China in Transition

Japan's Open-Door Policy - An unfinished agenda

Chi Hung KWAN
Consulting Fellow, RIETI

In contrast to China, which has seen robust growth since the late 1970s through implementing market-oriented reform and opening its door to the outside world, Japan has yet to find the path to economic recovery after a recession that has lasted for more than a decade. In response to this, both the public and private sectors in Japan are now trying to follow China's example by reinvigorating the economy through the acceleration of reforms using internationalization as a lever. The internationalization of the Japanese economy has traditionally centered on the outflow of goods, people and money, but in recent years we have also been seeing increasing moves toward market-opening, in which such resources flow in the opposite direction. The recently released 2003 White Paper on International Trade focuses on progress in revitalizing the Japanese economy through the input of foreign dynamism.

First, supported by the government, inward foreign direct investment, which had so far been relatively small, has been growing in recent years, especially through mergers and acquisitions. The inflow of foreign direct investment is expected to help activate the Japanese economy through the introduction of technology and management know-how, the creation of jobs, the development of skills, and a rise in productivity. Consumers are likely to benefit from this process as increased competition drives down prices. In fact, as introduced in the White Paper, there are already many success stories of foreign companies establishing themselves in Japan, such as the acquisition of Nissan Motor Co. by Renault of France. However, even though inward foreign direct investment is on the rise, it still only accounts for 1.2% of gross domestic product on an outstanding basis - a far cry from the 25% in the United States. On the other hand, as can be seen from moves by some foreign firms to downsize their operations in Japan, or pull out completely amid the protracted economic downturn, it is still difficult to have an optimistic outlook about inward direct investment.

Furthermore, the White Paper welcomes the inflow of foreign workers, especially those with professional and technical skills, hoping that it can contribute to an upgrading of Japan's industrial structure. However, in reality, as in the case of inward foreign direct investment, Japan has the lowest percentage of foreign workers in its workforce among major industrialized countries. It may be a good idea to utilize human resources from other countries, such as India, to fill in the labor shortage in such growing areas as information technology. But more importantly, the current state of the nation's universities, which cannot - and do not even attempt to - provide the human resources to support new industries, needs to be changed. Universities in the U.S. can get brilliant people from all around the world through accepting foreign students, but because Japanese universities lack international competitiveness, they have failed to both nurture human resources at home, and to attract talents from overseas.

Meanwhile, on the issue of outward foreign direct investment, the White Paper pointed out that the profitability of Japanese overseas subsidiaries is much lower than that of their U.S. counterparts, especially in the area of local-sales oriented direct investment. This can largely be explained by the fact that ambitious people are not attracted to Japanese affiliates, which are behind their western counterparts in the localization of management. In fact, in a recent survey of Chinese university students, U.S. firms monopolized the top spots of foreign firms they would like to work for, and not a single Japanese company was in the top 10. Since human resources hold the key to success in such high-tech areas as research and development and in marketing, localization is a pressing issue for Japanese firms.

Thus, although the White Paper attempts to highlight the progress Japan has made in opening up to the world, what we have seen are just early signs of change. As pointed out in the White Paper, one way to accelerate this process is to make use of the vitality of neighboring countries such as China through the establishment of an "East Asian Business Zone."

July 4, 2003
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July 4, 2003