2008-04-30 (Wednesday) by Gregory Tucker.

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2008-04-29 (Tuesday) by Gregory Tucker.

Here is my reply to a Three Asian Giants story in Economist.

The low levels of inward FDI in Japan surprised me. I made a living (and a bucket of cash) off foreign companies who were investing in the Japanese market, primarily in the banking sector in Tokyo. I have deep “street level” view of the business environment in Japan, but I never studied any of Japan at an academic level. However, the explanations in the Economist.com Three Asian Giants article were not consistent with my street-level view.

In fact, my first impression was the authors were repeating (ad nausium) commonly held misconceptions of Japan. You see this a lot when you spend a little time in Japan. One foreign journalist who doesn’t speak a lick of the Japanese language printed something in the 1960s, which gets repeated thousands of times for decades by other journalists, most of whom have never stepped foot in Japan and might struggle to locate the country on a map. Think of a Shakespearean comedy of errors routine, and you can imagine what is printed about Japan by foreign journalists.

Meanwhile change in Japan is deceptive: it appears where we do not expect it, and it fails to appear where we expect it the most. It turns out, my gut reaction may not have been completely incorrect.

This article makes a few observations:

1. Japan is a relative late-comer on the international scene, and lags in both inbound and outbound FDI, relative to its economic size. The currency was not fully convertible until 1972. Only after the economy grew in the 1960’s and 1970’s did Japan have sufficient management talent to engage in outward FDI. Weaker currency also contributed to Japanese preferences for exporting over FDI. However, outward FDI grew rapidly from US$2.4 billion in 1980 to US$50.5 billion in 1990.
2. A lot of research shows that inward FDI levels in Japan are very low. However, an analysis of employment statistics shows that employment by foreign-owned entities, depending on the definition, is much higher than generally reported, or about 50% the equivalent levels for manufacturing and service sector employment in the United States. One contributor has been the lack of cross border M&A activity, which is the preferred method of FDI in other countries, resulting from both government regulation and shareholding structures in Japan.
3. In the manufacturing sector, inward FDI is highly concentrated in chemical industry, including pharmaceuticals, and machinery industries, including motor vehicles and parts. These industries are knowledge intensive. Low levels of inward FDI in other manufacturing sectors suggests foreigners are investing in areas where Japan has comparative advantage. Foreign ownership in automobile and parts manufacturing is probably higher in Japan than in the United States.
4. Government regulation plays a bigger role in inward FDI in the service industries. Investments are concentrated in telecommunications, insurance, banking, and business services, which are the centers of government liberalization in Japan. However, low penetration in other sectors such as construction & civil engineering, energy, and utilities are probably the result regulatory barriers in general, not ones specifically aimed at foreigners ownership or inward FDI.
5. One impediment to inward FDI is the commonly held belief that the Japanese market is hard to penetrate.

High costs for labor and real estate, especially since 1980, may also contribute to low level inward FDI. Nevertheless, the Japanese market is significantly more transparent and easier to penetrate than China.

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