Japan and Foreign Direct Investment

Japan and Foreign Direct Investment for Economic Development

The rapid growth of the number of multinational corporations and their extensive spread worldwide continues as a major aspect of the globalization process begun over a decade ago. Transnational business enterprises reach into and are impacted by other countries in a variety of ways, first and foremost through foreign direct investment (FDI). Japan, for example, has found FDI outflow to be an important means for economic development and growth.

FDI inflow is the investment a country receives from another nation. Outflow is the amount of resources leaving the investing country into the source country. Postwar economic development in Japan has been characterized by the outflow of FDI. Japanese foreign direct investment, especially in East Asia, has increased substantially in recent years. This, for instance, is seen in its investment in countries such as India and the example of the Suzuki Motor Corporation noted below.

It is only recently, however, that FDI inflow into Japan has begun to increase significantly. FDI flowing into Japan is extremely low compared to other industrialized countries, where it makes important contributions to employment and capital investment (Fukao, Executive Summary). Japanese Prime Minister Junichiro Koizumi announced in 2003 (FDI Magazine) that the government aims to double FDI in Japan in five years to stimulate its stagnant economy and create employment. The government's Japan Investment Council, which is chaired by Koizumi, announced the program would focus mainly on the barriers faced by foreign companies in entering the Japanese market.

The following report will briefly provide an overview of FDI and the history of outflow from Japan to other countries. It will then provide detail on the status of FDI inflow. It is noted by the Japanese External Trade Organization (JETRO) that active promotion of FDI remains an important issue. Japan used to ban FDI into the country and strictly limited it until the early 1980s. Until 1995, Japan had the least amount of FDI inflow among developing countries. A number of actions are being taken to encourage foreign companies to invest in Japan. However, promotional activities need to be introduced for Japanese companies as well. Numerous misunderstandings and aversion to FDI still exist in the country.

It is hypothesized that in order to understand and take advantage of FDI inflow, a major educational and promotional program must be developed for internal organizations. Companies, especially middle-sized ones, need to be informed and encouraged to learn more about how they can relate to this economic opportunity.

To research this hypothesis, XXX (number) of companies in Japan of (determine size by yen or number of employees) were surveyed to determine 1) what promotional/educational programs on FDI have been attended by local firms and their results; 2) how much companies know about FDI inflow, 3) how they are/are not taking advantage of FDI and 4) recommendations on how to proceed in educational and promotional programs in the future. The results showed: (to COME).

BACKGROUND

The rapid expansion of the quantity and spread of multinational corporations continues as a major aspect of the globalization process begun over a decade ago. Transnational business ventures reach into and are impacted by other countries in a variety of ways, first and foremost through foreign direct investment (FDI). Japan, for example, has found FDI outflow to be an important means for economic development and growth in other nations as well as on its own shores.

The website "Big Picture" defines FDI as an investment that an investing company makes outside of its own country, but inside the investing company. The investor retains control over the use of the resources transferred. FDI consists of a package of assets and intermediate products, such as capital, technology, management skills, access to markets, and entrepreneurship. FDI outflow refers to investment coming from a country and going outside its borders. It measures the extent the country's businesses invest in their foreign operations. FDI inflow refers to the amount of investment in a country that stems from outside the county's borders, or how much foreigners have invested inside the country. FDI flows are invested over a set period of time such as a year, while FDI stocks are the cumulative FDI flows over time.

HISTORY

The overall scale of FDI began to increase enormously during the second half of the 20th century as companies began locating more and more of their manufacturing and other operations in foreign countries. Within the last 30 years, foreign investment has soared as countries started locating major aspects of their manufacturing, sale and service ventures in many other countries.

FDI outflow has impacted the restructuring of the Japanese economy and can be expected to continue to do so in the future. According to Blomstrom et. al, outward investment has helped Japanese organizations maintain foreign market shares and added to the shift of the Japanese economy away from older industries. The transitioning from exporting to affiliate production has geographically reallocated activities of Japanese firms, particularly those of multinational manufacturing companies. However, Japanese outward FDI is still not very large relative to the Japanese economy, despite the rapid growth since the mid-1980s; there is still room for a significant increase when compared with the levels of most other investing countries.

The Japan External Trade Organization (JETRO) website reports that there is a total of 989 Japanese manufacturers operating in both Europe and Turkey. Overall, business conditions for Japanese manufacturers in Europe were favorable in 2004, with 63.1% of respondent firms expecting to post an operating profit, and over half of firms forecasting improved year-on-year profits in 2005.

It is already being seen that Japan is increasing its FDI outflow. For example, according to a recent Bankok Post web article, Japanese direct investment in Thailand is expected to rise in the future based on the expansion of intraregional trade and the growth of the country's major automobile sector. Around 40% of Japanese joint ventures in Thailand plan to expand to Laos, most likely by using their Thai staff to focus on initial connections due to language similarities. Since the early 1960s, 16 Japanese automobile companies have invested in Thailand, directly contributing to the operations of 287 foreign component manufacturers, 68 joint ventures with local partners, and 1,500 local suppliers. Japanese carmakers are expected to continue to expand their facilities, resulting in Thailand being positioned as a regional production hub.

Japan's FDI in India through the Suzuki Motor Corporation serves as a positive model. In the past, despite a lengthy history and experience of investment in India by several hundred foreign companies, only a handful of firms have shown consistency in their growth and profitability in this Asian country. Given the normal conditions of an industrially developing host for foreign direct investment, not many foreign companies have desired to invest in India in a way that will yield constant growth and profitability. Suzuki's direct investment pattern is an unusual example that benefited Japan and helped the company to grow in size, profitability and global presence (Nayak, np).

In 1947, the government of India passed a law that stipulated if foreign companies did not plan on making automobiles locally, they would have to cease operations. Major assemblers such as Ford and GM followed the directive, and only a few cars were being made by smaller companies. Not until the 1960s did the government decide to produce small passenger cars and approve the establishment of Maruti Limited. However, the company did not succeed in building the cars as planned, and it was liquidated in 1977. The Government of India therefore created Maruti Udyog Limited (MUL) as a public sector company through an act of parliament (Nayak, np).

The government invited nearly 11 large established automobile companies from UK, France, West Germany, Italy and Japan to bid on the co-building of 100,000 cars in five years. Most foreign partners were very pessimistic about the joint venture. Mitzubishi of Japan seemed to be the likely winner, however, Suzukis' attractive offer and its high speed of working gained the contract. Contrary, to the belief of most foreign automobile manufacturers, Suzuki predicted Indian market potential to rise to 200,000 cars per annum by the year 2000. The company invested over a quarter of the capital in the JV as well as many other automobile-related businesses (Nayak, np).

Suzuki invested extensively in the local component manufacturers to improve quality and reduce procurement costs. Since then, it has not only invested capital in the Indian automobile industry, but also deputed its own manpower in JVs for manufacturing cars and components: nearly seven Japanese employees per year since 1987 to 1990 to work in the factory. Many Indian employees have been sent to Japan every year to learn Suzuki's production methods, quality assurance and Japanese management styles. Suzuki has enjoyed the largest market share of passenger cars since its inception. Until 1993, it had a virtual monopoly. It continues to lead the Indian passenger car manufacturers. Its total production in 1999 of nearly 400,000 cars, a figure twice what Suzuki Motors redicted about Indian market when it entered India in 1983 (Nayak, np).

Japanese inflow has not been as productive, due to ongoing bans by the country that were only relaxed in the last decade. Because of this, in 2003, Prime Minister Junichiro Koizumi announced that the government aims to double foreign direct investment in Japan in five years to stimulate its stagnant economy and create employment. The government's Japan Investment Council (JIC), which is chaired by Koizumi, announced the program would focus mainly on the barriers faced by foreign companies in entering the Japanese market. The 2003 report by Fukoa found the following:

Foreign companies have 10% higher productivity

Productivity at acquired Japanese companies shows improvement after merger/acquisition

Foreign firms usually have higher profitability than their Japanese counterparts, and greater (more active) capital investment

Therefore, FDI does not cause the loss of "management resources" from Japan, but rather their accumulation

If the share (as percent of GDP) of foreign affiliated firms' total production in Japan were to rise 10 points to the 11% average among developed countries (from the current 1%), Japan's total capital stock and GDP would increase 1.5%.

It is thus imperative that Japan finds additional ways of promoting FDI inflows.

STATEMENT of PROBLEM

International Monetary Fund statistics show that FDI flows into Japan remain low compared to other major economies. The ratio of inward FDI compared to nominal GDP in 2000 was only 1.1% in Japan. This compares to 27.9% in the U.S., 32.4% in the UK and 22.4% in Germany. The outstanding balance of FDI in Japan is only one-sixth that of the country's direct investment overseas. The balance of foreign direct investment in the U.S. exceeds that of U.S. investment in other countries. In Britain, Germany and France, the inward foreign investment balance is about half the amount of the outward foreign investment balance. FDI inflow is essential to create a globally competitive investment environment. It will help Japan to advance beyond the domestic precedents and structures that have constrained economic growth over the past decade (FDI Magazine)

FDI stock in Japan more than tripled in the period 1998-2003, from 3.0 trillion yen at the end of 1998 to 9.6 trillion yen at the end of 2003. Reforms in the financial, communications, and distribution sectors have encouraged foreign investment into these sectors. Improvements in corporate laws, bankruptcy laws, and accounting principles also helped attract foreign capital. In 2003, FDI toward Japan slowed to $6.3 billion from $9.2 billion in 2002, but this followed continued strong increases in FDI recorded over the last several years (FDI Magazine).

However, Japan continues to host the smallest amount of inward foreign investment as a proportion of total output of any major OECD nation. Foreign participation in mergers and acquisitions (M&a), which account for some 80% of FDI in other OECD countries, although on an upward trend, also lags in Japan (FDI Magazine).

Prime Minister Koizumi is taking new approaches to restructuring Japan's economy. His administration's Special Zones for Structural Reform (SZSR) initiative is working to revitalize Japan's regional economies through locally led regulatory and structural reform. The Special Zones initiative can help remove the regulatory barriers that limit U.S. business market entry and foreign investment into Japan. For example, Japan reduced customs overtime charges within it International Physical Distribution Zones by 50% in April, 2004.

According to research conducted by the Japan External Trade Organization (JETRO), as of September, 20004 there were 4,276 foreign-affiliated companies in Japan of these firms 2,611 were subsidiaries of foreign companies, 1,314 were sub-subsidiaries and 351 were Japanese branches of foreign-owned companies. By industry, 47.4% of firms were in the wholesale, retail and restaurant sector and 17.6% were in manufacturing. Nearly two-thirds of foreign affiliates were headquartered in Tokyo.

As of September 2004, foreign-affiliated firms employed some 1.02 million workers in Japan, JETRO research finds. This figure represents only 2.4% of Japan's total permanent workforce and lags well behind that of other developed countries such as the U.S. At 5.5% and Germany at 5.4%. In Japan's finance/insurance sector, however, the share of foreign-affiliated company employment accounted for 8.2% of the sector's total permanent workforce. Subsidiaries of foreign companies employ the most, at 598,657 workers, followed by sub-subsidiaries at 373,566, and Japanese branches of foreign-owned companies, at 51,218. By industry category, affiliates in the manufacturing industry employ the most, at 37.4%, followed closely by the wholesale, retail and restaurant sector, which accounts for 34.1% of the total figure for Japan. By country, foreign affiliates from the U.S. account for 59.6% of the total figure, followed by France and Germany, who both account for 12.9% of Japan's 1.02 million workers employed by foreign firms.