Section 3. International Investment Issue
1. Outline of Japanese Investment (From Trade to Investment)
Japan's overseas direct investment on a report basis in fiscal 1985 reached a record $12,217 million, an increase of 20.3% from the preceding fiscal year's $10,155 million, which was the previous peak.
(1) By region (please see Table 1), investment in developed countries rose 41.0% from the previous fiscal year to $7,950 million and accounted for 65.1% of the total, up from 54.5%. Investment in Europe leveled off at the previous year's level of $1,930 million. Investment in North America jumped 55.1% to $5,495 million and that in Oceania 41.0% to $7,950 million.
On the other hand, investment in developing countries fell 5.5% to $4,268 million. While investment in Central and South America climbed 14.2% to $2,616 million, investment in Asia fell 11.9% to $1,435 million and those in the Middle East and Africa incurred respective drops of 83.5% and 47.2%
(2) By type of industry (see Table 2), investment in the manufacturing sector declined 6.1% from the previous fiscal year. Investment in the machinery, transportation machinery and electrical machinery divisions fared well, but investment in the iron and nonferrous division and other divisions saw sharp falls.
On the other hand, investment in the non-manufacturing sector advanced 28.4%. Investment in the financial and insurance industry remained strong with an increase of 82.5% to $3,850 million. Investment in the real estate industry gained 180.7% to $1,270 million.
(3) The rise in Japan's overseas direct investment in fiscal 1985 was attributed to (i) the continued sharp expansion in investment in the financial and insurance industries mainly in North America, Central and South America and Oceania as a result of the expansion of Japanese financial institutions' international business (share in the total investment stood at 8% in fiscal 1980, at 21% in fiscal 1984 and at 31% in fiscal 1985), (ii) a sizable increase in Japanese investment in transportation machinery, general machinery and electrical machinery manufacturing sectors in North America against the background of trade friction (showing respective year-to-year gains of 53.9%, 195.9% and 66.5%) and (iii) a steep rise in real estate investment centering in North America (investment in North America trebled from the previous fiscal year to $1,121 million).
On the other hand, Japanese investment in Asia decreased as in the previous fiscal year. The downturn was ascribable to a drop in the number of large-scale resources development projects and higher labor costs.
(4) As for the pattern of Japan's overseas direct investment, there has been a shift away from the investment in pursuit of lower wages as exemplified by investment in the manufacturing sector in developing countries to the investment designed to help avoid trade friction as represented by the investment in the manufacturing sector in developed countries. But following the yen's recent sharp appreciation, Asian countries, NICs in particular, have come to attract renewed attention as investment recipient countries.
The promotion of overseas direct investment is needed not just for making the Japanese economy, which has come to post a huge current account surplus regularly, more harmonious with the rest of the world, but for helping develop the economies of Japan's trade partners, including developing countries.
In particular, an increase in direct investment in developing countries is strongly desired because such investment involves smaller debts and is expected to contribute to the solution of the Third World debt problem.
Table 1. Japan's Overseas Direct Investment by Region (On a Report Basis)
Table 2. Japan's Overseas Direct Investment by Region (On a Report Basis)
2. Promotion of Conclusion of Investment Protection Agreement
(1) Japan's overseas direct investment has been increasing (Please see diagram) and is expected to become even more active in the years ahead (such investment totaled $19,469 million on a report basis between April 1986 and February 1987).
Overseas investment contributes not just to the economy of the investing country, but to the economic development of the recipient country through the transfer of capital, technology and management method, and the creation of employment. It also strengthen relations between the two countries through economic and personnel exchanges, and helps alleviate trade friction. In view of the intensifying trade friction in recent years, the Government formulated the Outline of Procedures for the Promotion of Economic Structural Adjustment in May 1986. As part of this program, the Government has been promoting overseas direct investment, which is expected to have the effects mentioned above.
(2) As the first principle, private enterprises should be responsible for and make judgment on overseas investment. But as there are problems that cannot be solved by private enterprises alone, the investing country and the investment recipient country need to cooperate with each other in order to improve the investment environment as much as possible for the promotion of investment.
Japan's Overseas Direct Investment
For example, when policies of the investment recipient country are unpredictable investment in that country will be impeded because investors have difficulties making predictions and suffer from an unstable legal framework. An investment protection agreement stipulates ways of treating business activities and protecting investment assets, thus enables private-sector investors to make predictions regarding investment and provide a stable legal framework. Such an agreement is important for the improvement of the investment climate along with investment insurance and taxation systems. As Japan's overseas investment has increased sharply in recent years, the necessity of an investment protection agreement, which stipulates substantive and procedural provisions concerning investment in detail, has come to be recognized. The current economic environment surrounding Japan has made such an agreement all the more important as a means to promote investment.
(3) Up until now, Japan has concluded investment protection agreements with Egypt and Sri Lanka and has been conducting negotiations with China and the ASEAN countries (excluding Brunei) on the conclusion of such agreement.
Moreover, Japan started similar negotiations with Turkey in February 1987 and with Pakistan in March 1987.