Foreign Investment in Japan - Essay Example

Foreign Investment in Japan Why Invest in Japan Because of its rapid and progressive economic development, Japan was considered the ideal country for European companies as a base for their regional operations. However, the recent economic progress of China and other Asian countries has enhanced the worth of investing in these countries. This has resulted in many European and American companies moving their manufacturing and R&D operations to counties like India and China. In addition the recent natural disasters like the Tsunami have not only caused substantial direct damage to Japan, but have had an unfavorable effect on the general investment conditions (Padron and Moschetti). These developments coupled with the recent worldwide economic depression have instilled a sense of urgency that foreign direct investment is the only practical measure that could reverse this trend. Towards this, the government is giving incentives for foreign investors which include tax cuts, Comprehensive Special Zones, and reforms in immigration laws to increase foreign investment in Japan. It is also implementing agreements on Free Trade with many counties including the European Union (Padron and Moschetti). Traditionally, the Japanese have not encouraged foreign investment as a matter of fact they have been hostile towards foreigners investing in their country, especially in the manufacturing sector. Any foreign investment currently coming into Japan is in the service industry, especially hi-tech industries such as pharmaceutical and biotechnology. Japan itself has abundant technologies, but is not using these technologies in an appropriate manner (Finance and Investment). The current escalation of the Yen against other global currencies has served to make worse the disparity between Japan’s increasing investment and the dearth of foreign investments into Japan. When the strong Yen is compared with exceptional cultural, it seems that foreign investment in Japan might never increase. The Japanese government is intensifying its efforts to overcome these hurdles and increase foreign direct investment in Japan. Towards this the government has established the Invest Japan Business Support Center, and formulated an all-inclusive, wide-ranging Industry Attraction Plan (Finance and Investment). Making small changes in the law and incentives by the government really help, but the real issues that discourages foreign investors is Japan’s exceptional culture and the barriers between Japanese culture and other Western Cultures which highlights the difference between both forms of capitalism. The difference is that American companies keep the interests of their shareholders as their highest priority; Japanese workers feel that Japanese companies keep the interest of the stakeholders paramount. Foreign companies that acquire Japanese companies usually disregard Japanese business culture with the contention since they control the company, business should be done according to their own established ways dominant in the West (Finance and Investment). Western businessmen should revere Japanese culture to address employee apprehensions, while explaining to them the necessity of changing their perceptions. This increases commercial worth and also increases stakeholders’ significance for employees, customers and the community at large. This business model has proved successful in Japan, and the lessons learnt from these successes will encourage foreigner companies to invest in Japan. Companies that adhere to Japanese culture and show concern for their employees have a much better chance of succeeding than companies whose main motive is to generate as much return on investment by sacking employees and selling of company assets (ACCI Journal). Acquisitions that will not meet with resistance Foreign investors were strongly advised not to do business in Japan in an offensive or provoking manner. Better still, it was advised to select areas for investment that will not be opposed or challenged. Merchant Capital and Merrill Lunch made successful investment by adhering to a policy of non-confrontation, while other acquisitions such as US Company Steel Partners and London based TCI fund were challenge and ran into trouble because of non-compliance with these cultural norms (Finance and Investment). Negotiate as equals Foreign investors should be aware of and adhere to the Japanese way of considering probable Japanese investment as contemporaries. This goes beyond the insincerity of recounting acquisitions as “mergers” for the culturally precise and very dignified Japanese principle of having only equals carry out negotiations and other business formalities with each other (ACCI Journal). Avoid Employee reductions Japanese workers are used to the idea of lifelong employment, and this seems to be the main issue for foreign investors. The American practice of sacking employees as cost saving measures is one practice that is abhorrent to the Japanese populace. This was confirmed in polls carried out for determining the main reason for hostility towards foreign investors. As compared to this, Japanese businessmen do not consider the number of employees as an added liability when looking to acquire companies. Takeshi Kamiya and Ryosuke Kawashima who are consultant in Bain’s private equity advisory practice warn that any investment that tries to cut costs through lay-offs will be met with resistance and will have difficulties in future business deals. Japanese businessmen consider their companies and their employees as families, whereas American businessmen regard their employees as people working together for the sole purpose of achieving their business objects, mainly profits. This dissimilarity in business culture is a vital key for increasing the stakeholders’ worth and for recovery of investments (Finance and Investment). Cultural Influence One of the most overbearing impressions that Japanese business owners have is that selling out means that they have failed their employees. Their concern for the welfare of their employees after the acquisition has been made is important and they feel that local companies understand this much more than foreigners do. This issue is not limited to foreign buyers; even Japanese equity funds face great difficulties in acquiring Japanese companies. It takes a lot of hard work to convince potential targets to sell because of their concern for their employees. (ACCI Journal). This is the basic reason for the low numbers of transactions when compared to USA and Europe. This raises the question with most foreign investors as to whether Japanese companies are for sale? Japanese companies can be acquired, but this has usually been an uphill task because of cultural barriers. Now the feeling is that Japan needs foreign investment for sustenance (ACCI Journal). Following are the trends noted in the foreign direct investment in Japan during the past 30 years: Net outflows from 1977 to 2010 (Index Mundi) Net Foreign Direct Investment from 1977 to 2010 (Index Mundi). Works Cited ACCI Journal. "FDI and Japan." American Chamber of Commerce in Japan (2013). Finance and Investment. How the Environment for Foreign Direct Investment in Japan Is Changing - for the Better. 20 April 2009. 11 February 2013 . Index Mundi. "Japan - foreign direct investment." 2013. Index Mundi. 11 February 2013 . Padron, Ivar and Valérie Moschetti. Investing and localizing in Japan. Tokyo: EU-Japan Centre for Industrial Cooperation, 2011. Read More