Inward investment falters in Japan

Author: Richard Katz, Carnegie Council for Ethics in International Affairs Japan stands apart in a world where most countries seeking to boost growth encourage foreign companies to set up new facilities on their soil or buy domestic companies. Foreign Direct Investment (FDI) helps because the fresh ideas of foreign companies spill over into the broader […] The post Inward investment falters in Japan first appeared on East Asia Forum.

Inward investment falters in Japan

Author: Richard Katz, Carnegie Council for Ethics in International Affairs

Japan stands apart in a world where most countries seeking to boost growth encourage foreign companies to set up new facilities on their soil or buy domestic companies. Foreign Direct Investment (FDI) helps because the fresh ideas of foreign companies spill over into the broader economy, boosting the performance of their local suppliers, business customers and sometimes even their own competitors. The spectacular success of China, Southeast Asia and post-Communist Eastern Europe would have been impossible without it.

Only one major country has said ‘no thank you’ to these benefits: Japan. In 2019, the United Nations Conference on Trade and Development ranked 196 countries’ stock of inward FDI as a share of GDP. Japan came in dead last — just behind North Korea.

How is this possible when, almost 20 years ago, Tokyo incorporated inward FDI into its growth strategy? In 2001, FDI was a miniscule 1.2 per cent of GDP, compared to 28 per cent in a typical rich country. Then prime minister Junichiro Koizumi set a goal of 5 per cent by 2011 and changed Japan’s Commercial Code to remove some impediments. That made sense. Japanese economists have shown that even the small amount of FDI in Japan has helped.

By 2008, FDI had risen to 4 per cent. Then momentum stalled. As of 2019, the ratio was only a smidgeon higher, at 4.4 per cent, versus 44 per cent in other rich countries. If Japan performed like others with similar characteristics, the ratio would have reached an estimated 35 per cent of GDP by 2015.

To make matters worse, Tokyo is hiding how badly it has failed from itself. The Ministry of Finance reported that inward FDI climbed to US$359 billion in 2020, thereby achieving Shinzo Abe’s goal of doubling the level from 2013. According to the OECD, in reality, the 2020 figure stood at US$215 billion. The problem is that Tokyo uses a misleading set of figures. The IMF recommends the ‘directional principle’ for measuring growth in a country’s FDI. The Ministry instead highlights a different set, the ‘asset/liability principle’. The latter includes items having nothing to do with real FDI, such as loans from overseas affiliates back to their parents in Japan. On this measure, much foreign investment in Japan comes from Japanese companies based overseas.

Multinational companies regularly list Japan as a top target for investment. But foreign businesses face trouble buying Japanese companies. In a typical rich country, 80 per cent of inward FDI takes the form of foreign firms buying domestic firms, known as mergers and acquisitions (M&A). In Japan, it’s only 14 per cent.

While Koizumi reduced lingering regulatory impediments to M&A, Japan’s business setup poses the biggest obstacle. The most attractive companies are tied up in Japan’s corporate groups, known as keiretsu. These keiretsu, which include 26,000 parent companies and their 56,000 affiliates, employ 18 million people, a third of all employees in Japan. Traditionally, keiretsu members were never sold even to members of another keiretsu. While Japan’s economic travails have reduced resistance to inter-keiretsu M&A, most keiretsu remain strongly opposed to foreign purchasers. From 1996 to 2000, only a trifling 57 keiretsu members sold themselves to a foreign company, whereas 3,000 unaffiliated companies did so.

There are some potential drivers of a positive change. The most powerful is a huge succession crisis at Japan’s small and medium enterprises. Some 600,000 profitable enterprises may have to close by 2025 because their septuagenarian owners lack successors. Six million jobs are at risk. How many of these owners, who genuinely care about their employees’ job security, would rather shut their firm than refuse to sell to a foreigner, particularly if the government made the introduction? A 2020 draft paper issued by the Japanese FDI Promotion Council, an advisory body to the government, advocated soliciting foreign buyers. But the final document released by the Cabinet Office in June 2021 purged all mention of inward M&A.

Another potential driver is the push for reform of corporate governance to get firms to focus on profitability, not just sales and market share. This may seem unrelated to FDI, but the logic, as seen by foreign firms, is that to maximise profitability, corporate giants will have to focus on core competencies and sell even profitable non-core divisions and affiliates that don’t fortify the parent’s strategic position. That would not only boost national growth, but also increase the number of firms in the market for purchase.

While this logic may eventually bear fruit, it has yet to do so. The holdup, commented Bain & Co, a private equity firm, in a 2018 report, is that ‘boards and shareholders do not yet push for strategic divestitures’. Instead, they are taking easier routes to show a picture of higher ‘return on equity’, such as stock buybacks and selling unprofitable units.

These drivers can lay the groundwork, but unless policymakers promote inbound M&A, Japan will remain in the cellar of the FDI rankings and overall economic growth will remain as listless as it is today.

Richard Katz is a Senior Fellow at the Carnegie Council for Ethics in International Affairs. This is digested from .

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The Quad’s maritime rule of law hypocrisy

Author: Sourabh Gupta, Institute for China-America Studies The Quadrilateral Security Dialogue (Quad) countries are racking up a series of impressive firsts, progressing through to quadrilateral naval exercises in the Bay of Bengal in 2020 and an in-person leader-level summit at the White House in September 2021. The Quad is here to stay as a loose […] The post The Quad’s maritime rule of law hypocrisy first appeared on East Asia Forum.

The Quad’s maritime rule of law hypocrisy

Author: Sourabh Gupta, Institute for China-America Studies

The Quadrilateral Security Dialogue (Quad) countries are racking up a series of impressive firsts, progressing through to quadrilateral naval exercises in the Bay of Bengal in 2020 and an in-person leader-level summit at the White House in September 2021. The Quad is here to stay as a loose entente of like-minded democracies in the Indo-Pacific. But can it claim the moral high ground when it comes to the rule of law?

The idea of the Quad dates back to 2006 when the Bush administration, encouraged by the workings of the Tsunami Core Group formed in the wake of the 2004 Indian Ocean Boxing Day Tsunami, proposed that the four countries — as democracies with substantial naval capabilities — set up a platform for exchange of views on regional maritime challenges.

One of the foremost priorities of the grouping is to ‘champion adherence to international law, particularly as reflected in the United Nations Convention on the Law of the Sea (UNCLOS) to meet challenges to the maritime rules-based order’. Implicit in this view is that the Quad is a responsible custodian of the rule of law and good order at sea, especially in the context of Beijing’s presumptive threat to navigational freedoms and the ‘rules-based order’.

But how accurate or plausible is this premise, particularly as it applies to India?

In most respects, New Delhi’s observance of the rule of maritime law is just as questionable as Beijing’s — and in rare  instances, even more so. In the territorial sea, India has maintained a prior notification requirement for innocent passage of foreign warships since 1976, much like China has maintained a prior authorisation requirement since 1992. Beijing is pilloried for this excessive claim as tantamount to a denial of free navigation. New Delhi is not.

It is relevant in this context that the Permanent Court of Arbitration in Philippines v China judged that Beijing did not consider the sea areas within the ‘nine-dash line’ (beyond 12 nautical miles of the features it administers) to be equivalent to its territorial sea or internal waters. The ‘nine-dash line’ is not a limit of China’s maritime sovereignty and the geographic extent of Beijing’s territorial overreach in the South China Sea is no different from New Delhi’s overreach from its outlying islands.

India has drawn straight baselines around the Lakshadweep group of islands in the Arabian Sea since 2009, much like China drew similar baselines around the Paracel Islands in 1996. Neither India nor China are archipelagic states and these baselines exceed the maximum enclosable water-to-land ratio permitted by UNCLOS.

In the contiguous zone, New Delhi extends its territorial security prerogatives to this sea area, just as Beijing does. Both violate the UNCLOS rulebook which limits the extension of the coastal state’s territorial prerogatives in the contiguous zone to customs, fiscal, immigration and sanitary matters only.

India’s exclusive economic zone (EEZ)-related laws and regulations, contrary to UNCLOS, effect a wholesale extension of Indian penal law beyond the territorial sea — a point that New Delhi did not deny in its losing effort in the ‘Enrica Lexie’ case (Italy v India).

New Delhi’s submarine cable regime, too, fails to legally distinguish between cables and pipelines, which are accorded different treatments on the continental shelf. India is just one of two Asian states that impede the freedom of user states to maintain and repair submarine cables on its continental shelf.

More broadly, New Delhi’s regulations on oceanographic surveys, compulsory measures against foreign warships, establishment of restricted navigation zones, and entry and exit of hazardous cargoes within its exclusive maritime zones are in principle no different from Beijing’s revised Coast Guard and Maritime Safety Traffic Law. Each exceeds the limits specified by UNCLOS.

To be fair, India deserves enormous credit for its unqualified adherence to adverse Law of the Sea tribunal awards. Indian nationalism is often no less pungent than China’s, yet a tough-minded Indian government has shown as much grace in submitting to tribunal awards as an equally tough-minded leadership in Beijing has shown a lack of grace.

India also deserves credit for the panoply of maritime boundary agreements that it has stitched up with most of its neighbours. And unlike Beijing, New Delhi does not inject its coast guard or navy provocatively in sensitive waters at the first hint of tension. Territorial disputes are not leveraged for geopolitical gain.

On the other hand, China has never denied freedom of transit in ways that India did in 2015 when the Modi government instituted a five-month blockade of land-locked Nepal. New Delhi was annoyed that certain provisions had not been adopted in the new constitutional settlement crafted by Kathmandu’s constituent assembly. Even though 85 per cent of a fractious constituent assembly — itself elected by 78 per cent of the Nepalese electorate — had voted in favour of the constitution, and that this denial of transit aggravated the economic devastation wrought by a magnitude 7.8 earthquake in Kathmandu earlier that summer, it amounted to little in New Delhi’s eyes.

The Quad is still a work in progress. If it aspires to speak from a position of moral authority as a respectable custodian of the rule of law at sea, the Quad must first get its constituents to observe that rule of law.

Sourabh Gupta is a resident senior fellow at the Institute for China-America Studies, Washington DC.

A version of this article was published at RSIS Commentary.

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