The sale of Rockefeller Center, Columbia Pictures Entertainment, and Van Goghs at $40 million per canvas to Japanese buyers make for eye-catching headlines. But these big deals obscure more meaningful, less glitzy transactions carried on beyond the scope of media focus and public awareness. Foreign money, primarily Japanese, is buying into a host of many small, leading-edge technology companies -- the heart of America's entrepreneurial legacy. While its implications for the future remain unclear, this growing phenomenon has begun to spark serious debate (see "What's Wrong with Japanese Capital?", page 7).
Unlike Japan, the United States does not require comprehensive registration and reporting of the purchase of U.S. assets by foreign interests. In fact, an amendment to the Omnibus Trade and Competitiveness Act of 1988 requiring just that was killed. As a result, the picture of Japanese investment in U.S. technology is fragmentary. The U.S. Commerce Department's Office of Trade and Investment Analysis, for example, employs only one economist to work on global trends in international investment. Its data, not surprisingly, are correspondingly crude. Still, when the pieces from various sources are assembled, they do offer a compelling, if not comprehensive, mosaic.
According to Office of Trade and Investment Analysis calculations, direct Japanese investment in the American machinery industry (which includes computer-related companies) jumped from $1 billion in 1986 to $1.5 billion in 1987 to $2.5 billion in 1988.
The Washington, D.C.-based Japan Economic Institute -- funded by the Japanese government -- offers another perspective. It reports that in 1988 Japanese corporations' direct investment in U.S. manufacturing assets rose by 52% to $53.4 billion, that 205 companies, owned wholly or in part by the Japanese, were added to the list in 1988, bringing the total to 890. As a very rough comparison, between 1955 and 1984 there were only 32 examples of Japanese companies being acquired by foreign investors.
Numbers from Venture Economics Inc., in Needham, Mass., add further detail. During the first half of 1989 Japanese corporations invested a record $214 million in minority stakes in small U.S. technology companies. This is about two and a half times the figure from the first half of 1988. Moreover, it compares with $42 million for all of 1985, and a paltry $7 million for all of 1983. Two-thirds of that $214 million went either into computer or health-care companies. Nearly half of 1988's investment went to companies located in one state -- California -- and more than 80% of that money went into computer-related firms. In 1988, 40% of the Japanese dollars invested went into computer hardware and software companies.
Japan's hungry capital and America's open market have given rise to an elaborate infrastructure in this country of venture capitalists, investment bankers, lawyers, lobbyists, and assorted other middlemen. Their job is to ease Japan's access to the U.S. market, to find the fattest fruit.
Mark Radtke, a vice-president with the U.S. venture capital firm of Advent International Corp., is one such deal maker. On his travels to Japan he inevitably collects the annual reports of the large Japanese companies he visits. They make for startling reading. Says Radtke, "They all say pretty much the same thing, which is: 'The biggest thing happening right now is trying to figure out what sort of a company we want to be in the twenty-first century. What will we look like?' "
Virtually every large, mature company in Japan, says Radtke, is either setting up its own venture arm or working through U.S. funds to effect this transformation. The names, by now, are all but household words in America. Sony, Canon, Asahi Glass. Nippon Steel, Kobe Steel, and Kyocera. Fujitsu and Hitachi. "They pick out and develop the exciting new businesses. They actively try to figure out how to identify them, how to approach them," says Radtke, who finds the Japanese keen students of technology. "They study it, they ask questions. Then they visit the company and ask more questions. I'm in awe of their efficiency, the way they track down stuff that falls through the cracks here. When they find something they like they're willing to overpay, but in the long run it's not overpaying. The strategic value to them is enormous."
Radtke acknowledges past cases of Japanese expropriation of American technology. He ascribes this to naïve American companies that did not take sufficient steps to protect their intellectual property. He asserts that the Japanese more often than not enhance American technology. They widen its application and thereby benefit the U.S. companies they do business with.
Michael Borrus, a member of the Berkeley Roundtable on the International Economy at the University of California, says this is an issue that deserves more study. "One sensible perspective to take is to ask, 'What have the Japanese done for my economy lately?' " says Borrus. "If they use state-of-the-art technology, employ a lot of workers at well-paying jobs, and if they add something new, one could anticipate that this should be treated as positively as any investment. If it's set up so that all the value-added R&D and manufacturing is done in Japan, then it ought not to be welcomed at all."
The answer to that question remains open. More to the point, it is muddled by culture, believes Ronald A. Morse, a Japan specialist and, since March 1988, the development officer at the Library of Congress in Washington. The trade deficit, he argues, is owed in part to the now widely held belief that Japan's markets -- which favor the Japanese corporation at the expense of the Japanese consumer -- are closed relative to ours. Moreover, U.S. corporations must borrow capital at roughly twice the interest rate charged Japanese companies. The result is much more "critical mass" (money, technology, and management skill) available to Japanese companies.
But the true Japanese advantage, Morse argues, lies in their approach to technology. Unlike the Americans, they divorce science (innovation) from technology (application). "They buy up the scientific breakthroughs. That's where they're weakest. But when it comes to applications -- making something tangible and marketable from those innovations -- they're geniuses," says Morse. "They know exactly what they want, who has it, and how it can feed into their interests. They also know their only hope of surpassing the United States is to take their financial power and their human resources and hook them up to technology."
