The technical revolution that has taken place in Japan's production bases has, through technical chains and technical spill-over, had significant social benefit in that it has brought about revolutions in other industries and has helped in the development of new industries. As a result of businesses seeking their own individual corporate benefits in transferring production bases overseas, the possibility has increased of a divergence in the benefit of individual corporations and the social benefit.

Nevertheless, as we look at this current phenomenon, production bases are in fact being transferred to such countries as China. In contrast to the past, it is no longer only low-value added products that are moving, but also high value-added products such as digital cameras and DVD players. The focus of mass produced articles is unchanged and there are also many cases where advanced technologies are maintained, through component imports from Japan and technology transfers.

At the same time, there are also examples of not only production, but also research and development bases being transferred overseas. This, however, was done to meet the needs of regions overseas and for the development of products that are attuned to specific regional markets, where research and development bases have been created using superlative researchers and experts in the given region. Rather than replacing Japan's own research bases, they are, instead, complementing them. Though Japanese corporations have lost their competitive advantage and that almost all mass-produced items are now made overseas, efforts are still being made to ensure that at least one "mother factory" remains in Japan as a production base.

To be able to respond to the loss of know-how that is accompanied by the closure of production bases and in the event that changes in market and technological circumstances result in the reopening of domestic production, corporations are undertaking these activities in order to avoid path dependence. In addition, corporations are making efforts to regain their competitive advantage by producing high value-added goods.

Consequently, the issue of divergence of individual corporate benefit and social benefit is not a significant issue. Of course, the transfer of production bases overseas brings the specter of employment problems domestically, which would negatively impact the social good. In Japan, given the large gap between the labor market and the types of jobs available, it is also likely that social costs will rise. To this end, in Japan, a country that claims to maintain a free market structure, activities to maximize profits based on corporate comparative advantage cannot be limited. It is the responsibility of the government to create a minimum safety net to respond to this situation.

Policy Prescriptions

Is there a role for government in this matter? In the past, when economic issues of this sort arose, regardless of whether something could be done or not, the government would always, to some degree, formulate a prescription.

In the past, there was a good deal of asymmetry in the information that was passed between the public and private sectors. This situation has changed: the public sector lacks the knowledge and experience to initiate appropriate policies. In addition, the limitations of fiscal policy have become apparent and the scope of policies that can now be implemented by the government is finite. In other words, the role of government is shrinking. The government should consider a prescription that is within its means.

The government should, above all, strictly eschew a response that would obstruct corporate activities and the progress of globalization. The hollowing out being witnessed in Japan should be regarded as a part of the globalization of Japanese corporations. So isn't the real issue at hand that of Japanese corporations taking responsibility for their actions in a backdrop of economic freedom?

Corporations are changing with the times and becoming increasingly globalized. Policymakers should also change with the times--and create an investment environment that attracts business to Japan.

Author, Yoshiaki Nakamura
Fellow
Research Institute of Economy, Trade and Industry (RIETI)

Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391

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The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).