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Terutomo Ozawa

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Terutomo Ozawa

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Terutomo Ozawa

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Preface and acknowledgements

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

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Why Akamatsu’s original theory needs reformulation

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

Kaname Akamatsu set forth the flying-geese theory of economic development as back as the 1930s, drawing on his statistical studies of Japan’s trade in manufactures in 1870_1939. He considered essential the old-fashioned, highly nationalistic, infant-industry protection strategy, a strategy that was designed to propel the three-step sequence of import, domestic production, and export, all by indigenous firms in avoidance of incursions by foreign interests. Arm’s-length trade was the major mode of exchange. Since then, however, the world economy has drastically changed. Multinational corporations (MNCs) are now ubiquitous, setting up production and marketing facilities in each other’s economies. The three-step sequence is carried out instantaneously at the hands of MNCs: local production is initiated simultaneously for export as well as for import substitution. MNCs’ involvement in the three-step sequence is explored.

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The classical origins of Akamatsu’s ideas: a missing link to David Hume’s ‘flying-manufacturers’ theory

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

This chapter examines some important classical origins of Akamatsu’s ideas. While studying in Germany in 1924_26, Akamatsu was strongly influenced by a variety of the stages theories of development expounded by the German Historical School. As he himself acknowledged, ‘his’ idea of the infant-industry protection-driven, three-step sequence of import, domestic production, and export was directly borrowed from Friedrich List’s (1885/1966) book, The National System of Political Economy. However, why did Akamatsu fail to notice what may be called the ‘flying-manufacturers’ theory advanced by David Hume (1754/1985), a theory that no doubt adumbrated Akamatsu’s ‘flying-geese’ theory? This is probably because the German Historical School that stressed inductive reasoning and empiricism was at loggerheads with the British Classical School that by sharp contrast pursued deductive reasoning in search of universal abstract theories. Consequently, Akamatsu must have been blindsided by the German Historical School, missing a chance to read Hume’s writings. References: Hume, David (1754/1985), Essays: Moral, Political and Literary, ed. Eugene Miller, Indianapolis, IN: Liberty Fund. List, Friedrich (1885/1966), The National System of Political Economy, New York: Augustus M. Kelly Publishers.

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The ladder of economic development revisited – and elaborated

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

The nebulous notion of the ladder of economic development has been defined in terms of a stages-delineated framework á la Schumpeter, consisting of, so far, five stages or rungs (labor-driven, resources-processing, assembly-based, research and development-driven, and information and communication technology -enabled industries) plus an inchoate stage of green and health technology-based growth presently in the making. The first and second rungs (that is, labor-intensive manufacturing and heavy and chemical industries) were developed under Pax Britannica with its strategy of ethnocentric industrialization and ‘kicking away the ladder’ from emerging economies. In contrast, the higher (third through sixth) rungs have come into existence under Pax Americana that has been spreading mass consumerism and ‘providing the ladder’ to the emerging world, for business- and ideology-motivated reasons. In addition to the inter-industry ratcheting-up progression, an intra-industry side-ladder is conceptualized for each rung of inter-industry ladder. This is where cross-border supply chains are embedded to exploit both the ‘endowed’ and the ‘created’ advantages of constituent economies. In the Appendices to Chapter 3, the role of MNCs in industrial take-off and sustained growth is discussed by reproducing three short essays published in the Columbia FDI Perspectives series.

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The dynamics of MNC-impacted comparative advantage: relevance to Ricardo’s view on FDI and Samuelson’s skepticism about globalization

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

The notion of ‘pro-trade’ versus ‘anti-trade’ foreign direct investment (FDI) was conceptualized by Professor Kiyoshi Kojima (1921_2010) and theoretically formalized in an article in The Hitotsubashi Journal of Economics (Kojima and Ozawa, 1984a/1993; reproduced in the United Nations Library on Transnational Corporations, Vol. 8). The core idea is that multinational corporations’ (MNCs) overseas investments in emerging markets have two opposing effects on the basis for trade: one is to expand comparative advantage (that is, a pro-trade effect), and the other is to reduce comparative advantage (that is, an anti-trade effect). The pro-trade type of FDI is central to a successful ‘flying-geese’ formation. Furthermore, the above theoretical distinction helps clarify both David Ricardo’s (1817) pessimism about the welfare effect of cross-border investment on the home country and Paul Samuelson’s (2004) skepticism of the long-term benefit of free trade to the United States in an age of globalization. References: Kojima, Kiyoshi and Terutomo Ozawa (1984a/1993), ‘Micro- and Macro-Economic Models of Direct Foreign Investment: Toward a Synthesis’, Hitotsubashi Journal of Economics, 25 (1), 1–20. Reproduced in Gray, H. Peter and John H. Dunning (eds) (1993), Transnational Corporations and International Trade and Payments, Vol. 8 of United Nations Library on Transnational Corporations, London: Routledge. Ricardo, David (1817/1888), ‘Principles of Political Economy and Taxation’, in J.R. McClulloch (ed.), The Works of David Ricardo, London: John Murray. Samuelson, Paul A. (2004), ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, Journal of Economic Perspectives, 18 (3), 135–46.

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The rise of multinationals from emerging markets: East Asian experiences

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

This chapter examines state_industry linkages in the course of the rise of multinational coreporations (MNCs) in emerging markets by drawing on East Asian experiences. Multinationals are both a creature and an instrument of industrial structure change that characterizes the process of economic development. In order for emerging markets to sustain catch up with industrialization they need their own homegrown multinationals so that they can exploit overseas business opportunities at each stage of structural change. In this regard, Japan set important precedents in transplanting low-wage production abroad via outward foreign direct investment (FDI) as a catalyst for industrial upgrading at home (comparative advantage recycling in low-wage production) and combining its resources-seeking FDI with economic cooperation in emerging host economies. The precedent of low-wage production transplantation was first followed by the newly industrializing economies and then has begun to be replicated by China. The precedent of FDI-cum-economic cooperation is currently most actively repeated by China in its efforts to secure overseas minerals and fuels.