RIETI Report January 2021

Is Japan the least attractive country?

Japan has been struggling with the global economic order and its place in it for three decades, from the end of the bubble period in the early 90s, through the rise of China and other developing economies. Businesspeople, government officials and economists are working hard to try to bring vitality back to what was until recently the world's second-largest economy. There is a tendency to focus on optimistic indicators and to ignore signs of bad news, but this often leaves us unprepared for the challenges that we face, and in this column, RIETI Research Associate Kozo KIYOTA examines a truly disturbing statistic regarding Japan's reputation on the world stage. It is hoped that this sobering look will provide the impetus and inspiration to look at a wider variety of issues in developing solutions to the problems that this economy faces in order to develop solutions that will be effective.

This month's featured article

Is Japan the least attractive country?

KIYOTA KozoResearch Associate, RIETI

A college student communicating with her friends via LINE while commuting to school; a businessperson looking at an iPhone at Starbucks; a couple looking for a wedding ring at Tiffany; a mom shopping at SEIYU... Even though we have less occasions to go out these days due to the spread of the new coronavirus, these are scenes that we have seen before. What they have in common is that all these service providers are foreign-owned firms. Indeed, it is now common to see the services provided by foreign-owned firms in daily life.

According to the United Nations Conference on Trade and Development (UNCTAD), in 2019, the stock of inward foreign direct investment (FDI) relative to GDP in Japan was 4.4%, the lowest among 201 countries in the world ranking (UNCTAD, 2020). Inward FDI stock means the stock of the investment by foreign-owned firms. This lowest ratio means that the presence of foreign-owned firms in Japan is the lowest in the world. This suggests that Japan is the most closed and/or the least attractive country in the world for foreign-owned firms, controlling for the size of the economy. Of course, a higher ratio does not necessarily mean a better economy. Also, it can be said that Japanese firms are able to provide sufficient volume and quality of products and services and reasonable prices. Nevertheless, the lowest rank sounds unusual for an advanced country like Japan. Note that the 200th place is North Korea. This is a surprising result.

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