Introduction
The primary purpose of this paper is threefold: First, is to provide a clear picture of Foreign Investment in Japan. Second, based on the investigation of available literature present an analysis of the performance of foreign firms in the country with a particular emphasis on the possible measures to protect foreign investment, challenges, and investment opportunities. Thirdly, is to assess the future of foreign firms currently operational in the country and the likelihood of other businesses entering Japan in the future. To answer these questions, the discussion presented herein examines the economic situation in the country and the place of Japan within the current international economic environment.
Identification of issues
Despite the rise of the other economic powerhouses in emerging economies in the world – the Asian Tigers (Singapore, Taiwan, South Korea, and Hong Kong), Brazil, Mexico, and China – Japan remains one of the world’s largest economies (U.S. Department of State). As at 2014, Japan was the third largest economy and contributed about 6% of the global Gross Domestic Product (GDP) – far greater than the combined economies of Germany and the United Kingdom (Government of United Kingdom (UK) Trade & Investment). In Asia, its high-tech muscle is unrivaled and according to the Annual Global Wealth 2013 Report Japan boasts 62 Fortune 500 companies, the highest number of millionaires in the region, and its capital Tokyo houses the most millionaires in the world (Government of United Kingdom (UK) Trade & Investment). Moreover, as at 2014 the country ranks fourth in the global highest spenders on Research and Development (R&D) at 3.475% of its GDP (Government of United Kingdom (UK) Trade & Investment). 20% of the topmost, global R&D spenders are situated in the country partly owing to the increasing ‘Ease of Doing Business.’ It ranked 29th on the same index in 2014 (Government of United Kingdom (UK) Trade & Investment). Because of such factors and despite the competitive nature of the Japanese market, a significant and growing number of foreign firms are riding on the positive radiance in the country not only in terms of profitability but in terms of also regarding innovation and technology (Khan and Yoshihara). In fact, some of these multinational companies are so successful in Japan than they are elsewhere. For example, according to a study by UK Government, there are approximately 450 British companies in Japan ranging from FTSE 100 companies to the smallest of their kind (Government of United Kingdom (UK) Trade & Investment). Visible high-end companies include large multinationals such as GlaxoSmithKline, Rolls-Royce, and Ted Baker. Others such as Fortnum & Mason and specialist firms like BrewDog also have a strong presence in the country (Government of United Kingdom (UK) Trade & Investment).
While there are several reasons why Japan is one of the most attractive destination for multinational companies, none compares to the nation’s appeal for the protection of foreign corporations (Investors) (Banco Santander) (See Table 1). For instance, according to the 2015 World Report on Investment by United Nations Conference on Trade and Development (UNCTAD), Japan ranked 13th as the most attractive destination for multinationals for the period commencing 2015 to 2017 (Banco Santander). In the protection of FI, Japan has performed better than most major economies having never taken part in cases of disagreements of FI and to date, the country’s bilateral free trade agreements (FTAs) has given rise to no incidences of expropriation or nationalization (UNCTAD as cited in Banco Santander). The country is also signatory to a dozen Investment Conventions such as the International Chamber of Commerce, World Trade Organization (WTO), and the International Court of Arbitration that works to promote FI in the country. Japan is also a long term member of MIGA (Multilateral Investment Guarantee Agency) whose one of its functions is safeguarding and protecting the operation of foreign firms in its member countries (Banco Santander). Because of the favorable conditions in the country, 3,189 foreign-affiliated companies operated in Japan as at December 2013 (Teikoku Databank America, Inc.). Even though this number is 0.6% (20 companies) less than the previous year, the number has increased by more than 1.8 times since December 2000 and is expected to grow in the future (See Fig. 1) (Teikoku Databank America, Inc.).
Source: Doing Business, 2014 as cited in (Banco Santander)
Figure 1: Trends in the number of foreign-affiliated firms in Japan (2001-2013)
Source: (Teikoku Databank America, Inc.)
Analysis
Even though Japan’s reception of foreign firms regarding Foreign Direct Investment (FDI) plummeted in 2009 following the global economic meltdown the year before, its FDI influx returned in 2014 reaching to values above $10Million in 2014 (Banco Santander). Despite the fact that matters of high-technology and R&D cement the firm position of Japan as a global investment leader, some factors hinder Foreign Investment (FI) in the country. Notable hindrances to FI include linguistic barriers and challenges emanating from the clash of foreign cultures and the local mainstream business culture. However, natural disasters (such as earthquakes like the one that occurred in 2011 and the devastating tsunami that followed), as well as environmental and public health concerns related to technological mishaps like the Fukushima Daiichi Nuclear Accident, have increasing dampened FI prospects (Government of United Kingdom (UK) Trade & Investment). Regardless of such challenges, the country remains one of the key markets for foreign investors, thanks partly to the capacity of its development policy frameworks that can finance the reconstruction of the country in the wake of such disasters. The recent Growth Strategy of the Prime Minister Shinzo Abe for the period to 2020 best exemplifies this capacity (U.S. Department of State).
In addition to the above factors, available literature indicates that foreign countries succeed in part by employing and utilizing the economic expertise of Japanese CEOs and majorly by the high degree of autonomy prevailing in the country (U.S. Department of State). Moreover, there is also the positive ripple effects of the various Investment Aids (IAs) present in the country. Notable forms of IAs include the Government’s programs for promoting local investment and encouraging imports in forms of foreign loan guarantees, investment discounts, and reductions in taxes and lending rates levied on foreign investors (Ministry of Economy, Trade, and Industry [METI]). The AIs also takes the forms of assistance for all foreign exporters importing to Japan. The pinnacle of such aid was in the period following the 2011 disaster in which the Japans’ Ministry of Economy Trade and Industry (METI) rolled out plans to support foreign countries that aspire to establish High-Value-Added business operations in Japan (METI). The increasing acceptance of the National Strategic Special Zones” (NSSZ) designed to spearhead structural reform in Japan further offers a favorable environment for international companies to set up (U.S. Department of State). In the recent past, efforts by the major financial organization in the country to not only offer financial assistance at favorable rates but also to develop ‘nurseries’ that nurture and help foreign firms adapt to the local economic conditions are on the rise. The major financial institutions spearheading these developments are the Japanese Development Bank and the Japanese Bank for International Cooperation (U.S. Department of State).
Based on the above literature, the important finding is that most foreign companies in Japan are successful. This position is not only evident from a subjective sense but also manifests in the objective evidence. For instance in examining profitability, growth, and other financial indicators in his study ‘The Strategy and Performance of Foreign Companies in Japan’ Yoshihara notes firsthand that 15% of the surveyed firms consider their operations a ‘great success.’ Likewise, about 56% of the companies surveyed view the operations in Japan ‘successful’ (Yoshihara). Therefore, the direct study of the data as employed by Yoshihara indicates that out of four foreign firms in operations in Japan, three consider themselves successful. These figures greatly out masks the combined 24% of businesses that reported their activities a failure (Yoshihara). While others can argue that the self-evaluation questionnaire administered by Yoshihara and similar such studies may contain bias, available objective evidence supports the initial premise that most foreign firms in Japan are successful. For example using profits as a measure of international corporate success in Japan, studies find that more than 80% of companies in Japan are satisfied, and 40% of them remitted dividends in their dealings (Teikoku Databank America, Inc.). However, 29% of foreign firms have accumulated deficits during the years they have been in operation in the country but still 71% show accumulated profits with a profit to sales ratio of about 5.6% (Yoshihara). In sum, collaborative evidence as partially indicated above suggest that the majority of international firms in Japan are fruitful. Those who fail, however, do so either from a lack of understanding of the local economic situation or because of an apparent understatement of the intensity of competition in the local markets (Khan and Yoshihara). Empirical studies of the successful foreign entities in Japan indicate that these firms display the strongest ability to use own resources to create products and technologies that propel them to greater heights (Fukao, Ito, and Kwon; Khan and Yoshihara).
When compared with the subsidiaries of the local companies abroad, available pieces of information suggest that one of the most common reason for multinationals entering Japan is the attractiveness of the market (Fukao, Ito, and Kwon). More than 87% of the foreign Japan-based companies quote this as their primary objective while about 77% identify the Japan market as of significant importance to their overall global business strategy (Yoshihara). While these two reasons have historically been the prominent factors for foreign firms (such as IBM, Hewlett-Packard, and Pfizer Inc.) to enter the Japanese market, the role of Japan as a parent operational base in Asia has increasingly become the most common reason for multinationals to enter Japan (Teikoku Databank America, Inc.). Several reasons justify multinational entry into Japan. Firstly, is the economic significance and potential of the Japanese market itself. Secondly, the prospect of overcoming the obstacles of Japan’s closed market has been an increasing attractive force (U.S. Department of State). Thirdly, most firms consider entering Japan as part of their global strategy not only for the prospects of the market but the potential benefits of technology and know-how available to them there (Yoshihara). Japan is a world leader in automobile, machinery, electronics, and other such tech-based firms (Yoshihara). Therefore, to tap into these tech-based products, most companies are considering entering Japan and establishing operations in the country. This third reason also means that the market prospects and financial objectives, even though important, are not only the basis for foreign firms entering the Japanese markets (Yoshihara). Instead, an increasing number of international companies having recognized the importance of non-financial objectives such as personnel, skills, and know-how are entering the market to take advantage of such benefits (Khan and Yoshihara).
In addition to the above factors for foreign business success in Japan, a significant number of firms points to the superior goods and services the Japanese market offers as their top attraction. Technology and available competent Japanese personnel then follow product superiority in that order (Yoshihara). Compared to the other factors, the localization and use of Japanese personnel have become an increasing practice transcending the entire management of the firms in the country. For instance, in highlighting the significance of local staff in the success of foreign-affiliated corporations in Japan, U.S. Department of State notes that more than two-thirds of all foreign enterprises in the country have a Japanese head. The significances of having local personnel are diverse: they help multinationals in communicating with the locals, provide deeper insights into the internal workings of the Japanese market, and assist in dealing with issues related to the local workforce. In the past decades, the localization of management has advanced even further at the top functional levels of management (Chart 1). The benefits drawn from the localization of personnel are supported by the increasing realization of success derived from the adoption of Japanese style of management and production – the Kanban System – that is synonymous with the Western ‘lean production’ or the ‘just in time system.’ (Yoshihara).
Chart 1: The Localization of personnel
Source: (Yoshihara)
Potential strategies
Notwithstanding the issues that have slowed down the economic growth of Japan over the last two decades, the Japanese market remains vibrant and vast making it one of the leading exporters and overseas investors in the world (Hui, Hoshino, Kumarasinghe, and Mohamad). Such potency partly helps back the prediction of the International Monetary Fund (IMF) that the country is to realize growth rates of 1.2% in 2016 with the figure to double in the next few years (Government of United Kingdom (UK) Trade & Investment). Moreover, ‘Abenomics’ – the economic reforms instigated by Prime Minister Abe to tackle low levels of FDI in Japan - is expected to open opportunities for FI (U.S. Department of State). Major elements of ‘Abenomics that hold significant potential for foreign firms in Japan include breaking down of entry barriers through de-regulation, boosting monetary policies, and implementing vibrant economic stimulus packages (Fukao, Ito, and Kwon). Development in the above and other pertinent elements of the economy are expected to play significant roles in influencing future FI in Japan. One of these factors is the size of the Japanese market that is only second to the market of the US (Yoshihara). It is, therefore, a large market not only too hard for foreign firms to ignore but one which have unlimited potential and opportunities.
Secondly, because the Per Capita Gross Net Product (GNP) is one of the top most of the industrialized nations, it offers one of the most robust high-class markets for high-end commodities and services. Lastly, and perhaps the most significant is that the maturation of market liberalization that is taking hold in the country is slowly opening up the Japanese market to the possibilities of the global market (Hui, Hoshino, Kumarasinghe, and Mohamad). Together, these market factors – large size, increasingly global accessibility, and high-class consumers – will serve to attract foreign firms to Japan in the coming years (Hui, Hoshino, Kumarasinghe, and Mohamad). Another reason for a future increase in DFI and foreign-based local production is the high-level performance of Japanese local producers. Granted, from a cost analysis, while manufacturing in Japan is not one of the wisest ideas, a consideration of quality of service and goods, time, and other non-cost factors, Japan offers a good choice for manufacturing for quality and time conscious foreign producers.
Conclusion
It is unfortunate that some foreign-affiliated companies have found the Japanese market unfavorable. However, a great deal number of them have succeeded in the same market. The latter firms succeed due to several factors that include the utilization of local CEOs and the development of positive cycles of the economy due to the effects of Abenomics. Nevertheless, there is the need for Japan to advance the integration of reforms that promote liberalization to attract FDI. Japan also need to finalize major trade partnership agreements such as the pending Japan-EU economic partnership agreement to realize the benefits of free open economies. Concerning corporate tax, Japan needs to lower its effective corporate rates and advance tax reforms that compare favorably in global terms to sustain its current FI and attract FDI in the coming years.
Works Cited
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