Shuji Miyazaki
President of MIPRO
It is beyond question that direct investment in Japan will produce new employment and introduce new products, services, funds, technologies, and management techniques, thereby strengthening global competitiveness and triggering the vitalization of Japan's economy. As if to balance with the quick increase of investment in Asia (particularly in China) in the 1990s, investment in Japan increased in the last decade, supported by Japan's economic recovery, and flow-based foreign direct investment exceeded investment from Japan in 2006. Accompanying this, the stock-based inward investment balance doubled in five years from 2001 until 2006, and is still on an increase this year.
However, the absolute level of the inward investment balance is still the lowest among the advanced countries. At the end of 2005, investment was 28 times greater in the USA, 8.6 times in the UK, 6.7 times in Germany, 9.5 times in France, and 1.8 times in Singapore. Investment in Japan was just narrowly (0.87 times) greater than that in South Korea. In 2005, the ratio of inward investment balance was merely 2.4% in Japan but 22.5% in the USA, 40.9% in the UK, 25.0% in Germany, 47.4% in France, and 11.7% in South Korea. In Singapore, the ratio was as great as 159.1%. Comparison with Singapore may not be persuasive, as in Singapore, which has a population similar to Niigata Prefecturefs in an area the size of Tokyofs 23 wards, foreign investment is naturally high compared with GDP. However, we should recognize that inward investment in Japan is very low compared with this economic power.
About 80% of investment in Japan is M&A, while green field investment makes up no more than 20%. Of M&A with Japanese companies in 2006, 21.8% was in the manufacturing sector, while 53.8% was in the finance sector, 17.4% in the non-manufacturing sector, and 7.0% in the commercial sector. The percentage of green field investment was 42.0% in the manufacturing industry, which is an area in which Japan is strong, with the electric machinery, chemical, and transportation equipment industries standing at the top. Looking at sources of investment, 50% comes from North America, 30% from Europe, and only 20% from Asia. This is in sharp contrast with the fact that Japan makes investment mainly in Asia.
Classification by area shows a remarkable regional bias because almost 80% of investment is made in the Kanto and Koshin-etsu districts and 15% in the Kinki and Chubu districts. In a survey of awareness conducted on foreign-affiliated companies in Japan (by the Cabinet Office in 2005), many companies pointed out such structural factors as "complicated proceedings," "great business activity costs," "excessive regulations," and "fierce competition due to presence of many excellent companies" are disturbing investment in Japan. Other factors concern locational superiority, such as gshortage of information about area and market,h gshortage of incentives,h and gno attractive partner or party for merger.h The former factors can be solved if the government eases regulations by taking the lead, but the latter factors depend on efforts by the party receiving investment or the region.
Well, what are the problems in acceptance of inward regional investment in Japan? In fact, many local governments are spending a lot of labor and money and preparing subsidies and tax reductions as incentives to attract foreign companies. However, their efforts are not making expected progress, except in some areas, such as metropolitan areas. This may be mainly because foreign companies do not have enough understanding of the areas or regional industrial and economic activities, or the areas do not provide enough information about the acceptance of investment. Foreign companies that place priority on minimizing costs will attempt to reduce transportation and communication costs by establishing their bases in large urban areas. Considering that their greatest concern is successful investment in Japan, where land prices and labor costs are comparatively high and market competition is fierce, they may certainly think of locating in large city areas rather than in unfamiliar areas to avoid risks.
To be chosen by a foreign company despite these disadvantages, an area should enhance its competitive strengths and sell them to foreign companies. An area should first position foreign investment securely in local economic vitalization. create a program enabling the industrial sector of the area to cooperate with foreign companies, establish a system supporting such cooperation, and aggressively provide foreign companies with information. In some cases, using the special development zone system may be necessary for securing high-level human resources for research.
In successful cases of investment from overseas in Europe and America, regional cluster formation is often the key. There are many successful cases of company invitation, such as the high-level integration of IT, medical, and welfare industries in Juvashovi of Finland, Ile-de-France of France, and Scotland of the UK. Also in Japan, the Technology Advanced Metropolitan Area (TAMA) and other regional cluster activities, the integration of LSI and automotive industries in the northern part of Kyushu, and The Kobe Medical Industry Development Project are increasing inroads by foreign companies into these areas. Common to these activities are powerful incentives and infrastructure to attract foreign companies and regional industrial integration to support the companies.
Foreign companies will choose areas where they can have clear visions of business oppotunities. Large-scale investment at one time is risky. Since medium-sized companies will increase among investors as investment from Asian countries increases in the future, risks must be handled even more carefully. Therefore, foreign companies may attempt to promote cooperation with the industry of the area or business interchange with the area.
During an industrial tour to Ishikawa Prefecture held by MIPRO and others, many participants from foreign companies noted that they had been unaware of not only the areafs versatile and deep regional economy and society but also its tight industrial integration of high-tech companies and high academic-research collaboration until they actually visited it. I-O Data Device, Inc., which was originally established in Kanazawa, has become fixed as a national brand and is now engaged in activities based on business interchange with Asian countries. Some companies are producing high-level technical products for NASA and Boeing. There are many regional companies, small but shining, that support the making of things.
If its regional industrial power is widely known, many foreign companies that are confident of their technologies may take the first step into Japan through cooperation (technical tie-up, OEM supply, or joint development) with a regional high-tech company.
Another effective way may be to enter incubation facilities installed by the Organization for Small and Medium Enterprises and Regional Innovation, Japan (SMRJ) or local governments, or to enter research interchange facilities of universities to develop technical seeds into businesses. In this sense, we should note the roles of platforms installed by local goverments to create new industries and provide industrial support to small and medium companies. Many of these organizations are engaged in various activities to secure subcontract orders, give managerial guidance to small and medium enterprises, locate companies, and operate incubation facilities.
The progress of business interchange and industrial cooperation between foreign companies and regional companies can be expected to deepen activities on the investment level through the establishment of sales companies, the installation of production bases, or pursuit of joint business or M&As. With this kind of problem awareness, MIPRO is attempting to merge "support of access to Japan" and "support of investment in Japan" into "business interchange with Japan" for mutual linkage (see the figure).
The improvement of access to Japan will expand business interchange between foreign countries and Japan and increase investment in Japan. In other words, investment in Japan is an extension of access to Japan.
With gintroduction of foreign capital, and mainly secondary investment, into regional Japanh as a project goal, MIPRO is building up cooperative relationships with foreign governmental establishments, state governmental offices in foreign countries, foreign corporate bodies, market councils, and trade investment-related organs by utilizing internal and external networks for access to Japan that MIPRO has cultivated over the last 30 years. MIPRO is also sponsoring forums on investment in Japan for information-sharing with local governments. And it is holding industrial tours of specific sites and seminars with participants from foreign companies, foreign governmental establishments and local governments. Last year, spa companies from Singapore were guided to a spa resort in Ishikawa Prefecture, and a regional vitalization seminar was held that focused on sightseeing. These events attracted great attention from the local area, which is seeking to revitalize its spas. At the beginning of October of this year, an Invest Japan seminar was held in Taiwan for IT-related companies under the joint auspices of Interchange Association, Japan. Through such activities, MIPRO is making daily efforts to contribute to increased investment in Japan.
This text was partially reproduced from an article contributed to the JFTC Monthly Report of October 2007 (No.652). For the whole text, access the following website.
