Sluggish Direct Investment in Japan – Why and How to Improve

Osaka - Sunday, July 24, 2011




Nikkei, Japan’s leading newspaper specialized in business and economy, explained today about the target that was set by the Japanese government in the Koizumi Administration and its achievement.



The target wet was to double the direct investment in Japan by foreign capital in four years to increase to 5% of GDP by the end of 2010; however, the achievement was 3.7% of GDP. Percentage of the increase in the direct investment in Japan was only around 50% of the original target.



This did not draw much attention from the economists and general public because the target was set by the Liberal Democratic Party (LDP), the leading party of that time and not Democratic Party of Japan (DPJ), the current leading party. However, this has much meaning to the economy.



1. What is the main reason/background that the target was not achieved?



It is the drastic decrease in the importance of Japan in Asia. According to a survey executed by Ministry of Economy, Trade and Industry (METI), the number of foreign capitals/companies withdrawing from in Japan has been larger than the number of foreign capitals/companies that has been entering Japan.



The recent survey executed by METI targeting foreign capitals/companies asking how attractive Japan is as a business site in Asia explicitly supports it. Japan was #1 for R&D site in 2007 but the #1 position was taken over by China and Japan became #2. Japan was #1 also as APAC Regional HQ but fallen to #4.



2. Why Japan is not as attractive as other Asian countries to invest in?



The main reason for decrease in the attractiveness of Japan as a business site in Asia (i.e. a country to invest in) might be summarized as the smaller growth compared with other countries but that is not all.



Other reasons include slow start of joining the competition with other countries of providing incentives to attract foreign investment in the country. Countries such as China, Korea and Singapore have been proactively providing incentives in the area of tax and regulation to promote foreign capitals entering their country.



The Japanese government also started to set policies to promote Japan as an attractive country to invest in but is rather slow. The plan of decreasing corporate tax that is currently extremely high compared with other countries is yet to be implemented. Tax incentives to be given to foreign capitals when requirements of investment, employment etc. are met is still being studied in the Diet and it seems that it takes a while for its implementation.



3. Is this issue only about foreign capitals? Would it affect decision making of Japanese companies as well?



It is not only about foreign capitals and it is more than likely to affect global strategy of Japanese companies as well. This is because all global companies including those based in Japan would need to develop and execute their global strategy pursuing optimum location in the world.



Indeed, a few Japanese global companies started to relocate “strategic and intelligence-oriented functions” such as strategic planning, R&D and marketing to other countries in Asia. Today, when more than half of the business is operated and revenue is generated outside the home country, global companies located in Japan would be asked for accountability to locate strategic department in Japan.



This means that not only manufacturing sites but also strategic and intelligence-oriented functions may well outflow from Japan to other countries in Asia if appropriate measures are not taken by the government, academia, and industries, both public and private sectors.



4. What is one possible primary solution in avoiding outflow of strategic and intelligence-oriented functions?



It is attracting and acquiring globally-competitive talents. According to Ms. Sanae Tachibana Fukushima, the advisor of Korn/Ferry International APAC, top management of Japanese global companies started to realize this in the last year or two. They did not understand the significance of recruiting non-Japanese talent in the global HQ located in Japan but now they are extremely proactive in acquiring talent from around the globe.



If globally-competitive talent can be attracted and acquired in Japan from around the globe, the significance of locating HQ and other strategic and intelligence-oriented functions in Japan as the site to develop and execute global strategy would drastically increase.



5. What would be necessary to create an environment to attract and acquire globally-competitive talents?






1) Talents from around the globe



The most important policy would be creating an environment for non-Japanese talents to work in Japan such as making them easier to acquire visa to live and work in Japan. Providing them with tax incentive could be another option. Of course, providing talents with attractive work environment and challenging opportunities for development would also be vital as well.



2) Japanese talents from Japan



Improve education level of universities in Japan to up-level new graduates and increase the talent pool especially of scientists and engineers. And provide talents with attractive work environment and challenging opportunities for development.



6. What other requirements are necessary to make Japan more attractive country to invest in?



One is to make Japan be involved in the global network of EPA. Another is globally-competitive financial (stock/capital) market.



Both requirements are vital in today’s global economy, which requires initiative from the government meaning strong leadership.





Resources:-

Direct investment to Japan by foreign capitals has been sluggish when direct investment to other countries in Asia has been increasing. This attributes mainly to the differences in tax and regulation incentives to attract investments by foreign capitals, which would impact global strategy of Japanese companies as well. Creating an environment to attract globally-competitive talents worldwide, joining EPA and improving globally competitive financial market are requirements to improve the attractiveness of the country to invest in.