Japan and Foreign Direct Investment Term Paper

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Japanese inflow has not been as productive, due to ongoing bans by the country that were only relaxed in the last decade. Because of this, in 2003, Prime Minister Junichiro Koizumi announced that the government aims to double foreign direct investment in Japan in five years to stimulate its stagnant economy and create employment. The government's Japan Investment Council (JIC), which is chaired by Koizumi, announced the program would focus mainly on the barriers faced by foreign companies in entering the Japanese market. The 2003 report by Fukoa found the following:

Foreign companies have 10% higher productivity

Productivity at acquired Japanese companies shows improvement after merger/acquisition

Foreign firms usually have higher profitability than their Japanese counterparts, and greater (more active) capital investment

Therefore, FDI does not cause the loss of "management resources" from Japan, but rather their accumulation

If the share (as percent of GDP) of foreign affiliated firms' total production in Japan were to rise 10 points to the 11% average among developed countries (from the current 1%), Japan's total capital stock and GDP would increase 1.5%.

It is thus imperative that Japan finds additional ways of promoting FDI inflows.

STATEMENT of PROBLEM

International Monetary Fund statistics show that FDI flows into Japan remain low compared to other major economies. The ratio of inward FDI compared to nominal GDP in 2000 was only 1.1% in Japan. This compares to 27.9% in the U.S., 32.4% in the UK and 22.4% in Germany. The outstanding balance of FDI in Japan is only one-sixth that of the country's direct investment overseas. The balance of foreign direct investment in the U.S. exceeds that of U.S. investment in other countries. In Britain, Germany and France, the inward foreign investment balance is about half the amount of the outward foreign investment balance. FDI inflow is essential to create a globally competitive investment environment. It will help Japan to advance beyond the domestic precedents and structures that have constrained economic growth over the past decade (FDI Magazine)

FDI stock in Japan more than tripled in the period 1998-2003, from 3.0 trillion yen at the end of 1998 to 9.6 trillion yen at the end of 2003. Reforms in the financial, communications, and distribution sectors have encouraged foreign investment into these sectors. Improvements in corporate laws, bankruptcy laws, and accounting principles also helped attract foreign capital. In 2003, FDI toward Japan slowed to $6.3 billion from $9.2 billion in 2002, but this followed continued strong increases in FDI recorded over the last several years (FDI Magazine).

However, Japan continues to host the smallest amount of inward foreign investment as a proportion of total output of any major OECD nation. Foreign participation in mergers and acquisitions (M&a), which account for some 80% of FDI in other OECD countries, although on an upward trend, also lags in Japan (FDI Magazine).

Prime Minister Koizumi is taking new approaches to restructuring Japan's economy. His administration's Special Zones for Structural Reform (SZSR) initiative is working to revitalize Japan's regional economies through locally led regulatory and structural reform. The Special Zones initiative can help remove the regulatory barriers that limit U.S. business market entry and foreign investment into Japan. For example, Japan reduced customs overtime charges within it International Physical Distribution Zones by 50% in April, 2004.

According to research conducted by the Japan External Trade Organization (JETRO), as of September, 20004 there were 4,276 foreign-affiliated companies in Japan of these firms 2,611 were subsidiaries of foreign companies, 1,314 were sub-subsidiaries and 351 were Japanese branches of foreign-owned companies.

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By industry, 47.4% of firms were in the wholesale, retail and restaurant sector and 17.6% were in manufacturing. Nearly two-thirds of foreign affiliates were headquartered in Tokyo.

As of September 2004, foreign-affiliated firms employed some 1.02 million workers in Japan, JETRO research finds. This figure represents only 2.4% of Japan's total permanent workforce and lags well behind that of other developed countries such as the U.S. At 5.5% and Germany at 5.4%. In Japan's finance/insurance sector, however, the share of foreign-affiliated company employment accounted for 8.2% of the sector's total permanent workforce. Subsidiaries of foreign companies employ the most, at 598,657 workers, followed by sub-subsidiaries at 373,566, and Japanese branches of foreign-owned companies, at 51,218. By industry category, affiliates in the manufacturing industry employ the most, at 37.4%, followed closely by the wholesale, retail and restaurant sector, which accounts for 34.1% of the total figure for Japan. By country, foreign affiliates from the U.S. account for 59.6% of the total figure, followed by France and Germany, who both account for 12.9% of Japan's 1.02 million workers employed by foreign firms.

In a survey conducted by JETRO, foreign firms cited "high market potential" "existence of business partners" and "high-income level customers" as attractive features of doing business in Japan. About 53% of respondents liked the country's "well-established domestic transportation system," "proximity to markets and convenience for sales activities." Respondents also cited the country's "convenience for information-gathering" and "high number of global headquarter offices" as positive features.

Asked what prompted their investment in Japan, a high percentage of respondents cited "high market potential," "existence of business partners" and "stable political and social system." Among firms attracted to Japan for its high market potential, 30.5% of respondents believe that market conditions have improved since they entered the Japanese market; conversely, only 19.0% feel that conditions have worsened since their initial investment.

Japan recognizes that it must also educate and promote FDI inflow to its internal audience. The Japan Investment Council has instituted some programs to strive for public understanding of the role of FDI; widely and actively communicate with the Japanese public on the importance of FDI in Japan; demonstrate the need to attract more FDI to Japan; show the contribution that foreign-affiliated companies are making to the Japanese economy and the roles that they are playing. Japan is holding seminars and meetings that bring local governments in Japan into close contact with countries and regions that are considered to be promising sources of FDI in the country. However, this is just the beginning. Much more needs to be done to boost numbers of FDI.

RESEARCH

Numerous misunderstandings and aversion to FDI still exist in the country. FDI flowing into Japan is extremely low compared to other industrialized countries, where it makes important contributions to employment and capital investment (Fukao,

It is believed, therefore, that Japanese companies require more knowledge and encouragement to look for and take advantage of foreign FDI.

This it is hypothesized that in order to understand and take advantage of FDI inflow, a major educational and promotional program must be developed for internal organizations. Companies, especially middle-sized ones, need to be informed and encouraged to learn more about how they can relate to this economic opportunity.

To research this hypothesis, XXX (number) of companies in Japan of (determine size by yen or number of employees) were surveyed to determine 1) what promotional/educational programs on FDI have been attended by local firms and their results; 2) how much companies know.....

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