Japan’s Outward FDI in GlobalizationJapan’s Outward FDI in GlobalizationJapan’s Outward FDI in GlobalizationJapan’s Outward FDI in Globalization

Daisuke HiratsukaDirector General of Development Studies Center

Institute of Developing Economies, JETRO81-43-299-9676, Fax. 81-43-299-9763

daisuke_hiratsuka@ide.go.jp

25-26 April, 2007

2

1. What does determine outward FDI?2. New Asian economic landscape3. Distribution of Japan’s outward FDI4. Japan’s outward FDI inside Asia5. Evolution of global presence by Japan

ese firms6. International expansion by Japanese S

MEs7. Perspective of Japanese outward FDI i

n further economic integration

Contents

3

1. What does determine outward FDI?

Presence of transport cost

Country A

Agglomeration Force

(FDI in country A)

Dispersion Force

(FDI in country B)

Increase of factor pricesIn country A

Increase of profits

Decrease of profits

Fall of transport cost

Increase of profits

Increase of factor pricesIn country B

Country B:A new frontier

1. Agglomeration and dispersion forces are sources of FDI.

4

The differences in factor prices makes the “flying geese pattern” in terms of FDI. development

1. What does determine outward FDI?

Thailand

Indonesia

Malaysia

Korea

TaiwanHong Kong

Singapore

Japan

Cambodia

Laos

Vietnam

India

China

NIEs

ASEAN-4

Labor-intensive goods

Durable consumer goods

High-tech goods

Capital goods

R&D

Myanmar

Emergining countries

5

COVER: NHKDISK:HOYASCREW: KATAYAMASEAL: KOKOKU, TOKAIRAMP: DAICHITOP CLAMP: BPI, SOODELATCH: NOKPLATECASE: BRIDGESTONELABEL: SANSAIFILTER: SSRETEKPCBA: SSCISUSPENSION: NHK

Japan

SPNDLE MOTOR: NIDEC, NMBBASE: WEARNSCARRIAGE: FUJIKURA, SANEIFLEX CABLE: NOKPIVOT: NMBSEAL: KOKOKUVCM: SMT,TDKTOP COVER: NOK, NHKPCBA: SSCIHGA:UTCHAS:UTC Thailand

BASE: KENSEISHAPIVOT: NSK SPACER:KENSEISHAVCM:SHINETSUBASE:ASAHICARD:SCI, CELESTICATOP CLAMP: SCL, CELESTICA, SOODEDISK: KOMAG

COVER: KURODA, CHEUNGWOHSCREW:TIORMAC, SPURWAYPIVOT: NSKPC ADP: JSTDISC: HOYA

Singapore

PCBA:GBM,SSCICARRIAGE:TDKHGA: HSPCBASE: BPIHEAD: HGSTSUSPENSION:NHK

DAMPING PLATE: IMEASCOIL SUPPORT: TOTOKUPCBA: IONIX

TOP CLAMP: GML

DISK: HGSTHEAD: HGSTSUSPENSION:HTI

USA

FILTER CAP: GML

W.SUSPENSION: SUMITOMOVCM: SHINETSUPCBA: SOLECTION

Malaysia Hong Kong

Taiwan

Philippines

Indonesia

China

HEAD: GDL

Mexico

1. What does determine outward FDI?Industry have agglomerated in many Asian countries, and they have been linked to produce a good: most of suppliers are Japanese affiliates.

6

• Production process is becoming sequential stages of production, and instead of final products, parts and components within the same industry are traded.

• Assuming the two country case, a good across border four times: at the exported from the country A; imported into the country B; exported from the country B after processing , and imported back to the country A.

• In the actual sequential production, one good crosses borders many times to produce a final good.

• It implies that the reduction of trade costs, such as trade liberalization and facilitation measures, would develop the sequential production, increasing FDI flows.

1. What does determine outward FDI?

7

0

10

20

30

40

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Primary Goods

Processed goods

Parts and components

Capital goods

Consumption goods

（％）

Processed goods

Capital goods

Parts and components

Consumption goods

Primary goods

2. New Asian economic landscape: trade pattern inside Asia has changed from inter-industry to intra-industry that has traded parts and components.

Note: Asia contains the ASEAN five countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand), China, Japan, Korea, and Hong Kong. Imports of China are available after 1998. Source: IDE-JETRO/RIETI

8

2. New Asian economic landscape: Import relation between Japan and ASEAN

0

10

20

30

40

50

60

70

1980 1985 1990 1995 2000 1980 1985 1990 1995 2000

Primary GoodsProcessed goodsParts and componentsCapital goodsConsumption goods

（％）

Processed

Capital

Parts

Consumption

Primary

ASEAN→ Japan Japan→ASEAN

Parts

Capital

Consumption

Primary

Processed

9

2. New Asian economic landscape: Import relation between China and ASEAN

0

10

20

30

40

50

60

70

80

1980 1985 1990 1995 2000 1980 1985 1990 1995 2000

Primary goodsProcessed goodsParts and componentsCapital goodsConsumption goods

（％）

Processed

Capital

Parts

Consumption

Primary

ASEAN→ChinaChina→ASEAN

ConsumptionCapital

Primary

Processed

Parts

10

World market

theAmericas

EuropeAsia

PacificOther

1997 (582) 100.0 71.4 28.6 11.3 5.4 5.8 6.11998 (593) 100.0 71.1 28.9 13.4 6.0 4.9 4.61999 (643) 100.0 72.5 27.5 12.4 5.4 5.5 4.22000 (668) 100.0 71.9 28.1 12.6 5.2 6.4 3.92001 (715) 100.0 69.7 30.3 13.7 5.5 6.7 4.42002 (728) 100.0 68.0 32.0 13.7 6.0 7.8 4.62003 (738) 100.0 67.9 32.1 12.9 6.1 8.2 4.92004 (774) 100.0 67.3 32.7 12.2 6.4 8.8 5.32005 (804) 100.0 66.1 33.9 12.5 6.3 10.1 5.0

domestic overseasFY No. of

firmscirculated

Notes: 1. Above chart shows results of firms listed on the Tokyo Stock Exchange (TSE), whose fiscal year ends between December to March, and who release sales and operating profits by region. (Firms in banking and insurance industries are excluded.)Note 2: Year-on-year growth rates for sales/operating profits are calculated to include the same group of firms (to allow for comparison).Note 3: “Europe” includes Africa and the Middle East. “Others” includes answers wih multiple regions combined (e.g. “Europe and the US”).Source: prepared by JETRO based on Toyo Keizai Shimposha’s “Kigyo Zaimu Karte 2007”

Table 1 Share of sales for TSE-listed firms (by region)

2. New Asian economic landscape: overseas market is increasing share in sales and profits.

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Notes: 1. Above chart shows results of firms listed on the Tokyo Stock Exchange (TSE), whose fiscal year ends between December to March, and who release sales and operating profits by region. (Firms in banking and insurance industries are excluded.)Note 2: Year-on-year growth rates for sales/operating profits are calculated to include the same group of firms (to allow for comparison).Note 3: “Europe” includes Africa and the Middle East. “Others” includes answers wih multiple regions combined (e.g. “Europe and the US”).Source: prepared by JETRO based on Toyo Keizai Shimposha’s “Kigyo Zaimu Karte 2007”

Table 2 Share of profits for TSE-listed firms (by region)

2. New Asian economic landscape: overseas market is increasing share in sales and profits.

World market

theAmericas

EuropeAsia

PacificOther

1997 (582) 100.0 76.6 23.4 9.8 3.4 4.8 5.31998 (593) 100.0 73.4 26.6 13.8 4.8 4.4 3.61999 (643) 100.0 75.0 25.0 14.1 2.1 5.0 3.72000 (668) 100.0 79.9 20.1 10.4 0.7 6.0 3.02001 (715) 100.0 76.0 24.0 12.4 0.6 6.7 4.22002 (728) 100.0 72.9 27.1 13.0 2.8 7.2 4.12003 (738) 100.0 73.3 26.7 11.1 4.3 7.5 3.72004 (774) 100.0 71.8 28.2 10.9 4.7 8.6 4.02005 (804) 100.0 70.8 29.2 10.8 4.7 10.0 3.7

FY No. offirms

circulateddomestic overseas

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3. Distribution of Japan’s outward FDI

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1965

1966

1967

1968

1969

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1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Oceania

Africa

Europe

Mid & NearEast

Asia

Latin America

North America

Figure 6. Japan's Outward FDI (based on reports and notifications) by Country/Region (Million US$)

Note: Firms with capital more than 100 million yen are to report to the Ministry of Finance, Japan. Source: Original data from the Ministry of Finance of Japan, and converted into from Japanese yen to the US dollar by JETRO.

Inactive up to 1985

1st boom 1985-922nd boom 1993-97

After the crisis

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3. Distribution of Japan’s outward FDI

Fiigure 7. Share of Japan's Outward FDI (based on reports and notifications) by Country/Region (%)

Note: Firms with capital more than 100 million yen are to report to the Ministry of Finance, Japan. Source: Original data from the Ministry of Finance of Japan, and converted into from Japanese yen to the US dollar by JETRO.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1965

1966

1967

1968

1969

1970

1971

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1973

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1977

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1980

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1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

North AmericaAsiaEurope

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4. Japan’s outward FDI inside Asia

Fiigure 8. Japan's Outward FDI (based on reports and notifications) inside Asia by Country/Region (Million US$)

Note: Firms with capital more than 100 million yen are to report to the Ministry of Finance, Japan. Source: Original data from the Ministry of Finance of Japan, and converted into from Japanese yen to the US dollar by JETRO.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1965

1966

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1998

1999

2000

2001

2002

2003

2004

the rest of Asia Taiwan Korea Hong Kong ChinaASEAN10

Before the Plaza Accord

After the Plaza Accord Before the crisis

After the crisis

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4. Japan’s outward FDI inside Asia

Fiigure 9. Share of Japan's Outward FDI (based on reports and notifications) inside Asia by Country/Region (%)

Note: Firms with capital more than 100 million yen are to report to the Ministry of Finance, Japan. Source: Original data from the Ministry of Finance of Japan, and converted into from Japanese yen to the US dollar by JETRO.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1965

1966

1967

1968

1969

1970

1971

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1973

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1994

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1996

1997

1998

1999

2000

2001

2002

2003

2004

ASEAN10 China Hong Kong

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4. Japan’s outward FDI inside Asia

Fiigure 10. Share of Japan's Outward FDI (based on reports and notifications) inside ASEAN 6 (Million US$)

Note: Firms with capital more than 100 million yen are to report to the Ministry of Finance, Japan. Source: Original data from the Ministry of Finance of Japan, and converted into from Japanese yen to the US dollar by JETRO.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1965

1966

1967

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1969

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2003

2004

Viet Nam Thailand Singapore Philippines Malaysia Indonesia

After the crisis

Before the crisis

After the Plaza Accord

Before the Plaza Accord

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4. Japan’s outward FDI inside Asia: the rise of China

Figure 11 Japan's outward FDI inside Asia (based on balance of payments basis, net flow, US$ million)

Sources: Prepared by JETRO from Ministry of Finance Balance of Payments Statistics and Bank of Japan foreign exchange rates

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

China Northeast Asia NIES ASEAN5 India

The rise of China: the entry

in the WTO

ASEANWas the

major host

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4. Japan’s outward FDI inside Asia: Resurgence of ASEAN, the so called “China olus one”

Figure 12 Japan's outward FDI inside Asia (based on balance of payments basis, net flow, US$ million)

Sources: Prepared by JETRO from Ministry of Finance Balance of Payments Statistics and Bank of Japan foreign exchange rates

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Singapore Thailand Indonesia Malaysia Philippines

The rise of Thailand under the China

plus one

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6. International expansion by Japanese SMEs

1. In the mid 1980s, SMEs who afforded enough had in human resources and capitals, went to overseas, in particular to ASEAN, exporting back goods to Japan.

2. SMEs have suffered from the decreasing demands. As a breakthrough in severe business environments, Japanese SMEs have advanced to operate in Asia, in order to participate in the production networks.

3. After the China’s entry in WTO in 2001, a large number of SMEs have advanced to China, seeking market.

4. SMEs have at least two overseas production sites; one in ASEAN and another in China.

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6. Perspective in further economic integrationn

1. Japan will increase investment in Japan; the so-called “return to Japan.”

2. Production and distribution networks have been self-organizing, meaning that Japan will continue outward FDI at high level.

3. But, the presence of Japan’s FDI in Asia will be down, because most of Japan’s FDIs are the expansion of existing facilities, meanwhile FDIs by other Asia are new investments.

4. Japan will increase FDIs in the new frontiers such as Vietnam, India, and other emerging economies.