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Knock down barriers to FDIs

by Shinji Fukukawa

Following his party’s overwhelming victory in the Upper House election, Prime Minister Shinzo Abe’s administration is now expected to go full-throttle in its national growth strategy. In the basic policy for economic and fiscal management endorsed by the Cabinet in June, Abe expressed his determination to pull Japan out of deflation and revive its economy. One of the targets in the policy was to double the outstanding amount of foreign direct investments in Japan to ¥35 trillion by 2020, based on the belief that FDIs would play a major role in making the Japanese economy stronger.

From the days when I was with the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry), I have strongly advocated promoting FDIs in Japan because that would help enhance competition, accelerate technological innovations, strengthen corporate management and create job opportunities. I launched the Forum of Global Corporations in Japan, a specified non-profit corporation, in July 2012 in order to encourage investments by foreign firms from private-sector viewpoints.

FDIs in Japan are tiny by international standards. In 2011, outstanding foreign direct investments in Japan accounted for a mere 3.9 percent of its gross domestic product. The ratio is much lower than 23.3 percent in the United States, 20.0 percent in Germany, 34.7 percent in France and 49.8 percent in Britain. It is also far below 10.1 percent in China and 11.8 percent in South Korea. There were 125 foreign firms listed on the Tokyo Stock Exchange in 1990, but the number dropped to 41 in 2000 and declined to eight today.

There are some foreign corporations that favorably value the Japanese market. Surveys of companies that have invested in Japan show that they appreciate Japan’s high income standards, abundant potential customers, well-maintained infrastructure related to daily lives, social stability, consumers’ strong brand consciousness and a market where competitiveness can be verified. Their concerns heard in the past about the Japanese market’s allergic sentiment against foreign businesses seem to have almost disappeared.

Nevertheless, FDIs in Japan have not increased much. The biggest factor responsible for this situation is of course the declining growth potential of the Japanese market. But another major factor is the existence of various structural problems that remain unresolved.

First, the environment surrounding business activities here remains comparatively inferior. Japan still has a lot of strict regulations in a number of business fields although the Abe Cabinet says it will pursue deregulation. These regulations remain particularly strong in such sectors as medical care, pharmaceuticals, education, electric power and services.

Corporate tax also remains a heavy burden on business activities. The corporate tax rate was lowered slightly this year but the rate in Japan — along with that in the U.S. — remain the highest among the world’s advanced economies as well as emerging economies. The high costs of energy such as electricity as well as land and office rents continue to put pressures on companies operating in this country.

As for its trading environment, free trade agreements that Japan has either signed or put into effect represent only 17.6 percent of its overall trade — as against 18.0 percent for the U.S., 27.6 percent for the European Union, 21.5 percent for China and 35.8 percent for South Korea. In particularly, South Korea has already concluded FTAs with both the U.S. and the EU, prompting some Japanese businesses to consider taking advantage of the country’s such arrangements.

The second problem is the closed and exclusive nature of corporate behaviors and commercial practices that linger in Japan. As has long been pointed out from overseas, Japanese firms tend to irrationally stick to time-honored trading practices. Foreign businesses view this as a hard barrier to break as they try to enter the market here. To complicate matters, Japanese firms tend to favor bottom-up approach in decision making, which takes time before a conclusion is reached. In addition, foreign firms complain that they face disadvantages in access to information and administrative judgment as they compete in sectors where public regulations remain strong.

The third issue relates to the weak international awareness and adaptability of Japanese people in general. Communication skills of the people in this traditionally highly homogeneous society have tended to be poor. Relatively speaking, politicians, industrialists, academicians and journalists do not pay much attention to international issues.

In terms of English proficiency, Japan ranks 148th out of 167 nations in the average score on the TOEFL test — and 38th among 40 Asian countries. Lately Japanese youths appear to have become further inward-looking and tend to avoid studying and working abroad. People in foreign businesses often say that they find it very difficult to hire Japanese workers who have an international outlook. It is quite understandable that foreign firms tend to choose China, South Korea, Taiwan and Singapore as their investment destinations.

Japan needs to urgently turn this situation around. If it wants to regain international competitiveness, recover its innovative capabilities and play a major role in the global division of labor, this country must encourage leading foreign firms to come to the Japanese market. For this purpose, the corporate tax rate needs be lowered to levels on a par with other advanced economies.

The government should quickly conclude the Trans-Pacific Partnership free trade arrangement, conclude bilateral FTAs with many more countries, rectify regulations and business practices that constitute barriers to the entry of foreign enterprises, carry out education reforms to make the Japanese people more internationally minded, and introduce drastic incentives for foreign investments through such measures as special economic zones.

Japan is now being left behind in the waves of worldwide globalization. I strongly urge the Abe Cabinet to come out with radical steps to expand foreign direct investments in this country.

Shinji Fukukawa, formerly vice minister of the Ministry of International Trade and Industry (now the Ministry of Economy, Trade and Industry), is senior adviser of the Global Industrial and Social Progress Research Institute.

  • JS

    FDI follows human capital. A key reason for low FDI in Japan is the lackluster human capital in the country.

    A quick way to improve Japan’s human capital would be to introduce competition in the form of foreign workers, who can bring new blood, a global outlook, creative thinking, and best practices to the staid and insular world of Japanese companies. This has worked very well in the US. Unfortunately, this will never happen in Japan due to corporate Japan’s insecurities, phobias, and its fear of opening up.

    The few talented foreigners who show courage and take the initiative to work within corporate Japan are quickly disillusioned, since they are treated as perpetual outsiders, second class workers, and untrustworthy for long-term career development and career advancement.

    Corporate Japan needs to get rid of its shackles of insecurity, xenophobia, insularity and laziness. Furthermore, corporate Japan and the Japanese courts need to start treating foreign workers with respect and dignity. The courts should not discriminate against foreign workers, and they shoul uphold and apply Japanese labor laws and its protections equally to foreign workers.

    Otherwise, Japan will never be able to attract and retain top-tier foreign talent. The absence of new blood and competition in human capital will only hurt corporate Japan more, since Japanese workers will continue their downward spiral of descent unless they are intelectually challenged by foreign workers who can bring a more global outlook and new thinking.

    • Masa Chekov

      Japan is doomed unless foreigners and foreign thinking saves it? Got it.

      This is a simple variation on the paternalistic “people in other countries are children who must be taught how to act properly.” Some thinking never changes.

      • JS

        Well, it’s actually not as simple as that.

        All systems need diversity to thrive. Diversity is a natural phenomenon and all healthy natural systems have diversity.

        However, a place like Japan has gone to great lengths to keep out diversity, and this has created an overly homogenous and codified society. I am not talking about just ethnic diversity, but also diversity of thought and ideas. Systems in nature which do not have such diversity are not sustainable.

        There would be no need for foreigners if Japan was good at organically developing and fostering diversity of thought by itself. However, Japan has not done a very good job of creating a diverse society on its own, and has infact been becoming more insular.

        This is why it is particularly important for the country to open up, so that it can restore a healthy amount of diversity which is so important in creating any healthy and sustainable system.

      • http://www.dadsarmy.co.uk/ GMainwaring

        But “healthy and sustainable” for *whom*?

        I am reminded of an economic column on Japan that stated that unless Japan changed its ways, it would end up the “Switzerland of Asia – rich, comfortable and completely irrelevant.” I don’t think the Swiss find Switzerland irrelevant to themselves, and why should they care if the Austrians, British or Americans think Switzerland is irrelevant (although obviously America doesn’t think so, or it wouldn’t be trying to force Swiss banks to obey US law)?

        What if the majority of Japanese don’t *want* diversity? There are an awful lot of people born and raised in “diverse” societies who do not find the idea attractive and would rather have a much less “diverse” society. Unfortunately they tend to be derided by “enlightened” types who think diversity is the cure-all and no society can thrive without it.

        I often wonder how those people explain things that they must find to be historical anomalies – little things like England conquering most of the world while simultaneously remaining steadfastly, undiversedly British…

  • ra

    In 2011, outstanding foreign direct investments in Japan accounted for a
    mere 3.9 percent of its gross domestic product. The ratio is much lower
    than 23.3 percent in the United States, 20.0 percent in Germany, 34.7
    percent in France and 49.8 percent in Britain. It is also far below 10.1
    percent in China and 11.8 percent in South Korea.

    Look high percentage FDI receiving countries are accepting lot of immigrants. On the other hand China and South Korea are not immigrants friendly country. So, their FDI GDP ratio is low. Japan is same as its neighboring countries. And for Japan the correlation is more clear. I think author’s bureaucratic mind miss this important point.

  • Selchuk Driss

    Keep spreading yesterday’s solutions for infinite growth.
    We can see through your so called ‘free market’ rhetoric.
    The only thing that will happen is a drop in product quality, privatization of profits and socialization of losses, rising prices, inflation, cuts in jobs and wages.

    • http://www.dadsarmy.co.uk/ GMainwaring

      Indeed. Corporations do not invest out of altruism – they do so to make a profit. That is their first consideration, their second and their last. Nothing else matters except making more of a return on their investment this year then they made last year.

  • zer0_0zor0

    There are many problems with this commentary, but the most striking is the degree to which it contrasts with the international movement to abolish tax llop holes being exploited by international corporations, which will otherwise make them much less competitive, and level the playing field for the local competition.

    Corporate tax also remains a heavy burden on business activities. The corporate tax rate was lowered slightly this year but the rate in Japan — along with that in the U.S. — remain the highest among the world’s advanced economies as well as emerging economies.