JIC Expert Committee Report

- Seven Recommendations for Promoting Foreign Direct Investment in Japan -

April 23, 1999
Expert Committee
Japan Investment Council

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Contents

1. Introduction
2. Significance of Foreign Direct Investment in Japan
3. Current Status and Evaluation of Foreign Direct Investment in Japan
4. Efforts by the Government
5. Issues Which Should be Addressed in the Future
6. Recommendations for Further Promoting Inward Direct Investmen

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1. Introduction

Since its establishment in July 1994 as a council chaired by the Prime Minister and composed of the respective ministers concerned as members, the Japan Investment Council (JIC) has demonstrated to domestic and international parties through its "Statement of the Japan Investment Council" in June 1995 and its "The Statement of the Japan Investment Council on M&A" in April 1996, its active stance in promoting inward direct investment.

Since June 1997, the Expert Committee of the JIC has intensively discussed policies for promoting inward direct investment, hearing out the comments and requests of domestic and foreign businesses. This report summarizes the results of the Expert Committee's study and reports these to the JIC. The recommendations in this report are intended to further speed up the growth of inward direct investment, and we hope that by being promptly reflected in policy actions they will contribute to revitalizing Japanese economy.

2. Significance of Foreign Direct Investment in Japan

We are on the threshold of the 21st century, when people, capital, technology and information will flow freely in a highly networked society. In this context, one of Japan's most important challenges is to fundamentally restructure its socioeconomic system. Promoting inward direct investment will stimulate sound competition and contribute to creating a socioeconomic system compatible with global standards through the transfer of management resources and the introduction of new technologies and new systems. Taking the current state of our economy and society into consideration, promoting inward direct investment is important because of its significance in the following areas:

(1) Creating new management and technological systems

As corporate management becomes more global, foreign corporations are important partners for their Japanese counterparts. Utilizing their management resources -- personnel, capital, technology information and sales networks -- will promote revitalization of Japanese corporations. In particular, it is important to effect transfers of technology and management know-how, which are difficult to standardize and which incorporate intangible qualitative elements, and to create better management and technology systems through the fusion of these elements with ours.

According to "The Survey of Trends in Business Activities of Foreign Affairs" (Ministry of International Trade and Industry), the current profit rate on sales in FY1996 was 4.8% for foreign-affiliated companies compared to 1.9% for all Japanese companies, indicating that foreign-affiliated companies in Japan have a higher profit rate than other companies here. This also indicates that the entry of foreign enterprises will have a positive effect on domestic management and technology systems.

The movement of workers trained in foreign-affiliated companies to other companies could also bring about transfers of technology and management know-how and have a beneficial effect on the domestic economy. For example, when the Japanese automobile and semiconductor industries invested directly in the United States in the 1980s, workers trained in Japanese companies who took jobs with local companies transferred their technology and management skills to these companies, which had a positive effect on the overall U.S. economy. We hope that the creation of various partnerships with foreign enterprises will stimulate economic activity in Japan.

(2) Creating employment opportunities

One important aspect of inward direct investment which cannot be overlooked is the creation of employment opportunities. In addition to the direct job-creation effect, the entry of foreign enterprises means that new capital investment is made, new consumption stimulated, new demand formed and employment created. Considering that inward direct investment generates new management and technology systems and new types of consumption, not only would this increase employment in the usual occupations, it could also create new occupations.

For example, according to "The Survey of Trends in Business Activities of Foreign Affairs," the number of Japanese employed by foreign-affiliated companies increased by 1.7-fold between 1986 and 1996 to 230,000, from which it is obvious that these companies contribute to job creation in Japan.

But internationally, employment by foreign-affiliated companies is low. Although it is difficult, statistically-speaking, to make precise international comparisons of employment by foreign-affiliated companies, such firms employ 4.8% of all employed persons in the U.S. and 4.8% in Germany, whereas the figure is 0.6% in Japan. This indicates the potential for creating many jobs by increasing foreign direct investment in Japan to international levels. Unemployment in Japan reached the record-high level of 4.6% in February 1999, and therefore, promoting inward direct investment is assuming more importance in view of the severe domestic job situation.

(3) Increasing benefits to consumers

Where consumers are concerned, promoting inward direct investment would stimulate sound competition in the service sector and other non-trade goods industries, and making the economy more efficient would supply them with good-quality, low-cost goods and services. In addition, the appearance of new types of goods and services heretofore non-existent would give consumers more choice. Thus, promoting inward direct investment also contributes to increasing benefits to consumers.

(4) Establishing multi-faceted international economic relations

Promoting inward direct investment increases business opportunities for foreign enterprises in Japan. The Japanese economy has always harbored great potential for inward direct investment and could be very profitable for foreign enterprises.

From the global viewpoint, promoting inward direct investment can contribute to a balanced world economy and help create cooperative international relations. It is natural that, in a globalized world, foreign enterprises should invest in Japan, use our resources and conduct business activities here, and this also demonstrates the soundness of the Japanese socioeconomic system. This type of multi-faceted international economic relations promotes mutual understanding with other countries and will ultimately improve our standing in the international community.

3. Current Status and Evaluation of Foreign Direct Investment in Japan

(1) Recent situations

Inward direct investment has been increasing in recent years. According to the "Report on Inward and Outward Direct Investment" (Ministry of Finance), inward direct investment held more or less constant, with some up or down fluctuations, in the first half of the 1990s, and began increasing from FY1996. In the first half of FY1998, in particular, inward direct investment began growing especially rapidly, recording a 2.3-fold jump compared to the previous year.

In terms of breakdown, since FY1994 inward direct investment in non-manufacturing has exceeded that in manufacturing, and this is now becoming the main type of investment. By investing country, 70-90% is now inward direct investment by North American and European companies and re-investment by foreign-affiliated companies in Japan.

In the first half of FY1998, inward direct investment grew 13.4-fold in finance and insurance, and 6.4-fold in telecommunications year on year; this was a rapid increase in sectors where regulations have been loosened in Japan. It is also noteworthy that inward direct investment by the U.S. and the Netherlands increased substantially, as did further investment by foreign-affiliated companies already in Japan.

As a result, the ratio of outward to inward direct investment, which had been around 10 to 1 until FY1997, narrowed sharply to 3.9 to 1 in the first half of FY1998. This strong increase came about mainly because of more inward direct investment, although a slight drop in outward investment also contributed to this change in the ratio.

Thus, inward direct investment has greatly increased in the past few years, and the balance with outward direct investment has improved markedly, but the stock level of inward direct investment is still low by international standards.

IMF statistics for 1996 on the ratio of inward direct investment position (stock) to GDP were 16.0% in the U.S., 3.8% in Germany, 21.6% in the U.K. and 26.6% in France, compared to only 0.7% in Japan. And whereas in other countries the ratio of outward to inward in terms of direct investment position is generally 1- to 2-fold, this figure is 8.6 for Japan. This shows that the level of inward direct investment position in Japan remains low by international standards, given the size of the domestic economy and the scope of outward direct investment by Japan. Accordingly, the current upward trend of direct investment must be sustained and increased.

(2) Background to the recent increase

The potential for inward direct investment in Japan has always been great and the recent increase may be considered a gradual manifestation of this.

Japan has great potential because it is the world's second largest economy, individual income levels are high so the market is large and affluent; educational standards are high and the workforce is diligent, with a sophisticated infrastructure. In addition, it is politically, economically and socially stable, and in geographical terms, it is the gateway to Asian markets.

With this great potential in the background, inward direct investment has grown recently for following reasons:

4. Efforts by the Government

The government has been taking various measures, including easing of regulation and modification of systems relating to enterprise management, to promote inward direct investment. The major steps which have been taken are as follows:

As a result of these various activities, substantial progress has been made recently in the measures which should be implemented by the national government to establish institutional infrastructures for economic activities so that Japan can be considered an appealing investment location by enterprises with a global outlook.

5. Issues Which Should be Addressed in the Future

As the above sections have shown, the national government has made substantial progress in establishing institutional infrastructures for economic activity. In addition to the steady implementation of these policies, efforts by local government with a regional flavor and improvement of living conditions for foreigners and information infrastructure must be made.

(1) Promoting distinctive efforts by local government

Inward direct investment brings the nation numerous benefits, and it also has a beneficial impact on the socioeconomic system at the local level, in both tangible and intangible ways. In particular, in terms of diversifying the industrial structure portfolio, attracting foreign enterprises to local areas is a very valuable method for communities wishing to create new industry and new employment.

Statistical figures on foreign-affiliated companies by region in Japan are difficult to come by, but foreign-affiliated companies tend to concentrate largely in Tokyo and other major urban centers. For example, according to "The Survey of Trends in Business Activities of Foreign Affairs," 70% of all foreign-affiliated companies in Japan were headquartered in Tokyo in FY1996.

But whatever their location within Japan, while the cost of transport and telecommunications between foreign-affiliated companies and their parent companies varies little, labor costs and land prices do differ substantially. Since foreign companies do not necessarily always prefer to be located in a capital city, they are more likely to spread in various parts of the country than Japanese companies, and there is potential for them to locate in local area.

To realize this potential, locally-based initiatives for stimulating inward direct investment are needed. In fact, in many other countries, local governments play an important role in attracting foreign enterprises. Policies to inject vitality into local economies should take local characteristics into consideration, thus local governments should actively incorporate distinctive features of their region in their plans to attract foreign enterprises as well. Today, local governments have the authority to decide on subsidies and other inducements to attract foreign enterprises if the public interests so requires, and some have come up with their own unique policies.

In Kumamoto Prefecture's Techno Research Park, for example, the prefecture is offering subsidies, and working together with Kumamoto University to secure personnel, and has been successful in attracting a world-class manufacturer of semiconductor testing equipment.

To reduce the cost of setting up a business in Japan, many foreign companies are interested in leasing land or manufacturing plants, and the prefectures of Niigata and Okayama are offering land and facilities on a lease or rental basis. JRDC are also offering land and manufacturing plants on rental basis in response to the demand of foreign companies.

Thus, locally-based measures to attract foreign enterprises should be taken voluntarily and should reflect the special features of individual regions. The national government should also offer support so that the efforts of local governments can yield effective results.

(2) Improving living conditions for foreigners

When foreign enterprises establish themselves in Japan, the living environment for foreign families, including educational and medical care facilities, is an important factor as well. This means that in order to stimulate inward direct investment, the infrastructure for living conditions must be improved. Since Europeans or Americans posted to Japan usually bring their families with them, living conditions for foreign families have a major impact on enterprise location.

The shortage of places in international schools in the major urban areas in the past few years is a major problem for foreigners working here with foreign-affiliated companies. International schools in Tokyo and vicinity have already reached capacity enrollment, and it has been pointed out that they lack the facilities for handling any more students if major companies decide to set up operations there in the future. The number of students in international schools has been growing throughout Japan as well, and with more inward direct investment, the number of foreign children wishing to enroll in international schools is expected to grow.

To promote inward direct investment, not only better provisions for educating non-Japanese children in Japanese public schools are needed, but also efforts should be made to support the establishment and operation of international schools by interested parties.

And in order to give foreign families living here peace of mind, it is important for them to be able to receive medical care in foreign languages. This means that they should be able to have easy access to the needed information when they require information on health care.

Some private organizations in Tokyo and Osaka, supported by local governments, currently provide health care advice in foreign languages and have lists of medical facilities where foreign languages are spoken. It will be necessary to continue offering information on medical facilities with personnel speaking foreign languages, and provide more extensive translation services and so on, to make it easier for foreign residents to obtain information on medical care.

(3) Setting up a comprehensive system for providing information concerning inward direct investment

It has been said that Japan's system for providing information to foreign companies thinking of making inward direct investment is not as good compared to other countries. When foreign enterprises want to study and compare various locales for overseas investment, they often have difficulty in accessing regional information in Japan or they find research is time-consuming, and information is obtained too late for their decision-making processes.

Furthermore, foreign companies are often more interested in information on the "intangible" such as regional market characteristics, ease of locating tie-up or customer companies, the availability of support for research and development, and local employee recruitment and employment practices, rather than that on the "tangible" such as land available for setting up plants. But local governments tend to supply more information on the tangible features and the information they provide is often not what foreign firms require.

Also, since more inward direct investment is made in non-manufacturing than in manufacturing industries today, efforts will have to be made in future to attract foreign companies not just to manufacturing but to services as well. This highlights the importance of being able to provide information on intangible features.

To solve these problems, a substantial expansion of the infrastructure for providing information on regional areas is needed. The government and governmental organizations should work together with local governments to set up a more open and comprehensive system for providing information, using the Internet and other media. The information available should include details on incentives offered by various local governments, universities and R&D facilities, the social infrastructure, tie-up and customer companies, regional market characteristics, the living environment, labor market conditions.

6. Recommendations for Further Promoting Inward Direct Investment

To further promote inward direct investment, the measures taken by the government so far should continue to be steadily implemented, and the recommendations below should be adopted immediately. Given that inward direct investment is so important, sustained efforts to continue facilitating it will also be needed.

(1) Make further efforts to improve the various systems relating to enterprise management

As mentioned above, Japan has been taking active measures to facilitate M&A, including more extensive corporate financial disclosure to meet internationally accepted accounting standards, introduction of stock swaps and transfers system, and changes to laws about insolvency procedure. Positive steps are also being taken in the following area: the issues of promoting more labor fluidity such as expanding worker dispatching businesses and fee-charging employment referral services, and reviewing pension portability; a full-scale examination of consolidated taxation system. These measures would contribute to promoting inward direct investment, thus they should be implemented.

(2) Make further efforts to promote deregulation

The government has taken action to relax regulation in many different areas, but it will be necessary to continue steadily implementing the provisions of the Three Year Deregulation Action Program, newly revised in March 1999, and to make more progress in deregulating and changing existing systems. When this is being carried out, appropriate action should also be taken to further encourage inward direct investment, regarding international harmonization of regulations, and so-called "private sector regulation" including how industry associations should operate.

(3) Facilitate the establishment and operation of international schools

Providing better international education facilities is vital from the perspective of improving living conditions for foreigners in Japan. Until now, the government has concentrated on providing better educational programs for foreign children in Japanese public schools, but given that international schools play an important role in educating foreign children, it is also important to introduce various measures to facilitate the establishment and operation of international schools by interested parties.

To accomplish this, for the time being, the following measures should be taken: to facilitate the transfer of closed-down schools and other public assets for the use of international schools; to study measures to facilitate private sector financial support for international schools; to examine permission for foreign children graduated from international schools to enter Japanese universities, while taking into consideration the appropriateness of the standards for Japanese primary and secondary education and how admission to higher education of students in international schools is handled in other countries.

(4) Provide more extensive information on health and medical care for foreigners

It is very important for foreigners to have easy access to information about medical facilities where they can receive care in their own language, which is currently being provided by some public organizations, NPOs and others. Information and support services should be expanded. Basically, it is important for medical institutions to be able to provide information directly to foreigners who are their potential clients.

From this viewpoint, the regulations on advertising contained in the Medical Care Law, which are currently being reviewed, should also include a provision enabling medical institutions to freely advertise that they offer services in foreign languages.

Furthermore, the information on national university's hospital, national hospitals and sanatoria where medical care is offered in foreign language should be provided actively.

(5) Promote closer coordination between the national and local governments through the Meetings on Promoting Inward Direct Investment in Regional Areas.

To make the most of the distinctive efforts of local governments to attract foreign enterprises, the government should reinforce its systems for directly linking its external network with local governments.

From this perspective, local areas interested in attracting foreign enterprises should make use of the Meetings on Promoting Inward Direct Investment in Regional Areas, and work cooperatively with the national government, JETRO, JDB and JRDC to exchange information on promotion of inward direct investment.

(6) Establish a comprehensive system for providing information concerning inward direct investment

When foreign enterprises make inward direct investment, it is difficult for them to obtain the information they need about local regions in Japan, in order to compare them with candidate venues in other countries; they must have ready access to the information to match the speed of decision-making in their organizations.

For example, information on the 'tangible' and 'intangible' elements available in various regions should be collected, organized and translated into a database and made available so that foreigners can access and understand it easily. Information held by the government, JETRO, JDB, and JRDC should be organized into an inward direct investment information network and should be made available on the Internet as a more comprehensive and open information source.

To remedy the scarcity of information available to foreign companies concerning labor practices, labor laws, recent labor market trends and other related matters, steps should be taken to provide accurate information on labor conditions in Japan.

(7) Respond quickly to complaints and requests

For individual complaints regarding inward direct investment, active use should be made of the OTO (Office of the Trade and Investment Ombudsman) to reach solutions.

Where requests related to various areas of inward direct investment are concerned, the voluntary efforts of NPOs and other private sector bodies should be supported, and the Meetings on Promoting Inward Direct Investment in Regional Areas should be used so that the concerned government organizations can respond quickly.

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