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Adam Youssef

Professor Brown

Political Science 3510

19 April 2021

FDI Open Up! Outlook on Japan Accepting Foreign Investments

One look at a chart of Japan’s annual economic growth over the years and it is clear to

see that the past decade has been a long era of relative stagnation with a staggering sense of

disappointment, but could the answer have been readily available this whole time? Throughout

most of its history, Japan has maintained an image of being the antisocial overachiever that in

modern times has come to preach interdependence despite its actions. Remarkably, this has

worked exceptionably well for Japan in terms of its initial economic development; however, as

the rest of the world globalizes at intense rates, can the country continue its economic relevancy

without the help of foreign investments? If not, how can it get over the socio-political barriers it

has created to allow for such change?

To answer this, it is important to understand the historic context behind such a heavily

isolated and regulated, yet once rapidly growing economy. Due to Japan’s long held policy of

Asianism, its trading partners were almost strictly China and Korea until the first Westerners

arrived from Portugal in 1543 and managed to trade successfully (Paprzycki and Fukao 35).

Although, by the mid 1600’s, most western traders had been ejected from the country (except for

the Dutch), and trade was not reopened until Commodore Perry forcefully threatened Japan out

of isolation in the 1850’s (Paprzycki and Fukao 36). Moving forward to the post WWII era, the

US occupied Japan until the country was given its independence again in 1952 (Paprzycki and

Fukao 37).
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During the occupation, American officials worried that any inward foreign direct

investment (FDI) could harm a weakened Japanese economy by exploiting domestic firms and

dominating the market. As a result, it was apparently those same officials who proceeded to

impose restrictions that would serve as a framework for Japan’s isolationist nature to be

integrated into a modern economy. Accordingly, the nation remains amongst the lowest statistics

in inward FDI in comparison to other countries (Paprzycki and Fukao 17). This is despite

initiatives taken by Prime Ministers in the 90’s (Paprzycki and Fukao 69). Even though Abe’s

plan was to have FDI stocks at five percent of GDP by 2010, the country barely past that mark a

couple years ago. It is situations like these which raise the question as to why these policies fail

on a societal level, even though they are planned well in theory.

The answer to that may very well lie in the concept of trust. While Japan may be

considered a safe country to the rest of world, this unfortunately only fuels a narrative used to

segregate against foreigners (Vogt 81). Between some media outlets heavily exaggerating the

rates of crimes committed by foreigners and Japanese people surveying as generally untrusting,

there is an almost constant challenge to any progress within multiculturalism and the ability to

diversify societal relations (Lukner and Sakai 1). The importance of trust and understanding its

deficit within Japan’s policy of multiculturalism, extends beyond just economic policies and is

critical in allowing the country to keep up with its internationalistic foreign policy and maintain

relevancy in a hastily globalizing world. With these contexts, it is now possible to analyze the

effects on inward FDI on Japan’s economy and the significance of Japan’s “brand image”.

This analysis will focus primarily on Japan’s inward FDI trends during the late 90’s and

2000’s (Paprzycki and Fukao 2). This was crucial time for the Japanese economy as it was going

through a big boom due to the increase in mergers and acquisitions (M&A). This study will hope
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to point out any correlation between the most advanced businesses during that economic period

and the respective divisions within Japan that were affected by the influx or lack of inward FDI

(Paprzycki and Fukao 3). Starting off, it may not come to much of a surprise at this point to say

that Japan’s inward FDI has, for the most part, been minimal in comparison to all the other

developed countries at the time. Thus, one must inquire about if, when and why it ever changed,

as well as the effect of this change.

To do this, it is of the utmost importance to comprehend the reasons behind this sluggish

period in Japan’s economy, and for that we must understand total factor productivity (TFP). TFP

is the economic model for growth and consists of technological advancements, capital funds and

the labor market (Paprzycki and Fukao 86). As stated on page 86 of Foreign Direct Investment

in Japan,

“Each of these three has contributed to the slowdown in economic growth in the1990s:

the working-age population and working hours have declined; private investment has

dropped, and TFP growth has stalled. Moreover, looking at the prospects for each of the

major components driving economic growth –labor input, capital input, and technological

progress (i.e., TFP) – it becomes clear that if the Japanese economy is to achieve

sustained growth in the coming decades, this will largely have to be based on

improvements in TFP. Consequently, if foreign firms investing in Japan are more

productive than domestic firms, then they can make an important contribution to

economic growth. That foreign firms indeed tend to be more productive than domestic

firms, and that FDI can therefore help to lift Japan’s economic growth…”

Hence, we must break down exactly how inward FDI can solve these issues.
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As mentioned before, Japan’s economy has had a history of regulations that continue to

oppose an increase in FDI and other changes (Paprzycki and Fukao 37). Structural changes that

might benefit these programs have started from as early as the 60’s, yet there is still much to be

worked on even to this day. This is particularly due to the government attempting a multitude of

structural and business reforms to try and combat the stagnated status of the nation’s GDP and

TFP growth. Though federal direct investment within Japan continues to be controlled, the

impact on major businesses brought upon by foreign firms such as in the auto industry is

undeniable (Paprzycki and Fukao 18). Likewise, this is because many new technologies usually

come with the entrance of more international firms and introducing them into a society boosts

efficiency and productivity in industrialization. This was very prevalent during the worldwide

boom in federal direct investments, especially in the in industrial changes brought in by Ghosn to

turnaround Nissan, regardless of how controversial as he may be now (Paprzycki and Fukao 70).

In addition to the improvements in technology and production systems, how else do

international firms introduce further growth and industry in the country? As it turns out, opening

up the economy at the time caused more M&A maneuvers. While this may be a touchy subject

for Japanese nationalists who may view a Japanese company being acquired as a blow to

Japanese pride, the reality could not be further from the truth. Mergers and acquisitions are the

most important federal direct investment activities, in fact, the increase in trends of FDI is most

likely the outcome of more M&A operations (Paprzycki and Fukao 59). This has resulted in

thousands of billions of private investment dollars entering and strengthening the Japanese

economy.

Of course, aside from to the efficiency, productivity, and financial re-stability (supplied

by acquisitions and mergers) that these firms can provide what other factors may be touched
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upon? The biggest benefactor that may be offered is the introduction of a mainly high skilled or

experienced foreign workforce. Needless to say, this topic is largely related to adding additional

manpower to the aging society without the need to overwork current employees to make up the

lost hours, there are also certain, exclusive benefits to having a globalized labor market

(Paprzycki and Fukao 86). The biggest contribution is the introduction of diversity (Mikitani and

Mikitani 46).

Diversity in the workforce means that companies get to choose between more skillsets

and no longer must maintain a work environment where stagnation is imminent (Mikitani and

Mikitani 30). This is because diversity adds competition to the equation. Employees are much

more likely to perform better and identify with the company if they must compete for the

position instead. Not only that, but since foreign workers bring a variety of new skills it will push

the Japanese workers to educate themselves to be well equipped for the new opposition they may

face. This may help to get rid of the long-standing lifetime employment system that has proven

to be detrimental to progress in the work environment. As a result of the new and improved labor

force, coupled with the addition of new technologies and strategies, innovation is a key element

towards progress within the industries. The meaning of innovation itself has been widely debated

amongst scholars and officials and is often confused with invention but innovation goes much

further than that since it is a combination of both invention and industrial experience (Mikitani

and Mikitani 29).

For example, imagine that you are a business owner, and you realize that your company

has been deadlocked for quite some time. When it comes to hiring you have two options. You

can continue to contribute to the issue by hiring another new employee from the same institute

and with the same skillsets as the last person. On the other hand, you might find someone who
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has experience developing breakthrough business plans in more intense international markets.

The choice is obvious because if the first candidate had the skillsets you need to progress, so

would others you have already hired. As this competition goes on, education would be reformed

to better equip future workers and in doing so would conclude that competitive diversity in the

workforce can lead to innovation in industry and education.

This concludes our economic analysis by stating that M&As contribute to more inward

FDI and thus more private investment, foreign firms bring with them new technologies and

strategies to increase productivity and finally, introducing more foreign workers into the society

can fill in the gap left by retiring employees while not having to increase working hours and

adding diversity to the workforce to bring on innovation. These factors together can potentially

overcome the obstacles faced when trying to revitalize TFP and GDP growth in the economy.

With these examples and concepts, it is now possible to move on from this economics-heavy

section. Before we move on to a more prospective topic, let us first consider what the general

Japanese public would think of the influx of more foreign nationals.

Earlier on, it was mentioned that groups within the media attempt to push a negative

rhetoric about foreigners in Japan, but just how effective are these attempts in reality? And what

do the average citizens really think? According to a study by Eiji Yamamura, data shows that

there are not too many Japanese citizens who think to poorly of foreigners. In fact, the biggest

concern was not crime ratings, but rather job opportunities. The surveys in the study show state

that, “In general, frequent contact with foreigners sharpens perceptions of the effects of

immigration, but these perceptions differ depending upon the respondent’s household income

and education.” (Yamamura 8). Those with low incomes agree that more frequent contact

equates to fewer job opportunities for Japanese people in the communities, while those with high
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incomes think oppositely and that the influx would mean a need for more jobs. Finally, the study

also concludes that “Those with more education, whether they have a high income or a low

income, are more likely to have a favorable attitude toward immigration.” And also that, “taken

together, the results of this study suggest that in Japan, a homogeneous society in which

foreigners are relatively few, not only education but also contact with foreigners play a role in

forming perceptions about immigration.” (Yamamura 8).

That being said, since more diversity would eventually lead to educational reform, it

would be safe to presume that one can be optimistic about the prospective future for Japan’s FDI

if eventually the local citizens would be taught to be more lenient; however, there is still a major

topic issue that has yet to be discussed. Up until now we have been talking about how Japanese

people and the local industries could benefit and adapt to accommodating for more inward FDI,

but we since have not mentioned how to appeal enough to foreigners to make these high skilled

workers want to leave their home countries to work in Japan instead. While there are many who

would love to say Japan is great enough as it is, there is still definitely work to do and much to

talk about when it comes to this topic.

Even though Japan is well known for its businesses and its potential for M&A activity, in

terms of advantages such as cheap labor or widely available land, Japan is now far behind many

other East Asian countries. To make matters even worse, the lack of communication capability

and difficulty of the Japanese language, does not exactly make Japan the most foreign friendly

place in Asia. Rakuten founder, Hiroshi Mikitani, has some interesting takes on solutions to this

problem, including how he changed Rakuten’s official language to English in 2010 (Mikitani and

Mikitani 47). He also places a huge emphasis on the power of the Japan brand, stating,
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“Because the brand value of Japanese products is in part based on the brand of Japan as a

nation, I think we need to improve the image that people have of Japan. And I do not just

mean talking about Japan’s brand by itself— I also think that we need to tell the world

loud and clear that Japan is not just a safe country, it is also a place where the food is

delicious, and the fashion is cool. The government has done a lot of different things for

this, but I feel like they are approaching this from the perspective that all they need to do

is spend money, while marketing is something that should really be done strategically”

(Mikitani and Mikitani 181). This difference in thought between business leaders with

progressive thoughts and the Japanese government officials is all too common.

An article in, Migration and the Labour Market in Asia, mentions that,

“The government announced the ‘Ideal Society and Policies for Economic Rebirth’ and

the ‘9th Basic Plan for Employment Measures. in August, 1999… led by a will to admit

foreigners with technical and professional competences and to study carefully the

applications filed by unskilled workers. Even after the Cabinet’s decision on the

Economic Plan and the 9th Employment Measures Plan, the debate continues on the

admission of permanent immigrants and the enlargement of the scope of these

admissions” (OECD 279). While both have a point in trying to actively figure out the best

way to deal with the economic crisis through migration policies, the government seems to set a

rather slow pace while the voices of industry leaders go relatively unheard as Hiroshi states

while talking about his time being on the Industrial Competitiveness Council and being unable to

properly address serious issues due to the seemingly complete control that the Japanese

bureaucracy has (Mikitani and Mikitani 1).

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Regardless of who will end up making the decision, the fact remains that Japan’s

economy has undergone enough regulatory reforms, amongst other adjustments to see current

increases in M&As and inward FDI which seem to be on a continuously slow rise thanks to

international events like the Summer Olympics keeping the country’s “brand” relevant even

through the pandemic. If Japan can manage to make the country more appealing to foreign firms

and labor market while utilizing trust building policies to strengthen the idea of a “homogenous

society” with foreigners, it seems quite likely that it would be able to make the business

decisions it needs to boost its TFP/GDP enough push it out of the immovable economic rut it dug

itself into. This will not only lead to economic prosperity, but as innovation reaches the

education system over time and more future Japanese citizens are taught to be more accepting of

outsiders, it may lead to a new kind of social prosperity as well. In a way, this should directly

correspond with the nation’s foreign policies of internationalism as well as developmentalism by

embracing these international institutions and truly separating its political views of foreigners,

whatever they may be, from what’s best for its economy. That being said, hopefully Japan will

not shy away the next time FDI comes knocking at its door.
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Works Cited

Lukner, Kerstin, and Alexandra Sakaki. “Japan’s Political Trust Deficit.” Japan Forum, vol. 29,

no. 1, 2016, pp. 1–18. Taylor & Francis Online, doi:10.1080/09555803.2016.1227349.

Mikitani, Hiroshi, and Ryoichi Mikitani. The Power to Compete: An Economist and an

Entrepreneur on Revitalizing Japan in the Global Economy. Wiley, 2014. ProQuest,

ebookcentral.proquest.com/lib/templeuniv-ebooks/detail.action?docID=1822534.

OECD, et al. “Migration and the Labour Market in Asia 2002.” Migration and the Labour

Market in Asia, 2003. OECD, doi:10.1787/migr_labour-2002-en.

Paprzycki, Ralph, and Fukao Kyoji. Foreign Direct Investment in Japan: Multinationals’ Role in

Growth and Globalization. Cambridge University Press, 2008. EBSCOhost,

search.ebscohost.com/login.aspx?direct=true&db=e000xna&AN=221230&site=ehost-

live&scope=site.

Vogt, Gabriele. “Multiculturalism and Trust in Japan: Educational Policies and Schooling

Practices.” Japan Forum, vol. 29, no. 1, 2016, pp. 77–99. Taylor & Francis Online,

doi:10.1080/09555803.2016.1227354.

Yamamura, Eiji. “Perceived Consequences of Immigration in Japan Depend upon Frequency of

Contact with Foreigners.” Japanese Economy, vol. 39, no. 2, 2012, pp. 37–48. Taylor &

Francis Online, doi:10.2753/jes1097-203x390202.