June 12, 2017 1:00 pm JST
Nobuko Kobayashi

Japan: The foreign investment magnet that isn't

Its business community could help by losing its closed-mindedness

Men are seen through an automatic glass door in Tokyo, Japan April 2017. © Reuters

While the pro-globalization camp is exhaling in relief at the outcome of France's presidential election, it is not claiming victory. Nor should it. The fact that a candidate like Marine Le Pen could come as close as she did to winning the top spot in an EU cornerstone like France speaks volumes about the decline of the global-trade consensus -- as did Brexit and Trump.

Do these unsettling signs portend a world veering toward autarky? Not exactly. While global foreign direct investment remains lower than pre-Great Recession levels (teetering around $1.5 trillion after reaching a record high of $2 trillion in 2007), the appetite for this kind of investment is showing impressive resilience.

The U.N. Conference on Trade and Development forecasts a 10% increase in FDI flows in 2017. This comports with a finding by my A.T. Kearney colleagues: About 75% of investors in one of our surveys said they plan to increase their FDI in the coming three years.

While this might seem inconsistent with the anti-trade zeitgeist, it actually isn't. In fact, a trade slowdown can encourage companies to step up foreign investment to establish a presence in a desirable market -- and thereby reduce their exposure to the volatile whims of trade politics.

These days, of course, many of those desirable markets are in Asia. Our firm's research has found that four of the 10 most attractive destinations for FDI spending are China, Japan, India and Singapore.

As a Japanese businesswoman, however, I can't help but notice an anomaly here.

Clearly, investors are bullish on the leading Asian economies, including Japan. Just as clearly, they recognize the specific attributes of Japan as an investment target: a large and healthy national economy, a world-class tech sector, an outstanding workforce, and a democratic and relatively stable political system (an increasingly scarce commodity in the industrialized world).

Yet despite all of this, Japan draws relatively little actual investment from abroad. Its FDI stock is just 4% of GDP, compared to an OECD average of 35%.

So what gives?

Perhaps the answer lies in how FDI is commonly structured. We've found that the favored mode is a joint venture with a local company. This preference creates a problem for Japan, whose business community is widely regarded as closed-minded and resistant to change.

For too long, Japanese companies have settled for dominant positions in their own lucrative domestic market. Collaboration typically took place among Japanese peers -- and even more narrowly in some sectors through the keiretsu system, in which companies loosely group themselves together via cross-shareholdings and other protocols developed over decades and even centuries.

As the relative size of the domestic market diminishes, however, companies must become more willing to team up with overseas counterparts, thereby letting go of old comforts.

There is much to gain from such permeability. By engaging more actively in global joint ventures, Japanese companies can absorb new ideas and processes that will strengthen their competitive position.

Japan's government understands the necessity of attracting more investment and has established a goal of nearly doubling the amount of FDI entering the nation by 2020. Toward this end, it has sought to make legal and regulatory processes more efficient.

As worthwhile as such initiatives might be, the more fundamental solution to Japan's FDI problem must come from within the nation's business community. If it can make itself more open to international joint ventures, Japan may finally attract the foreign investment it needs -- and deserves.

Nobuko Kobayashi is a Partner with A.T. Kearney, a global management consulting firm, based in Tokyo. She specializes in the consumer sector with a special focus on multi-national corporations operating in Japan.

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