Toward Expanding Sluggish Inward Foreign Direct Investment in Japan
4. Response by the Japanese government to increase inward foreign direct investment in Japan
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
this index and inward foreign direct investment (as a percentage of GDP) for 28 OECD countries for the period between 1996 and 2005, which showed the closed nature of the market is inhibiting inward foreign direct investment. Japan's investment index was 50.7, lower than the OECD average of 54.1, indicating Japan was more closed than the OECD average.14
Difficulty in securing human resources is pointed out as an issue for foreign-affiliated companies in locating themselves in Japan. Knowledge and ability of foreign languages such as English is required for the staff working for foreign-affiliated companies in order to communicate with staff at the parent companies; however, there is an issue of a shortage of personnel with such ability in
national level by the central government and those at the regional level by regional governments.
As for the proportion, there has been a shift in inward foreign direct investment promotion policies from the central level to the regional level in response to issues such as the investment disparity between large cities and provincial cities.
The Japanese government's measures to support inward foreign direct investment started in 1984 with the low-interest loan system by the Japan Development Bank. It was introduced at the time as one of the measures to achieve market liberalization and import promotion, which was a major issue, rather than an attempt to actively accept foreign direct investment. The measures supporting inward foreign direct investment included preferential taxation, debt guarantee and the provision of information as well as the low-interest loan system mentioned above.
The central government adopted policies to increase inward investment itself since 1994 when the Japan Investment Council, chaired by the Prime Minister, was established.15 In the background of actively implementing investment promotion policies was the recognition that an increase in inward foreign direct investment was needed as a measure to reinvigorate the Japanese economy, which had been flagging since the collapse of the bubble economy, and to respond to the hollowing-out of the Japanese economy as a result of the increase in outward foreign direct investment due to the sharp appreciation of the yen since the second half of the 1980s. The
“Statement of the Japan Investment Council Toward the Promotion of Foreign Direct Investment in Japan,” which was adopted by the Japan Investment Council in 1995, resolved to actively proceed with various initiatives to increase investment, including deregulation, preferential treatment in terms of taxation and finance, the handling of claims from foreign-affiliated companies and the provision of support services by the Foreign Investment in Japan Development Corporation (FIND).
In addition, the “Statement of the Japan Investment Council on M&A” was adopted in 1996, which expressed the basic policy concerning the expansion in M&A investment.
In January 2003, (then) Prime Minister Koizumi set the target to double the inward foreign direct investment balance from 6.6 trillion yen in 2001 to 13.2 trillion yen in 5 years before the end of 2006. In order to achieve this target, the Japan Investment Council produced in March 2003 the
“Inward Investment Promotion Program,” which they decided to promote. This program consists of 5 priority areas and 74 items, including, more specifically, speeding up mergers and acquisitions, promoting participation by foreign companies in the corporate revival process, corporate tax liability relief, strengthening corporate governance, simplifying administrative procedures, providing information to foreign media organizations and diplomatic establishments abroad, and
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
promoting understanding among the Japanese public of the advantages of inward foreign direct investment. Under the Inward Investment Promotion Program, relevant offices and ministries commenced a one-stop information service (“Invest Japan”), which helps foreign investors to obtain information, and various kinds of information concerning investment have been made available through the Japan External Trade Organization (JETRO). In response to the Inward Investment Promotion Program, the Ministry of Economy, Trade and Industry implemented the
“Forward-thinking Projects to Promote Inward Foreign Direct Investment” in 2003 and 2004, and
“Projects to Support Enterprise Zones to Attract Foreign Companies” since 2005.
The Democratic Party of Japan came to power in 2009, and in June 2010, “New Growth Strategy: Blueprint for Revitalizing Japan” was adopted at a Cabinet meeting, under which doubling inward foreign direct investment was positioned as one of the important aims in order to revitalize Japan as a business base in Asia.16 In 2010, there was concern about the decrease in Japan's location competitiveness due to the sharp appreciation of the yen, and, in an effort to encourage investment from both inside and outside of Japan, the “Round Table on the Promotion of Inward Investment” was established in September of the same year to discuss increasing investment.
In November of the same year, the Round Table meeting laid down the “Inward Investment Promotion Program.”
In November 2011, the Conference to Promote Japan as an Asian Business Center and Direct Investment into Japan was established within the Cabinet Office, which produced the Program for Promoting Japan as an Asian Business Center and Direct Investment into Japan in December. The program set targets to be achieved by 2020, which are increasing high value-added sites, doubling the number of employees of foreign-affiliated companies and doubling foreign direct investment into Japan. Individual measures to achieve these targets are grouped under five central initiatives, which are initiatives (1) to boost profitability, (2) to utilize a special zone system, (3) to improve the investment environment and create a structure for investment support, (4) to improve the living environment and (5) to enrich the dissemination of information welcoming investment. Specific measures under each initiative include (1) strengthening incentives such as corporate tax reduction and subsidies, (2) utilizing a special zone system in organic cooperation with local governments, (3) reviewing regulations, transparent administrative procedures concerning investment, convenient access to information and public administration in English, (4) preparing an environment for foreign nationals such as education and health care, and (5) PR activity by the government on the appeal of the location environment. However, this program has not been implemented at this time.
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As an inward foreign direct investment promotion policy at the regional level, the same subsidy as for Japanese companies is provided to foreign-affiliated companies such as a reduction or exemption of local tax and grants. Some local governments have also sent their staff, including governors, abroad to attract foreign-affiliated companies to the region. There are examples where top-level sales pitches by governors have led to successfully attracting foreign-affiliated companies in prefectures such as Miyagi, Mie and Kumamoto. Local government-led investment promotion can be fine-tuned to suit the conditions in the region and implemented swiftly, which is a strength.