Toward Expanding Sluggish Inward Foreign Direct Investment in Japan
5. Toward expanding foreign direct investment in Japan
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.
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
view that the definition of national security tends to be stretched. More specifically, acquisitions by foreign-affiliated companies were restricted in some cases for reasons of national security although it was a threat to the company but not to national security. For example, when an investment fund in the Macquarie Group from Australia tried to increase its shares in Haneda Airport Buildings in 2007, the Ministry of Land, Infrastructure and Transport put a stop to it for reasons of national security. In order to restrain the over-interpretation of national security, there should be a clear definition of national security and the screening for authorization must be carried out in a strict manner while firmly maintaining transparency and consistency. At present, when prior notification or screening is required for inward foreign direct investment by foreign companies, the Finance Minister and the Minister having jurisdiction over the business review the case in the first phase, then if any issue is found, the opinion of the Council on Customs, Tariff, Foreign Exchange and other Transactions is sought in the second phase before a final decision is made. The whole process can take up to five months. This review period can be shortened by skipping the first phase and carrying out only the second phase of the review. It would be efficient in that case to form an investment committee comprising mainly specialists, as in many other countries, and the review to be carried out by the committee. The Japanese government's approach toward controlling inward foreign direct investment is for assessment before the foreign companies enter Japan, and not for dealing with issues that arise after their entrance. Foreign-affiliated companies’ expansion into Japan can also be promoted by speeding up the prior review combined with monitoring their activities after their entrance. Some claim that monitoring the activities of foreign-affiliated companies after they enter the Japanese market costs a great deal; however, monitoring the activities of companies should be carried out regardless of whether the company is foreign or domestic, and hence the additional cost should not be significant.
As for individual regulations, there are said to be issues concerning regulations relating to M&A by foreign-affiliated companies and taxation. Preparing an M&A-friendly environment, compared to other developed countries, would help increasing inward foreign direct investment. With regards to taxation, the corporate tax rate should be reduced to be on par with other developed countries.
The third suggestion is to establish a system that will support economic activities that will forge the future of the Japanese economy, and operate it effectively. In particular, research and development is essential in improving the competitiveness of industries and companies, and its significance is extremely high in an economy such as Japan’s, where a declining birthrate and aging population is rapidly advancing. Therefore, in order to promote research and development, an
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environment should be provided which is easy for research and development, not only for domestic companies but also for foreign-affiliated companies. In fact, when domestic companies that are competitive in research and development emerge, that would encourage foreign-affiliated companies to expand into Japan in the hope of collaborative research with those domestic companies. When an environment for research and development is provided, that will attract talented personnel, which will then attract companies after those people. Given this perspective, the importance of establishing a structure for the smooth flow of people, money and information necessary for research and development becomes clear. In connection with this, the cultivation of human resources in Japan is an urgent issue because the existence of excellent human resources is a prerequisite for attracting personnel from abroad.
The fourth suggestion is to evaluate the effect of existing policies to attract foreign investment, utilize the lessons from the experiences, and make use of them in establishing policies to attract foreign investment from now on. As discussed in Section 4, the Japanese government has implemented a number of policies to attract foreign investment; however, these do not seem to have been evaluated thoroughly. Without such an evaluation, it is difficult to establish desirable policies.
Additionally, it would also be beneficial to examine the policies, systems and their effects in other countries.
Finally, it is of the utmost importance in attracting inward foreign direct investment to create an economic environment that is full of energy and has potential for the future. Such an environment will attract foreign direct investment, and as a result, economic growth will be promoted. The achievement of economic growth will attract further investment. In order to create such a positive growth cycle, policies such as those discussed in this section should be implemented to increase inward foreign direct investment.
References
Japanese
AMANO Tomofumi (2009) “Changes in foreign direct investment into Japan and the economic impact: Examination of economic policies, corporate behavior and economic achievement,” from
“Changes in International Environment and the Japanese Economy,” edited by ITOH Motoshige, published by Keio University Press.
2011-2012 JIIA Research Project: Policies Needed to Ensure Japan’s International Competitiveness
Ministry of Economy, Trade and Industry (2011) “White Paper on International Economy and Trade”
National Diet Library (2007) “Attracting and regulating foreign investment,” Survey and information No. 600
American Chamber of Commerce in Japan (2010) “Charting a New Course for Growth - Recommendations for Japan’s Leaders”
JETRO (2011) “2011 JETRO Global Trade and Investment Report”
FUKAO Kyoji and AMANO Tomofumi (2004) “Foreign Direct Investment and the Japanese Economy,” Nikkei Inc.
Cabinet Office (2008) “Analysis of factors for inward and outward foreign direct investment: An explanation for low level of foreign direct investment in Japan” (Policy issues analysis series 1) Cabinet Office (2010) “White Paper on the Economy and Public Finance” (2010 version)
English
IMD (2011) World Competitiveness Yearbook 2011
－ Notes －
1 JETRO (2011) p. 35
2 The amount of inward foreign direct investment in Japan is from the FDI database of UNCTAD, and the GDP figures are from the World Development Indicator by the World Bank.
3 JETRO (2011), Table 7 on p. 108
4 JETRO (2011), p. 38
5 “2009 Economic Census for Business Frame” by the Ministry of Internal Affairs and Communications
6 Nikkei (electronic version), February 7, 2012
7 Investment cost comparison by JETRO <http://www.jetro.go.jp/world/search/cost/>
8 OECD Tax Database
9 Includes NTT Law, Radio Act, Broadcast Act, and Civil Aeronautics Act, etc.
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10 National Diet Library (2007) serves as a useful reference with regards to restrictions on foreign investment.
11 National Diet Library (2007)
12 Please refer to Fukao and Amano (2004) with regards to the effects on the economic indices of the companies purchased as a result of purchases of Japanese companies by foreign-affiliated companies.
13 For example, please refer to American Chamber of Commerce in Japan (2010).
14 The Cabinet Office (2010) carried out a similar analysis using the statistics for the period between 2001 and 2007 and obtained similar results.
15 Please refer to Amano (2009), National Diet Library (2007), etc.
16 Please refer to the Ministry of Economy, Trade and Industry (2011).