Factors Enabling U.S. Companies to Gain the Highest Yields in Direct Investment from Japan | Print |

Opening Remarks

  • Mr. Yasuo Hayashi, Chairman & Chief Executive Officer, Japan External Trade Organization (JETRO)

Mr. Hayashi gave a comprehensive overview of efforts the Japanese government is making to improve Japan’s business environment for foreign firms. The government has made considerable strides in structural reform and deregulation and has introduced new corporate laws. Led by these initiatives, Japan’s firms have worked hard over the years to shed what was considered excess of employment, capacity, and debt. These actions have helped the Japanese economy recover from its earlier years in recession and made the business environment in Japan more attractive to foreign direct investment:
  • In 2007, Japan’s inward direct investment totaled US$22.2 billion, surpassing the record of US$12.3 billion set in 1999.
  • Capital inflows rose 48.3% year on year to US$67.7 billion, while outflows fell 13.2% to US$45.5 billion, resulting in a significant increase in the net inflow. This was due to several large-scale cross-border M&As targeting Japanese firms.
  • As a consequence, Japan’s inward FDI stock stood at US$132.8 billion at the end of 2007, with the FDI stock to GDP ratio rising from 2.5% to 2.9%.

The government is still working to raise the FDI-stock-to-GDP ratio to close to 5% by 2010, but Mr. Hayashi acknowledged that, considering the current financial crisis, a certain level of upcoming capital outflow will have to be assumed.

Nevertheless, Japan is one of the most attractive markets for foreign direct investment, namely for foreign companies to begin overseas operations, and features the following key characteristics:
  • Second largest market. Japan is the world’s second largest market after the United States and is an important destination for U.S. companies seeking top business resources and profitability
  • Heavy R&D investments. Japan’s global brands like Toyota and Sony have been investing aggressively into R&D to enhance their growth and international competitiveness. They and companies like them now lead the way in hybrid cars, robotics, and many other innovative fields.
  • Essential SMEs. A factor often overlooked is that behind these well known firms are numerous Japanese SMEs that develop and own essential technologies and techniques. For example, Apple’s best-selling iPods contain a micro hard disk drive made by a small, not unknown Japanese firm with only 120 people, Nakamura Manufacturing. And the back surfaces of the players are processed by a Niigata-based firm with only 100 employees, Toyo Rikagaku Kenkyusho.
  • Globally leading industries. Many Japanese products have a commanding share of the global market: 30% of the automobiles market, 40% of the robotics market, 70% of the market for carbon fibers—which are being used for next-generation aircraft, and 74% of the silicon wafers market.
  • The potential of a partnership created with a Japanese firm. Partnering with Japanese companies allows both parties to leverage one other’s business expertise, enhance international competitiveness, and introduce innovative products to the world market. Avoid delaying more than you need to. Some companies say they entered the Japanese market later than they wish they did due to a negative initial perception of Japan’s business environment. Others say that the Japanese market took some time to crack into, but once they did, it proved very profitable.
  • Direct investment yields from Japan the highest among developed countries. According to U.S. Department of Commerce statistics analyzed by JETRO, direct investment yields that U.S. companies have gained from Japan averaged 13% per annum from 2001 to 20051, the highest yield among developed countries. [Link to article] Japan ranked at the top for yields in the electrical equipment, professional technical services, transportation equipment and finance industries.
  • Japan’s business environment has improved, say foreign companies. According to a recent JETRO survey, foreign companies in Japan view the country’s business environment more favorable compared to a decade ago. Issues that traditionally ranked first, such as high business costs, complicated administrative procedures, and closed markets, all ranked lower in this recent survey. While Japan’s business tax and other business costs are admittedly still high, Japan provides foreign companies with a comfortable and secure environment, a well developed information and telecommunication infrastructure, and a reliable system for intellectual property protection.
  • Pleasant living environment. Japan also has a safe and pleasant living environment with a variety of foods and cultures from around the world. Tokyo, for example, boasts the largest number of Michelin-star rated restaurants in the world. Restaurants awarded at least one star total 150 restaurants—which is more than Paris and New York combined—and eight are 3-star restaurants.

Mr. Hayashi also described the efforts of the Expert Committee on FDI Promotion—of which he is a member—which was created to further improve Japan’s business environment for foreign companies and investors. The Committee is pressing the Japanese government to develop systems to better facilitate M&As, leverage foreign investment to revitalize Japan’s regions, and demonstrate Japan’s willingness to welcome FDI. The aim of these actions is to erase the mindset that Japan is a closed market and to create a fair and transparent business environment for foreign firms in Japan.

Doing its part to help foreign companies take advantage of opportunities in the Japanese market and investments in Japan, JETRO provides market entry services via its offices overseas (six in the U.S.). Qualified companies can obtain further support in Japan through JETRO’s Invest Japan Business Centers (IBSCs), located in Japan’s six major business areas. Some of the services available are
  • Free temporary office space
  • Access to expert advisors
  • Help with all aspects of setting up or expanding business in Japan. To date, more than 600 firms have utilized JETRO’s support and services to set up their businesses in Japan.

Mr. Hayashi closed by highlighting one of JETRO’s more recently developed efforts, which is promoting inward M&As. These efforts not only help Japan achieve its goal to boost FDI stock, but they also help remedy a developing concern in Japan: a slow atrophy of Japan’s SMEs. An increasing number of SMEs are being forced to shut down because their owners, now nearing retirement age, have no family or directors to succeed their business. As a result, many opportunities are forming, such as through acquisition, for foreign firms to help such firms survive. Mr. Hayashi encouraged the audience to utilize JETRO’s network at home and abroad as contact points and to work in close collaboration with M&A boutiques and regional banks. “We are hoping to promote M&As that create win-win relationship for both parties,” he said.

1Source: U.S. Direct Investments in Japan Offer the Highest Yields Among Major Industrialized Nations


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Note: The above summary is an adaptation of the speaker’s presentation. Contents and quotes may not be entirely accurate.