Introduction

One of the major economic developments that emerged in Europe during the late 1980s is the sudden growth of Japanese direct investment into the European markets. While Japanese direct investment has grown most spectacularly in the United States during the 1980s, its growth in Europe is equally notable particularly after 1987. The flow of Japanese direct investment into European manufacturing surged from $323 million in 1985 to $852 million in 1987 and further increased to $1,548 million in 1988. Indeed, the investment flow of 1987 and 1988 alone accounted for approximately half of the cumulative flow of Japanese direct investment into Europe between 1965 and 1988.

Just as the growing presence of Japanese direct investment in the United States has generated debates regarding its impact on the US economy, the sudden increase in Japanese direct investment into Europe has sparked policy discussions over its influence on European trade and industry. One of the fundamental questions that is raised by these policy discussions within the European Community (EC) is whether the issue of Japanese direct investment should be considered from the perspective of each member state or from the EC-wide perspective (Stopford, 1990, and Micossi and Viesti, 1991). Despite the importance of this issue that constitutes a reference point for the formulation of a common EC-wide policy towards foreign direct investment, there is a scarcity of systematic analysis of the data that guides the discussion (Dunning and Cantwell, 1989).