country market penetration. The interaction between foreign trade and FDI undergoes in effect a metamorphosis from the initial substitutional relationship of FDI supplanting export penetration to one of FDI and exports functioning in a symbiotic framework, i.e., export penetration aids FDI, which subsequently aids further export penetration of the host country markets. Consequently, the resu!ts of a lagged static analysis might be expected to show a 2-way causality with exports “causing” FDI and FDI “causing” exports. Given that the above relationship in fact pertains: 1. The U.S. originating export market share of some Canadian industry “i” averaged over a preceding 3-year period “x-l, x-2, and x-3” should be positively correlated with the MNE market share in Canada for the year “x.” 2. The converse should also hold, i.e., the averaged MNE market share for the preceding years “x-l, x-2, and x-3” should be positively correlated with the U.S. originating export market share in Canada for the year “x.” The relative time periods suggested here are based on research by Aharoni (1966) and Liebowitz (1982). These authors argue that the elapsed temporal period between the firm’s recognition of market demand and their subsequent response is completed within an approximate 3-year span. If the aforementioned scenario constitutes a plausible hypothesis that links FDI and foreign trade in a temporally continuing and complementary relationship, the task in the following sections is to attempt an explanation as to why these 2 modes of market penetration might interact.
Processing Zntensity (Variable names: U-CVAL,
UVAL,
and CVA L)
The role of value added in FDI and export penetration has been diverse. Caves et al. (1980) used value added per establishment as a size proxy. Caves (1974) employed value added per worker in the largest plants divided by the same for the smallest plants to proxy labor intensity and diseconomies of small scale, respectively. Baumann (1976) also developed a plant level economies of scale variable involving value added. The use of value added in this research differs from the aforementioned studies both in terms of specification and intended underlying hypotheses. Value added divided by sales is intended to act as a proxy for the amount of “processing intensity” required by a given industry to produce its output. “Processing intensity” is hypothesized-first and foremost-to be a function of the complexity of the manufacturing process. This is argued to produce an upward influence on the value added to sales ratio. Kohli (1975), among others, has suggested that comparatively high labor content and relatively short production runs are related to the introduction of technologically innovative products. Firms (or industries) characterized by such technologically advanced product outputs might
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consequently display a comparatively high processing intensity or value added to sales ratio. Second, the “completeness” of the manufacturing process may also contribute to an industry’s level of processing intensity. To the extent that a firm or industry is characterized by a high value added to sales ratio, the implication is that its output may tend to be in the “finished” or “near finished” goods category (versus a “raw materials” state) relative to that of another firm or industry with a low value added to sales profile. The concept of processing intensity may also be comparative in nature. (Appreciation is due Dr. Richard Caves for providing this suggestion.) The comparative variable format implies a simultaneous consideration (through either differencing or ratioing) of both host (Canadian) and donor (American) country data in order to assess the relative advantages that might face the U.S. multinational in its decision to attempt penetration of a foreign market. The U.S. and Canadian value added to sales ratios are differenced (as opposed to “ratioed”) in this study in efforts to produce more easily interpreted results. Combining the “processing intensity” concept with the comparative variable approach to specification leads to the following hypothesis. It is expected that the interaction between the differential (U.S. minus Canadian) value added to sales ratios and either form of the dependent variables (U.S. sourced FDI or exports) will be positive. This is because those U.S. industries that have a high value to sales ratio relative to the Canadian equivalent industry “i” are hypothesized to be in a position to exploit their comparative technological advantage-both through process innovations (FDI) and/or product embodied innovations (exporting of finished or near finished goods to the Canadian market). An important caveat, however, regarding comparative variable specifications of the kind introduced above is required. An “equal and opposite sign” test is traditionally conducted on such specifications in order to ensure that the relationship with the dependent variable is not unduly influenced by either the minuend (U.S. value added/sales ratio) or subtratend (Canadian value added/sales ratio) in the comparative variable. If the specification fails such a test, the rationale for introducing the comparative variable is suspect because either the minuend or subtratend alone are argued to unduly influence the statistical relationship with the dependent variable. This means that 1 of the 2 components in the comparative variable should be dropped. In light of the equal and opposite signs constraint, the individual roles of the U.S. value added/sales ratio and its Canadian equivalent must be considered. The relationship of both these components of the comparative variable with one of the dependent variables-the U.S. export share of the Canadian market-especially warrants scrutiny because the preliminary stages of statistical analysis indicated that problems with the comparative specification could arise. Considered individually, the expected signs and underlying hypotheses for the U.S. and for the Canadian value-added/sales ratios corresponds to the following: 1. The interaction between the U.S. value added/sales ratio alone and the market penetration of Canada (both FDI and American exports) should be positive. Given the role of the ratio as a proxy for technological advancement, one would expect that ceteris paribus a U.S. industry “i” which is character-
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ized by a high value-added/sales ratio, would be in a better position to exploit its technological sophistication-through both process innovations (by FDI) and product embodied innovations (by exporting)-than some alternative low value-added U.S. industry “j.” 2. The Canadian processing intensity variable should bear a positive relationship to FDI (proxied by the market share of U.S. subsidiaries in the host country) if the MNEs resident in Canada are concentrated in industries requiring a great deal of processing intensity. Conversely, the relationship will be negative if the MNE-dominated industries are characterized by comparatively little processing activity. This could occur either because the MNEs have avoided manufacturing intensive and/or technologically sophisticated industries (unlikely given U.S. corporate manufacturing expertise)-or because the MNEs are relying to some degree upon the products from their U.S. resimportation of “near finished” or “finished” ident affiliates and parent companies to provide part of the material factor inputs for their Canadian manufacturing operations. This latter hypothesis, taken at the extreme, reduces to MacCharles’ (1984) “tariff factory” argument. The relationship between the Canadian processing intensity variable and U.S. export penetration when controlling for the influence of resident MNEs should be positive. Canada, as argued by Baumann (1976), tends to import new products (which could be expected to embody technological content) from the U.S. and also exports in similar product classifications (Lermer, 1973; Caves et al., 1980). The likely industrial sectors in which one might expect to observe such import-export activity should be characterized by a relatively high value added component. This relationship might tend to occur by reason of the processing intensity, which involves comparatively high labor content (Kohli, 1975) and relatively short production runs that are argued to accompany the introduction of technologically innovative products. It was considered necessary to control for the market shares of U.S. MNEs in Canada when evaluating the product processing intensity hypothesis (proxied by the Canadian value added to sales ratio). Unfortunately, the interaction of the Canadian value added proxy and U.S. export penetration is unpredictable. If U.S. subsidiaries dominate total Canadian industry “i” demand for U.S. originating finished goods in order, for example, that the U.S. MNE in Canada might fulfill factor input requirements or balance its product lines (at the expense of Canadian processing intensity) then the resultant low Canadian value added to sales ratio would be linked inversely to the U.S. export penetration share via the purchasing habits of the U.S. MNEs. A converse argument and sign expectation (positive) would pertain if the MNEs dominated the Canadian high value added industries. This argument has been suggested by a Statistics Canada study (1978) and also indirectly by Lipsey and Weiss (1984)-“but foreign [Canadian] production is also positively related to the [U.S.] firm’s exports of finished products from the United States” (1984, p. 304). The comparative U.S. and Canadian
variable format, which considers the differential between the value-added to sales ratios, is attractive because it explicitly
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captures the relative disparity between the 2 countries’ ratios. The disadvantage of the specification is that it has not been widely used in the literature. Conversely, entering the U.S. and Canadian value added/sales ratios independently of each other sacrifices the “relative comparison” aspect, but it does not have the advantage of being a more widely used variable format, e.g., both the U.S. “large sized firms” and the U.S. research and development variables (also used in this study) have been applied extensively in previous research. To the extent that the comparative variable specification must be abandoned, its American and Canadian components cannot, unfortunately, be entered together. Even preliminary research indicated that the simple correlation between the U.S. and Canadian value added to sales ratios was unacceptably high, thereby prohibiting their simultaneous use in the same equations. Linking the processing intensity hypotheses to the foreign trade-cum-FDI relationship (variable names UEX and UMNE) suggested earlier might hopefully provide a plausible reason for the longer term dynamic interaction whereby U.S. exports contribute to U.S. FDI, which in turn fosters more U.S. export activity. Specifically, foreign market penetration based on the diffusion of technological innovation from the donor country (U.S.) would “tie in” nicely with the phenomenon of mutual causality running between American exports and FDI. Furthermore, the “diffusion of technology” argument provides a specific motive for the multinational’s strategy of simultaneously exporting to, while directly investing in, a foreign market. In order to provide circumstantial evidence in support of the preceding rationale, it is necessary to introduce the hypotheses underlying “technological specialization. ”
Technological Specialization (Variable Names: UENG and USRD) One of the most widely reseti. ned aspects of foreign market penetration in recent years has centered around technological advantage. R&D expenditures and R&D occupational content by industry appear to have been 2 of the more popular variables used to proxy this hypothesis. The variable introduced here represents an attempt to “narrow down” to some extent the nature of the R&D proxy in order to address the issue of “What kind of R&D efforts by the MNE appear to be helpful in foreign market penetration?” A previous widely used R&D occupational proxy such as mathematicians, scientists, and engineers, while a robust explanatory variable constitutes a rather wide ranging occupational mix with regard to answering such questions. Three occupational categories (mechanical, electrical, and chemical engineers) were initially selected on the premise that the bulk of technologically innovative goods and processes in the last 2 decades appeared to be based on research in these fields. Furthermore, it might be argued that the research output generated through engineering is somewhat more applied in nature (and therefore more quickly utilized in manufacturing processes) than the “pure” research most often associated with scientists and mathematicians. Initial testing ultimately led to specification of a variable comprised of mechanical and chemical engineers only. (The electrical engineering group could prove to be
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more appropriate for “explaining” diffusion of innovations in the late 1970s and 1980s.) The expected relationship of American FDI and U.S. export penetration with the aforementioned U.S. engineering classifications should be positive. (Unfortunately, lack of Canadian data makes a “differenced” format of this variable impossible.) The technologically innovative outputs flowing from the efforts of these particular occupational groups should be in the nature of both process advantages (which might be expected to foster FDI) and product embodied advantages (which should aid in export penetration of foreign markets). Inclusion of the technological specialization variable should accomplish two objectives: 1. A positive correlation between this specification and the differenced value added to sales ratio should provide some support for the contention that the latter variable is in fact capturing some technological aspects hypothesized to be inherent in processing intensive industries. A similar positive correlation between the more general R&D variable (first introduced in earlier studies) and the processing intensity proxy should also pertain if a technological component is inherent in the value added to sales specification. 2. a positive correlation between the technological specialization proxy and the more traditional R&D variable should pertain if the “engineers” specification is capturing some of the effects argued to underlie the more widely accepted R&D variable.
Advertising Spillover (Variable Names: U-CTV and U-CMAG) Advertising spillover has been addressed by a number of authors-Caves et al. (1980), Schoner and Schwindt (1980), and Meredith (1984). A much more detailed discussion can be obtained by consulting these sources. Briefly, however, the spillover effect is argued to occur when U.S. firms that undertake advertising expenditures in their own American domestic trading area (as a necessary cost of business) are able to capture extra rents because the advertising communications spill over into the neighboring Canadian markets. By making their products available in Canada either through FDI or exportation, the U.S. producer is able to spread the American advertising expenditure over a wider sales base. The variables of choice to proxy the preceding hypothesis are the percentage of U.S. industry “i” advertising budget expended on U.S. network television and national magazines, since these would be the most likely media in which spillover would occur. Other authors have used the total advertising/sales ratio by industry. This may, however, be too general since it would also include such unlikely spillover media at U.S. spot television, local newspaper, and billboard expenditures. The variables used here are again presented in a differenced or comparative variable format, i.e., the Canadian network television and national magazines’ respective percentages of the total advertising budget for a given industry “i” are subtracted from the U.S. equivalent industry. This is because the spillover incentive to the U.S. firm in industry “i” may be reduced through the presence of countervailing (though proportionately much smaller in absolute terms) advertising activity by the equivalent Canadian industry “i” firms. This argument reduces to an ad-
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vertising engendered entry barrier effect. The role of Canadian-based advertising in network television and magazines as used in this study is consequently to act as a downward adjustment calculation to the U.S. spillover data. A positive relationship between the spillover variables (U-CTV and U-CMAG) and the dependent variable that proxies U.S. multinational FDI in Canadian industries (MNESHAR) should pertain. Conversely, a negative relationship between the spillover variables and the U.S. export share of the Canadian manufacturing industries (EXSHAR) is expected. This is based on persuasive arguments by Caves et al. (1980) that: 1. “It [advertising] also impedes entry by imports, the seller of which must incur the fixed costs of creating a goodwill asset in the national marketplace. 2. . . the firm skilled in the differentiation and promotion of a product will choose to serve a foreign market by means of local production instead of exports. 3. . . advertised goods tend to be produced locally rather than traded, we also know that goods that are structurally heterogeneous but not subject to advertising are especially prominent in international trade. Advertising which is applied most heavily to goods that are relatively simple and homogeneous, is thus a negative predictor of the sorts of physically heterogeneous goods that many countries’ buyers can acquire only through trade” (1980, p. 69).
Host Country (Canadian) Media Effects (Variable Name: CLAD) American spillover effects might be expected to have a detrimental impact on Canadian national television and magazine purchases by multinationals resident in Canada or by U.S. exporters. This is because U.S. spillover media that already supply the same coverage should obviate the need for further Canadian national media expenditures. Conversely, U.S. FDI and exports to Canada might well bear a positive relationship to purchases of Canadian local media. First, because MNEs that import from the U.S. and that may rely on spillover are still very likely to use Canadian local media to complete their advertising coverage. Second, because Canadian firms that also import from the U.S. have a greater propensity to use local versus national media for their advertising requirements according to the conclusions of Caves et al. (1980, p. 161, fn31).
Large Sized Firms (Variable Name: ULSF) The “large sized firms” variable was originally introduced into the literature to test the hypothesis that larger (as opposed to small) companies were more easily able to overcome entry barrier effects (e.g., capital costs) associated with direct investment in foreign markets. It is used here in a similar context. There should be a positive relationship between those U.S. industries characterized by large sized firms and the presence of American foreign direct investment in the equivalent Canadian industries. Although the capital costs and management skills associated with exportation may be argued to be less than those attached to foreign direct investment, such
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barriers to entry nevertheless exist for the exporter as well. Large firms with their greater resource base should be able to absorb such costs more easily than smaller companies. Specifically, it is also hypothesized that a positive relationship should exist between U.S. industries that are characterized by large sized firms and the presence of a high U.S. based export market share held in the equivalent Canadian industry. An
Econometric
Lode1
of U.S.
Market
Penetration
in Canada
Variable Specifications The variables used in the subsequent OLS regressions are a combination of both “traditional” and unvalidated explanations of foreign market penetration. The unvalidated variables are introduced via the explanations provided in the preceding hypotheses section as well as by reference to Meredith (1984) for justification and description of the marketing and comparative variables used in this study. The “traditional” variables have been previously replicated in other studies and are best described by Caves (1974), Caves et al. (1980), Gorecki (1976), and Orr (1974). The hypotheses underlying these variables have, therefore, due to space limitations, been only briefly mentioned. The expected signs (where a priori predictable) between the dependent and independent variables have been identified by a “ + ” (positive) or “ - ” (negative) notation. In some instances where no rationale exists for positing a relationship between an independent and one of the dependent variables, an N/A designation has been entered (see Table 1). Statistical
Results The 2-way causality linking U.S. sourced be supported in Equations (1) and (2). EXSHAR Coefficient Beta coeff. t-value
=
(Y +
0.324 0.490 ( - 2.978)” (2.940)’ R’
R2 = 0.40 MNESHAR Coefficient Beta coeff. t-value RZ = 0.58
P,UMNE
- 0.341
=
= 0.33 (Y +
0.235 (7.42)” R*
Note: All equations
+
0.413 0.379 (2.860)” F = 5.88
P,UEX 0.427 0.283 (2.894)”
= 0.55
+ PzCVAL
FDI and exports
+
P,CLAD
d.f.
P,U-CVAL
p,U-CTV -0.004 -0.469 ( - 2.367)”
-
appears
p,U-CMAG
to (1)
-0.001 - 0.036 (-0.237)
= 5,44 +
0.889 0.436 (4.441)” F = 21.06
-
0.004 0.507 (2.638)”
to Canada
P,U-CTV
(2)
0.006 0.410 (4.176)” d.f.
= 3,46
are conducted using a Student’s t-value one-tailed test; a is significant at 1%) b is significant at 5%, and c is significant at 10%. The lagged 3-year average FDI market share (UMNE) is significant at the 0.01 level when entered in Equation (l), where U.S. originating export market share is used as the dependent variable. Conversely, the lagged U.S. export market share is also significant at 0.01 in Equation (2), where MNESHAR (the U.S. FDI market share in Canada) is used as the dependent variable. Generally, in tests over nu-
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Table
1. Dependent
Dependent variables MNESHAR
EXSHAR
Independent variables UMNE (expected signs: MNESHAR N/A EXSHAR + )
and
Independent
and D. R. Maki
Variables
The sales based market share of Canadian manufacturing industry “i,” held by U.S. controlled multinational enterprises. Source: unpublished C.A. L. II. R.A., Corporation Financial Statistics. Control groups 2 & 4, Industry group 2, 1975. The sales based market share of Canadian manufacturing industry held by U.S. exports. Source: Numerator-unpublished ‘Statistics Canada-External Trade Division Imports from the U.S.A., 1980. Denominator same for MNESHAR.
“i,”
(unvalidated) The ratio of U.S. multinational enterprise sales to Canadian total market sales for Canadian industry “i” averaged over the period 1972 through 1974 inclusive. Source: same as for MNESHAR.
UEX (expected signs: MNESHAR + EXSHAR N/A)
U.S. originating exports to Canada divided by Canadian total market sales for Canadian industry “i” averaged over the period 1972 through 1974 inclusive. Source: Numerator-same as for EXSHAR numerator; denominator-same as for MNESHAR.
U-CVAL (expected signs: MNESHAR + EXSHAR + )
The difference between the U.S. and Canadian industry “i” value added to sales ratios. Source: U.S. data from U.S. Bureau of the Census. Annual Survey of Manufacturers, General Statistics for Industry Groups & Industries, Table 1, 1972-1975. Canadian data from Statistics Canada, Manufacturing Industries of Canada, Cat. 31203, Table 3, 1972-1975.
UVAL (expected signs: MNESHAR + EXSHAR + )
The ratio of value added to sales for a U.S. manufacturing industry “i”. Source: U.S. Bureau of the Census. Annual Survey of Manufacturers, General Statistics for Industry Groups & Industries, Table 1, 1972-1975.
CVAL (expected signs: MNESHAR EXSHAR +)
The ratio of value added to sales for a Canadian manufacturing industry “i”. Source: Statistics Canada, Manufacturing Industries of Canada, Cat. 31-203, Table 3, 1972-1975.
UENG (expected signs: MNESHAR + EXSHAR +)
The number of mechanical and chemical engineers relative to total employment in each industry “i” in the United States. Source: U.S. Bureau of the Census. Census of Population: 1970, Occupation by Industry, Final Report, Table 8, 1972.
CLAD (expected signs: MNESHAR + EXSHAR +)
The percentage of total advertising budget invested by Canadian industry “i” in local media (spot TV, radio, newspapers and billboards). Source: Marketing Magazine, April 1975.
U-CTV (expected signs: MNESHAR + EXSHAR -)
The difference between the U.S. and Canadian industry “i” percentages of total advertising budgets invested in network television advertising. Source: Canadian data from Marketing Magazine, April 1975. U.S. data courtesy of Dr. Richard Caves and from Advertising Age, Vol. 46, 1975.
U-CMAG (expected signs: MNESHAR + EXSHAR -)
The difference between the U.S. and Canadian industry “i” percentages of total advertising budgets invested in magazine advertising. Source: same as for previous variable.
U.S. Foreign Trade Linkage With Canadian
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Table 1 (continued) Independent variables USDR (expected signs: MNESHAR + EXSHAR +)
(“traditional”) The proportion of research and employment related personnel relative to total employment in each U.S. industry “i.” Source: same as for UENG.
Proportion of shipments accounted for by plants with greater than 100 employees in U.S. industry “i”. Source: U.S. Bureau of the Census, Census of Manufacrurers, 1972. Vol. I, Industry Series Part I, Table 4, 1975.
ULSF (expected signs: MNESHAR + EXSHAR +)
merous equations, the performance of UMNE appeared to be somewhat more robust than that of the UEX variable. This result might be expected. given the earlier arguments that U.S. multinationals may act as conduits for the subsequent introduction of American export innovations and/or finished products into the host country markets, i.e., FDI and exports exhibit a complementary relationship. If the alternative hypothesis dominated (that U.S. multinationals first test foreign markets through exports and subsequently substitute FDI for exportation), then one might expect to see the U.S. export share variable act as a better predictor of American FDI than vice-versa. The processing intensity variables (UVAL, CVAL, and their difference, UCVAL) yielded mixed performances. These are variously tested in the preceding Equations (1) and (2) as well as in the following Equations (3), (4), and (5). EXSHAR Coefficient Beta coeff. t-value
=
a
+
B,UVAL
- 0.373
0.349 0.269 (2.72)h
(- 3.416)” R2 = 0.51
EXSHAR Coefficient
=
a
+
-0.492
Beta coeff. t-value
(-4.584)”
RI
Coefficient
=
u
+
0.004 0.543 (3.241)”
= 0.44
B,U-CTV
-
- 0.005 -0.550 (-3.035)” d.f.
F = 7.48
B,U-CMAG
0.456
9.495
0.005
- 0.007
-0.003
0.259
0.419
0.494
0.630
- 0.727
-0.194
(1.698)h
(3.733)”
(4.024)”
(3.823)”
= 0.53
-
B,U-CTV
0.462
0.004
-0.005
0.424
0.579
-0.551
(1.790)h
(3.226)”
(3.043)”
( - 0.867)
F = 5.25
B,U-CMAG
(-
+
1.455)’
B,ULSF
(4)
0.002 0.226 (1.975)”
d.f. = 7,42
0.318
= 0.38
~
(-4.064)”
0.211
R2
+
F = 8.74
(3)
0.002 0.247 (2.102)b
0.171
RZ
B,ULSF
= 6,43
B,U-CTV
R2 = 0.47
+
-0.002 -0.116 (-0.816)
BzCVAL + B,CLAD -
- 0.473 (-3.772)”
8.641 0.450 (3.502)”
-
BJUENG + B&LAD
B,UMNE
Beta coeff. t-value
+ B&LAD
l3,UMNE + B,CVAL+
R’ = 0.59
EXSHAR
+ B,UENG
-
( - 2.778)”
B,U-CMAG
+
B,USRD+
B,ULSF (5)
-0.002
0.784
0.001
-0.132
0.221
0.200
(1.552)
(1.524)’
d.f. = 7.42
The specification U-CVAL, suggested by Caves, easily provides the most consistently robust performance of the 3 processing intensity specifications. Regrettably, this difference between the U.S. and Canadian value added intensities can only be used in equations that employ MNESHAR as the dependent variable. UCVAL failed the “equal and opposite signs” test in each of the Equations 1, 3, 4, and 5 where it was initially tested. In fact the differenced format of the processing intensity variable failed in every single application where the U.S. export market share (EXSHAR) was the designated dependent variable.
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The U.S. processing intensity variable yielded the expected positive sign (albeit at only the 0.05 significance level) in the Equation (3) regression with EXSHAR. UVAL was found to be consistently weaker in performance than CVAL (the Canadian processing intensity variable). Controlling for the endogenous effects of FDI on CVAL proved to be unnecessary. The coefficients and t-values for the Canadian processing intensity variable changed very little with the inclusion or exclusion of UMNE. The consistently strong positive sign on CVAL might be viewed as support for the contentions of Baumann (1976), Caves et al. (1980), and Lermer (1973) that Canada tends to import new products from the U.S. The first “technological specialization” variable (UENG) is tested in Equations (3), (4), and (7) (Equation (7) is shown later). Used in equations with EXSHAR as the dependent variable (Equations (3) and (4)), it became apparent that UENG (the proportion of the total U.S. industry “i” labor force comprised of mechanical and chemical engineers) yielded a better performance than the USRD variable (the proportion of U.S. research and development personnel in industry “i”). For comparative purposes, note the equivalent Equations (4) and (5), where the UENG performance is well within the 0.01 significance level (Equation (4)) while USRD only achieves significance at 10% (Equation (5)). Conversely, in Equations (6) and (7) (where MNESHAR is the dependent variable), USRD (significant at 0.05 in Equation (6)) produces a better performance in terms of t-values than does UENG (insignificant in the equivalent Equation (7)). MNESHAR Coefficient Beta coeff. t-value
=
- 0.059 (-0.552)
Coefficient Beta coeff. t-value R’ = 0.53
B&LAD
=
(Y +
- 0.058 (-0.525)
+ B,U-CTV
0.002 0.209 (1.375)’
RZ = 0.51
R* = 0.56 MNESHAR
(Y +
B,UENG 4.615 0.157 (1.266)
R2 = 0.48
0.004 0.301 (1.935)h F = 11.02 +
B&LAD 0.002 0.210 (1.335)’
F = 9.91
+
B,U-CMAG 0.004 0.183 (1.457)’
+
B,USRD
+
P,ULSF
(6)
0.002 0.199 (1.772)h
1.302 0.240 (2.077)”
d.f. =5,44 + p&J-CTV 0.004 0.307 (1.819)”
+
P,U-CMAG 0.004 0.196 (1.507)’
+
P,ULSF
(7)
0.003 0.236 (2.079)”
d.f. = 5,44
The simple correlation (0.539) between USRD and the differenced processing intensity variable, U-CVAL, lends some support to the argument that the latter variable does in fact capture some aspects of technological orientation suggested to be present in processing-intensive industries. A similar, though weaker, correlation (0.359) also pertains between UENG and U-CVAL. Finally, in defense of the argument that UENG does in fact capture some of the technological orientation that has been suggested to underlie the R&D variable, it should be noted that the simple correlation between UENG and USRD is 0.742. The performances of the media variables across all equations are as expected. Due to collinearity problems, the t-values range from insignificant in the case of U-CMAG to significant well within the 0.01 region+specially for U-CTV and CLAD (the U.S. minus Canadian network television and the Canadian local media expenditure variables, respectively). These results are consistent with those obtained in the earlier work of Meredith (1984).
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Caves’ “large sized firms” variable yields the expected results, but only at the 0.10 and 0.05 levels. ULSF has the advantage of providing consistent results across a wide number of different studies. Its disadvantage lies perhaps with its “general” nature and the higher order collinearities that may be present as a result. Due to the nature of such variables, it is sometimes difficult to specifically identify the effects that the variable is proxying. Conclusions The objectives of this study were first, to explore the FDI-cum-export penetration linkage of the Canadian market by U.S. sources, and second, to provide a plausible rationale for the existence of such a linkage. Results indicate that both FDI market share and U.S. export market share appear to be reasonably good explanatory variables for each other. The consistently positive and significant signs that characterize the FDI-export relationship lend credence to the contention that those 2 variables interact in a complementary as opposed to a substitutional capacity with each other. Such a conclusion is not really consistent with the positions taken by Horst (1972) or Baumann (1973). Whereas these authors using cross-sectional regression emphasized the 2 modes of market penetration as alternative means of exploiting comparative advantage, the position taken here is the antithesis. Exports and foreign direct investment within the framework of a static analysis are suggested to act as mutually complementary methods by which the multinational can strengthen its position in foreign markets. Future research may have to take into account more explicitly the problems of static versus dynamic analysis when addressing the interaction of FDI and export penetration. Ideally, when attempting to determine whether FDI might act as subsequent substitute for exporting, one might prefer to use a time series approach based on data that contain: 1) sufficient temporal information to allow for the fact that industries might move through a transition of initial home country production for export followed by host country FDI, and 2) sufficiently disaggregated S.I.C. information in order to date the “arrival” of new industries. This type of data base is suggested because the inherent methodological approach underlying the theory of “alternative” or substitute modes of market penetration is argued to be dynamic in nature. Regrettably, lack of adequate information often leaves little choice but to operate with a static model where dynamic implications can at best be 7;rived at through static based evidence. Arguments related to the“complexity and completeness” of U.S. manufactured outputs provide the foundation for the processing intensity variables. The processing intensity variables are intended to provide part of the rationale for the FDIexport linkage, i.e., the diffusion of product and process innovations as well as the opportunity to funnel “finished” or “near finished” exports through host country subsidiaries induces the mutual dependency of FDI and export penetration. The relationships between the key variables evident in the equations, as well as their simple correlations, appear to be internally consistent with the preceding notions. For example the following simple correlations, while certainly not conclusive, are nevertheless worthy of consideration: 1) MNESHARKJEX 2) MNESHARKJ-CVAL
= 0.415 = 0.577
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3) UEX/UVAL 4) MNESHAR/CVAL
L. N. Meredith
and D. R. Maki
= 0.363 = 0.220
The technological specialization variable (proxied by the engineering occupational groups) seems to function quite well in the U.S. sourced export equations but less so in the FDI equations. The theoretical basis for this type of variable can be found in the trends of earlier studies that have moved along a continuum starting with Caves’ (1974) nonproduction employees, to R&D occupations followed by marketing management employment. The implication of such a trend is that we are gaining more insight into the specific types of human capital that aid in foreign market penetration. A somewhat speculative generalization based on the type of specifications used in this study is that the U.S. export share variable may be more amenable to explanation by determinants that are quite specific compared with those used in the multinational share equations. By way of examples, the aggregate U.S. R&D variable does not seem to be a very efficacious determinant of U.S. export market share in Canada compared with the disaggregated engineering occupations (UENG). The converse argument holds when attempting to explain the MNE market share. Caves’ (1974) U.S. “nonproduction employees” variable is a good predictor of U.S. MNE market share, but not of export market share. This issue of specificity may possibly be related to the technological advantages requirement, which has been widely argued to underlie international trade. Whereas successful FDI relies on a whole range of tangible and intangible capital requirements, successful export penetration may turn on being able to supply particular innovations that the host country is unable or unwilling to produce. If the processing intensity and technological specialization variables help to define some of the motivations that might spur U.S. international business expansion, the media usage variables (U-CTV, U-CMAG, and CLAD) as well as Caves’ “large sized firms” variable (ULSF) fulfill the role of identifying just some of the myriad techniques and characteristics that help to make the expansionary objective a reality, i.e., technological advantage, in and of itself, might not be a sufficient condition for achieving multinational status. Clearly, the types of hypotheses and variables used in this study must be subjected to a great deal more rigorous empirical testing before they can be accorded the kind of credibility given the traditionally accepted determinants of export penetration and foreign direct investment. Given that the main thrust of this research can be substantiated, however, a number of policy implications emerge: Governments intent on regulating foreign investment as well as imports should be more sensitive to the idea that multinationals now employ marketing strategies that attempt to create an optimal mix of FDI and exports to the host country simultaneously. This implies for example, that government policy must be coordinated over both tariffs and FDI. Policy makers find it useful to distinguish between FDI and export penetration by MNEs that have the effect of diffusing product and/or process innovations versus those that simply create subsidiaries for purposes of final assembly and packaging of “finished” and “near finished” products (“tariff factories”). More consideration might be given to the possibility that a positive relation-
U.S. Foreign Trade Linkage With Canadian
J BUSN RES 1992:24:73-M
Manufacturing
87
ship exists between the prevalence of certain specific occupational categories trade in the directly and a country’s dominant position, i.e., international related industries that rely heavily on those occupations. The related issues of FDI and foreign trade have been the subjects of active research for a good many years. Academics and practitioners alike can be expected to continue their interests in this area because the impacts of FDI and foreign trade will be even more strongly felt in future decades as the incidence of international competition and trade agreements continues to increase. Just as the introduction of the European Economic Community has had a significant impact on the trade patterns of its constituent countries, the recently negotiated Free Trade Agreement between the U.S. and its largest trading partner, Canada, can be expected to introduce marked changes in the interaction of these 2 nations. Undoubtedly, the demands for future research on FDI and foreign trade will continue to increase. References Aharoni, Y., The Foreign Investment Decision School of Business Administration, Harvard Baumann, H., The Industrial Composition of Canadian Market: Note. American Economic Baumann, H., Structural Characteristics of Economics 9 (1976): 408-424.
Process, Division of Research Graduate University, Cambridge. 1966. U.S. Export and Subsidiary Sales to the Review 63 (1973): 1009-1012.
of Canada’s
Pattern
of Trade.
Canadian Journal
Canada, Minister of Industry, Trade and Commerce, Corporations and Labour Unions Returns Act-Part I Corporations. Annual Report of the Minister of Industry, Trade and Commerce. Statistics Canada, Cat. No. 61-120, March 1979. Caves, R., Causes of Direct Investment: Foreign Firms’ Shares in Canadian and United Kingdom Manufacturing Industries. The Review of Economics and Statistics 56 (1974): 279-293. Caves, R., Porter, M., Spence, M., and Scott J., Competition in the Open Economy, A Model Appked to Canada. Harvard Economic Studies, Harvard University Press, Cambridge. 1980. Gorecki, P., The Determinants of Entry by Domestic and Foreign Enterprises in Canadian Manufacturing Industries: Some Comments and Empirical Results. The Review of Economics and Statistics 59 (1976): 485-488. Gruber, W., Mehta, D., and Vernon, R., The R&D Factor in International International Investment of U.S. Industries. Journal of Political Economy 20-37. Horst, T., The Industrial Composition of U.S. Exports and Subsidiary Market. American Economic Review 62 (1972): 37-45.
Trade and 75 (1967):
Sales to the Canadian
Kohli, U., Canadian Technology and Derived Import Demand and Export Supply Functions, Unpublished Ph.D. Thesis, University of British Columbia, Vancouver, 1975. Lermer, G., Evidence from Trade Data Regarding the Rationalizing Canadian Journal of Economics 6 (1973): 248-256. Liebowitz, S., Measuring 119-136.
Industrial
Disequilibria.
of Canadian
Southern Economic
Industry.
Journal 49 (1982):
Lipsey, R., and Weiss, M., Foreign Production and Exports of Individual Firms. The Review of Economics and Statistics 66 (1984): 304-308. MacCharles, D., Canadian Domestic and International Intra-Industry Trade. mimeo, versity of New Brunswick, Saint John, N.B., Canada, 1984.
Uni-
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Meredith, L., U.S. Multinational Investment in Canadian Review of Economics and Stati.rtics 66 (1984): 111-119.
L. N. Meredith Manufacturing
Orr, D., The Determinants of Entry: A Study of the Canadian The Review of Economics and Statistics 56 (1974): 58-66.
and D. R. Maki Industries.
Manufacturing
The
Industries.
Orr, D., The Industrial Composition of U.S. Exports and Subsidiary Sales to the Canadian Market: Comment. American Economic Review 65 (1975): 230-234. Schoner, B., and Schwindt, R., Advertising Direct Foreign Investment and Canadian tional Identity. Canadian Review of Studies in Nationalism 1 (1980): 127-150.
Na-
Statistics Canada, Financial Flows and Multinational Enterprise Decision. Canadian Imports by Domestic and Foreign Controlled Enterprises, 1978. Catalogue No. 67-509, Minister of Supply and Services, Ottawa, Canada. October 1981, pp. l-25. Williamson, P., Multinational Enterprise Behaviour and Domestic Industry Under Import Threat, unpublished working paper. 1985. pp. l-26.
Adjustment
73
The United States Export and Foreign Direct Investment Linkage in Canadian Manufacturing Industries Lindsay Dennis
N. Meredith R. Maki
Simon Fraser University
The objectives of this article are to: 1) explore the linkage between export penetration of a host country’s markets and foreign direct investment activity in those markets, and 2) provide a possible rationale for the direct investment-cumexport penetration linkage. Results indicate that the U.S. originating foreign direct investment market share and U.S. export market share in Canada are mutually good “predictors” of each other. Results also support the arguments that the direct investment-export profile may be dependent to some degree upon: the amount of processing intensity rhat characterizes a particular industry’s production systems; the occupational orientation of its research and development staff; the advertising media usage profile that characterizes the industry; and the size of the firms that typify the given industry.
Introduction The objectives of this research are to: 1) introduce evidence regarding the linkage between U.S. foreign direct investment (hereafter FDI) and American export penetration of Canadian manufacturing industries. (Please note that licensing and joint venture agreements between the two countries are excluded from the scope of this study.), and 2) test the applicability of processing intensity, technological specialization, media usage, and firm size variables as determinants of FDI and/or U.S. based export penetration.
Hypotheses The interaction between direct investment and export penetration (foreign trade) of Canadian manufacturing industries has been argued to occur in a number of ways. The earlier work of Gruber et al. (1967) hypothesized a dynamic sequential
Address correspondence Burnaby, British Columbia,
to Lindsay Meredith, Canada V5A 1S6.
Journal of Business Research 24, 73-88 (1992) 0 1992 Elsevier Science Publishing Co., Inc. 655 Avenue of the Americas, New York, NY 10010
Faculty
of Business
Administration,
Simon
Fraser
University,
0148-2963/92/$3.50
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L. N. Meredith and D. R. Maki
relationship whereby foreign trade preceded (and was subsequently replaced by) FDI. Subsequent research ,by Horst (1972) and by Baumann (1973) used a static analysis to explore the determinants of exporting versus direct investment decisions by U.S. firms. Conclusions of relevance from Horst’s study were that “ . . . exporting and subsidiary production represent alternative means (emphasis added) by which U.S. firms exploit technological advantages over their foreign competitors. ..” (1972, p. 43). Baumann supported Horst “. . . with the additional refinement that the comparative advantage of U.S. exports is largely based on product innovating while the comparative advantage of U.S. subsidiaries may be based on process innovating” (1973, p. 1010). In the interests of completeness however, it should be noted that Orr’s (1975) results, based on disaggregated data (3-digit versus 2digit S.I.C. information) raised questions regarding Horst’s conclusions. More current work by Lipsey and Weiss (1984) and by Williamson (1985) is also of relevance. Lipsey and Weiss (1984) using a cross-sectional analysis concluded that the FDI-foreign trade relationship was not substitutional in nature. In fact, they concluded that “the higher the level of output by a U.S. firm in a foreign area, the higher in general were that firm’s exports from the United States to that area” (1984, p. 308). Williamson (1985) in a working paper analysis of 36 Australian manufacturing industries investigated the reactions of resident multinationals versus domestic suppliers to changes in-the price of imports. Support was found for the hypothesis subsidiaries with established investments that “. . . the existence of multinational in local market information, marketing, and distribution channels may provide a ready conduit for imports to flow into a domestic market in response to an increase in the competitiveness of offshore supply” (1985, p. 20). The hypotheses of interest for this study are structured in an attempt to: 1) tie together the stated objectives delineated at the outset of this paper, and 2) create a theoretical construct that is consistent with the results of the previously discussed research while introducing an essentially static empirical analysis of what could arguably be considered the dynamic interaction of FDI and foreign trade.
Foreign
Trade - FDI Lirikages
(Variable
Names:
UMNE
& UEX)
The Gruber et al. (1967) theory, that U.S. firms exploit their comparative technological advantage initially by exportation followed subsequently by FDI for purposes of producing in the host country, offers an intuitively appealing dynamic scenario. Inherent in their hypothesis is the idea that ultimately, FDI becomes the successor to, and substitute for, export servicing of the host country market. The interaction of foreign trade and foreign direct investment suggested in this study is complementary rather than substitutional in orientation. This is not meant in the least to imply that the Gruber et al. (1967) hypothesis is incorrect. Rationalization of their approach with that suggested in this research can be found in the static versus dynamic approaches that underlie the respective analyses. Once the process defined by Gruber et al. (1967) has been completed, however, it also seems quite reasonable to suggest that the parent organization can use its multinational enterprise (hereafter MNE) subsidiary as a conduit for the introduction of subsequent technologically innovative products or processes to
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the host country market. This kind of scenario relies in part on the findings of Lipsey and Weiss (1984), Williamson (1985), and Aharoni (1966), since these authors to varying degrees appear to collectively support the notion that FDI and exports are coexistent (rather than mutually exclusive) modes of host country market penetration. The interaction between foreign trade and FDI undergoes in effect a metamorphosis from the initial substitutional relationship of FDI supplanting export penetration to one of FDI and exports functioning in a symbiotic framework, i.e., export penetration aids FDI, which subsequently aids further export penetration of the host country markets. Consequently, the resu!ts of a lagged static analysis might be expected to show a 2-way causality with exports “causing” FDI and FDI “causing” exports. Given that the above relationship in fact pertains: 1. The U.S. originating export market share of some Canadian industry “i” averaged over a preceding 3-year period “x-l, x-2, and x-3” should be positively correlated with the MNE market share in Canada for the year “x.” 2. The converse should also hold, i.e., the averaged MNE market share for the preceding years “x-l, x-2, and x-3” should be positively correlated with the U.S. originating export market share in Canada for the year “x.” The relative time periods suggested here are based on research by Aharoni (1966) and Liebowitz (1982). These authors argue that the elapsed temporal period between the firm’s recognition of market demand and their subsequent response is completed within an approximate 3-year span. If the aforementioned scenario constitutes a plausible hypothesis that links FDI and foreign trade in a temporally continuing and complementary relationship, the task in the following sections is to attempt an explanation as to why these 2 modes of market penetration might interact.
Processing Zntensity (Variable names: U-CVAL,
UVAL,
and CVA L)
The role of value added in FDI and export penetration has been diverse. Caves et al. (1980) used value added per establishment as a size proxy. Caves (1974) employed value added per worker in the largest plants divided by the same for the smallest plants to proxy labor intensity and diseconomies of small scale, respectively. Baumann (1976) also developed a plant level economies of scale variable involving value added. The use of value added in this research differs from the aforementioned studies both in terms of specification and intended underlying hypotheses. Value added divided by sales is intended to act as a proxy for the amount of “processing intensity” required by a given industry to produce its output. “Processing intensity” is hypothesized-first and foremost-to be a function of the complexity of the manufacturing process. This is argued to produce an upward influence on the value added to sales ratio. Kohli (1975), among others, has suggested that comparatively high labor content and relatively short production runs are related to the introduction of technologically innovative products. Firms (or industries) characterized by such technologically advanced product outputs might
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consequently display a comparatively high processing intensity or value added to sales ratio. Second, the “completeness” of the manufacturing process may also contribute to an industry’s level of processing intensity. To the extent that a firm or industry is characterized by a high value added to sales ratio, the implication is that its output may tend to be in the “finished” or “near finished” goods category (versus a “raw materials” state) relative to that of another firm or industry with a low value added to sales profile. The concept of processing intensity may also be comparative in nature. (Appreciation is due Dr. Richard Caves for providing this suggestion.) The comparative variable format implies a simultaneous consideration (through either differencing or ratioing) of both host (Canadian) and donor (American) country data in order to assess the relative advantages that might face the U.S. multinational in its decision to attempt penetration of a foreign market. The U.S. and Canadian value added to sales ratios are differenced (as opposed to “ratioed”) in this study in efforts to produce more easily interpreted results. Combining the “processing intensity” concept with the comparative variable approach to specification leads to the following hypothesis. It is expected that the interaction between the differential (U.S. minus Canadian) value added to sales ratios and either form of the dependent variables (U.S. sourced FDI or exports) will be positive. This is because those U.S. industries that have a high value to sales ratio relative to the Canadian equivalent industry “i” are hypothesized to be in a position to exploit their comparative technological advantage-both through process innovations (FDI) and/or product embodied innovations (exporting of finished or near finished goods to the Canadian market). An important caveat, however, regarding comparative variable specifications of the kind introduced above is required. An “equal and opposite sign” test is traditionally conducted on such specifications in order to ensure that the relationship with the dependent variable is not unduly influenced by either the minuend (U.S. value added/sales ratio) or subtratend (Canadian value added/sales ratio) in the comparative variable. If the specification fails such a test, the rationale for introducing the comparative variable is suspect because either the minuend or subtratend alone are argued to unduly influence the statistical relationship with the dependent variable. This means that 1 of the 2 components in the comparative variable should be dropped. In light of the equal and opposite signs constraint, the individual roles of the U.S. value added/sales ratio and its Canadian equivalent must be considered. The relationship of both these components of the comparative variable with one of the dependent variables-the U.S. export share of the Canadian market-especially warrants scrutiny because the preliminary stages of statistical analysis indicated that problems with the comparative specification could arise. Considered individually, the expected signs and underlying hypotheses for the U.S. and for the Canadian value-added/sales ratios corresponds to the following: 1. The interaction between the U.S. value added/sales ratio alone and the market penetration of Canada (both FDI and American exports) should be positive. Given the role of the ratio as a proxy for technological advancement, one would expect that ceteris paribus a U.S. industry “i” which is character-
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ized by a high value-added/sales ratio, would be in a better position to exploit its technological sophistication-through both process innovations (by FDI) and product embodied innovations (by exporting)-than some alternative low value-added U.S. industry “j.” 2. The Canadian processing intensity variable should bear a positive relationship to FDI (proxied by the market share of U.S. subsidiaries in the host country) if the MNEs resident in Canada are concentrated in industries requiring a great deal of processing intensity. Conversely, the relationship will be negative if the MNE-dominated industries are characterized by comparatively little processing activity. This could occur either because the MNEs have avoided manufacturing intensive and/or technologically sophisticated industries (unlikely given U.S. corporate manufacturing expertise)-or because the MNEs are relying to some degree upon the products from their U.S. resimportation of “near finished” or “finished” ident affiliates and parent companies to provide part of the material factor inputs for their Canadian manufacturing operations. This latter hypothesis, taken at the extreme, reduces to MacCharles’ (1984) “tariff factory” argument. The relationship between the Canadian processing intensity variable and U.S. export penetration when controlling for the influence of resident MNEs should be positive. Canada, as argued by Baumann (1976), tends to import new products (which could be expected to embody technological content) from the U.S. and also exports in similar product classifications (Lermer, 1973; Caves et al., 1980). The likely industrial sectors in which one might expect to observe such import-export activity should be characterized by a relatively high value added component. This relationship might tend to occur by reason of the processing intensity, which involves comparatively high labor content (Kohli, 1975) and relatively short production runs that are argued to accompany the introduction of technologically innovative products. It was considered necessary to control for the market shares of U.S. MNEs in Canada when evaluating the product processing intensity hypothesis (proxied by the Canadian value added to sales ratio). Unfortunately, the interaction of the Canadian value added proxy and U.S. export penetration is unpredictable. If U.S. subsidiaries dominate total Canadian industry “i” demand for U.S. originating finished goods in order, for example, that the U.S. MNE in Canada might fulfill factor input requirements or balance its product lines (at the expense of Canadian processing intensity) then the resultant low Canadian value added to sales ratio would be linked inversely to the U.S. export penetration share via the purchasing habits of the U.S. MNEs. A converse argument and sign expectation (positive) would pertain if the MNEs dominated the Canadian high value added industries. This argument has been suggested by a Statistics Canada study (1978) and also indirectly by Lipsey and Weiss (1984)-“but foreign [Canadian] production is also positively related to the [U.S.] firm’s exports of finished products from the United States” (1984, p. 304). The comparative U.S. and Canadian
variable format, which considers the differential between the value-added to sales ratios, is attractive because it explicitly
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and D. R. Maki
captures the relative disparity between the 2 countries’ ratios. The disadvantage of the specification is that it has not been widely used in the literature. Conversely, entering the U.S. and Canadian value added/sales ratios independently of each other sacrifices the “relative comparison” aspect, but it does not have the advantage of being a more widely used variable format, e.g., both the U.S. “large sized firms” and the U.S. research and development variables (also used in this study) have been applied extensively in previous research. To the extent that the comparative variable specification must be abandoned, its American and Canadian components cannot, unfortunately, be entered together. Even preliminary research indicated that the simple correlation between the U.S. and Canadian value added to sales ratios was unacceptably high, thereby prohibiting their simultaneous use in the same equations. Linking the processing intensity hypotheses to the foreign trade-cum-FDI relationship (variable names UEX and UMNE) suggested earlier might hopefully provide a plausible reason for the longer term dynamic interaction whereby U.S. exports contribute to U.S. FDI, which in turn fosters more U.S. export activity. Specifically, foreign market penetration based on the diffusion of technological innovation from the donor country (U.S.) would “tie in” nicely with the phenomenon of mutual causality running between American exports and FDI. Furthermore, the “diffusion of technology” argument provides a specific motive for the multinational’s strategy of simultaneously exporting to, while directly investing in, a foreign market. In order to provide circumstantial evidence in support of the preceding rationale, it is necessary to introduce the hypotheses underlying “technological specialization. ”
Technological Specialization (Variable Names: UENG and USRD) One of the most widely reseti. ned aspects of foreign market penetration in recent years has centered around technological advantage. R&D expenditures and R&D occupational content by industry appear to have been 2 of the more popular variables used to proxy this hypothesis. The variable introduced here represents an attempt to “narrow down” to some extent the nature of the R&D proxy in order to address the issue of “What kind of R&D efforts by the MNE appear to be helpful in foreign market penetration?” A previous widely used R&D occupational proxy such as mathematicians, scientists, and engineers, while a robust explanatory variable constitutes a rather wide ranging occupational mix with regard to answering such questions. Three occupational categories (mechanical, electrical, and chemical engineers) were initially selected on the premise that the bulk of technologically innovative goods and processes in the last 2 decades appeared to be based on research in these fields. Furthermore, it might be argued that the research output generated through engineering is somewhat more applied in nature (and therefore more quickly utilized in manufacturing processes) than the “pure” research most often associated with scientists and mathematicians. Initial testing ultimately led to specification of a variable comprised of mechanical and chemical engineers only. (The electrical engineering group could prove to be
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JBUSN RES 1992:24:73-88
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more appropriate for “explaining” diffusion of innovations in the late 1970s and 1980s.) The expected relationship of American FDI and U.S. export penetration with the aforementioned U.S. engineering classifications should be positive. (Unfortunately, lack of Canadian data makes a “differenced” format of this variable impossible.) The technologically innovative outputs flowing from the efforts of these particular occupational groups should be in the nature of both process advantages (which might be expected to foster FDI) and product embodied advantages (which should aid in export penetration of foreign markets). Inclusion of the technological specialization variable should accomplish two objectives: 1. A positive correlation between this specification and the differenced value added to sales ratio should provide some support for the contention that the latter variable is in fact capturing some technological aspects hypothesized to be inherent in processing intensive industries. A similar positive correlation between the more general R&D variable (first introduced in earlier studies) and the processing intensity proxy should also pertain if a technological component is inherent in the value added to sales specification. 2. a positive correlation between the technological specialization proxy and the more traditional R&D variable should pertain if the “engineers” specification is capturing some of the effects argued to underlie the more widely accepted R&D variable.
Advertising Spillover (Variable Names: U-CTV and U-CMAG) Advertising spillover has been addressed by a number of authors-Caves et al. (1980), Schoner and Schwindt (1980), and Meredith (1984). A much more detailed discussion can be obtained by consulting these sources. Briefly, however, the spillover effect is argued to occur when U.S. firms that undertake advertising expenditures in their own American domestic trading area (as a necessary cost of business) are able to capture extra rents because the advertising communications spill over into the neighboring Canadian markets. By making their products available in Canada either through FDI or exportation, the U.S. producer is able to spread the American advertising expenditure over a wider sales base. The variables of choice to proxy the preceding hypothesis are the percentage of U.S. industry “i” advertising budget expended on U.S. network television and national magazines, since these would be the most likely media in which spillover would occur. Other authors have used the total advertising/sales ratio by industry. This may, however, be too general since it would also include such unlikely spillover media at U.S. spot television, local newspaper, and billboard expenditures. The variables used here are again presented in a differenced or comparative variable format, i.e., the Canadian network television and national magazines’ respective percentages of the total advertising budget for a given industry “i” are subtracted from the U.S. equivalent industry. This is because the spillover incentive to the U.S. firm in industry “i” may be reduced through the presence of countervailing (though proportionately much smaller in absolute terms) advertising activity by the equivalent Canadian industry “i” firms. This argument reduces to an ad-
80
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vertising engendered entry barrier effect. The role of Canadian-based advertising in network television and magazines as used in this study is consequently to act as a downward adjustment calculation to the U.S. spillover data. A positive relationship between the spillover variables (U-CTV and U-CMAG) and the dependent variable that proxies U.S. multinational FDI in Canadian industries (MNESHAR) should pertain. Conversely, a negative relationship between the spillover variables and the U.S. export share of the Canadian manufacturing industries (EXSHAR) is expected. This is based on persuasive arguments by Caves et al. (1980) that: 1. “It [advertising] also impedes entry by imports, the seller of which must incur the fixed costs of creating a goodwill asset in the national marketplace. 2. . . the firm skilled in the differentiation and promotion of a product will choose to serve a foreign market by means of local production instead of exports. 3. . . advertised goods tend to be produced locally rather than traded, we also know that goods that are structurally heterogeneous but not subject to advertising are especially prominent in international trade. Advertising which is applied most heavily to goods that are relatively simple and homogeneous, is thus a negative predictor of the sorts of physically heterogeneous goods that many countries’ buyers can acquire only through trade” (1980, p. 69).
Host Country (Canadian) Media Effects (Variable Name: CLAD) American spillover effects might be expected to have a detrimental impact on Canadian national television and magazine purchases by multinationals resident in Canada or by U.S. exporters. This is because U.S. spillover media that already supply the same coverage should obviate the need for further Canadian national media expenditures. Conversely, U.S. FDI and exports to Canada might well bear a positive relationship to purchases of Canadian local media. First, because MNEs that import from the U.S. and that may rely on spillover are still very likely to use Canadian local media to complete their advertising coverage. Second, because Canadian firms that also import from the U.S. have a greater propensity to use local versus national media for their advertising requirements according to the conclusions of Caves et al. (1980, p. 161, fn31).
Large Sized Firms (Variable Name: ULSF) The “large sized firms” variable was originally introduced into the literature to test the hypothesis that larger (as opposed to small) companies were more easily able to overcome entry barrier effects (e.g., capital costs) associated with direct investment in foreign markets. It is used here in a similar context. There should be a positive relationship between those U.S. industries characterized by large sized firms and the presence of American foreign direct investment in the equivalent Canadian industries. Although the capital costs and management skills associated with exportation may be argued to be less than those attached to foreign direct investment, such
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barriers to entry nevertheless exist for the exporter as well. Large firms with their greater resource base should be able to absorb such costs more easily than smaller companies. Specifically, it is also hypothesized that a positive relationship should exist between U.S. industries that are characterized by large sized firms and the presence of a high U.S. based export market share held in the equivalent Canadian industry. An
Econometric
Lode1
of U.S.
Market
Penetration
in Canada
Variable Specifications The variables used in the subsequent OLS regressions are a combination of both “traditional” and unvalidated explanations of foreign market penetration. The unvalidated variables are introduced via the explanations provided in the preceding hypotheses section as well as by reference to Meredith (1984) for justification and description of the marketing and comparative variables used in this study. The “traditional” variables have been previously replicated in other studies and are best described by Caves (1974), Caves et al. (1980), Gorecki (1976), and Orr (1974). The hypotheses underlying these variables have, therefore, due to space limitations, been only briefly mentioned. The expected signs (where a priori predictable) between the dependent and independent variables have been identified by a “ + ” (positive) or “ - ” (negative) notation. In some instances where no rationale exists for positing a relationship between an independent and one of the dependent variables, an N/A designation has been entered (see Table 1). Statistical
Results The 2-way causality linking U.S. sourced be supported in Equations (1) and (2). EXSHAR Coefficient Beta coeff. t-value
=
(Y +
0.324 0.490 ( - 2.978)” (2.940)’ R’
R2 = 0.40 MNESHAR Coefficient Beta coeff. t-value RZ = 0.58
P,UMNE
- 0.341
=
= 0.33 (Y +
0.235 (7.42)” R*
Note: All equations
+
0.413 0.379 (2.860)” F = 5.88
P,UEX 0.427 0.283 (2.894)”
= 0.55
+ PzCVAL
FDI and exports
+
P,CLAD
d.f.
P,U-CVAL
p,U-CTV -0.004 -0.469 ( - 2.367)”
-
appears
p,U-CMAG
to (1)
-0.001 - 0.036 (-0.237)
= 5,44 +
0.889 0.436 (4.441)” F = 21.06
-
0.004 0.507 (2.638)”
to Canada
P,U-CTV
(2)
0.006 0.410 (4.176)” d.f.
= 3,46
are conducted using a Student’s t-value one-tailed test; a is significant at 1%) b is significant at 5%, and c is significant at 10%. The lagged 3-year average FDI market share (UMNE) is significant at the 0.01 level when entered in Equation (l), where U.S. originating export market share is used as the dependent variable. Conversely, the lagged U.S. export market share is also significant at 0.01 in Equation (2), where MNESHAR (the U.S. FDI market share in Canada) is used as the dependent variable. Generally, in tests over nu-
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82
L. N. Meredith
1992:24:73-t%
Table
1. Dependent
Dependent variables MNESHAR
EXSHAR
Independent variables UMNE (expected signs: MNESHAR N/A EXSHAR + )
and
Independent
and D. R. Maki
Variables
The sales based market share of Canadian manufacturing industry “i,” held by U.S. controlled multinational enterprises. Source: unpublished C.A. L. II. R.A., Corporation Financial Statistics. Control groups 2 & 4, Industry group 2, 1975. The sales based market share of Canadian manufacturing industry held by U.S. exports. Source: Numerator-unpublished ‘Statistics Canada-External Trade Division Imports from the U.S.A., 1980. Denominator same for MNESHAR.
“i,”
(unvalidated) The ratio of U.S. multinational enterprise sales to Canadian total market sales for Canadian industry “i” averaged over the period 1972 through 1974 inclusive. Source: same as for MNESHAR.
UEX (expected signs: MNESHAR + EXSHAR N/A)
U.S. originating exports to Canada divided by Canadian total market sales for Canadian industry “i” averaged over the period 1972 through 1974 inclusive. Source: Numerator-same as for EXSHAR numerator; denominator-same as for MNESHAR.
U-CVAL (expected signs: MNESHAR + EXSHAR + )
The difference between the U.S. and Canadian industry “i” value added to sales ratios. Source: U.S. data from U.S. Bureau of the Census. Annual Survey of Manufacturers, General Statistics for Industry Groups & Industries, Table 1, 1972-1975. Canadian data from Statistics Canada, Manufacturing Industries of Canada, Cat. 31203, Table 3, 1972-1975.
UVAL (expected signs: MNESHAR + EXSHAR + )
The ratio of value added to sales for a U.S. manufacturing industry “i”. Source: U.S. Bureau of the Census. Annual Survey of Manufacturers, General Statistics for Industry Groups & Industries, Table 1, 1972-1975.
CVAL (expected signs: MNESHAR EXSHAR +)
The ratio of value added to sales for a Canadian manufacturing industry “i”. Source: Statistics Canada, Manufacturing Industries of Canada, Cat. 31-203, Table 3, 1972-1975.
UENG (expected signs: MNESHAR + EXSHAR +)
The number of mechanical and chemical engineers relative to total employment in each industry “i” in the United States. Source: U.S. Bureau of the Census. Census of Population: 1970, Occupation by Industry, Final Report, Table 8, 1972.
CLAD (expected signs: MNESHAR + EXSHAR +)
The percentage of total advertising budget invested by Canadian industry “i” in local media (spot TV, radio, newspapers and billboards). Source: Marketing Magazine, April 1975.
U-CTV (expected signs: MNESHAR + EXSHAR -)
The difference between the U.S. and Canadian industry “i” percentages of total advertising budgets invested in network television advertising. Source: Canadian data from Marketing Magazine, April 1975. U.S. data courtesy of Dr. Richard Caves and from Advertising Age, Vol. 46, 1975.
U-CMAG (expected signs: MNESHAR + EXSHAR -)
The difference between the U.S. and Canadian industry “i” percentages of total advertising budgets invested in magazine advertising. Source: same as for previous variable.
U.S. Foreign Trade Linkage With Canadian
J BUSN RES 1992:24:73-88
Manufacturing
83
Table 1 (continued) Independent variables USDR (expected signs: MNESHAR + EXSHAR +)
(“traditional”) The proportion of research and employment related personnel relative to total employment in each U.S. industry “i.” Source: same as for UENG.
Proportion of shipments accounted for by plants with greater than 100 employees in U.S. industry “i”. Source: U.S. Bureau of the Census, Census of Manufacrurers, 1972. Vol. I, Industry Series Part I, Table 4, 1975.
ULSF (expected signs: MNESHAR + EXSHAR +)
merous equations, the performance of UMNE appeared to be somewhat more robust than that of the UEX variable. This result might be expected. given the earlier arguments that U.S. multinationals may act as conduits for the subsequent introduction of American export innovations and/or finished products into the host country markets, i.e., FDI and exports exhibit a complementary relationship. If the alternative hypothesis dominated (that U.S. multinationals first test foreign markets through exports and subsequently substitute FDI for exportation), then one might expect to see the U.S. export share variable act as a better predictor of American FDI than vice-versa. The processing intensity variables (UVAL, CVAL, and their difference, UCVAL) yielded mixed performances. These are variously tested in the preceding Equations (1) and (2) as well as in the following Equations (3), (4), and (5). EXSHAR Coefficient Beta coeff. t-value
=
a
+
B,UVAL
- 0.373
0.349 0.269 (2.72)h
(- 3.416)” R2 = 0.51
EXSHAR Coefficient
=
a
+
-0.492
Beta coeff. t-value
(-4.584)”
RI
Coefficient
=
u
+
0.004 0.543 (3.241)”
= 0.44
B,U-CTV
-
- 0.005 -0.550 (-3.035)” d.f.
F = 7.48
B,U-CMAG
0.456
9.495
0.005
- 0.007
-0.003
0.259
0.419
0.494
0.630
- 0.727
-0.194
(1.698)h
(3.733)”
(4.024)”
(3.823)”
= 0.53
-
B,U-CTV
0.462
0.004
-0.005
0.424
0.579
-0.551
(1.790)h
(3.226)”
(3.043)”
( - 0.867)
F = 5.25
B,U-CMAG
(-
+
1.455)’
B,ULSF
(4)
0.002 0.226 (1.975)”
d.f. = 7,42
0.318
= 0.38
~
(-4.064)”
0.211
R2
+
F = 8.74
(3)
0.002 0.247 (2.102)b
0.171
RZ
B,ULSF
= 6,43
B,U-CTV
R2 = 0.47
+
-0.002 -0.116 (-0.816)
BzCVAL + B,CLAD -
- 0.473 (-3.772)”
8.641 0.450 (3.502)”
-
BJUENG + B&LAD
B,UMNE
Beta coeff. t-value
+ B&LAD
l3,UMNE + B,CVAL+
R’ = 0.59
EXSHAR
+ B,UENG
-
( - 2.778)”
B,U-CMAG
+
B,USRD+
B,ULSF (5)
-0.002
0.784
0.001
-0.132
0.221
0.200
(1.552)
(1.524)’
d.f. = 7.42
The specification U-CVAL, suggested by Caves, easily provides the most consistently robust performance of the 3 processing intensity specifications. Regrettably, this difference between the U.S. and Canadian value added intensities can only be used in equations that employ MNESHAR as the dependent variable. UCVAL failed the “equal and opposite signs” test in each of the Equations 1, 3, 4, and 5 where it was initially tested. In fact the differenced format of the processing intensity variable failed in every single application where the U.S. export market share (EXSHAR) was the designated dependent variable.
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The U.S. processing intensity variable yielded the expected positive sign (albeit at only the 0.05 significance level) in the Equation (3) regression with EXSHAR. UVAL was found to be consistently weaker in performance than CVAL (the Canadian processing intensity variable). Controlling for the endogenous effects of FDI on CVAL proved to be unnecessary. The coefficients and t-values for the Canadian processing intensity variable changed very little with the inclusion or exclusion of UMNE. The consistently strong positive sign on CVAL might be viewed as support for the contentions of Baumann (1976), Caves et al. (1980), and Lermer (1973) that Canada tends to import new products from the U.S. The first “technological specialization” variable (UENG) is tested in Equations (3), (4), and (7) (Equation (7) is shown later). Used in equations with EXSHAR as the dependent variable (Equations (3) and (4)), it became apparent that UENG (the proportion of the total U.S. industry “i” labor force comprised of mechanical and chemical engineers) yielded a better performance than the USRD variable (the proportion of U.S. research and development personnel in industry “i”). For comparative purposes, note the equivalent Equations (4) and (5), where the UENG performance is well within the 0.01 significance level (Equation (4)) while USRD only achieves significance at 10% (Equation (5)). Conversely, in Equations (6) and (7) (where MNESHAR is the dependent variable), USRD (significant at 0.05 in Equation (6)) produces a better performance in terms of t-values than does UENG (insignificant in the equivalent Equation (7)). MNESHAR Coefficient Beta coeff. t-value
=
- 0.059 (-0.552)
Coefficient Beta coeff. t-value R’ = 0.53
B&LAD
=
(Y +
- 0.058 (-0.525)
+ B,U-CTV
0.002 0.209 (1.375)’
RZ = 0.51
R* = 0.56 MNESHAR
(Y +
B,UENG 4.615 0.157 (1.266)
R2 = 0.48
0.004 0.301 (1.935)h F = 11.02 +
B&LAD 0.002 0.210 (1.335)’
F = 9.91
+
B,U-CMAG 0.004 0.183 (1.457)’
+
B,USRD
+
P,ULSF
(6)
0.002 0.199 (1.772)h
1.302 0.240 (2.077)”
d.f. =5,44 + p&J-CTV 0.004 0.307 (1.819)”
+
P,U-CMAG 0.004 0.196 (1.507)’
+
P,ULSF
(7)
0.003 0.236 (2.079)”
d.f. = 5,44
The simple correlation (0.539) between USRD and the differenced processing intensity variable, U-CVAL, lends some support to the argument that the latter variable does in fact capture some aspects of technological orientation suggested to be present in processing-intensive industries. A similar, though weaker, correlation (0.359) also pertains between UENG and U-CVAL. Finally, in defense of the argument that UENG does in fact capture some of the technological orientation that has been suggested to underlie the R&D variable, it should be noted that the simple correlation between UENG and USRD is 0.742. The performances of the media variables across all equations are as expected. Due to collinearity problems, the t-values range from insignificant in the case of U-CMAG to significant well within the 0.01 region+specially for U-CTV and CLAD (the U.S. minus Canadian network television and the Canadian local media expenditure variables, respectively). These results are consistent with those obtained in the earlier work of Meredith (1984).
U.S. Foreign Trade Linkage With Canadian Manufacturing
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85
Caves’ “large sized firms” variable yields the expected results, but only at the 0.10 and 0.05 levels. ULSF has the advantage of providing consistent results across a wide number of different studies. Its disadvantage lies perhaps with its “general” nature and the higher order collinearities that may be present as a result. Due to the nature of such variables, it is sometimes difficult to specifically identify the effects that the variable is proxying. Conclusions The objectives of this study were first, to explore the FDI-cum-export penetration linkage of the Canadian market by U.S. sources, and second, to provide a plausible rationale for the existence of such a linkage. Results indicate that both FDI market share and U.S. export market share appear to be reasonably good explanatory variables for each other. The consistently positive and significant signs that characterize the FDI-export relationship lend credence to the contention that those 2 variables interact in a complementary as opposed to a substitutional capacity with each other. Such a conclusion is not really consistent with the positions taken by Horst (1972) or Baumann (1973). Whereas these authors using cross-sectional regression emphasized the 2 modes of market penetration as alternative means of exploiting comparative advantage, the position taken here is the antithesis. Exports and foreign direct investment within the framework of a static analysis are suggested to act as mutually complementary methods by which the multinational can strengthen its position in foreign markets. Future research may have to take into account more explicitly the problems of static versus dynamic analysis when addressing the interaction of FDI and export penetration. Ideally, when attempting to determine whether FDI might act as subsequent substitute for exporting, one might prefer to use a time series approach based on data that contain: 1) sufficient temporal information to allow for the fact that industries might move through a transition of initial home country production for export followed by host country FDI, and 2) sufficiently disaggregated S.I.C. information in order to date the “arrival” of new industries. This type of data base is suggested because the inherent methodological approach underlying the theory of “alternative” or substitute modes of market penetration is argued to be dynamic in nature. Regrettably, lack of adequate information often leaves little choice but to operate with a static model where dynamic implications can at best be 7;rived at through static based evidence. Arguments related to the“complexity and completeness” of U.S. manufactured outputs provide the foundation for the processing intensity variables. The processing intensity variables are intended to provide part of the rationale for the FDIexport linkage, i.e., the diffusion of product and process innovations as well as the opportunity to funnel “finished” or “near finished” exports through host country subsidiaries induces the mutual dependency of FDI and export penetration. The relationships between the key variables evident in the equations, as well as their simple correlations, appear to be internally consistent with the preceding notions. For example the following simple correlations, while certainly not conclusive, are nevertheless worthy of consideration: 1) MNESHARKJEX 2) MNESHARKJ-CVAL
= 0.415 = 0.577
86
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BUSN RES 1992:24:73-X8
3) UEX/UVAL 4) MNESHAR/CVAL
L. N. Meredith
and D. R. Maki
= 0.363 = 0.220
The technological specialization variable (proxied by the engineering occupational groups) seems to function quite well in the U.S. sourced export equations but less so in the FDI equations. The theoretical basis for this type of variable can be found in the trends of earlier studies that have moved along a continuum starting with Caves’ (1974) nonproduction employees, to R&D occupations followed by marketing management employment. The implication of such a trend is that we are gaining more insight into the specific types of human capital that aid in foreign market penetration. A somewhat speculative generalization based on the type of specifications used in this study is that the U.S. export share variable may be more amenable to explanation by determinants that are quite specific compared with those used in the multinational share equations. By way of examples, the aggregate U.S. R&D variable does not seem to be a very efficacious determinant of U.S. export market share in Canada compared with the disaggregated engineering occupations (UENG). The converse argument holds when attempting to explain the MNE market share. Caves’ (1974) U.S. “nonproduction employees” variable is a good predictor of U.S. MNE market share, but not of export market share. This issue of specificity may possibly be related to the technological advantages requirement, which has been widely argued to underlie international trade. Whereas successful FDI relies on a whole range of tangible and intangible capital requirements, successful export penetration may turn on being able to supply particular innovations that the host country is unable or unwilling to produce. If the processing intensity and technological specialization variables help to define some of the motivations that might spur U.S. international business expansion, the media usage variables (U-CTV, U-CMAG, and CLAD) as well as Caves’ “large sized firms” variable (ULSF) fulfill the role of identifying just some of the myriad techniques and characteristics that help to make the expansionary objective a reality, i.e., technological advantage, in and of itself, might not be a sufficient condition for achieving multinational status. Clearly, the types of hypotheses and variables used in this study must be subjected to a great deal more rigorous empirical testing before they can be accorded the kind of credibility given the traditionally accepted determinants of export penetration and foreign direct investment. Given that the main thrust of this research can be substantiated, however, a number of policy implications emerge: Governments intent on regulating foreign investment as well as imports should be more sensitive to the idea that multinationals now employ marketing strategies that attempt to create an optimal mix of FDI and exports to the host country simultaneously. This implies for example, that government policy must be coordinated over both tariffs and FDI. Policy makers find it useful to distinguish between FDI and export penetration by MNEs that have the effect of diffusing product and/or process innovations versus those that simply create subsidiaries for purposes of final assembly and packaging of “finished” and “near finished” products (“tariff factories”). More consideration might be given to the possibility that a positive relation-
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J BUSN RES 1992:24:73-M
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87
ship exists between the prevalence of certain specific occupational categories trade in the directly and a country’s dominant position, i.e., international related industries that rely heavily on those occupations. The related issues of FDI and foreign trade have been the subjects of active research for a good many years. Academics and practitioners alike can be expected to continue their interests in this area because the impacts of FDI and foreign trade will be even more strongly felt in future decades as the incidence of international competition and trade agreements continues to increase. Just as the introduction of the European Economic Community has had a significant impact on the trade patterns of its constituent countries, the recently negotiated Free Trade Agreement between the U.S. and its largest trading partner, Canada, can be expected to introduce marked changes in the interaction of these 2 nations. Undoubtedly, the demands for future research on FDI and foreign trade will continue to increase. References Aharoni, Y., The Foreign Investment Decision School of Business Administration, Harvard Baumann, H., The Industrial Composition of Canadian Market: Note. American Economic Baumann, H., Structural Characteristics of Economics 9 (1976): 408-424.
Process, Division of Research Graduate University, Cambridge. 1966. U.S. Export and Subsidiary Sales to the Review 63 (1973): 1009-1012.
of Canada’s
Pattern
of Trade.
Canadian Journal
Canada, Minister of Industry, Trade and Commerce, Corporations and Labour Unions Returns Act-Part I Corporations. Annual Report of the Minister of Industry, Trade and Commerce. Statistics Canada, Cat. No. 61-120, March 1979. Caves, R., Causes of Direct Investment: Foreign Firms’ Shares in Canadian and United Kingdom Manufacturing Industries. The Review of Economics and Statistics 56 (1974): 279-293. Caves, R., Porter, M., Spence, M., and Scott J., Competition in the Open Economy, A Model Appked to Canada. Harvard Economic Studies, Harvard University Press, Cambridge. 1980. Gorecki, P., The Determinants of Entry by Domestic and Foreign Enterprises in Canadian Manufacturing Industries: Some Comments and Empirical Results. The Review of Economics and Statistics 59 (1976): 485-488. Gruber, W., Mehta, D., and Vernon, R., The R&D Factor in International International Investment of U.S. Industries. Journal of Political Economy 20-37. Horst, T., The Industrial Composition of U.S. Exports and Subsidiary Market. American Economic Review 62 (1972): 37-45.
Trade and 75 (1967):
Sales to the Canadian
Kohli, U., Canadian Technology and Derived Import Demand and Export Supply Functions, Unpublished Ph.D. Thesis, University of British Columbia, Vancouver, 1975. Lermer, G., Evidence from Trade Data Regarding the Rationalizing Canadian Journal of Economics 6 (1973): 248-256. Liebowitz, S., Measuring 119-136.
Industrial
Disequilibria.
of Canadian
Southern Economic
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Journal 49 (1982):
Lipsey, R., and Weiss, M., Foreign Production and Exports of Individual Firms. The Review of Economics and Statistics 66 (1984): 304-308. MacCharles, D., Canadian Domestic and International Intra-Industry Trade. mimeo, versity of New Brunswick, Saint John, N.B., Canada, 1984.
Uni-
88
J BUSN RES 1992:24:73-88
Meredith, L., U.S. Multinational Investment in Canadian Review of Economics and Stati.rtics 66 (1984): 111-119.
L. N. Meredith Manufacturing
Orr, D., The Determinants of Entry: A Study of the Canadian The Review of Economics and Statistics 56 (1974): 58-66.
and D. R. Maki Industries.
Manufacturing
The
Industries.
Orr, D., The Industrial Composition of U.S. Exports and Subsidiary Sales to the Canadian Market: Comment. American Economic Review 65 (1975): 230-234. Schoner, B., and Schwindt, R., Advertising Direct Foreign Investment and Canadian tional Identity. Canadian Review of Studies in Nationalism 1 (1980): 127-150.
Na-
Statistics Canada, Financial Flows and Multinational Enterprise Decision. Canadian Imports by Domestic and Foreign Controlled Enterprises, 1978. Catalogue No. 67-509, Minister of Supply and Services, Ottawa, Canada. October 1981, pp. l-25. Williamson, P., Multinational Enterprise Behaviour and Domestic Industry Under Import Threat, unpublished working paper. 1985. pp. l-26.
Adjustment