Making Use of the Vitality of Emerging Economies

ITO Koji
Senior Fellow, RIETI

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.

Development of emerging markets

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.

Only a handful of companies are capable of exploring overseas 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.

Bringing emerging economies to Japan

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.

Figure : Changes in Recurring Margins for Foreign and Japanese Companies Figure: Changes in Recurring Margins for Foreign and Japanese Companies

Source: METI 2009a

Spirit of mutual learning is the key

Major obstacles for foreign companies in doing business in Japan are fairly clear with "high business costs" and "difficulty in securing human resources" among the most cited impediments to doing business in Japan (METI 2009b).

Providing a good reference in addressing these impediments are East Asian countries that have achieved robust economic growth by using inward direct investments as leverage, namely, member countries of the Association of Southeast Asian Nations and China. Mobilizing a whole range of measures including the establishment of special economic zones and tax incentives, these countries have aggressively invited foreign companies thereby laying foundation for the development of national economy. It would be a waste for Japan not to emulate such excellent role models that can be found among its immediate neighbors. Demonstrating the spirit of mutual learning, Japan should study policies implemented by other East Asian countries to attract foreign businesses and incorporate them into its own policies.

November 24, 2009
  • *1. A margin of error should be allowed for the ratio of exporters. Wakasugi et al. (2008) is based on a survey targeted at manufacturers with 50 or more employees and thus does not reflect the situation of smaller manufacturers with 49 or less employees as well as of non-manufacturers. In addition, export figures that can be obtained in the Basic Survey of Japanese Business Structure and Activities and the Survey on Overseas Business Activities are those for direct exports by manufacturers and do not include indirect exports through trading companies and other intermediaries.
  • *2. During the RIETI Brown Bag Lunch (BBL) seminar on October 19, 2009, entitled "Strategies for Economic Growth of Japan: Implications from Growth Theory and Firm-level Empirics," Professor Yasuyuki Todo of the University of Tokyo stressed the importance of the advancement into overseas markets by what he calls "sleeping dragons," i.e. companies that are highly productive but remain in the domestic market, for instance, simply for the lack of an adequate opportunity.
  • *3. Detailed analysis of the effects of inward direct investments is provided in Fukao and Amano (2004).
  • * Ministry of Economy, Trade and Industry (METI), 2009a, White Paper on International Economy and Trade 2009, Nikkei Printing Inc.
  • * METI, 2009b, FY2008 Survey Report on Foreign-affiliated Companies' Attitudes toward Foreign Direct Investment in Japan
  • * Ministry of Land, Infrastructure, Transport and Tourism, 2009, White Paper on Tourism in Japan 2009, Communica Corp.
  • * Japan External Trade Organization (JETRO), 2009, Sekai no Shohi Shijo / Kankyo-kanren Bijinesu Shijo ni kansuru Anketo Chosa (Questionaire survey on the world's consumer markets and environment-related business markets)
  • * TODO Yasuyuki., 2009. Strategies for Economic Growth of Japan: Implications from Growth Theory and Firm-level Empirics, presentation materials for RIEI BBL seminar on October 16, 2009 ( [PDF:1.53MB] (Japanese))
  • * FUKAO Kyoji, and AMANO Tomofumi, 2004. Tainichi Chokusetsu Toshi to Nihon Keizai (Inward Direct Investments in Japan and the Japanese Economy), Nikkei Inc.
  • * WAKASUGI Ryuhei, TODO Yasuyuki, SATO Hitoshi, NISHIDA Shuichiro, MATSUURA Toshiyuki, ITO Banri, and TANAKA Ayumu, 2008. The Internationalization of Japanese Firms: New findings based on firm-level data, RIETI Discussion Paper Series 08-J-046
  • * Melitz, Mark. J., 2003. The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity, Econometrica, 71(6): 1695-1725.

November 24, 2009