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With the economy in the doldrums, cash-strapped local governments have begun warring with each other to attract foreign businesses and the jobs and tax revenue they bring. Touting tax incentives, lower land prices and proximity to factories in related industries, they are encouraging foreign firms to ditch Tokyo and set up in other areas.

But following decades of slow foreign investment, conducting business away from the capital remains far from easy.

U.S. semiconductor parts maker Cabot K.K. is one happy entrant.

When the firm was hunting in 1998 for a site for its first factory in Japan, it was wooed by various cities and prefectures that sent information about everything from local businesses to cuisine and hot spas.

Cabot selected a site in Kitakoyama Industrial Estate in Geino, Mie Prefecture.

“By negotiating with a number of prefectures at the same time, we got a good deal,” said Toshinori Kameda, plant manager at Cabot Microelectronics Corp., which began production in January 1999.

“People trust ‘Made in Japan’ in the semiconductor industry. I believe we got that brand-name trust at the best value,” Kameda said.

The firm chose the site for a number of reasons, including its proximity to clients such as Fujitsu, Toshiba Corp. and Sharp Corp., all of which have factories in Mie.

The site is also 3 km from the Ise Expressway and a 20-minute drive from Yokkaichi port.

In addition to prefectural subsidies offered to new businesses, the town of Geino offered Cabot a two-year exemption on fixed property taxes, which fall under the jurisdiction of municipal governments.

The plant, located in the middle of rice fields, now employs 80 engineers, managers and other staffers to create semiconductor parts for use in cellphones and game consoles.

As the cost of building or acquiring factories has fallen since the bursting in the early 1990s of the asset-inflated bubble economy, more and more foreign companies have been seeking inroads into Japan.

Foreign direct investment jumped 30.3 percent in fiscal 2000 to a record 3.13 trillion yen, 2.7 trillion yen of which was spent on acquiring Japanese firms, according to the Finance Ministry.

And like Cabot, some are disqualifying Tokyo almost immediately. Land prices alone for a 1,000-sq.-meter factory in the capital, even on the outskirts, would amount to 300 million yen — up to 10 times the national average.

But some local governments need to attract still more businesses as falling business profits have cut into the local tax base.

The proportion of local government revenues taken from local taxes in fiscal 1999 fell 2.5 percent year-on-year to 33.7 percent — or 35 trillion yen — down from the peak of 44 percent in 1988.

In fact, securing more companies to set up businesses in a prefecture usually means only a slight increase in revenues, because a prefecture’s share of local allocation taxes — subsidies from the central government — drops as its own tax revenues rise.

Still, Kazuhiro Fujimoto, director of Mie Prefecture’s Industrial Site Development Division, said Mie needs to secure independent revenue sources to achieve its own policies.

While the central government cannot legally specify how tax grants should be used, Fujimoto said it does ask local governments to pay for government-initiated public works projects out of their allocation taxes.

“There is no such thing as money from the central government without strings,” he said. “It (local tax revenue) is our own money and we can use it to have the most effect in the economy.”

Securing a tax base is even more important in light of moves by Prime Minister Junichiro Koizumi’s Cabinet to force local governments to be more self-reliant by cutting local allocation taxes, Fujimoto said.

The central government itself is struggling with a huge debt.

Foreign firms are especially attractive to local governments because they avoided the overextension that plagued domestic players during the bubble economy.

During the 19 months since it opened, Cabot has doubled its production space to 8,000 sq. meters — this at a time when domestic companies are cutting back production, capital expenditure and their workforces.

No wonder, then, that a survey in 1999 by the then Economic Planning Agency showed that 70 percent of municipal governments were “highly interested” in drawing foreign capital.

“The demand is there, on both sides,” said Satoshi Fukasawa, director at the Development Bank of Japan’s Center for the Promotion of Direct Investment in Japan. “The question is: Who will get the business?”

As competition among local governments intensifies, the gap between winners and losers is becoming more apparent.

Most successful prefectures employ a strategic approach to attracting foreign investment, Fukasawa said.

In 1994, Kumamoto Prefecture began targeting businesses tied to Japanese semiconductor and information technology companies that have factories in the prefecture.

It thus focused on suppliers and clients of companies like Mitsubishi Electric Corp., NEC Corp. and Sony Corp.

At the same time, the prefecture has tied with local universities to help foreign companies recruit researchers and new graduates.

Yokohama created incubators such as the German Industry and Trade Center, a joint venture with Deutsche Bank, and the British Industry Center. Both boast full occupancy.

These centers — which provide conference rooms, factories, office space, cafes and warehouses — were designed to reduce startup costs for foreign companies.

“Companies feel more comfortable about starting businesses when the companies around them are all familiar,” said Norio Saeki, manager of the German Center.

Yokohama municipal officials also make regular tours of small and midsize companies involved in information technology operating in Tokyo.

Of the 27 foreign companies the city lured away from Tokyo in fiscal 2000, 70 percent were involved in software or IT-related manufacturing.

Despite these results, fundamental barriers remain that may limit the future growth of foreign businesses in rural areas.

“Japan is extremely centralized,” said Richard Dyck, president and CEO of TCS Japan Co. and former president of Kumamoto-based semiconductor maker Teradyne Japan.

Dyck pointed to the lack of infrastructure for expatriates that may prevent foreign companies from permanently setting up in rural areas.

Yokohama, however, succeeded in inviting the German International School to open there in 1987 at the same time when the city set up the German Center.

“It was a struggle to recruit U.S. middle-management to come to Kumamoto,” he said. “There were no international schools for their children. There are no hospitals with English-speaking staff.”

Hiring new graduates with a bicultural education to bridge the gap between domestic and foreign staff is also “very, very difficult,” Dyck said.

And this advantage that prefectures close to Tokyo enjoy may offset their higher land prices and cost-of-living.

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