The stock of foreign direct investment in Japan by foreign companies stood at 53 trillion yen at the end of 2024. The Japanese government has set a target of increasing it to 120 trillion yen in 2030 and 150 trillion yen in the first half of the 2030s. This is because, remarkably, foreign direct investment in Japan as a percentage of gross domestic product (GDP) is the lowest among Organization for Economic Cooperation and Development (OECD) countries, and such investment can become one of the engines of Japan’s economic growth.
If foreign companies invest directly in Japan to set up manufacturing and sales bases, employment in Japan will increase. Even more importantly, however, their investments can contribute to Japan’s technological innovation.
Foreign companies often have advanced technologies and knowledge that are not available in Japan. The spread of such technologies and knowledge among Japanese companies will improve the overall technology level and productivity of Japan. This has been demonstrated by research including my own, using firm-level data from countries such as Japan, the United States, the United Kingdom, and China.
However, for technology spillovers to occur, cooperation between foreign and Japanese companies is necessary. For example, foreign companies’ connections with their Japanese counterparts through supply chains make technology transmission easier. Among Japanese affiliated companies, suppliers receive technical guidance on production and quality control from their customer companies to improve product quality. Similarly, Japanese suppliers can acquire technologies from foreign companies that are not available in Japan.
Intellectual cooperation, such as joint research between foreign and Japanese companies, can also contribute to the spread of new foreign technologies in Japan. Japanese companies improve their technology development capabilities by absorbing new foreign technologies through joint research with foreign companies, as demonstrated by our study using patent data. Foreign direct investment in Japan is often accompanied by joint international research, providing opportunities for technological innovation through intellectual cooperation.
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A prime example of foreign direct investment in Japan that led to partnerships between foreign and Japanese companies is the investment by Taiwan Semiconductor Manufacturing Co. (TSMC) to build a plant in Kumamoto. According to the Kyushu Bureau of Economy, Trade and Industry, companies engaging in the production of semiconductor materials and manufacturing equipment and in the back-end process of semiconductor production have implemented and planned 162 investment deals worth 4.8 trillion yen in Kyushu since TSMC announced the investment in October 2021. A large-scale semiconductor supply chain is being developed in Kyushu, led by TSMC, that undertakes the front-end process of semiconductor production.
Furthermore, TSMC is collaborating with Kyushu University and Kumamoto University to implement research and development and foster human resources. New investment deals triggered by the TSMC project in Kyushu include the establishment of research and development bases by foreign companies, such as IBM Japan and Amcor Technology Solutions of the United States, that contribute to expanding intellectual networks.
TSMC also participates in a technology consortium of the National Institute of Advanced Industrial Science and Technology that conducts research and development in Tsukuba, Ibaraki Prefecture. In addition to other foreign companies, Japanese companies and universities also participate in the consortium, spreading intellectual cooperation with TSMC nationwide. These business networks can be expected to spread new technologies among many Japanese companies, which will contribute to the development of Japan’s semiconductor industry.
While inward direct investment in Japan contributes to the Japanese economy, it remains at a low level, as noted above, and policy measures are required to promote such investment. Options include subsidies and tax incentives provided for TSMC, but under the current fiscal situation of the national and local governments in Japan, providing extensive and sustained fiscal support is difficult. Governance problems regarding the management of these measures also exist.
A more cost-effective measure is providing information support to foreign companies. The cost of collecting information on markets and institutions and finding suitable business partners in investment destination countries is a major barrier to international investment. The effectiveness of providing information and matching support to overcome this barrier has been demonstrated by many studies, including one by Associate Professor Ryo Makioka at Hokkaido University.
An effective way to increase foreign direct investment in Japan is to disseminate information overseas about investments, visa acquisition, taxes, and other Japanese systems, as well as information about Japanese companies and universities that could be potential business partners. Such a service has already been implemented by the Japan External Trade Organization (JETRO) and local governments, but it must be enhanced significantly from its current status.
As mentioned above, intellectual cooperation between foreign and Japanese companies must be enhanced to maximize the effect of foreign companies’ investment in Japan. However, according to JETRO’s 2024 Survey on Business Operations of Foreign-affiliated Companies in Japan, only 21% of foreign companies in Japan collaborate with Japanese companies or universities.
Therefore, Japan should proactively disseminate information overseas about the technologies held by Japanese companies and universities to promote foreign direct investment in Japan and foster cooperation between foreign and Japanese companies. JETRO is already providing such support. For example, JETRO supported an investment in Japan by a U.S. industrial robot system development company , which led to a technology partnership with a major Japanese manufacturer. This kind of support should be expanded further.
It is also effective to implement additional policies to develop regional supply chains and intellectual cooperation. Kyushu’s success was the result of various support measures being added to those used for attracting TSMC. For example, the Kyushu Bureau of Economy, Trade and Industry has become the secretariat of a semiconductor-related consortium, which has been joined by 155 entities from industrial, academic, government, and financial sectors, contributing to regional cooperation and Kyushu’s connection with Taiwan.
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As indicated by the TSMC case, foreign direct investment in Japan stimulates regional economies. However, foreign direct investment in Japan is biased towards the Tokyo metropolitan region, as shown in the figure below, making it necessary to promote foreign investment in Japan’s non-metropolitan areas.
One problem is that information barriers are more severe in non-metropolitan areas, so it is difficult for foreign companies to see what kind of suppliers, sales destinations, and applicable technologies exist in Japan’s non-metropolitan areas.
In fact, there are attractive small- and medium-sized companies and universities in non-metropolitan areas. National and local governments should explore and compile information on such “lying dragons” in non-metropolitan areas and efficiently disseminate this information overseas.
Another problem is that living environments in non-metropolitan areas are not always favorable for highly skilled and knowledgeable foreign workers. In particular, insufficient multilingual support at public and medical institutions and the lack of international schools in non-metropolitan areas are barriers to working in Japan for highly skilled foreign workers. The government of Kumamoto Prefecture also attracted an international school to the region, which influenced TSMC’s decision to invest in Kumamoto.
Recently, antipathy toward immigrants has been growing in Japan. However, when highly skilled foreign workers stay in Japan in conjunction with foreign companies’ investments, their skills and knowledge should greatly contribute to regional economic growth.
Local governments that host foreign companies and workers should carefully explain the contributions such workers make to local economies and provide opportunities for highly skilled foreign workers and local residents to promote mutual exchanges and understanding.
That said, even though promoting foreign direct investment in Japan’s non-metropolitan areas is necessary, it is unrealistic to expect large-scale foreign investment to occur throughout Japan. It would be more efficient to concentrate such investment in core cities.
Rather than trying to directly attract inward investment, regions around core cities should achieve more inclusive economic growth by focusing their policies on providing information and matching support and infrastructure development to build connections with foreign and Japanese companies operating there.
Finally, increasing foreign direct investment must also take economic security into account. I hope that policies promoting foreign direct investment in Japan from friendly countries, combined with Japanese companies’ subsequent technological innovation, will invigorate Japan’s economy.
>> Original text in Japanese
* Translated by RIETI.
December 5, 2025 Nihon Keizai Shimbun
