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Corporate Links and Foreign Direct
Investment in Asia and the Pacific
Corporate Links and Foreign
Direct InvestiDent in Asia
and the Pacific

edited by

Edward K.Y. Chen

and

Peter Drysdale

~ ~ ~~o~~~~~i~G~oup
New York London

in association with
The Pacific Trade and Development Conference Secretariat
The Australian National University
Centre of Asian Studies, The University of Hong Kong
First published 1995 by Westview Press
in association with
The Pacific Trade and Development Conference Secretariat
The Australian National University

Published 2018 by Routledge

711 Third Avenue, New York, NY 10017, USA
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright© 1995, 2002 Taylor & Francis

All rights reserved. No part of this book may be reprinted or reproduced or

utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in writing from
the publishers.

Notice:
Product or corporate names may be trademarks or registered trademarks, and
are used only for identification and explanation without intent to infringe.

Copy edited by Beth Thomson

Index by Suzanne Ridley
Typeset by Minnie Reis

ISBN 13: 978-0-8133-8973-8 (pbk)

Contents---- -------

Tables vii
Figures X

Participants xii
Preface XVll

Introduction and overview

H adi Soesastro
2 Growth and decline in multinational enterprises: from
equilibrium models to turnover processes 9
Richard E. Caves
3 The interdependence of trade and investment in the
Pacific 29
Peter A. Petri
4 Subregional economic integration: Hong Kong, Taiwan,
South China and beyond 56
Yun- Wing Sung
5 Chinese capitalism in Thailand: embedded networks and
industrial structure 87
Gary G. Hamilton and Tony Waters
6 On the causes of low levels of FDI in Japan 112
Ryuhei Wakasugi
7 Japan's low levels of inward direct investment: causes,
consequences and remedies 129
Mark Mason

v
CoRPORATE LINKS AND FoREIGN DIRECT INVESTMENT

8 Multinational corporations and technology transfer in

Penang and Guadalajara 153
Juan J. Palacios
9 A study of the operations of Japanese firms in Asia: the
electrical machinery industry 187
Motoshige Itoh and Jun Shibata
10 Technological change, foreign investment and the new
strategic thrust of Japanese firms in the Asia Pacific 203
Denis Fred Simon and Yongwook Jun
11 The international procurement and sales behaviour of
multinational enterprises 227
Chia Siow Yue
12 Direct investment in low-wage and high-wage countries:
the case of Taiwan 262
Tain-Jy Chen, Ying-Hua Ku and Meng-Chun Liu
13 Summary of discussion 275
Gordon de Brouwer

Index 290

vi
Tables-------------- ----------

Table 3.1 Measures of regional interdependence (two-way trade),

1938-92 32
Table 3.2 FDI inflows, 1971-92 35
Table 3.3 East Asian FDI stocks, 1988-92 36
Table 3.4 Recent changes in FDI approvals, 1991-93 37
Table 3.5 Distribution of inward foreign investment stocks by source,
1980-92 38
Table 3.6 Distribution of inward FDI stocks 39
Table 3.7 Effects of foreign production on trade 43
Table 3.8 Sales distribution of Asian affiliates of Japanese and US
firms 45
Table 3.9 Sales distribution of Asian manufacturing affiliates of
Japanese firms, 1988-92 45
Table 3.10 Definitions and sources of variables 47
Table 3.11 Determinants of trade/GOP ratios, 1988-90 48
Table 3.12 Determinants of inward FDI/GDP ratios, 1988-90 49
Table 3.13 Correlation of external linkages and protection 50
Table 4.1 Basic economic indicators for Greater South China, 1992 57
Table 4.2 Contracted FDI in China by source country, 1979-92 62
Table 4.3 Hong Kong's trade involving outward processing
operations in China, 1989-93 68
Table 4.4 Values, growth rates and market shares of Hong Kong's
exports, 1978 and 1993 71
Table 4.5 Exports of Hong Kong firms operating in Hong Kong and
Guangdong by commodity, 1993 73

Vll
CoRPORATELINKs AND FoREIGN DJREcr INvEsTMENT

Table 4.6 Taiwan's exports to Hong Kong and China, 1988-93 77

Table 4.7 Taiwan's 'direct' and indirect trade with China, 1986-93 78
Table 6.1 Changes in market parameters in the United States and
Japan,1975-91 119
Table 6.2 Spearman's and Kendall's rank correlation coefficients 121
Table 6.3 Regression coefficients of explanatory variables 124
Table 7.1 Top 25 foreign-affiliated companies in Japan by reported
income, 1992 134
Table 7.2 US exports to majority American-owned affiliates as a
percentage of affiliates' total sales, preliminary 1991
estimates 144
Table 7.3 US exports to majority American-owned affiliates in Japan
as a percentage of affiliates' total sales, preliminary 1991
estimates 145
Table 8.1 Structure of Malaysia's electronics industry, 1986 and 1990 157
Table 8.2 Growth of factories in Penang' s industrial estates, 1980-93 158
Table 8.3 Distribution of factories in Penang' s industrial estates, 1993 159
Table 8.4 Employment structure of electrical/electronics industry
in Penang's industrial estates, 1993 161
Table 8.5 Location of electronics factories in Penang' s industrial
areas, 1992 161
Table 8.6 Major electronics products manufactured in Penang, 1992 163
Table 8.7 Concentration of major exporting companies by state, 1990 172
Table 9.1 Distribution of foreign affiliates of the Japanese electrical
machinery industry in Asia, 1993 189
Table 9.2 Japan's exports to and imports from Malaysia of electrical
machinery, 1985 and 1993 197
Table 9.3 Export pattern for parts made in Malaysia and Singapore 199
Table 10.1 Location of Japanese FDI, 1988-92 214
Table 10.2 Japanese firms manufacturing VCRs in the Pacific Rim 217
Table 11.1 Share of foreign affiliates in total exports of East Asian
host countries 230
Table 11.2 Export ratios of foreign and local manufacturing firms in
Singapore, 1991 231
Table 11.3 Export ratios of foreign affiliates in selected East Asian
host countries 232
Table 11.4 Measures taken by Japanese firms to cope with yen
appreciation 236

viii
 TABLES

Table 11.5 Role of trading affiliates of US MNEs in exports of US

majority-owned affiliates in host countries, 1977, 1982,
1988 and 1989 242
Table 11.6 Purchases of Singaporean IPOs by source country
and destination, 1992 245
Table 11.7 Purchases of Singaporean IPOs by origin of IPO, 1992 245
Table 11.8 Sales, inputs and intragroup transactions: a comparison
of Japanese affiliates in the United States, the European
Union, Asia and the NIBs, 1990 250
Table 11.9 Procurement and sales of Asian affiliates of Japanese
firms, 1989 251
Table 11.10 Comparison of procurement and sales behaviour of
Japanese and US affiliates, 1980 and 1990 256
Table 12.1 FDI by Taiwan's leading 674 firms, 1986-91 264
Table 12.2 FDI in high-wage and low-wage countries of Taiwan's
leading674firms, 1986-91 265
Table 12.3 Single equation PROBIT estimates of FDI by Taiwanese
firms 268
Table 12.4 Bivariate PROBIT estimates of FDI 270
Table 12.5 Effect of FDI on performance, 1986 and 1992 271

lX
Figures-----------

Figure 3.1 Intensity of regional trade, 1938-92 33

Figure 3.2 East Asian FDI inflows relative to regional GDP, 1971-92 36
Figure 3.3 Effects on trade and balance of payments of $1 of FDI in
Thailand 44
Figure 3.4 Relationship between FDI and trade intensity 46
Figure 6.1 FDI in Japan: net inflow of foreign capital and FDI
notifications, 1970-92 113
Figure 6.2 FDI in Japan by sector, 1971-91 114
Figure 6.3 International comparison of FDI inflows, 1982-91 115
Figure 6.4 Sales of foreign firms as a share of Japanese sales, and
royalites paid by Japanese firms on foreign technology, by
industry 121
Figure 6.5 Technological advantage and share of local production of
foreign firms 122
Figure 6.6 Profit rates of Japanese and foreign firms in Japan's
manufacturing sector, 1985-90 126
Figure 7.1 US FDI position abroad: main hosts as of 1992 130
Figure 7.2 US FDI postion in Japan and other G-5 countries, 1980-92 131
Figure 7.3 US FDI position in Japan versus Japanese FDI position
in the United States, 1980-92 132
Figure 7.4 Principal source countries of FDI stocks in Japan as of
1992 132
Figure 7.5 FDI position in the United States, United Kingdom, (West)
Germany and Japan, 1983-91 133
Figure 7.6 FDI stocks in Japan by sector, 1992 135

X
 fiGURES

Figure 7.7 Japanese mergers and acquisitions, 1981-92 141

Figure 9.1 Direct investment in Asia by Japan, the United States
and the European Union, 1987-91 189
Figure 9.2 Assembly process for automobiles and VCRs 191
Figure 9.3 Share of imported parts in output of Japan's home
electrical appliances industry, 1985-2000 193
Figure 9.4 Share of internal production of parts in home
electrical appliances industry, 1985-2000 194
Figure 9.5 Location of sales of automobiles and electrical machinery,
1984 and 1993; location of supply of automobile and
electrical/electronic parts, 1984 and 1992 198
Figure 9.6 Share of parts in Japan's total machinery exports by
region, 1993 200
Figure 10.1 FDI and the emergence of networks 205
Figure 10.2 Impact of the microelectronics revolution 208
Figure 10.3 Impact of the information technology revolution 210
Figure 10.4 NEC: networks, alliances and D&D in the Pacific Rim 219
Figure 10.5 NBC's PC business network 220

xi
Participants

Dr Florian A. Alburo Professor Edward K.Y. Chen

University of the Philippines, The University of Hong Kong,
The Philippines Hong Kong

Dr C. Fred Bergsten Dr Po-Chih Chen

Institute for International Economics, Taiwan Institute of Economic Research,
United States Taiwan

Dr Alan E. Bollard Dr Tain-Jy Chen

Commerce Commission,New Zealand Chung-hua Institution for Economic
Research, Taiwan
Mr Gordon de Brouwer
The Australian National University, Dr Leonard Cheng
Australia Hong Kong University of Science and
Technology, Hong Kong
Mr Javier Guzman Calafell
International Economic Affairs, Mexico Professor Chia Siow Yue
National University of Singapore,
Mr Giovanni Capannelli Singapore
Hitotsubashi University, Japan
Dr Yun-peng Chu
Professor Richard E. Caves Fair Trade Commission,
Harvard University, United States Republic of China

Dr Lawrence L.C. Chau Professor Rolf D. Cremer

School of Economics and Finance, Department of Economics,
United States New Zealand

xii

Professor Wendy Dobson
University of Toronto, Canada
Professor Peter Drysdale
The Australian National University,
Australia
Professor Dennis J. Encarnation
Harvard University, United States
Professor H. Edward English
Carleton University, Canada
Professor Carlo Filippini
Bocconi University, Italy
Dr John Frankenstein
The University of Hong Kong,
Hong Kong
Professor Ross Garnaut
The Australian National University,
Australia
Professor Gary Hamilton
University ofWashington,
United States
Dr Farid Harianto
University of Toronto, Canada
Dr Hal Hill
The Australian National University,
Australia
Sir Frank Holmes
National Bank of New Zealand,
New Zealand
Mr Ralph Huenemann
University of Victoria, Canada
Professor Motoshige Itoh
University of Tokyo, Japan
xiii
pARTICIPANTS
Dr Satish C. Jha
Asian Development Bank, India
Professor Yongwook Jun
Chung-Ang University, South Korea
Dr Mingsarn Kaosa-ard
Thailand Development Research
Institute Foundation, Thailand
Professor Kiyoshi Kojima
Suguradai University, Japan
Professor Akira Kohsaka
Osaka University, Japan
Professor Lawrence B. Krause
University of California, San Diego,
United States
Mr C.H. Kwan
Nomura Research Institute, Japan
Ms Ying-Hua Ku
Chung-Hua Institution for Economic
Research, Taiwan
Professor Y. Y. Kueh
Lingnan College, Hong Kong
Ms P.K. Lau
Hong Kong Polytechnic, Hung Hom,
Kowloon
Dr Lee Tsao Yuan
Institute of Policy Studies, Singapore
Mr Edward Leung
Hong Kong Trade Development
Council, Hong Kong
Dr K.W. Li
City Polytechnic of Hong Kong,
Hong Kong
CORPORATE LINKS AND FOREIGN DIRECT INVESTMENT

Dr Justin Lin Professor Denis F. Simon

Department of Rural Economic Tufts University, United States
Development, China
Dr Hadi Soesastro
Mr Meng-Chun Liu Centre for Strategic and International
Chung-Hua Institution for Economic Studies, Indonesia
Research, Taiwan
Dr Devinda Subainge
Professor Mark Mason World Bank, United States
Yale University, United States
Dr Yon-Wing Sung
Professor Corrado Molteni Chinese University of Hong Kong,
Bocconi University, Italy Hong Kong

Professor S.J. Nicholas Ms Tomoko Takahashi,

The University of Melbourne, Australia FAIR, Japan

Professor Mee-Kau Nyaw Professor Moktar Tamin

The Chinese University of Hong Kong, University of Malaya, Malaysia
Hong Kong
Dr Min Tang
Dr Juan J. Palacios Asian Development Bank,
University of Guadalajara, The Philippines
Mexico
Mr John Chun-Wah Tsang
Dr Mari Pangestu Assistant Director General of Trade,
Centre for Strategic and International Kowloon
Studies, Indonesia
Professor Shujiro Urata
Mr Steve Parker Waseda University, Japan
The Asia Foundation, United States
Professor Ricardo Vicuna
Professor Hugh Patrick Ministry of Foreign Affairs, Chile
Columbia University, United States
Professor Ryuhei W akasugi
Professor Peter A. Petri Yokohama National University, Japan
Brandeis University, United States
Dr D.O. Wang
Mr Graeme Pirie The University of Hong Kong,
Asia-Pacific Economic Cooperation Hong Kong
Secretariat, Singapore
Mr Tony Waters
Mr Jun Shibata University of California, Davis,
University of Tokyo, Japan United States

xiv
 PARTICIPANTS

Professor Maria Weber Dr Vladimir Yakubovsky

Bocconi University, Italy Visiting Fellow, Japan Centre for
Economic Research, Japan
Ms Anissa Wong
Industry Department, Hong Kong Professor Ippei Yamazawa
Hitotsubashi University, Japan
Ms Teresa Wong-Kwong
The University of Hong Kong, Dr Soogil Young
Hong Kong Korea Transport Institute,
South Korea
Professor Wu Rong-I
Taiwan Institute of Economic Research, Dr Zhu Naixiao
Taiwan South China Normal University,
China
Dr Eugenia Yakovleva
Institute of World Economy and
International Relations, Russia

XV
Preface------------------------

The Asia Pacific economies have enjoyed high growth rates over the past several
decades. The East Asian 'economic miracle' began with Japan and was carried
forward with the export-oriented industrialisation strategies of the four little 'dragons' -
Hong Kong, South Korea, Singapore and Taiwan. It has come to encompass the other
East Asian economies, including China, over the last decade or so. The transmission
of economic growth throughout the East Asian region has been powerful.
One important mechanism for such transmission has been foreign direct invest-
ment. An earlier PAFTAD volume, Direct Foreign Investment in Asia and the
Pacific, explored the role of foreign direct investment in Asia Pacific development and
growth at the end of the 1960s. A number of other studies have examined the impact
of direct investment on the regional economy. However, there has been less research
on corporate strategies and firm-level behaviour in multinational corporate operations
in the region. For this reason, P AFT AD 21 chose to focus on corporate links and
foreign direct investment in Asia and the Pacific as its central theme.
This volume is a collection of the edited papers presented at the Twenty-First
Pacific Trade and Development (PAFTAD) Conference held in Hong Kong in June
1994. The Centre of Asian Studies, an integral part of the University of Hong Kong,
was very pleased to act as host for the conference. Despite the fact that Hong Kong
scholars have been participating in PAFT AD activities for a long time, this was the
first time that the conference was held in Hong Kong. We would like to express our
gratitude to the Hong Kong government for its most generous financial support of the
conference. In particular, thanks are due to Mr Brian T.H. Chau, Secretary for Trade
and Industry, for his assistance throughout the preparations for the conference. We
also thank the Governor of Hong Kong, Mr Christopher Patten, for his presence at the
conference and for officiating at the opening ceremony. His opening address was much
more than ceremonial, and contained a mixture of his personal insights and experience
relating to the issues discussed throughout the conference.

xvii
CoRPORATE LINKS AND FoREIGN DIRECT INVESTMENT

The PAFT AD Conference and this volume would not have been possible without
the consortium of funders from around the region. We are grateful to the Asian
Development Bank, the Asia Foundation, the Australian National University, the Ford
Foundation, the Kansai Federation of Economic Organisations, the Korea Develop-
ment Institute, the Rockefeller Brothers Fund, the Taiwan Institute of Economic
Research and the Tokyo Chamber of Commerce for their continuing support for the
work of PAFT AD over many years.
We would like to acknowledge the efficient assistance provided by the PAFT AD
Secretariat in Canberra and the advice given by the International Steering Committee.
We are also very grateful to the local organising committee members, Dr Lawrence
L.C. Chau, Dr Sung Yun-Wing and Ms Teresa Y.C. Wong, for their hard work and
guidance. Credit also goes toMs Mely Caballero-Anthony, Conference Secretary,
who was responsible for overseeing the logistics of the conference preparations.
The volume was edited at the PAFTAD Secretariat at the Australian National
University. Ms Beth Thomson has done an excellent job in editing the original papers
for publication and Ms Minni Reis an equally fine job in designing and typesetting the
manuscript.
We trust that you agree that the volume makes a valuable contribution to
understanding of the role of foreign direct investment and corporate links in the
process of Asia Pacific economic development.

Edward K.Y. Chen and Peter Drysdale

November 1994

xviii
1 Introduction and overview--
Hadi Soesastro

The setting
Some of the most interesting developments that have taken place in recent years in the
Asia Pacific region have been in the field of foreign direct investment (FDI).
Intraregional FDI flows have increased dramatically over the past 10 years or so. The
stock of FDI in the ASEAN countries excluding Brunei (Indonesia, Malaysia, the
Philippines, Thailand and Singapore) is estimated to have increased by about 14 per
cent annually in 1980-92. The average increase in the stock of FDI in China over the
same period was 15 per cent per annum. The rate of increase has been even higher in
recent years: about 25 per cent annually for 1988-92. In terms of approvals, reports
indicate that inward FDI flows to China increased sharply in 1993. This suggests that
there may have been significant diversions of investment to China from other
destinations, particularly the ASEAN countries. In the three Asian NIEs (Hong Kong,
South Korea and Taiwan) the rate of increase in the FDI stock was on average 22 per
cent per annum in 1980-92. The stock of FDI in the whole of developing East Asia
(China, the Asian NIEs, Indonesia, Malaysia, the Philippines and Thailand) may have
increased by as much as US$130 billion during this period.
Japan was, of course, the main source of FDI to developing East Asia. Based on
balance of payments data, during the period 1985-92 cumulative outward flows of
Japanese FDI amounted to about US$220 billion. The United States is still the main
destination of Japanese FDI, most of it in non-manufacturing activities. In contrast,
the bulk of Japanese FDI in East Asia continues to be directed at manufacturing
activities. In other words, East Asia has received a substantial share of Japan's total
direct investment in manufacturing.
Traditional sources of direct investment, namely the United States and Europe,
continue to be important for the East Asian region. There has also been a rapid increase
in new sources. The Asian NIEs' stock of FDI in East Asia, most of it in ASEAN
countries and China, increased by close to US$40 billion in 1980-92. This means that
about one-third of the total increase in the stock ofFDI in East Asia during this period
CoRPORATE LINKs AND FoREIGN DIRECT INvEsTMENT

originated from the Asian NIEs. A rise in cross-investment is another interesting

feature observed in the region. The stock of FDI from developing East Asia in the
United States could now amount to about US$10 billion, most of it of recent vintage.
Thus, the FDI picture in the Asia Pacific region is characterised not only by a dramatic
rise in the volume of direct investment, but also by shifts in the destinations and sources
of FDI flows.
The immediate issues that arise from this brief review are the sustainability of these
rates of increase, the pattern of distribution ofFDI flows across countries in the region,
and the likely implications of the changing structure ofFDI sources on trade and other
cross-border activities of the regional economies. The relevance of these questions,
from a regional point of view, rests on a recognition that FDI flows have been
responsible for the economic dynamism of the region and in particular the high rates
of growth experienced by developing East Asia. In addition, intraregional FDI flows
have contributed significantly to the deepening of regional economic interdependencies
and the market-driven integration of regional economies. However, in the political
economy realm, deepening of interdependence is not always good news. The creation
of regional production networks that could in turn alter the geo-economics of the Asia
Pacific region may have serious politico-security implications.
Direct investment flows in the region have been influenced by push and pull factors
that have changed over the years. Peter Petri in chapter 3 of this volume identifies four
waves of FDI flows into developing East Asia in the postwar period. The first wave,
which took place in the 1960s and early 1970s, was motivated by protected local
markets and the first major yen revaluation. Investment was concentrated mainly in
joint ventures in textiles and household electrical equipment. The second wave, in the
1970s, was spurred by the region's bright prospects and the availability of low-cost
capital. This wave of investment included import substitution projects in basic
industries and the creation of American export platforms in consumer electronics and
semiconductors. The third wave, involving the relocation oflabour-intensive industry
from Japan and the Asian NIEs to ASEAN, resulted essentially from the appreciation
of the yen and several NIE currencies in the mid 1980s. This push coincided with a
major pull: the significantly improved investment climate in ASEAN countries, which
boosted their export capacity.
The story of these first three waves, particularly the third, has often been told. It
is the fourth wave that will draw the attention of those interested in the region. Petri
identified this as involving a massive foreign investment boom in China. He thought
that it may be the most significant wave of investment yet in terms of its geo-economic
implications for the region. There is as yet disagreement as to whether this latest wave
of investment will cause a major diversion of investment, from the A SEAN region in
particular, as investors are attracted to China's huge domestic market. Should
ASEAN countries attempt to minimise the threat of diversion by introducing even
more liberal investment regimes? If this proves insufficient, what strategy should the
ASEAN countries adopt?

2
 INTRODUCTION AND OVERVIEW

An alternative view suggests that this fourth wave may be characterised not so
much by a shift in destination as a major change in the origin ofFDI flows in the region.
This is seen in the increase in capital movements initiated by Overseas Chinese, as
manifested in FDI flows from the Chinese economies of Hong Kong and Taiwan. These
flows are not, however, going exclusively into China but to a significant degree into
ASEAN countries as well. Similarly, it can be argued that the main source ofthe FDI
boom in China could well be Japan.
Yet another scenario postulates that the fourth wave of FDI flows originated in
Japan and is undertaken for strategic considerations, but based on a product rather
than a market orientation. This scenario, proposed by Ken'ichi Imai at an earlier
Pacific Trade and Development Conference, suggests that the fourth investment wave
differs from the third in that it is driven, not by the major currency realignments of the
1980s, but rather by the globalisation of Japanese production activities involving new
cutting-edge technologies, such as fibre optics. These manufacturing activities on the
technological ascendancy curve can be undertaken outside Japan, but with Japan
retaining production of core technologies. As the ASEAN countries and China
continue to upgrade their technological capability, they will be able to participate in
such production networks, together with the Asian NIEs. This scenario sees both a
further consolidation of the East Asian regional production network with Japan at its
core and simultaneously an elevation of this network to higher technological levels,
thus giving support to the 'flying geese' paradigm.
Predicting what might constitute the fourth wave ofFDI necessarily involves some
speculation. However, in view of the possible significant longer term geo-economic
implications, this is both a useful and necessary exercise. Discussion at the Twenty-
First Pacific Trade and Development Conference provided important insights into the
major factors influencing the direction of changes in the nature and structure of FDI
flows in the Asia Pacific region.

The actors
Investment in the Asia Pacific region is undertaken by many investors, each acting on
the basis of some guidance or rules. An important feature of the region today is the
active involvement in cross-border activities, including FDI, not only of multinational
enterprises (MNEs) but also of small and medium sized enterprises from Japan or the
Asian NIEs. Firms from developing economies, such as the ASEAN countries, have
also entered the picture.
Richard Caves reminded the conference that transaction cost theory sees the MNE
as an economic agent that internalises decisions about resource allocation. Such
internalisation will be manifested in either a horizontally or vertically integrated firm
with activities that spill across national boundaries. To increase our understanding of
the behaviour of these actors, Caves suggests in chapter 2 that the process of gross
turnover of business units be examined more closely. Business units, he says, undergo

3
CORPORATE LINKS AND FOREIGN DIRECT INVESTMENT

processes of birth, expansion, contraction and demise. It has been observed, among
other things, that in manufacturing industries infant mortality rates are high, but that
there is a correlation between the rates of entrance and exit of firms.
This raises the question of the adaptability of business units to a changed
environment, and whether the capability to transform differs across cultures, countries
or regions, or sectors. In response to adverse changes in the environment, it has been
observed that subsidiaries ofMNEs do often restructure and change their roles, rather
than opting for exit. Anecdotal evidence was also given about the greater stability,
even in bad times, of Thai-Japan joint ventures compared with, say, Thai-Taiwan
joint ventures.
In chapter 12, Tain-Jy Chen et al. examine the direct investment patterns in high-
wage and low-wage countries of Taiwan's larger firms. As might be expected,
Taiwanese FDI in low-wage countries, such as Thailand, is undertaken mainly for
defensive purposes, namely to cut production costs and restore the firm's competitive-
ness in the export market. FDI in high-wage countries, on the other hand, is primarily
for the purpose of expanding markets. It is interesting to note the extent to which the
behaviour of large Taiwanese firms has not been significantly influenced by govern-
ment policy, particularly with respect to locational decisions.
MNEs and other business units constantly make investment decisions in conditions
of uncertainty. Multinational corporations use their proprietary assets to compensate
for the uncertainty of the environment in which they operate. Although the imputed
value of a firm's proprietary assets may itself suddenly change, it has been observed
that MNEs are more likely to be risk takers than other business units. In contrast, small
and medium sized enterprises, which are much less able to spread risks, may simply
follow others in their investment location decision. The large-scale migration of
Japanese small and medium sized enterprises - the supporting industries - to
Thailand in the late 1980s essentially followed the successful relocation there earlier
on of their subcontractors. At an earlier Pacific Trade and Development Conference,
Paul Krugman pointed to the importance of this demonstration effect. The 'new
economic geography' would also predict why such clustering or agglomeration
occurs. Still needing explanation, however, is why this has not equally been the case
in Indonesia. Specifically, why has not Indonesia been able to attract investment by
small and medium sized enterprises?

The emerging networks

The case of Greater South China, described so well by Yung-Wing Sung in chapter4,
provides one example of a subregional cluster. It involves investment, mainly in
Guangdong, by small and medium sized enterprises from Hong Kong and, to a lesser
extent, Taiwan. In fact, a very large proportion of Hong Kong's total FDI in China is
in Guangdong, most likely due to proximity and cultural factors. This subregional
production network is definitely market driven, and has developed in response to
China's policy of opening up its economy. It remains to be seen whether this situation

4
 INTRODUCTION AND OVERVIEW

can be replicated elsewhere in the region and how effectively the clustering of
economic activities can be influenced by policy. The 'growth triangles' of the A SEAN
region- SIJORI (involving Singapore, Johor in Malaysia and Riau in Indonesia),
IMT (Indonesia, Malaysia and Thailand) and EAGA (the East ASEAN Growth Area,
involving eastern Malaysia, southern Philippines, Brunei and eastern Indonesia)-
were initiated (or sponsored) by governments, basically to attract FDI. The success of
the growth triangles in achieving this goal will depend on whether the complementarities
that exist among their constituents produce locational advantages.
The A SEAN Free Trade Area (AFT A) is also intended to attract investment flows
to the ASEAN region as a whole. While the movement of goods has become less
constrained, factors cannot as yet move freely. It is hoped that a larger, single, freer
ASEAN market will allow greater economies of scale to operate. Within the region,
the distribution of FDI will be affected by the way in which investors perceive
differences in comparative advantage among the A SEAN countries. The new patterns
of division of labour emerging in the ASEAN region are a part of those developing in
the wider Asia Pacific region.
In chapter 9, Motoshige Itoh and J un Shibata study the emerging division of labour
and operations of Japanese firms in the Asia Pacific region, focusing on the electrical
machinery industry. This industry, while dynamic, has special characteristics that
make it more suited to the globalisation of production than other industries. The impact
of the emerging division of labour on the operations of Japanese firms in other
industries therefore remains inconclusive at this stage.
In the production of VCRs, for example, the parent firm is usually involved in a
number of production and assembly stages. This would suggest that the business
network will be dominated by the parent company. In the automotive industry, on the
other hand, the parent firm is usually involved only in the production oflarge parts and
final assembly. This opens the possibility for firms to develop partnerships or other
types of strategic alliances. Gary Hamilton and Tony Waters argue in chapter 5 that
although the organisational modes in the automotive sector have evolved from an
internalised structure to global networks, the parent firm retains control of the links
in the production chain because the network is producer rather than buyer driven. Even
within the electrical machinery industry, different types of corporate links or business
networks can develop, suggesting that corporate links may not be as sector specific as
previously thought. They may be specific to the operations of the 'network firm', that
is, the firm that manages and coordinates the network. This will need to be substan-
tiated by further research.
While modes of operation may vary, Denis Fred Simon and Jun Y ongwook are of
the opinion that Japanese firms investing abroad do in general have a common strategic
objective: the creation of regional sources of competitive advantage that will strengthen
their position both in the international marketplace and at home. They argue in chapter
10 that Japanese firms have increasingly come to view their counterparts in many
Asian economies as actual or potential partners. This indicates that the development
and consolidation of regional production networks by Japanese firms is likely to

5
CORPORATE LINKS AND FOREIGN DIRECT INvESTMENT

continue. Simon and Jun give a number of interesting examples ofthe various kinds
of business networking engaged in by Japanese firms.
Networking can be of the internal or external kind. Internal networking is
undertaken when control, usually through ownership, is considered important. Exter-
nal networking refers to the use of 'bonding' mechanisms of a non-equity type, such
as licensing, supplier or original equipment manufacturer (OEM) contracts, subcon-
tracting, or strategic alliances. The different network structures can be either function-
ally based (through marketing or manufacturing) or even culturally linked. In the more
competitive and uncertain environment in which firms operate today, networking
enables companies to enhance constantly their access to complementary assets and
partners with high value-added.
This trend has a number of possible implications. Some see the emergence of two
major production and business networks in the Asia Pacific region, one Japanese and
the other Chinese. The latter refers to the cross-border production linkages formed by
Overseas Chinese capital, especially with mainland China. Although any Japanese
network will most likely be based on technology, it is much more difficult to define the
basis of a Chinese network. The notion of a community of Overseas Chinese linked by
culture is questioned, especially by the younger generation of Southeast Asians of
Chinese ancestry .It can be argued that within each society Overseas Chinese are likely
to have a sense of common identity based on their minority status. It is also apparent
that particular business practices attributed to the group are often not clearly
formulated or transparent, although in practice they seem to have worked well. It has
often been suggested that Chinese networks are essentially based on trust. Alterna-
tively, however, they may be based on forms of financial relations.
Further, more precise study is needed to determine whether Japanese or Chinese
business networks in the Asia Pacific region are unique to that region or, indeed,
unique to Japan and China- if they exist at all as distinct entities. It is also unclear
whether these networks have changed over time. There are no compelling reasons to
predict that these two major networks are bound to collide with each other. Japanese
direct investment in East Asia is not at present concentrated in Southeast Asia, and will
probably be directed to China in increasing amounts; a significant amount ofFD I from
Hong Kong and Taiwan, meanwhile, continues to flow into ASEAN. What we may be
seeing is the emergence of two layers of regional production networks, with that of
Japan having a higher technological content.

Implications for trade and beyond

The changing nature of direct investment in the Asia Pacific region and the emergence
of production networks are believed to have an impact on trade. Petri shows that there
is a virtuous circle of investment, trade and growth in the region. The basis for this
observation is that outward-oriented trade and investment policies have stimulated
trade and attracted FDI, in turn encouraging governments to sustain policies that are
favourable for international linkages.

6
 lNTRooucnoN AND OvERVIEW

Some believe that this trade-investment nexus may not have existed in the past
when FDI inflows- into a number of ASEAN countries, for example- were meant
to substitute for imports. Statistics show, however, that for the most part there were
no significant reductions in imports, but rather a shift in industrial structure from
finished products to capital goods and intermediate inputs. FDI flows into ASEAN in
the 1980s were definitely trade creating. In Indonesia, for example, about 70 per cent
of direct investment projects undertaken since the latter part of the 1980s have been
export oriented. A causal relationship can be established from this observation. If, in
the future, non-equity arrangements become the preferred mode of investment, the
trade-investment nexus will tend to be weakened.
The creation of regional production networks in East Asia has many interesting
implications for trade relations in the region. Intraindustry and intrafirm trade have
generally increased. Developing East Asia's trade with major partners (the United
States and Europe) has increased steadily, as has the trade imbalance in favour of East
Asia. The imbalance between Japan and East Asia in Japan's favour has also risen,
as is to be expected given that Japan uses East Asia as an export platform. If further
globalisation of Japanese firms results in a different mode of operation, this imbalance
may no longer be an issue. However, developments in this area need to be monitored
closely; their political-economic implications should not be overlooked.
Concern has been expressed at Japan's relatively low levels of manufacturing
imports from East Asia, including parts produced by Japanese subsidiaries. This
deserves further, more detailed study. The slowdown of the Japanese economy in
recent years may be partly responsible for this trend, but other factors - structural
or policy- cannot be ignored. Chia Siow Yue shows in chapter 11 that Japanese firms
can make greater use of international procurement centres, such as those in Singapore,
to promote the import of parts and components from the region.
The low levels of direct investment in Japan have also received attention, perhaps
largely because of the huge imbalance in bilateral FDI flows between Japan and the
United States. There is no economic reason why there should be a balance in this
relationship, although there is some evidence to suggest that an increase in American
FDI in Japan could raise the level of US exports to Japan. Ryuhei Wakasugi in chapter
6 and Mark Mason in chapter 7 both show that while the Japanese government has
taken measures to liberalise investment and encourage inflows of FDI, a number of
serious impediments to investment still remain. The immediate removal of these
impediments and the provision of greater incentives, including subsidies from the
Japanese government, are unlikely to have a significant effect on flows of FDI to
Japan. Yet it appears that the international community expects Japan to take such
steps, to show its political will and its resolve to make Japan a 'normal' country. The
situation may change as Japanese companies continue to globalise- and they will be
forced to do so as competing networks proliferate, not only in the Asia Pacific region
but also globally.
Beyond these issues, there is also a need to study in greater depth the implications
for technology transfer of changes in the nature and magnitude of FDI flows in the

7
CoRPORATE LINKS AND FoREIGN DIRECT INVESTMENT

region, and of the creation of production networks. While the role of government is
important in efforts to upgrade human capital and skill, Juan Palacios argues in
chapter 8 that technology transfer in the electronics industry has essentially been
market driven, that is, driven by market competition. The increase in spin-offs
observed in Guadalajara, for instance, supports the hypothesis that direct investment
is an effective channel for technology transfer. This conclusion may not be generalisable
to other industries. It is, indeed, not immediately clear which technologies have been
transferred, and whether more advanced technologies tend to be transferred more
readily to import-substituting than to export-oriented activities. However, the ques-
tion is whether this should matter.
In closing it would be stimulating for further deliberations to repeat the provocative
question raised during discussions at the Twenty-First Pacific Trade and Development
Conference: what are the effects of emerging production networks and corporate links
on consumer welfare in the Asia Pacific region?

8
2 Growth and decline in
multinational enterprises:
from equilibrium models to
turnover processes
Richard E. Caves

Our understanding of the multinational enterprise (MNE) as an economic agent comes

from transaction cost analysis, which demonstrates how the MNE internalises
decisions about resource allocation that could occur instead as arm's-length transac-
tions. This powerful theory, first applied to vertically integrated firms, explains
equally well why multiactivity firms spill across national boundaries, and what their
existence implies for levels and patterns of production and international trade in goods,
services and technologies.
Like most of standard microeconomics, the transaction cost theory is static; that is,
it predicts or explains positions of equilibrium in which no agent wishes to alter any
of its economic choices, or it predicts how the agent will adjust following some
exogenous disturbance in the economic environment ('comparative statics'). We apply
the body of theory to actual economic agents in whatever setting we find them- in
or out of equilibrium, still adjusting to past disturbances, and starting to cope with
today' s perturbations. At least when analysing statistical samples, economists usually
apply equilibrium models to disequilibrated situations with impunity, controlling for
displacements from equilibrium where they can and otherwise assuming that they
represent random noise. These theoretical and empirical procedures have yielded a
useful and satisfying body of knowledge about the MNE. Our major empirical
conclusions about MNEs' behaviour probably suffer no serious errors or distortions
due to this procedure.
Nonetheless, by applying mainly static models to ever-changing data we might have
missed some opportunities for a deeper understanding of the MNE. In this chapter I
demonstrate two specific shortcomings in static approaches to the analysis ofMNEs.

1 A number of puzzles lurk in the empirical research on MNEs that can be

resolved once we recognise that static models have been applied to systemati-
cally changing data without filtering the processes of change.
2 The business units that we study undergo systematic processes of birth,
expansion, contraction and demise that are not well addressed by the standard

9
CoRPoRATE LINKs AND FOREIGN DIRECT INvEsTMENT

static theory. Rich opportunities for understanding these processes of change

are being exposed by empirical research on the gross turnover of enterprises
and business units, and by theoretical models of the turnover process.

In the first section of this chapter we summarise empirical and theoretical evidence
that has recently accumulated on change and turnover in the distribution of firms in
national markets. We then relate that evidence and models to findings in the empirical
literature on MNEs and conclude with an effort to identify unexploited opportunities
for research on multinationals.
Although the analysis is general, it has important applications to the Asia Pacific
area. Japan has recently grown into a major foreign direct investor, and the fates of
its recently founded subsidiaries support significant findings about turnover. Offshore
assembly operations in East and Southeast Asia incur few sunk costs, and for that
reason might be expected to show high turnover and mobility. Multinational busi-
nesses originating in Asian developing countries probably face high levels of organi-
sational and commercial risks as they first venture abroad.

Turnover of firms: new evidence and theory

Industrial economists have long been interested in the turnover of firms, but they could
work only with truncated samples of the largest industrial firms while comprehensive
data lay locked away in the world's census bureaus. In the past decade researchers
have at last gained the keys to those locks. Most of the important research is hence quite
new, as are the important theoretical contributions. Because the theory seems useful
more for organising empirical evidence than for testing hypotheses, we review selected
evidence first.

New evidence on business units' turnover

The population of firms that make up an industry is observed over some period of time.
Some firms apparently enjoy favourable changes in their costs or capabilities and
increase their market shares; others suffer impairments and give up shares. The
changes in fortune and the resulting growth or shrinkage tend to coincide in time: at
the beginning of a decade one cannot predict which firms (of a given size) will grow
and which will shrink. Even in the short run (year to year) there is not on average much
persistence in firms' growth rates. A business unit holding a large market share at the
outset is more likely subsequently to lose than to augment it; a firm with a small share,
unless it exits, is more likely to gain. More churning goes on among the small firms
in an industry than among the large ones, but even the leaders are on average likely to
lose their positions eventually.
Entrants come on the scene. Not a few of them discover that their cost levels are high
or their capabilities inferior, and their exits give rise to high rates of infant mortality.
Luckier entrants whose productivity levels equal or exceed the typical incumbent's

10
Another random document with
no related content on Scribd:
profession on practically the same level as the only three that to us have a
level at all, namely, the Army, the Navy, and the Service diplomatic or
ministerial of the State?
To Browne, therefore, when I finally climbed down from my caravan into
the soaking grass that awaited me at the bottom and found him breakfasting
alone, the others being scattered about in the condition of feverish yet sterile
activity that is characteristic of caravan life, I behaved in a manner perfectly
suitable applied to an ordinary pastor who should begin to talk to me with an
air of equality—I was, that is, exceedingly stiff.
He pushed the coffee-pot toward me: I received it with a cold bow. He
talked of the rain in the night and his fears that my wife had been disturbed
by it: I replied with an evasive shrug. He spoke cheerily of the brightness of
the morning, and the promise it held of a pleasant day: I responded with
nothing more convivial than Perhaps or Indeed—at this moment I cannot
recall which. He suggested that I should partake of a thick repulsive
substance he was eating which he described as porridge and as the work of
Jellaby, and which was, he said, extraordinarily good stuff to march on: I
sternly repressed a very witty retort that occurred to me and declined by
means of a monosyllable. In a word, I was stiff.
Judge then of my vexation and dismay when I discovered not ten minutes
later by the merest accident while being taken by Mrs. Menzies-Legh to a
farm in order that I might carry back the vegetables she proposed to buy at it,
that the young gentleman not only has a title but is the son of one of the
greatest of English families. He is a younger son of the Duke of Hereford,
that wealthy and well-known nobleman whose sister was not considered (on
the whole) unworthy to marry our Prince of Grossburg-Niederhausen, and
far from being mere Browne in the way in which Jellaby was and remained
mere Jellaby, the young gentleman I had been deliberately discouraging was
Browne indeed, but with the transfiguring addition of Sigismund and Lord.
Mrs. Menzies-Legh, with the same careless indifference I had observed in
her husband, spoke of him briefly as Sidge. He was, it appeared, a distant
cousin of her husband’s. I had to question her closely and perseveringly
before I could extract these details from her, she being apparently far more
interested in the question as to whether the woman at the farm would not
only sell us vegetables but also a large iron vessel in which to stew them. Yet
it is clearly of great importance first, that one should be in good company,
and secondly, that one should be told one is in it, because if one is not told
how in the world is one to know? And my hearers will, I am sure,
sympathize with me in the disagreeable situation in which I found myself,
for never was there, I trust and believe, a more polite man than myself, a
man more aware of what he owes to his own birth and breeding and those of
others, a man more careful to discharge punctiliously all the little (but so
important) nameless acts of courtesy where and whenever they are due, and
it greatly distressed me to think I had unwittingly rejected the advances of
the nephew of an aunt whom the entire German nation agrees to address on
her envelopes as Serene.
While I bore back the iron vessel called a stew-pot which Mrs. Menzies-
Legh had unfortunately persuaded the farmer’s wife to sell her, and also a
basket (in my other hand) full of big, unruly vegetables such as cabbages,
and smooth, green objects, unknown to me but resembling shortened and
widened cucumbers, that would not keep still and continually rolled into the
road, I wished that at least I had eaten the porridge. It could not have killed
me, and it was churlish to refuse. The manner of my refusal had made the
original churlishness still more churlish. I made up my mind to seek out
Lord Sigismund without delay and endeavour by a tactful word to set
matters right between us, for one of my principles is never to be ashamed of
acknowledging when I have been in the wrong; and so much preoccupied
was I deciding on the exact form the tactful word was to take that I had
hardly time to object to the nature and size of my burdens. Besides, I was
beginning to realize that burdens were going to be my fate. There was little
hope of escaping them, since the other members of the party bore similar
ones and seemed to think it natural. Mrs. Menzies-Legh at that moment was
herself carrying a bundle of little sticks for lighting fires, tied up in a big red
handkerchief the farmer’s wife had sold her, and also a parcel of butter, and
she walked along perfectly indifferent to the odd figure she would cut and
the wrong impression she would give should we by any chance meet any of
the gentlefolk of the district. And one should always remember, I consider,
when one wishes to let one’s self go, that the world is very small, and that it
is at least possible that the last person one would choose as a witness may be
watching one through an apparently deserted hedge with his eyeglasses up.
Besides, there is no pleasure in behaving as though you were a servant, and
old James certainly ought to have accompanied us and carried our purchases
back. Of what use is a man servant, however untidy, who is nowhere to be
seen when washing up begins or shopping takes place? Being forced to
pause a moment and put the stew-pot down in order to rest my hand (which
ached) I inquired somewhat pointedly of my companion what she supposed
the inhabitants of Storchwerder would say if they could see us at that
moment.
“They wouldn’t say anything,” she replied—but her smile is not equal to
her sister’s because she has only one dimple—“they’d faint.”
“Exactly,” said I meaningly; adding, after a pause sufficient to point my
words, “and very properly.”
“Dear Baron,” said she, pretending to look all innocent surprise and
curling up her eyelashes, “do you think it is wrong to carry stew-pots? You
mustn’t carry them, then. Nobody must ever do what they think wrong.
That’s what is called perjuring one’s soul—a dreadfully wicked thing to do.
Do you suppose I would have you perjure yours for the sake of a miserable
stew-pot? Put it down. Don’t touch the accursed thing. Leave it in the ditch.
Hang it on the hedge. I’ll send Sidge for it.”
Send Sidge? At once I snatched it up again, remarking that what Lord
Sigismund could fetch I hoped Baron von Ottringel could carry; to which
she made no answer, but a faint little sound as we resumed our journey came
from behind her motor veil, whether of approval and acquiescence or
disapproval and contradiction I cannot say, for there was nothing, on looking
at her as she
 “Dear Baron,” said she, “do you think it is wrong to carry stew-pots?”

walked beside me, to go on except the tip of a slightly inquiring nose and the
tip of a slightly defiant chin and the downward curve of the row of
ridiculously long eyelashes that were on the side next to me.
When we got back to the camp we found it in precisely the same
condition in which we had left it—that is, in confusion. Every one seemed to
be working very hard, and nothing seemed to be different from what it was a
full hour before. Indeed, hours seem to have strangely little effect in
caravaning: even hours and hours have little; and it is only when you get to
hours and hours and hours that you see a change. In our preparations each
morning for departure it always appeared to me that they would never have
ended but for a sudden desperate unanimous determination to break them off
and go.
The two young girls who had not appeared the previous night when I
retired to rest had at last, as Menzies-Legh would say, turned up. They had
done this, I gathered, early in the morning, having slept with their governess
at an inn in Wrotham, she being a discreet person who preferred not to
search in rain and darkness for that which when found might not be nice.
She had arrived after breakfast, handed over her charges, and taken her
departure; and the young girls as I at once saw were not young girls at all,
but that nondescript creature with a thick plait down its back and a
disconcerting way of staring at one that we in Germany describe as
Backfisch and the English, I am told, allude to as flapper.
Lord Sigismund was cleaning boots, seated on the edge of a table in his
shirt sleeves with these two nondescripts standing in a row watching him,
and I was greatly touched by observing that the boot he was actually
engaged upon at the moment of our approach was one of Edelgard’s.
This was magnanimity. More than ever was I sorry about the porridge. I
hastily put down the stew-pot and the basket and hurried across to him.
“Pray allow me,” I said, snatching up another boot that stood on the table
at his side and plunging a spare brush into the blacking.
“That one’s done,” said he, pipe in mouth.
“Ah, yes—I beg your pardon. Are these——?”
I took up another pair, with some diffidence, for the done ones and the
undone ones had a singular resemblance to each other.
“No. But you’d better take off your coat, Baron—it’s hot work.”
So I did. And much relieved to hear by his tone that he bore me no ill will
I joined him on the edge of the table; and if any one had told me a week
before that a day was at hand when I should clean boots I would, without
hesitation,
 Thus, as it were, with blacking, did I cement my friendship with Lord Sigismund

have challenged him to fight, the extremity of the statement’s incredibleness

leaving me no choice but to believe it a deliberate insult.
Thus, as it were with blacking, did I cement my friendship with Lord
Sigismund. I think he thought me a thoroughly good fellow who was only,
like so many people, a little stiff at breakfast, as I sat there helping him, my
hat pushed back off my forehead, one leg swinging, and while I brushed and
blackened chatting cheerfully about the inferior position the clergy occupy to
the German eye. I am sure he was interested, for he paused several times in
his work and looked at me over his spectacles with much attention. As for
the two nondescripts, they never took their exceedingly round and
unblinking eyes off me for an instant.
 CHAPTER VI

I T was twelve o’clock before we left Grib’s (or Grip’s) Common, lurching
off it by another grassy lane down into the road in the direction of
Mereworth, and leaving, as we afterward discovered, several portions of
our equipment behind us.
“What a lovely, sparkling world!” said Mrs. Menzies-Legh, coming and
walking beside me.
I was struggling with the tempers of my very obstinate horse, so could
only gasp a brief assent.
The road was narrow, and wound along hard and smooth between hedges
she seemed to find attractive, for every few yards she stopped to pull
something green out of them and take it along with her. The heavy rain in the
night had naturally left things wet, and there being a bright sun the drops on
the blades of grass and on the tips of the leaves could not help sparkling, but
there was nothing remarkable in that, and I would not have noticed it if she
had not looked round with such apparent extreme delight and sniffed in the
air as if she were in a first-class perfumery shop Unter den Linden where
there really are things worth sniffing. Also she appeared to think there was
something very wonderful about the sky, which was just the ordinary blue
one has a right to expect in summer sprinkled over with the usual number of
white fine-weather clouds, for she gazed up at that too, and evidently with
the greatest pleasure.
“Schwärmerisch,” said I to myself; and was internally slightly amused.
My hearers will agree with me that such raptures are well enough in a
young girl in a white gown, with blue eyes and the washed-out virginal
appearance one does not dislike at eighteen before Love the Artist has
pounced on it and painted it pink, and they will also, I think, agree that the
older and married women must take care to be at all times quiet. Ejaculations
of a poetic or ecstatic nature should not, as a rule, pass their lips. They may
ejaculate perhaps over a young baby (if it is their own) but that is the one
exception; and there is a good reason for this one, the possession of a young
baby implying as a general rule a corresponding youth in its mother. I do not
think, however, that it is nice when a woman ejaculates over, say, her tenth
young baby. The baby, of course, will still be sufficiently young for it is a
fresh one, but it is not a fresh mother, and by that time she should have
stiffened into stolidity, and apart from the hours devoted to instructing her
servant, silence. Indeed, the perfect woman does not talk at all. Who wants
to hear her? All that we ask of her is that she shall listen intelligently when
we wish, for a change, to tell her about our own thoughts, and that she
should be at hand when we want anything. Surely this is not much to ask.
Matches, ash-trays, and one’s wife should be, so to speak, on every table;
and I maintain that the perfect wife copies the conduct of the matches and
the ash-trays, and combines being useful with being dumb.
These are my views, and as I drove my caravan along the gravelly road I
ruminated on them. The great brute of a horse, overfed and under-worked,
was constantly endeavouring to pass the Ailsa which was in front of us, and
as that meant in that narrow lane taking the Elsa up the bank as a
preliminary, I was as constantly endeavouring to thwart him. And the sun
being hot and I (if I may so put it) a very meltable man, I soon grew tired of
this constant tugging and looked round for Edelgard to come and take her
turn.
She was nowhere to be seen.
“Have you dropped anything?” asked Frau von Eckthum, who was
walking a little way behind.
“No,” said I; adding, with much readiness, “but my wife has dropped
me.”
“Oh!” said she.
I kept the horse back till she caught me up, while her leaner sister, who
did not slacken her pace, went on ahead. Then I explained my theory about
wives and matches. She listened attentively, in just the way the really clever
woman knows best how to impress us favourably does, busying herself as
she listened in tying some flowers she had gathered into a bunch, and not
doing anything so foolish as to interrupt.
Every now and then as I warmed and drove my different points home, she
just looked at me with thoughtful interest. It was delightful. I forgot the
annoying horse, the heat of the sun, the chill of the wind, the bad breakfast,
and all the other inconveniences, and saw how charming a caravan tour can
be. “Given,” I thought, “the right people and fine weather, such a holiday is
bound to be agreeable.”
 The day was undoubtedly fine, and as for the right people they were
amply represented by the lady at my side. Never had I found so good a
listener. She listened to everything. She took no mean advantage of one’s
breath-pauses to hurry in observations of her own as so many women do.
And the way she looked at me when anything struck her particularly was
sufficient to show how keenly appreciative she was. After all there is
nothing so enjoyable as a conversation with a thoroughly competent listener.
The first five miles flew. It seemed to me that we had hardly left Grip’s
Common before we were pulling up at a wayside inn and sinking on to the
bench in front of it and calling for drink.
What the others all drank was milk, or a gray, frothy liquid they said was
ginger-beer—childish, sweet stuff, with little enough beer about it, heaven
knows, and quite unfit one would think for the stomach of a real man.
Jellaby brought Frau von Eckthum a glass of it, and even provided the two
nondescripts with refreshments, and they took his attentions quite as a matter
of course, instead of adopting the graceful German method of ministering to
the wants of the sterner and therefore more thirsty sex.
The road stretched straight and white as far as one could see on either
hand. On it stood the string of caravans, with old James watering the horses
in the sun. Under the shadow of the inn we sat and rested, the three
Englishmen, to my surprise, in their shirt-sleeves, a condition in which no
German gentleman would ever show himself to a lady.
“Why? Are there so many holes in them?” asked the younger and more
pink and white of the nondescripts, on hearing me remark on this difference
of custom to Mrs. Menzies-Legh; and she looked at me with an air of grave
interest.
Of course I did not answer, but inwardly criticized the upbringing of the
English child. It is characteristic of the nation that Mrs. Menzies-Legh did
not so much as say Hush to her.
On the right, the direction in which we were going to travel, the road
dipped down into a valley with distant hills beyond, and the company,
between their sips of milk, talked much about the blueness of this distance.
Also they talked much about the greenness of the Mereworth woods rustling
opposite, and the way the sun shone; as though woods in summer were ever
anything but green, and as though the sun, when it was there at all, could do
anything but go on shining!
 I was on the point of becoming impatient at such talk and suggesting that
if they would only leave off drinking milk they would probably see things
differently, when Frau von Eckthum came and sat down beside me on the
bench, her ginger-beer in one hand and a biscuit, also made of ginger, in the
other (the thought of what they must taste like together made me shiver) and
said in her attractive voice:
“I hope you are going to enjoy your holiday. I feel responsible, you
know.” And she looked at me with her pretty smile.
I liked to think of the gentle lady as a kind of godmother, and made the
proper reply, chivalrous and sugared, and was asking myself what it is that
gives other people’s wives a charm one’s own never did, never could, and
never will possess, when the door-curtain of the Elsa was pulled aside, and
Edelgard, whose absence at our siesta I had not noticed, stepped out on to
the platform.
Lord Sigismund and Jellaby immediately got up and unhooked the steps
and held them for her to come down by. Menzies-Legh also went across and
offered her a hand. I alone sat still, as well I might; for not only am I her
husband, but it is absurd to put false notions of her importance into a
woman’s head who has not had such attentions paid her since she was
eighteen and what we call appetitlich.
Besides, I was rooted to the bench by amazement at her extraordinary
appearance. No wonder she was not to be seen when duty ought to have kept
her at my side helping me with the horse. She had not walked one of those
five hot miles. She had been sitting in the caravan, busily cutting her skirt
short, altering her hair, and transforming herself into as close a copy as she
could manage of Mrs. Menzies-Legh and her sister.
Small indeed was the resemblance now to the Christian gentlewoman one
wishes one’s wife to seem to be. Few were the traces of Prussia. I declare I
would not have recognized her had I met her casually in the road; and to
think she had dared do it without a word, without asking my permission,
without even asking my opinion! Her nice new felt hat with its pheasant’s
wing had almost disappeared beneath a gauze veil arranged after the fashion
adopted by the sisters. Heaven knows where she got it, or out of what other
garment, now of course ruined, she had cut and contrived it; and what is the
use of having a pheasant’s wing if you hide it? Her hair, up to then so tight
and inconspicuous, was loosened, her skirt showed almost all of both her
boots. The whole figure was strangely like that of the two sisters, a little
thickened, a little emphasized.
What galled me was the implied entire indifference to my authority. My
mind’s indignant eye saw the snap her fingers were executing in its face.
Also, one’s own wife is undoubtedly a thing apart. It is proper and delightful
that the wives of others should be attractive, but one’s own ought to be
adorned solely with the ornament of a meek and quiet spirit combined with
that other ornament, an enduring desire to keep the husband God has given
her comfortable and therefore happy. Without these two a wife cannot be
regarded as a fit object for her husband’s esteem. I plainly saw that I would
find it impossible to esteem mine in that skirt. I do not know what she had
done to her feet, but they looked much smaller than I had been accustomed
to suppose them as she came down the steps assisted by the three gentlemen.
My full beer-glass, held neglected in my hand, dripped unheeded on to the
road as I stared stupidly at this apparition. Rapidly I selected the first few of
the phrases I would address to her the moment we found ourselves alone.
There should be an immediate stop put to this loosening of the earth round
the roots of the great and sheltering tree of a husband’s authority.
“Poor silly sheep,” I could not help murmuring, those animals flashing
into my mind as a legitimate development of the sheltering-tree image.
Then I felt there was a quotation atmosphere about them, and was sure
Horace or Virgil—elusive bugbears of my boyhood—must have said
something that began like that and went on appropriately if only I could
remember it. I regretted that having forgotten it I was unable to quote it, to
myself as it were, but yet just loud enough for the lady beside me to hear.
She, however, heard what I did say, and looked at me inquiringly.
“If I were to explain, dear lady,” said I, instantly responding to the look,
“you would not understand.”
“Oh,” said she.
“I was thinking in symbols.”
“Oh,” said she.
“It is one of my mental tricks,” I said, my gaze however contracting
sternly as it fell on Edelgard’s approaching form.
“Oh,” said she.
Certainly she is a quiet lady. But how stimulating. Her solitary oh’s are
more packed with expressiveness than other women’s hour-long tirades.
 She too was watching Edelgard coming toward us across the sun-beaten
bit of road, her head slightly turned away from me but not so much that I
could not see she was smiling at my wife. Of course she must have been
amused at such a slavish imitation; but with her usual kindness she made
room on the bench for her and, without alluding to the transformation,
suggested refreshment.
Edelgard as she sat down shot a very curious glance at me round the
corner of her head-wrappings. I was surprised to see little that could be
called apology in her way of sitting down, and looked in vain for the red spot
that used to appear on each cheek at home when she was aware that she had
done wrong and that it was not going to be passed over. She was sheltered
from immediate steps on my part by Frau von Eckthum who sat between us,
and when Jellaby approached her with a glass of milk she actually took it
without so much as breathing the honest word beer.
This was too much. I threw back my head and laughed as heartily as I
have ever seen a man laugh. Edelgard and milk! Why, I do not believe she
had drunk it pure like that since the day she parted from the last of her
infancy’s bottles. Edelgard becoming squeamish; Edelgard posing—and
what a pose; good heavens, what a pose! Edelgard, one of Prussia’s
daughters, one of Prussia’s noblemen’s daughters, accepting milk instead of
beer, and accepting it at the hands of a Socialist in shirt sleeves. A vision of
Storchwerder’s face if it could see these things rose before me. Of course I
laughed. Not, mind you, without some slight tinge of bitterness, for laughter
may be bitter and hearty at the same time, but on the whole I think I did
credit to my unfailing sense of humour in spite of very great provocation,
and I laughed till even the horses pricked up their ears and turned their heads
and stared.
Nobody else smiled. On the contrary—it cannot be true that laughter is
infectious—they watched me with a serious, amusingly serious, surprise.
Edelgard did not watch. She knew better than that. Carefully she concealed
her face in the milk, feeling no doubt it was the best place for it, and unable
to leave off drinking the stuff because of the problem of how to meet my
eyes once she did. Frau von Eckthum regarded me with much the same
attentive interest she had
 Edelgard posing—and what a pose; good heavens, what a pose!

shown when I was explaining some of my views to her on the march—I

mean, of course, my views on wives, but language is full of pitfalls. The
Menzies-Legh niece (they called her Jane) paused in the middle of a banana
to stare. Her friend, who answered to the singular name (let us hope it was
merely a sobriquet) of Jumps, forgot to continue greedily pressing biscuits
into her mouth, and, forgetting also that her mouth was open to receive them,
left it in that condition. Mrs. Menzies-Legh got up and snap-shotted me.
Menzies-Legh leaned forward when I had had my laugh nearly out and said:
“Come, Baron, let us share the joke?” But his melancholy voice belied his
words, and looking round at him I thought he seemed little in the mood for
sharing anything. I never saw such a solemn, dull face; it shrivelled up my
merriment just to see it. So I merely shrugged one of my shoulders and said
it was a German joke.
“Ah,” said Menzies-Legh; and did not press me further. And Jellaby,
wiping his forehead (on which lay perpetually a long, lank strand of hair
which he was as perpetually brushing aside with his hand, apparently
desirous of not having it there, but only apparently, for five seconds with any
competent barber would have rid him of it forever)—Jellaby, I say, asking
Menzies-Legh in his womanish tenor voice if the green shadows in the wood
opposite did not remind him of some painter friend’s work, they began
talking pictures as though they were as important every bit as the great
objects of life—wealth, and war, and a foot on the neck of the nations.
Well, it was impossible to help contrasting their sluggishness with a party
of Germans under similar conditions. Edelgard would have been greeted
with one immense roar of laughter on her appearing suddenly in her new
guise. She would have been assailed with questions, pelted with mocking
comments, and I might have expressed my own disapproval frankly and
openly and no one would have thought it anything but natural. There,
however, in that hypocritical country they one and all pretended not to have
seen any change at all; and there was something so depressing about so
many stiff and lantern jaws whichever way I turned my head that after my
one Homeric burst I found myself unable to go on. A joke soon palls if
nobody else can see it. In silence I drank my beer: and realized that my
opinion of the nation is low.
It was chiefly Menzies-Legh and Jellaby who sent down the mercury, I
reflected, as we resumed the march. One gets impressions, one knows not
how or why, nor does one know when. I had not spoken much to either, yet
there the impressions were. It was not likely that I could be mistaken, for I
suppose that of all people in the world a Prussian officer is the least likely to
be that. He is too shrewd, too quick, of too disciplined an intelligence. It is
these qualities that keep him at the top of the European tree, combined,
indeed, with his power of concentrating his entire being into one noble
determination to stay on it. Again descending to allegory, I can see Menzies-
Legh and Jellaby and all the other slow-spoken and slow-thoughted
Englishmen flapping ineffectually among the lower and more comfortable
branches of the tree of nations. Yes, they are more sheltered there; they have
roomier nests; less wind and sun; less distance to fly in order to fetch the
waiting grub from the moss beneath; but what about the Prussian eagle
sitting at the top, his beak flashing in the light, his watchful eye never off
them? Some day he will swoop down on them when they are, as usual,
asleep, clear out their and similar well-lined nests, and have the place to
himself—becoming, as the well-known picture has it (for I too can allude to
pictures), in all his glory Enfin seul.
The road went down straight and long and white into the flat. High dusty
hedges shut us in on either side. Across the end, which looked an
interminable way off, lay the blue distance the milk drinkers admired. The
three caravans creaked over the loose stones. Their brown varnish glistened
blindingly in the sun. The horses plodded onward with hanging heads,
subdued, no doubt, by the growing number of the hours. It was half-past
three, and there were no signs of camp or dinner; no signs of our doing
anything but walk along like that in the dust, our feet aching, our throats
parching, our eyes burning, and our stomachs empty, forever.
 CHAPTER VII

A MAN who is writing a book should have a free hand. When I began my
narrative I hardly realized this, but I do now. No longer is Edelgard
allowed to look over my shoulder. No longer are the sheets left lying
open on my desk. I put Edelgard off with the promise that she shall hear it
when it is done. I lock it up when I go out. And I write straight on without
wasting time considering what this or that person may like or not.
At the end, indeed, there is to be a red pencil,—an active censor running
through the pages making danger signals, and whenever on our beer
evenings I come across its marks I shall pause, and probably cough, till my
eye has found the point at which I may safely resume the reading. Our guests
will tell me that I have a cold, and I shall not contradict them; for whatever
one may say to one friend at a time in confidence about, for instance, one’s
wife, one is bound to protect her collectively.
I hope I am clear. Sometimes I fear I am not, but language, as I read in
the paper lately, is but a clumsy vehicle for thought, and on this clumsy
vehicle therefore, overloaded already with all I have to say, let us lay the
whole blame, using it (to descend to quaintness) as a kind of tarpaulin or
other waterproof cover, and tucking it in carefully at the corners. I mean the
blame. Also, let it not be forgotten that this is the maiden flight of my Muse,
and that even if it were not, a gentleman cannot be expected to write with the
glibness of your Jew journalist or other professional quill-driver.
We did not get into camp that first day till nearly six (much too late, my
friends, if you should ever find yourselves under the grievous necessity of
getting into such a thing), and we had great difficulty in finding one at all.
That, indeed, is a very black side of caravaning; camps are rarely there when
they are wanted, and, conversely, frequently so when they are not. Not once,
nor twice, but several times have I, with the midday sun streaming vertically
on my head, been obliged to labour along past a most desirable field, with
just the right aspect, the sheltering trees to the north, the streamlet for the
dish-washing loitering about waiting, the yard full of chickens, and cream
and eggs ready to be bought, merely because it came, the others said, too
early in the march and we had not yet earned our dinner. Earned our dinner?
Why, long before I left the last night’s camp I had earned mine, if exhaustion
from overwork is what they meant, and earned it well too. I pity a pedant; I
pity a mind that is made up like a bed the first thing in the morning, and goes
on grimly like that all day, refusing to be unmade till a certain fixed evening
hour has been reached; and I assert that it is a sign of a large way of
thinking, of the intellectual pliability characteristic of the real man of the
world, to have no such hard and fast determinations and to be always ready
to camp. Left to myself, if I were to see the right spot ten minutes, nay, five,
after leaving the last one, I would instantly pounce on it. But no man can
pounce instantly on anything who shall not first have rid himself of his
prejudices.
On that second day of dusty endeavouring to get to Sussex, which was
and remained in the much talked of blue distance, we passed no spot at all
except one that was possible. That one, however, was very possible indeed in
the eyes of persons who had endured sun and starvation since the morning—
a shaded farmhouse, of an appearance that pleased the ladies owing to the
great profusion of flowers clambering up and down it, an orchard laden with
fruit suggestive of dessert, a stream whose clear waters promised an
excellent foot bath, and fat chickens in great numbers, merely to look on
whom caused little rolls of bacon and dabs of bread sauce and even
fragments of salad to dance delightfully before one’s eyes.
But the woman was cross. Worse, she was inhuman. She was a monster
of indifference to the desires of her fellow-creatures, deaf to their offers of
payment, stony in regard to their pains. Arguing with her, we gave up one by
one our first more succulent visions, and retreating before the curtness of her
refusals let first the camp beneath the plum trees go, then the dessert, then
the chickens with their etcaeteras, then, still further backward, and fighting
over each one, egg after egg of all those many eggs we were so sure she
would sell us and we wanted so badly to buy.
Audaciously she swore she had no eggs, while there beneath our very
eyes walked chickens brimful of the eggs of the morrow. Where were the
eggs of the morning, and where the eggs of yesterday? To this question, put
by me, she replied that it was no business of mine. Accurséd British female,
—certainly not lady, doubtfully even woman, but emphatically Weib—of
twisted appearance, and a gnarled and knotty age! May you in your turn be
refused rest and nourishment when hard put to it and willing to pay, and after
you have marched five hours in the sun controlling, from your feet, the
wayward impulses of a big, rebellious horse.
 She shut the door while yet we were protesting. In silence we trooped
back down the brick path between rose bushes that were tended with a care
she denied humans, to where the three caravans waited hopefully in the road
for the call to come in and be at rest.
We continued our way subdued. This is a characteristic of those who
caravan, that in the afternoons they are subdued. So many things have
happened to them by then; and, apart from that, they have daily got by then
into that physical condition doctors describe as run down—or, if I may alter
it better to fit this special case, walked down. Subdued, therefore, we
journeyed along flat uncountrified roads, reminding one, by the frequent
recurrence of villas, of the outskirts of some big town rather than the
seclusion it had been and still was our aim to court, and in this way we came
at last to a broad and extremely sophisticated bridge crossing a river some
one murmured was Medway.
Houses and shops lined its approach on the right. On the left was a wide
and barren field with two donkeys finding difficulties in collecting from the
scanty herbage a sufficiency of supper. In the gutter, opposite a public house,
stood a piano-organ, emitting the sounds of shrill yet unconvincing
joyfulness natural to those instruments, and mingled with these was a burr of
machinery at work, and a smell of so searching a nature that it provoked
Frau von Eckthum into a whole sentence—a plaintive and faintly spoken
one, but a long one—describing her conviction that there must be a tannery
somewhere near, and that it was very disagreeable. Her plaintiveness
increased a hundredfold when Menzies-Legh announced that camp we must
at all costs or night would be upon us.
We drew up in the middle of the road while Lord Sigismund made active
inquiries of the inhabitants as to which of them would be willing to lend us a
field.
“But surely not here?” murmured Frau von Eckthum, holding her little
handkerchief to her nose.
It was here, however, and in the field, said Lord Sigismund returning,
containing the donkeys. For the privilege of sharing with these animals their
bare and shelterless field, exposed as it was to all the social amenities of the
district, including the piano-organ, the shops opposite, the smell of leather in
the making, and the company as long as the light lasted of innumerable
troops of children, the owner would make us a charge of half a crown per
caravan for the night, but this only on condition that we did not turn out, as
he appeared to have had the greatest suspicions we would turn out, to be a
circus.
With a flatness of which I would not have