Foreign direct investment - challenges and opportunities in Japan

Everybody wants into Japan. This is one of the most desirable markets in the world — large and wealthy, with skilled, educated workers and sophisticated, enthusiastic consumers. Both businesses and individuals are ready and willing to pay for quality. Unfortunately, the market here also has a reputation as a hard nut to crack.

The Japanese government is enthusiastic about attracting foreign investment. Regulators and much of the private sector agree that foreign direct investment (FDI) is a good thing and should be encouraged. Some of the regulatory roadblocks that had hindered foreign companies from coming to Japan to do business have been reduced or removed.

But the level of FDI in this country is still low. Japan’s ratio of outstanding FDI to GDP has for years been the lowest among industrialised countries, and is even now well below that of many emerging economies in Asia. It stands at only about 3.8% of nominal GDP, compared to some 30% for the OECD. It totaled ¥17.8 trillion in 2012, and the Japanese government has expressed its intention to boost the figure to ¥35 trillion by 2020.

That’s good news for the EU. “Europe is the biggest foreign investor in Japan,” notes Bjorn Kongstad, policy director at the EBC in Japan. “But still, the levels are lower than for industrialised nations.”

The Japanese government is well aware of this — and of the benefits of FDI, both for the new money it brings in, and for the edge it gives Japanese firms trying to penetrate markets overseas. That is, if the private sector can point to a more open market at home.

In April, EBC members participated in a series of meetings with Japanese government and political leaders, as well as members of the Cabinet Office’s Expert Group Meeting on Foreign Direct Investment in Japan. Many of the recommendations put forward were met with enthusiasm by government officials, and some initiatives have already been put in place.

Yuki Shimazu is assistant director at the Trade and Economic Cooperation Bureau of the Ministry of Economy, Trade and Industry (METI). He says, “The government is very positive about FDI, and is implementing measures to increase the attractiveness of the Japanese market.”

Since the April meeting, according to Shimazu, the steps taken have included a ministerial group meeting attended by high-level ministers; a series of “kickstarter” seminars in New York and London, to encourage investors to come to Japan; a new national strategy for economic growth that explicitly mentions FDI; and an Invest in Japan Attaché program, which enlists consultants, ad agencies and other entities to contribute their knowhow to boosting the image of Japan as a place in which to set up shop. The government is also establishing six special zones around the country armed with special incentives to attract foreign firms.

One of the recommendations from the EBC side has been to boost the role of the Japan External Trade Organization (JETRO), which is already helping foreign firms enter the market here by offering assistance in navigating the thickets of rules and regulations. The government also is pushing its Invest in Japan Attaché scheme. “Until now, FDI has been JETRO’s job, but the new approach will be to recruit CEOs, PR people and others, and utilise their personal networks” to get the word out about opportunities in Japan, explains Shimazu.

The EBC, however, feels that some additional regulatory reforms would greatly enhance attracting foreign investors. Lower corporate taxes, for example, would be a start.

“This is the biggest hurdle,” says Kongstad. “The corporate income tax here is very high — not by world standards, necessarily, but compared to neighbouring countries, which compete for foreign investment with Japan.”

Singapore, Taiwan and South Korea all have much lower corporate tax rates: as much as 20 points lower in South Korea’s case. In addition, Kongstad says the net operating loss (NOL) carry-forward period in Japan has for a long time been limited to nine years. In other countries, the NOL can be carried forward for as many as 20 years, or even for an unlimited time.

The EBC also believes that simplifying the business environment to make it more flexible and easier to provide services or to import certain physical products are important objectives. “Obviously, if it becomes easier to sell products, companies will be more willing to come to Japan,” notes Kongstad.

Nonetheless, it’s going to take a lot more than policy tweaks to turn around the FDI environment here, according to Kongstad. One of the biggest issues, needless to say, is a cultural difference. Japanese stockholders are a patient lot and, for the most part, content to park their money in one company, keeping it there for the long term. There are few demands placed on management from such stakeholders. This may free up company leaders to make their own long-term strategy, but cause potential foreign investors to balk at the lack of transparency.

In terms of the business culture, Kongstad says, “It’s hard for an investor to get insights into a board, and whether it’s working in the best interests of the shareholders. You can’t know the true health of the company [this way].”

For enterprises looking to set up shop in Japan, there are plenty of thorny issues, including the challenge of hiring the right people — at all levels, from grads to mid-career talent with the connections necessary to get things done. The EBC’s senior vice-chairman, Michel Theoval, notes that “many common practices here in Japan would be impossible to justify for a European company — such as amakudari”, in which top government officials retire to lucrative positions in the private sector.

The Japanese antipathy towards mergers and acquisitions is another barrier to foreign firms wanting to buy into the market. “In Japan, a company is more than just a commodity”, notes Theoval, who is also president of GHT – Group Hi Tech, a division of PMC. “A company here is a family, and its subsidiaries and suppliers are cousins — and you don’t sell your cousin.”

METI’s Shimazu sees two basic barriers: lack of attractiveness of the market, and the hesitancy of local governments and business people to deal with foreign firms. “How to motivate local governments to encourage smaller companies to accept foreign money is an on-going problem,” he says.

Though moving ahead, slowly but steadily, FDI in Japan has a bright future.

“When you’re in it, Japan is a good, profitable market; there are good margins here,” says Kongstad. “And though Japan as an aggregate might not grow much in the [near] future, due to demographic and other reasons, some sectors will continue to grow consistently, such as mobile communications, foodstuffs, medical devices, etc.”

© Japan Today