My previous post on possible linkages between the Livedoor scandal and Foreign Direct Investment in Japan got me curious about the latter topic, so I did a little reading over the weekend.
I started with last year’s report by U.S.-Japan Business Council on expanding FDI in Japan. This is a fascinating and surprisingly easily approachable document that I strongly recommend to anyone with an interest in investment issues is Japan.
Below are a few of the more interesting points from the report, along with some graphical illustrations I worked up using data from the United Nations Committee on Trade and Development’s annual World Investment Report, and the Ministry of Finance‘s on-line FDI data.
Japan’s inward FDI falls well below international standards:
At 2.1% of GDP, the accumulated foreign direct investment (FDI) in Japan is much less than the average of 20% for all developed economies, and G-7 economies such as the United States (14%), Germany (22%), and the United Kingdom (37%).
In spite of the quantitative difference, the composition in terms of type of investment is very similar to other developed countries:
According to the OECD, over 70% of the FDI in developed economies takes place via Mergers and Acquisitions (M&A), transactions in which one company acquires a whole or partial ownership stake in another. Japan is no different. Over 70% of FDI in Japan since 1997 has been through M&A.
Still, Japan still falls far behind the pack in cross border M&As.
Furthermore, a large number of these M&As share a similar characteristic:
Where most of these Japanese/U.S. and U.S./EU transactions can be characterized as “friendly” transactions, most foreign acquisitions in Japan are cases in which U.S. or European firms acquired stakes in financially troubled Japanese companies. The Japanese companies generally agreed to be acquired only because they needed capital to survive.
Regular readers of Japanese news are probably already aware of some of these cases. Two biggies named in the report are Renault/Nissan and Long Term Credit Bank/Ripplewood Holdings.
In spite of these sucessful cases however, attitudes towards FDI in Japan are slow to change:
Japanese attitudes are much like they were in the United States in the 1980s. While foreign companies are much more prevalent now, there is still much uncertainty and suspicion about – and some outright hostility toward – FDI among politicians, the private sector, and the public, particularly with regard to M&A and distressed asset purchases.
To avoid generalization however, it should be noted that not everyone in Japan shares this ambivalence towards FDI:
There are some positive steps being taken by the Government of Japan, particularly METI and JETRO, to overcome this legacy and promote FDI in Japan. Most positive of all, of course, is Prime Minister Koizumi’s January 2003 goal to double FDI in five years, as this for the first time put the government squarely behind the goal of increasing FDI.
Advisory groups such as the Japan Investment Council (JIC) and the Invest Japan Forum (IJF), have also issued reports recommending ways to encourage FDI in Japan.
Nor is ambivalence towards FDI a uniquely Japanese characteristic. I’m sure most readers will recall the fuss Cnooc caused last year when it attempted to purchase the U.S. energy firm Unocal. (Not to mention the Japanese purchases of Pebble Beach, Rockefeller Center, and Columbia Studios in the 1980s.)
Part II of this post will examine why all of this matters.
p.s. I really couldn’t figure a way to work this graph into the post, but since I already made it I may as well append it here. This is a breakdown of investment by the three largest global economic regions.