Economy of Japan
...atement on inward foreign direct investment (FDI) in the context of "Rebirth of Japanese" in the General Policy Speech by the Prime Minister on January 31,2002: Foreign direct investment in Japan will bring new technology and innovative management methods, and will also lead to greater employment opportunities. Rather than seeing foreign investment as a threat, we will take measures to present Japan as an attractive destination for foreign firms in the aim of doubling the cumulative amount of investment in five years.' This was a confirmation on the part of the government of the significance of inward FDI and a clear demonstration to parties in Japan and abroad of the government's firm intentions to increase inward FDI. This report presents a practical series of steps to follow in order to achieve the government's goal. 1. The Importance of FDI into Japan (1) FDI as a Key to Revive Japan While Japan was able to achieve a high level of growth after making a new start following the disintegration of many of the country's existing organizational structures in the postwar period, certain constraints have built up over the past 50 years. Entrenched patterns of success, habits and system now impede the efforts of entrepreneurs and administrators and have instilled a sense of impotence in the hearts of the Japanese people. In order to liberate Japan from such constraints, and enable it to look out on the world with unclouded vision and take bold steps forward without avoiding risks, it is necessary to attract investment from foreign countries. Inward FDI brings with it new capital, human resources, management know-how and technology that are unfettered by existing organizations and practices. Cooperation with foreign enterprises can also enable companies to respond to the challenge of global competition in product development. Some companies can provide new products and services that do not exist in the domestic market and thus create new markets, enhance competition and increase benefits to consumers. In addition, foreign capital can be expected to play the role of a provider of so-called risk money, which does not shrink from taking appropriate risks and have abundant Know-how on risk-management. Such new winds may become 'A Key to Revive Japan', vitalizing the economy and securing employment. (2) Revitalization of many economies through FDI in many countries For some time now many countries have recognized the significance of inward FDI and have made efforts to promote it. In the United States during the 1970s and 1980s, when many industries were moving abroad, those states that felt threatened made active efforts to attract foreign investment. These efforts, for example, investment by Japanese auto manufacturers accompanied by the introduction of Japanese production management systems, contributed to the revitalization of the American automobile industry in the 1990s. The unemployment rate in the UK that exceeded 10% in the 1980s has decreased to a level of about 5%. This is also considered to be an outcome of active efforts to attract the investment of foreign-affiliated companies as part of the country's initiatives for reform. When Korea faced serious economic difficulties in the wake of the Asian monetary crisis, the country embarked on a daring economic reform plan to dispose of bad debts, reform conglomerates and greatly reduce regulations. At that time, the introduction of foreign capital was targeted as one of the mainstays in support of this process. While FDI to China was increasing, Korea also proactively attracted FDI by means such as promoting economic free zones. Since China publicly declared its commitment to economic reform and liberalization, the introduction of foreign capital has been defined as an important driving force for the country's economic growth. While China in attractive to foreign companies because of its low costs, abundant labor force and enormous latent market, other significant factors that have drawn the attention of foreign investors have been the bold reforms in regulations and the provision of incentives initiated by local government. (3) Investment potential that Japan is throwing away Nevertheless, FDI to Japan remains remarkably low compared to other major countries. According to IMF statistics, the stock of inward FDI compared to nominal GDP in 2000 was only 1.1% in Japan, while it was 27.9% in the US, 32.4% in the UK and 22.4% in Germany. While it may be said that Japan does not share national borders with any other country and its language and culture differ markedly from other major developed countries, the stark difference in FDI clearly illustrates that Japan is throwing away enormous potential investment. There are some who hold the view that outward FDI is at the root of the so-called "Hollowing out" of the Japanese economy. However, while in many major countries the stork of outward FDI exceeds 20% of GDP, it is only 6% in Japan. In fact, the major problem is considered to be the fact that inward FDI is low. Japan has a business environment with a market four times as large as China's, an established legislative system, accumulated technology, a wide range of supporting industries, a diligent workforce, and a favorable living environment in terms of factors such as safely. According to UNCTAD, Japan's Inward FDI potential Index is the 14th among 140 countries (although its Performance Index 131st). If Japan makes this latent apparent, dispels irrational feelings of wariness concerning foreign investment, reforms some of its systems and makes efforts to attract investment, it should be able to take advantage of employment and development opportunities to be gained by making use of inward FDI. (4) Inward FDI as the basis for structural reform If Japan is to develop an awareness of international competition in attracting companies, it will have to focus on examining the advantages and disadvantages of various systems in other countries and creating an env...