Earlier this year, NHK aired the three-part TV program “Made in Japan,” which dramatized an electronics company’s struggle to survive tough economic times. While fictional, the story detailed the harsh reality Japan Inc. faces from Chinese competition.

But was the drama in fact a reality TV show? With the Upper House election over, talk about “Abenomics” has shifted to Prime Minister Shinzo Abe’s so-called third arrow, i.e. structural economic reforms. And one factor missing from the discussion is the role of foreign direct investment.

Japan’s inward FDI as share of GDP stands at a meager 4 percent. It is clearly lagging its G-7 peers, who are in double-digit figures, and is even dwarfed by North Korea’s FDI ratio of 12.5 percent. Since inward FDI is an indicator of an economy’s openness and attractiveness, there is no way Abe’s government will be able to conduct fundamental reform without taking the power of foreign investment into account.

This means the government must actually promote it. Which also means pushing direct investment from rivals like South Korea and China even if it leads to the takeover of a domestic firm by a foreign competitor. Some might call this a form of the “creative destruction” espoused by Austrian economist Joseph Schumpeter.

But this is where a huge problem lies: The Japanese public’s general stance toward China is very negative.

Japan is not alone. In June, a major business survey conducted by MSL China said that 58 percent of respondents in the U.S. and Europe consider the prospect of being acquired by a Chinese firm as a threat. But such fears are nowhere near as profound as in Japan.

In May 2013, a big BBC survey revealed that only 5 percent of Japanese have a positive view of China — by far the lowest result of the 25 countries polled. This view partly reflects the regional and historical disputes they share and is likely to continue for some time. From a business point of view, however, it can translate into viable long-term opposition toward Chinese companies and investors.

Notable examples of anti-Chinese sentiment include the bitter dispute in the city of Niigata over the construction of a new Chinese consulate in 2012, and the failure to brand a Tokyo neighborhood filled with Chinese businesses as “Tokyo Chinatown.” In both cases, local opposition proved too strong to overcome.

Chinese investment in Japan remains low, with deal values rarely exceeding $100 million. This is in striking contrast to Canada or the United States, where GNOOC’s purchase of Nexen in 2012 totaled $15 billion and Shunagfui’s takeover of Smithfield Foods in May 2013 amounted to $5 billion.

While the total value lags, the number of Chinese investment deals has grown rapidly in recent years. In 2010, Chinese companies bought 37 Japanese firms, surpassing the U.S. in acquisitions for the first time.

The Japanese deals that attracted the most attention included Lenovo’s joint venture with NEC in personal computers, Haier’s purchase of Panasonic’s appliance unit, and Suning Appliance’s acquisition of electronics retailer Laox.

All of these investments share the same three investment motifs: technology, brands and expertise.

Rising labor costs and lower profit margins at home are forcing Chinese companies to move rapidly toward higher-value activities and internationalization. Japanese firms have a lot to offer in this regard, given their superior technology, established brands, distribution channels and skilled labor.

A country offering interesting lessons for Japan in this regard is Germany, which has a similar industrial structure and has become the favored destination for Chinese investment in Europe.

More than 20 percent of the Chinese M & As in Europe targeted German firms, with the machinery and automotive sector accounting for more than half of all the companies acquired.

Unlike their dealings in Japan, however, the Chinese started out by making major acquisitions. In 2012, Sany bought Putzmeister for $450 million, and Weichai Power invested close to $1 billion to grab a major stake in Kion Group.

The management teams at both Putzmeister and Kion are praising their new owners and actually regard them as crucial to expanding not only to China, but to other overseas markets as well.

Likewise, the overall skepticism Germany once harbored about Chinese investors is slowly giving way to a more balanced and increasingly positive view of Chinese capital. The well-known Bertelsmann Foundation recently published the results of a major study that said Chinese investment has created significant growth and jobs in Germany.

Most business leaders in Japan are aware of this fact and have taken advantage of the opportunities when they knocked. Back in 2004, for example, Marubeni, Sumitomo Trust & Banking and other domestic institutional investors provided 90 percent of the financing for the first Japan investment fund set up by CITIC, the China International Trust and Investment Corporation.

And China is the only country besides the United States to which the influential Keizai Doyukai (Japan Association of Corporate Executives) has dedicated an entire committee.

“Made in Japan” ended with the Japanese company saving itself by cooperating directly with a major competitor from China. As China continues to grow as a trade partner and investor, Japan’s politicians must make sure that public opinion does not turn into outright opposition, because Chinese FDI is as valuable to Japan as FDI from Germany, France or the U.S.

The development of inward FDI over the next two to three years will be an important indicator of the prospects for Abenomics.

Jochen Legewie is president of German communications consultancy CNC Japan K.K. (See his blog at www.cncblogs.jp).

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