Key to prosperity in the door of foreign direct investment

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In addition to the huge trade surplus, the imbalance in foreign direct investment has long been regarded as a symbol of Japan’s “closed” economy.

In 1997 outward FDI made by Japanese businesses was 3.14 trillion yen, compared with inward FDI of just 0.39 trillion yen, on a balance-of-payments basis. In other words, Japan’s ratio of inward to outward FDI was only 0.12 for the year, which is considerably lower than the average of 1 observable in other developed countries.

However, in the past few years, something remarkable has happened on this front: Inward FDI has been rapidly increasing. In fact, during 1999 it reached 1.40 trillion yen, compared with 0.42 trillion yen the previous year. Even in 2000, an announcement by DaimlerChrysler that it will purchase significant stakes in Mitsubishi Motors Corp. is a notable example of this sudden inflow.

There are several reasons for this.

The first seems to be low share prices, especially for companies that are currently ailing but have high potential for growth. These kinds of stocks look attractive to foreign enterprises. Take Nissan Motor Co. If the foreign management team sent by Renault of France succeeds in reorganizing Nissan and utilizing its strong technological capabilities, then Renault will someday be the recipient of two benefits — a higher share price and a strategic alliance.

The second reason concerns people’s expectations of foreign capital in Japan.

Japanese companies have established long and sometimes intensive relationships with suppliers and customers. Therefore, it seems difficult for them to reorganize or streamline established purchasing policies.

One good example is subcomponents. Japanese purchasing managers often tend to stick with older suppliers, regardless of price. This is considered one of the causes of Nissan’s poor price competitiveness. But the new management team from Renault is not familiar with these customers, and thus appears to be free of the customary constraints typical of Japanese business practices.

This unfamiliarity enables them to move freely in introducing more cost-oriented purchasing methods, and can be seen as an advantage for a company that is rebuilding. In this light, we can insist there is a widespread environment that favors the arrival of foreign capital in Japanese businesses.

A third reason is the cost of doing business in Japan. During the 1980s, Japanese land prices soared to historically and internationally high levels. As a consequence, it was tremendously difficult at the time to construct new factories here. However, throughout the 1990s, land prices have declined considerably. We can see the same trend in wage levels. Furthermore, a reduction in basic business costs can be expected due to progress in deregulation in various sectors.

Take communications charges. It is true recent negotiations between the U.S. and Japanese governments over NTT’s high access charges have been reportedly deadlocked. But some companies will be providing new, less expensive communications services not by using NTT lines, but by using optical-fiber lines that extend throughout the electricity supply network of the Kanto region.

In other words, thanks to technological advances, Japanese communications charges are soon expected to plummet. This in turn will contribute to a more favorable business environment and make the Japanese economy more attractive not only for Japanese firms, but foreign firms as well.

According to Finance Ministry statistics, the value of outward FDI in 1999 was 2.61 trillion yen, still significantly larger than the value of inward FDI the same year. However, as has been mentioned above, the inward-outward gap has narrowed and will continue to do so.

Foreign direct investment naturally has profound effects on both the host and recipient economies. Japanese outward FDI has positively influenced a number of countries, including the U.S. and Europe.

It is Japan’s turn to try its best to attract and accept foreign capital so that it can reorganize and restructure its corporate sector. Doing so will lead Japan into an age of mutual investment where such exchanges will be able to have a positive impact on the economies of both the giving and receiving nations.