Making Use of the Vitality of Emerging Economies

While a year has passed since the outbreak of the global economic crisis, the Japanese economy continues to be deep in the doldrums with economic activities far from returning to levels prior to the crisis. Japan's exports in September were down 30.6% year on year and the index for industrial production (IIP) for the month also dipped 18.4% from a year before. In sharp contrast to the slow pace of recovery in Japan and other developed countries, emerging economies, most notably China and India, are maintaining high growth.

In what follows, I would like to discuss how Japanese companies can utilize the robust growth of emerging economies.

Before the global economic crisis, emerging economies were growing at a pace far greater than Japan and the crisis has brought no substantive changes to that. If this situation is to continue into the future, it would be only natural for Japanese companies to shift their focus away from Japan and to rapidly-growing emerging economies. In this regard, the Japan External Trade Organization (JETRO) conducted a questionnaire survey related to company activities and plans for global consumer markets as well as environment-related markets. According to the survey results announced on September 17, 2009, 82.8% of respondents said they might expand (or launch) overseas business in the future, for which "growth potential in emerging markets" and "maturation and saturation of the domestic market" were by far the overwhelming reasons. It is expected that Japanese companies (as well as companies in other countries across the world) will intensify moves to explore emerging markets.

Due to the fact that the survey was targeted at JETRO member companies, it is assumed that most of the respondents are global companies that have already advanced into overseas markets through exports and/or direct investments. But such global players represent only a small percentage of Japanese companies.

Since Melitz (2003) , it has become common in the field of international trade theories to assume that only a portion of companies, i.e. highly productive ones, in within the same industry are export-capable. The idea is underpinned by facts found through empirical research using firm-level micro data. In Japan, a team of researchers led by RIETI Faculty Fellow Ryuhei Wakasugi conducted analysis using firm-level data collected by the Ministry of Economy, Trade and Industry for the Basic Survey of Japanese Business Structure and Activities and the Survey on Overseas Business Activities ( Wakasugi et al. 2008 ). The analysis found that 30.5% of manufacturing companies were exporters in 2003 with the top 10 exporters accounting for 92% of the total export value. ^*1 It has been also found that the number of employees, amount of value added, and total factor productivity (TFP) for exporters are respectively 3.02 times, 5.22 times, and 1.38 times greater than those for non-exporters in average terms. In other words, exports are almost exclusively undertaken by highly productive large companies.

Then, it should be an important policy goal for the government to help highly productive domestic players to advance into overseas markets. ^*2 However, for a vast majority of companies that are not sufficiently productive, moving into emerging markets on their own and directly getting a share of the growth pie would be a far cry.

But it is not impossible for those companies to savor a piece of the growing economic pie without going into emerging markets themselves. Companies and human resources in emerging economies can be brought to Japan.

The tourism industry is among the first to launch efforts in this regard. Nowadays, it is not uncommon to see visitors from China, South Korea, and other Asian countries when traveling to sightseeing areas of Japan. For instance, the number of visitors from China increased from about 290,000 in 1999 to above 1 million in 2008, accounting for 12.0% of total visitors from overseas ( Ministry of Land, Infrastructure, Transport and Tourism, 2009 ).

A challenge that should be addressed in the immediate future is to invite investments from emerging economies. Foreign companies making direct investments in Japan have significantly higher productivity than their Japanese counterparts, particularly domestic players ( figure ). Such direct investments are often made through the merger and acquisition (M&A) of domestic businesses and it is known that productivity tends to increase in companies that have become subject to M&A because of the resulting business restructuring and other reform measures. ^*3 Thus, it is fair to say that boosting inward direct investments can be an effective tool to revitalize the stagnant domestic economy. While developed economies remain faced with their post-crisis recession, replacing them as a powerful source of direct investments are emerging economies led by China, a country boasting the largest foreign reserves in the world.

Spirit of mutual learning is the key