Japan’s post-war economy is regarded as one of the most successful and efficient. Despite the fact that a few slumps took place in the 1970s and 1990s, the Japanese economy is listed among the world’s strongest. The contribution of the Japanese economy to world’s GDP grew from just two per cent to over 10 per cent between 1967 and 1987. Therefore its impact can be acknowledged as ‘dramatic’ (Beamish et al., 1997). Undoubtedly, the expansive activities of Japanese corporations back up the dominant position of Japan in the global economy. Among
the top 100 multinationals there are 39 Japanese corporations, including the largest auto- makers, electronic firms and trading companies: Toyota, Mitsubishi, Sony, Nissan, Fujitsu and Mitsubishi (Flath, 2005). Global JFDI is determinant of this success.
Japanese manufacturers made their way in the world after the end of the World War II. From 1951, companies were allowed to invest abroad (from 1955 Japan accessed GATT), but due to a weak post-war economy and Japanese government restrictions on outward investments, JFDI was limited. Morris (1988) distinguishes three phases of Japanese direct investments; 1947- 1971 – a period of steady and modest increases; 1971-1980 a surge of growth, and the turning point of the scale of foreign investment took place in 1972. In the years 1972 and 1973 FDI was greater than in the preceding period: 1951-1971. The phase starting from 1980 was characterized by a steep upward trend (with the ‘boom’ period: 1986-89). The 1980s consolidates Japan’s domination in terms of outflow investments. In 1989 the value of Japan’s foreign investment was USD 67.5 billion, more than any country in the world at that time. Japanese corporations provided about 30 per cent of world FDI flows (Westley, 2008). This sudden growth can be explained by several factors: as a result of Plaza Accord (1985), an international agreement which allowed depreciation of the American dollar; in the period 1985- 1988 Japan’s currency appreciated and the value of yen against the dollar almost doubled. Yen appreciation evoked the ‘crisis of high yen’ (Japanese: endaka) which greatly affected Japanese exports, so crucial for the country’s economy. Endaka encouraged Japanese firms to overseas investments as a result of much lower manufacturing costs abroad. On the other hand appreciation of yen badly affected Japanese subsidiaries abroad, much depended on materials imported from Japan (Komiya, 1990). Even though endaka did not stop Japan’s export competitiveness, it rather boosted Japanese determination to remain one of the most efficient and competitive nations in the world (Olivier and Wilkinson, 1992).
Further, another factor which contributed to JFDI’s expansion was the so-called Japanese ‘bubble economy’; companies were able to finance overseas investment through cheap and available credit (Beamish et al., 1997). The ‘bubble economy’ made land prices higher, which turned real-estate firms and companies needing land for factories to invest abroad. The next motivation for expansion of Japanese FDI in 1980s was hollowing-out (de-industrialization) of manufacturing industry. Japan’s production significantly shifted out of manufacturing. This share of real GDP fell from 27.9 in 1985 to 24.3 in 1990. Decline in this sector also affected manufacturing’s share of employment in Japan; large firms began to recruit fewer new graduate
managers, older workers were retired or shifted to other companies. Corporations were forced to seek manufacturing employees abroad as they shifted industrial production outside Japan (Morgan et al., 2002).
Japan’s stagnation in the 1990s substantially reduced the amount of the outward JFDI. The last two decades showed that Japanese corporations have been not investing so extensively, as they used to in the late 1980s. The Japanese economy was heavily affected by the economic bubble in the early nineties and was not immune to the Asian financial crisis (1997). Those slumps reduced the global volume of JFDI. During the 1990s Japan was the second largest investor, after USA. In the 2000s other developed economies (France, Germany, and the UK) outpaced Japan in the value of FDI outflow.
Characteristically outflows of FDI from Japan were much larger than equivalent inflows to the country; by 1993, the stock of JFDI abroad stood at USD 422.5 billion - almost fifteen times the USD 29.9 billion stock of FDI received by Japan (Bayoumi and Lipworth, 1997). This gap was growing over the years. The Japanese government had hostile policies to inward investment, which remained persistent until the 1980s. In addition features of isolated Japanese culture and language made Japan a hard place to invest and contributed to this investment imbalance (Flath, 2005). Foreign economic policy is described appropriately by popular slogans in Japan: ‘Export or die’ and ‘Making the economy more sufficient’. This kind of approach accurately explains the trend of Japanese foreign investment in the years 1970-1990.
Japanese investments during the first thirty post-war years (1951-1980) were primarily concentrated in Asia, Middle East and Latin America. Until 1980 developing countries received about half of all JFDI (Jun et al., 1993). In the 1980s Japanese corporations established new subsidiaries in the USA, the UK and France - Japan’s prime exports markets, shifting some investments away from Asia to Western developed countries. Japanese companies continued investing in the developing world mainly in ASEAN countries (Indonesia, Thailand, Philippines, and Malaysia) and Asian Tigers (South Korea, Taiwan, and Singapore). The major target of JFDI in the 1980s was North America: the United States and Canada. In 1989 the value of all JFDI in the USA alone was 50 per cent; another 22 per cent was invested in Europe (see Figure 2.1). Japanese investment in Europe exceeded that in America in 1999; 39 per cent and 33 per cent of the total respectively. In Australia, Japan was the third major investor, after the USA and the UK. At the same time JFDI in Asia and Latin America remained at the same level, around 30 per cent altogether. There is insignificant presence of JFDI in the Middle East
(few considerable investments in Iraq and Iran before 1980, stopped by the war between these countries); and Africa (Zaire, Nigeria and Zambia); (ibid).
Figure 2.1 Global distribution of JFDI, (1980-2005).
Source: Author based on Westney (2008)
Therefore, initially JFDI strongly depended on geographical location, leaning towards proximity to the home country; the majority of the investment went to neighbouring Asian economies. Apart from closer location, some cultural, political and historical reasons influenced investment in Asia. From the 1980s Japanese companies recognized the proximity to the sales market, moving capital to the North America and Europe. The big shift in outward JFDI from developing countries to developed countries has been caused by several factors including worsening of investment environments in the most developing countries (political instability, accumulated debt, civil wars), and rising barriers to imports from Japan to the United States and some European countries (Komiya, 1990).
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1980 1989 1995 2005 Other Oceania Latin America Asia Europe North America
The UK was the primary location for JFDI in Europe, constituting over a third of total Japanese investment in the European Economic Community (EEC). The number of Japanese companies in Great Britain rose from 20 in 1980 to around 160 in 1991, employing 50,000 workers and accordingly 272 in 1996 with 80, 000 employees. The United Kingdom became the most favoured location in Europe due to a positive political climate; the Conservative Government reduced trade union power1, the existence of large markets (domestic and European), the English language, skilled labour, good infrastructure and one of the world’s biggest businesses, a legal and administrative centre - London (Nguyen, 1997). The British government has played a positive role in encouraging capital expenditure; at the end of the 1970s Invest in Britain Bureau (IBB) with the regional agencies promoting inward investments was established. The majority of the Japanese investment went to depressed areas of the UK: South Wales, North East and Scotland. Japanese manufacturers were investing in the regions of relatively high unemployment; however the new towns such as Telford, Milton Keynes and Livingstone received significant investment. Despite the positive effects (creating new jobs), there is also some criticism towards Japanese corporations. Most of the JFDI in the UK commitments are largely in low-value added assembly operations, dependent on components from outside the country. Jobs created at the plants have been low-paid and low- skilled, when R&D and production within the high-value added components remained in Japan. ‘Optimists’ have argued that this was a temporary phase and it was declining, as the local component supplies began to replace imported parts. In many developed countries, the Japanese have clustered investments, which reinforced the influence of Japanese firms on the local economy and indigenous working practices (Elger and Smith, 1994).
In the 1990s there were some cases of Japanese firms closing UK plants to restructure their operations either regionally across Europe or globally (closure of Fujitsu plant of semi- conductors in the North East England in 1998). Other EU countries became more attractive locations for JFDI (Toyota’s second European plant is currently in Valenciennes in France) due to the UK staying out of euro-zone and rising costs in the British Isles (Morgan et al., 2002).
1 The Conservative Government wanted to replace and modernize ailing manufacturing sectors and discipline
labour. Two Japanese commentators note: ‘The British government expressed the hope that Japanese companies would introduce new industrial relations practices and transfer their manufacturing philosophy and technology to their British counterparts’ (Kume and Totsuka, 1991: 53).
The current trend shows that, in emerging markets, the Japanese are outpaced by the South Korean or local investors. Ichii et al. (2012: 127) attribute this to: Japanese aversion to mergers and acquisitions, a reluctance to commit financially and organizationally in those countries, also to the failure to properly allocate managerial talents, and negligence of the middle and low segments of the markets2. This is the case of Brazil, Russia, India and China, where rival Asian and European multinationals seized the advantage. The booming Chinese economy might be the ideal place for Japan to locate their factories in terms of geographical proximity, the size of the labour pool and the market. Nonetheless, the historical animosities between both countries can still harm economic cooperation. Recent diplomatic tensions (September 2012) over disputed islands Senkaku/Diaoyu have led to huge anti-Japanese protests. Many Japanese businesses in China, but also in Western Europe were forced to close down and JFDI to downsize, including the major Japanese manufacturers: Toyota, Panasonic and Honda.
The political and economic transformation of the late 1980s in Eastern Europe had opened the door to multinationals and new markets emerged. This vacuum was partly filled by JFDI shifting this time from Western economies to Central and Eastern Europe (CEE). Table 2.1 illustrates this trend in relocation of JFDI. The next section looks at the Japanese investment in the CEE region.
Table 2.1 Number of JFDI in manufacturing in selected European counties (1990-2010).
Country 1990 1995 2000 2005 2010 United Kingdom 265 320 370 308 248 Germany 120 149 146 141 146 France 147 162 180 194 133 Italy 64 70 75 77 62 Spain 74 81 81 76 57 Poland 0 6 21 54 80 Czech Republic 0 15 32 85 94 Hungary 4 15 39 50 39 Slovakia 0 0 6 12 16
Source: Author based on JETRO (2012).
2 The authors supported it with the interesting example from India, where the TV sets market is still dominated
(70 per cent) by cathode-ray-tube televisions. Japanese electronics corporations exclusively manufacture flat screen sets, ignoring the demand of the Indian market.