Japan External Trade Organization
Part I: TRENDS IN GLOBAL FOREIGN DIRECT INVESTMENT
1.
Global Foreign Direct Investment Rises 28.3% from Prior Year to
Jump Straight to US$300 Billion Level
2.
Rising FDI Inflow of Developing Countries Spurred by Regional
Economies and Production Close to Consumption
3.
Japanese Foreign Direct Investment Outflow in Manufacturing
Industries Sets New Record for First Time in Six Years
4.
Fears of Liberalization Pull Backs in Some East Asian Countries
5.
FDI Inflow in Manufacturing Industries in Japan Sluggish in
FY1995 Due to High Value of Yen
6.
Japan as an Attractive Investment Market
7.
Japan Pressed To Take Initiative in Establishing International
Rules for Investment
Part II: FOREIGN DIRECT INVESTMENT BY COUNTRY/REGION
1.
North America - Rapid Growth of Foreign Direct Investment in the
U.S. and Canada
2.
Latin America - Foreign Direct Investment Rides Out Financial
Crisis
3.
Asia and Oceania - Foreign Investment by Asian NIEs and ASEAN in
Full Gear
4. Europe
(1) Western Europe -
Growing Dispersion of Investment from Previous Orientation Inside
Region
(2)
Central Eastern Europe and Russia
(3)
Russia - Gradual Establishment of Legal Framework
5.
Middle East and Africa
(1) Middle
East - Peace Process Governing Future Investment
(2)
Africa - Growing Number of Countries Receiving Investment
Tables
Table 1: Outflow of Foreign Direct
Investment by Major Country/Region (Based on Balance of Payments)
Table 2: Megadeals Among Major
Western Corporations (1995)
Table 3-1: Top Five Countries in
Foreign Direct Investment Outflow
Table
3-2: Top Five Countries in Foreign Direct Investment Inflow
Table 4: Regional Shares of
Cross-Border M&As
Table 5: FDI Outflow and Inflow
of Asian NIEs (Based on Balance of Payments)
Table 6: FDI Inflow in ASEAN 4,
Latin America, and Central Europe (Based on Balance of Payments)
Table 7: FDI Inflow in Major
Countries/Regions (Based on Balance of Payments)
Table 8: Asian Policies
Protecting Local Industries
Table 9: Trends in Japan's
Foreign Direct Investment Outflow (by Sector/Region)
Table 10: Trends in Shares of
Japan's Foreign Direct Investment Outflow
Table 11: Direct Investment
Matrix (Share) (1986, 1990, 1995)
Table 12: Japanese M&As
Targeting Foreign Companies (by Region)
Table 13: Total Investment by
Japanese Affiliates (Manufacturing Industries) by Region in
FY1994
Table 14: Direct Investment
Matrix (Share) (1986, 1990, 1995)
Table 15: Rise in Real Wages in
East Asia
Table 16: Overseas Expansion of
Japanese Companies in East Asia
Table 17: Direct Investment in
Japan by Sector/Half Year
Table 18: Trends in Exchange
Rate of U.S. Dollar
Table 19: Direct Investment in
Japan by Sector
Table 20: Changes in Market
Environment in Japanese Pharmaceutical Industry
Table 21: Main Cases of FDI
Inflow in Japan (Chemical Industry)
Table 22: Share of Main Sectors
in Total Direct Investment in Japan by Country/Region
Table 23: Main FDI Inflow Cases
in Japan from Asian Companies
Table 24: Comparison of Sizes
of Economies of Japan and Rest of East Asia
Table 25: Level of Wages and
Cost of Manufacturing Sites in Japan
Table 26: Problems in Entry
into Japanese Market and Problems After Entry
Table 27: Average Monthly Wages
of White Collar Workers
Table 29: Japan's Direct
Investment Outflows and Inflows
Fig 1: Trends in Total Investment by
Japanese Affiliates (Manufacturing Industries) (By Region)
Fig 2: Scheme of Intra-Asian
Networks Built with Investment by Japanese Affiliates
Global foreign direct investment outflow (balance of payments, flow based) rose 28.3 percent from the previous year to US$317.4 billion in 1995 thereby crossing the watershed US$300 billion mark for the first time in history. Since bottoming out in 1992, global investment has risen for three straight years (Table 1).
The main reasons for the increase can be found in (1) the huge two-way investment between the U.S. and the EU, (2) the renewed activity in M&As, behind this, (3) the global scale industrial restructuring of the four fields of power, telecommunications, pharmaceuticals and other chemicals, and financing (Table 2), and (4) strong economic performance enabling this massive investment and, in turn, the recovery in corporate earnings.
(1) The tone for the increase in scale of global foreign direct investment in 1995 was set by three countries: the U.S., which was the top investing nation (investment rising 75.4% from previous year), the second placed UK (up 42.6%), and the third placed Germany (up 109.0%) (Table 3). Japan ranked fourth in terms of global foreign direct investment in 1995.
(2) Viewing the global foreign direct investment, the industrialized nations accounted for about eight-tenths of the FDI outflow (investment made in other countries) and about six-tenths of the FDI inflow (investment received) (UNCTAD estimates). The majority of the direct investment made in the industrialized nations took the form of M&As. Examining global M&As in this light, 89.4 percent of the M&As, on a value basis, was by companies in the industrialized nations in 1995 and 70.3 percent of the M&As were performed in those countries (Table 4). This M&A form of direct investment served to speed the restructuring of global industry.
(3) The developing countries were also active in foreign direct investment. In particular, the three Asian Newly Industrialized Economies (NIEs) of the Republic of Korea, Taiwan, and Singapore (Hong Kong does not release its statistics) played important roles as suppliers of investment. These three economies are considered to have provided about half of the FDI outflow of the developing countries in 1995. The three economies made US$10.1 billion in FDI outflow and received US$10.2 billion in FDI inflow (Table 5). Behind this are the facts that, domestically, they are facing rising wages and a consequent weakening of their international competitiveness and, internationally, they are being fast caught up with by the nearby Association of Southeast Asian Nations (ASEAN) countries. They are accordingly being forced to aggressively invest overseas to ensure the survival of their industries. At the same time, they have to attract foreign investment to upgrade their industrial structures to a high tech orientation.
(4) A look at the developing countries receiving foreign direct investment shows that in 1995 investment in the four main Latin American countries of Mexico, Brazil, Argentina, and Chile and investment in the transitional economies, primarily the four major Central European countries, were on a par with investment in the four ASEAN countries other than Singapore (Table 6). In Asia, Latin America, and Central Europe, there was an increase in the flow of direct investment to the developing countries with growth potential. This is extremely beneficial for the development of the economy.
Direct investment by the world in the developing countries rose 14.5 percent in 1995 to US$99.7 billion (UNCTAD estimates). Asia received the largest share of this. More than six-tenths of the overall investment in the developing countries went to East Asia alone (Table 7).
In the era of borderless expansion of markets, a characterizing feature of the foreign direct investment in the manufacturing industries has been production in proximity to the markets of consumption. The best way to quickly grasp changes in demand and reflect them back into production is to produce near to the markets. Each of the world's regional economies has a number of developing countries close by considered promising as such production bases. For the Asia-Pacific economy, China (receiving US$37.7 billion in investment in 1995) and the ASEAN 4 (US$13.8 billion) are expected to serve as such production bases, while for North America the four major Latin American nations (US$14.8 billion) and for Europe the transitional economies (three former East European countries, US$10.9 billion) are expected to perform these functions. These countries are indeed receiving a greater amount of investment (Table 6).
(1) "East Asia" (eight economies excluding Hong Kong for which statistics were not available) itself should more realistically be considered broken down into three parts in view of the characteristics of the markets, that is, first, the Asian NIEs, second, ASEAN, and, third, China. More specifically, in the first group, Hong Kong will be reintegrated into China proper, while Singapore is trying to integrate itself into the ASEAN economy. This leaves the Republic of Korea and Taiwan. These two economies are busy promoting their own companies so as to convert to high tech industrial structures. The second group, the ASEAN nations, would suffer from the handicap of small markets on an individual level and therefore is redoubling efforts to create a broader market in the region through aggressive introduction of foreign investment and bold steps to liberalize commerce and trade. China, the third piece, is adopting its own strategy for growth of its industries through a policy of selective promotion of foreign investment, using its vast potential domestic market as an incentive.
(2) The country receiving the most investment in the developing countries is China. In recent years, however, investment in China has slowed in growth. In 1993, investment surged ahead 146.6 percent from the previous year. In 1994, however, this fell to 22.8 percent and in 1995 11.7 percent. In this way, the flow of investment has gradually slowed. This was due to the abolition of some incentives for foreign investment in 1993 and the shift to a policy of selective promotion of foreign investment.
(3) While there has therefore been a breather in investment in China, investment in ASEAN has been leaping ahead. The five ASEAN nations, including Singapore, which is firmly positioning itself in the ASEAN region, received a total of US$20.8 billion in 1995 or 39.4 percent more than the previous year. However in 1996, even the ASEAN region started showing signs of a slowdown in economic growth and vacillation in some cases of liberalization (Table 8). It is necessary to watch what kind of repercussions this will have on the influx of FDI inflow in the future. Further, from the standpoint of recipients of investment, a considerable increase has been seen in the past few years in investment in Latin American and the transitional economies - all of which compete with the ASEAN region.
Japanese foreign direct investment outflow (based on statistics of investments notified to the Ministry of Finance) rose 23.5 percent from the previous year in fiscal 1995 to reach US$50.69 billion. This was equivalent to 75 percent of the peak level of fiscal 1989.
Dividing this into manufacturing and non-manufacturing industries, investment in the former rose by a wide 35.1 percent. In absolute terms, it grew to US$18.62 billion - exceeding the US$16.3 billion of the previous peak of fiscal 1989 and setting a new record for the first time in six years. Investment in the latter, however, while growing by a high 15.8 percent from the previous year, still only recovered to 62 percent of the peak level of fiscal 1989 in absolute terms. The trend continued in the first half of fiscal 1996 as well, and outflow of Japanese foreign direct investment in the manufacturing industries rose 77.5 percent from the same period of the previous year to US$11.5 billion. Investment in the non-manufacturing industries, however, while reaching US$12.4 billion, fell 16.8 percent from the same period of the previous fiscal term (Table 9).
(1) In fiscal 1995, the biggest recipient of Japanese investment was the U.S. (accounting for 43.8% share of overall investment). As a region, investment in East Asia came in second (23.2%). This, however, was about half of the investment in the U.S. Focusing on the manufacturing industries alone, however, the U.S. received 37.8 percent of the investment, while East Asia received 41.7 percent - a reversal of the shares (Table 10). This reversal has been seen since fiscal 1994. From that year on, the share of investment in East Asia in the manufacturing industries has been increasing.
(2) This being said, the share of Japan in the total investment received by East Asia from the world has been declining since the end of the 1980s (Table 11). This has been due, on the one hand, to the rise in investment within the region, in particular from the Asian NIEs, and on the other hand to the even greater rise in investment from outside the region - lured by the growth potential of East Asia.
(3) In Japan's foreign direct investment, there has been an increase in the number of M&As and investments through local procurement of funds. Looking first at the former, the number of Japanese M&As targeting foreign firms has been steadily climbing since 1993. Looking at this by region, M&As targeting American firms (76) and European firms (34) have been large in size, while M&As targeting Asian companies (80) have been small both in terms of average value and average funds invested. The reason is believed to be that M&As by Japanese companies in Asia have by nature been less of "investments" and more of strengthening relations for securing sources of supply of products and consignment of production (Table 12).
(4) Regarding the latter, once Japanese manufacturing operations become firmly entrenched in their host countries and strengthen their earning power, they become more able to raise funds for investment locally. Data for fiscal 1994 shows that Japanese companies made US$13.8 billion in direct investment from their home countries and made US$13.6 billion in reinvestment for a total of US$27.4 billion in foreign investment (Table 13). Viewed by region, Asia received the most in terms of the ratio of reinvestment (receiving US$5.2 billion from Japan and reinvesting US$7.0 billion, Fig. 1).
East Asia received US$108.4 billion in investment from the world in 1995 (based on national statistics of individual countries) (Table 14). Of this, 37.1 percent was intra-regional investment. This was not that much different from 1990 (36.6%). On the other hand, the share of investment from the U.S. rose somewhat from the 10.8 percent of 1990 to 12.2 percent in 1995, while the share of Japan dropped sharply from 27.5 percent to 16.5 percent (Table 11).
When discussing East Asia, the mechanism of autonomous development is usually pointed to. It must be stressed again that just under four-tenths of the foreign direct investment is in fact from inside the region. Signs of corporate networking befitting the information age are starting to appear in East Asia as well (Fig. 2).
(1) As explained previously, in 1995 East Asia accounted for over six-tenths of the foreign direct investment received by the developing countries (UNCTAD estimates).
(2) The luster of economic growth in East Asia, however, is beginning to fade. The Asian NIEs and the ASEAN nations are facing shortages of either overall labor or, in some cases, that of skilled labor. There are visible signs of trouble with rising wages and severe shortages of technicians (Table 15). Further, the electronics and electrical machinery industries (in particular the semiconductor industry), which drove growth in the past, are now facing a global slump in demand and a resultant surplus in supply capacity. This is leading directly to sluggish exports in East Asia. In addition, the way to correct the growing external imbalance is to lower exchange rates, but the governments concerned are unable to consider this as a policy option due to fears over aggravating domestic inflation.
(3) Confronted with such growth-limiting factors, the countries of East Asia are all starting to try to convert to higher added-value industries - each by their own unique approaches. The Republic of Korea, Taiwan, and Singapore are on the one hand strengthening their foreign direct investment and on the other hand changing over from traditional industries to high-tech industries in an attempt to cut through their problems. The ASEAN nations are becoming more aggressive in encouraging the influx of foreign investment and technology and broadening their markets, while China has shifted to a policy of selective promotion of foreign investment so as to convert to a more sophisticated industrial structure.
(4) Attempts to convert to necessarily more sophisticated industrial structures are naturally accompanied with considerable pain. Indonesia, China, and other countries which have up until just recently been pursuing a policy of liberalization have been either retracting or showing signs of retracting their previous promises in the areas of commercial and trade policies and foreign investment policies, due to the hardship these place on local industries (Table 8). These are good examples of how such pain can cause changes in policy stances.
(5) Japanese companies have displayed remarkable adaptability in the process of industrial restructuring in Asia. Typical examples of this are the formation of networks in the household electrical appliance industry and auto part industry in anticipation of an enlarged ASEAN market and the establishment of numerous factories and ventures in different regions of China, with a view toward securing a piece of the domestic market and the growth potential there (Table 16).
Direct investment by other countries in Japan (based on investments notified to the Ministry of Finance) rose 12.1 percent in number from the previous year to 1,272, but dropped 7.6 percent in value to US$3.83 billion. The in-out imbalance of Japan in the field of direct investment therefore failed to be corrected (later Table 29). There were two features characterizing direct investment in Japan in fiscal 1995. The first, looking at the number of investments, was the accelerated pitch of investment in Japan in the second half of the year compared with the first. The second, viewing the year in terms of value, was the large decline in investment in the manufacturing sector but the steady increase in the non-manufacturing sector (however, in the first half of fiscal 1996, investment in the manufacturing sector increased in reaction to the correction of the value of the yen, Table 17).
(1)The above two features of fiscal 1995 directly reflect the high value of the yen (Table 18) and the high cost structure of the Japanese economy. In particular, the decline in investment in the manufacturing industries can be considered to be a result of the deterioration of the production environment in Japan for foreign firms. In fact, fiscal 1995 saw a huge drop in foreign investment in electrical machinery and transport equipment, which used to be Japan's prime export industries, compared with the previous fiscal year (Table 19).
(2) Conversely, there were manufacturing industries in which investment rose, that is, chemicals, food, and textiles (Table 19). These industries were either in fields where the market environment surrounding competing Japanese companies is rapidly changing (Table 20, Table 21) or in fields governed by consumer preferences or fashions and thereby best suited to production in the consumption area. Foreign firms have seized the opportunity to invest in Japan presented by these changes in the Japanese market.
(3) Direct investment in Japan in the non-manufacturing sector (based on fiscal years) bottomed out in fiscal 1993 and has been steadily recovering and rising every year since. There has been a visible rise in foreign investment in the fields of financing and insurance and in transportation, communications, and software (Table 19). Transportation and communications compared to financing and insurance account for extremely small shares of FDI in the "non-manufacturing sector." Full-scale entry of foreign capital into these fields has yet to come.
(4) Looking at the direct investment made by foreign firms in Japan by country/region, a clear difference can be discerned in the nature and object of the investments. North America accounted for the largest share of the investment (48.4%). This was mainly investment from the U.S. in financing, insurance, and software. In contrast, the investment from Europe (34.3%) was mostly in the manufacturing industries, in particular, chemicals. On the other hand, while still small in overall share, recently there has been a notable rise in investment from Asia, in particular, the Republic of Korea and Taiwan (Table 22).
(5) The direct investments in Japan from the rest of Asia include a notable number of cases made with some unique motivations. More specifically, investments have been made in an attempt to acquire Japanese technology through stronger ties with Japanese companies. This was the driving force behind the direct investment made by Malaysia in Japan (case of Premier Choice Co.) (Table 23). Acquisitions of Japanese companies or tie-ups with Japanese companies for this purpose will probably increase in number in the future.
Foreign affiliates operating in Japan believe that Japan has future potential as an investment market. A JETRO survey (October to November 1996) found that 85.8 percent of foreign affiliates already operating in Japan were planning to expand their business in the Japanese market in the future (44.9%) or else maintain current business (40.9%).
When viewed as an investment market, Japan suffers from the handicap of a high cost structure, but is attractive in terms of the size of the market, the high per-capita purchasing power (Table 24), the state of infrastructure, and the availability of manpower (in particular, due to the recent increased mobility of manpower). Even as a regional base for Asia, Japan is more than competitive than rivals such as Hong Kong and Singapore.
(1) It is easy to speak of Japan as a single investment market, but in fact the environment differs between the Tokyo metropolitan area, which functions as a sales market, and the local regions, which function as production bases. In fact, there are major differences between the Tokyo metropolitan area and local regions in terms of wages and costs of acquiring land (Table 25). Due to these differences, while 96.4 percent of the offices of foreign affiliates in Japan are concentrated in one of the three large economic areas of metropolitan Tokyo, Kyoto-Osaka-Kobe, or Chukyo, 47.4 percent of the factories are located outside of these areas. The interpretation to be drawn from this is that foreign affiliates in Japan recognize the advantages of the local regions as production bases. This preference toward the local regions as sites for foreign-owned can be expected to increase further in the future.
(2) The above JETRO survey also found 67.0 percent of the respondents indicating that foreign affiliates in Japan encounter more problems after rather than before establishment. This is different from the former image of Japan as being closed, that is, problems in barriers to investment in the Japanese market at the time of establishment (Table 26). The widespread perception is that there are problems in the Japanese market after entry. Specifically, the high business costs, the existence of Japanese-style business practices, and legal and administrative regulations, etc. continue to be the focus of complaints.
(3) Further, examination of the findings of the JETRO survey show that 45.4 percent of the parent companies of foreign affiliates in Japan control operations in the Asian region from the home country of the parent company and 7.8 percent and 15.7 percent from Hong Kong or Singapore respectively. On the other hand, 24.9 percent were controlling operations from Japan. In short, over nine-tenths of the parent companies of foreign affiliates in Japan had their regional headquarters for Asian operations located either in their home countries or in Japan, Singapore, or Hong Kong.
(4) Looking at this from the viewpoint of the functions of a regional headquarters, Hong Kong and Singapore, viewed as competitors of Japan, have seen conditions deteriorate in the past few years due to soaring wages of white collar workers and office rents (Table 27). Japan, on the other hand, has kept a lid on costs in these areas and, further, ha adopted a policy of deregulation and thereby has conversely improved in competitiveness in the areas of international telephone rates and other communication costs, air fares, etc.
What stance should Japan, an investment superpower, take in the midst of these changes in foreign direct investment? Five points will be stressed here:
(1) The need is rising for establishment of global rules for foreign direct investment. The negotiations at the OECD over a Multilateral Agreement on Investment (MAI) supports this contention. Similar attempts are being made at APEC and in part at the WTO as well. Japan should make aggressive use of all such forums, whether at the OECD, APEC, or the WTO, to promote the establishment of international rules for investment so as to protect and ensure stable environments for foreign direct investment and further liberalize foreign investment systems and their administration.
(2) When establishing these new rules, the opinions of private sector companies should be reflected in the rules as much as possible. In this sense, the important role played by representatives of private sector industry in the rule-making at APEC is an extremely good precedent.
Further, the phenomenon of liberalization pull backs has been seen in the mid-1990s in some East Asian countries which had previously adhered to a strict policy of liberalization. Now is the time that careful attention be paid so that, above all, these regressive steps by these countries not be allowed as exceptions to future rules for liberalization.
(3) Foreign direct investment, particularly among the industrialized nations, should be based on the principle of reciprocity. In this regard, the massive in-out imbalance suffered by Japan in the balance of direct investment (Table 29) must be redressed. Specifically, Japan must strive to change itself so that it appears more attractive to foreign firms as an investment market. It has much to do, such as correcting its high cost structure, decisively deregulating its financial, distribution, communications, and other service sectors, etc., correcting some specific Japanese business practices, and globalizing the organization of its companies. At the same time, greater effort should be directed to promoting investment in Japan so as to correct the imbalance.
(4) Global foreign direct investment, whether in the industrialized nations or in the developing countries (for example, case of introduction of foreign investment through privatization), is increasingly taking the form of M&As. Japanese companies must work to familiarize themselves more with western-style management and ownership practices.
(5) That the Japanese economy is being forced to restructure itself is clear today. On the other hand, the rest of East Asia, where Japanese manufacturers are moving their production bases to, is undergoing similar changes in its economic structure. The economies of Japan and the rest of East Asia interact with each other. When Japan restructures its own industries, it is essential to consider all of East Asia when adopting policies for promoting investment abroad and attracting foreign investment.
[1] Trends in Direct Investment
Foreign direct investment in the U.S. (flow: difference of
balance at end of each year) rose 61.4 percent from the previous
year in 1995 to US$57.7 billion due mainly to the favorable
performance of the U.S. economy in 1995 and the depreciation of
the U.S. dollar with respect to the currencies of the main
countries investing there. On the other hand, U.S. direct
investment abroad in the end of 1995 climbed 59.6 percent from
the end of the previous year to US$90.6 billion aided by improved
corporate earnings in the U.S. and other factors. Direct
investment by other countries in Canada rose 46.2 percent in 1995
to C$15.3 billion as a result of the reinvested earnings by
foreign subsidiaries in Canada. Canadian direct investment abroad
fell across the board in the main industries and dropped overall
33.7 percent to C$11.0 billion.
[2] Changes in Investment Environment
Corporate earnings rose due to the continued strong performance
of the U.S. economy. There was consequently greater activity both
in American firms' investment abroad and foreign firms'
investment in the U.S. In particular, a number of M&As etc.
were pushed through in the communications and media industries
due to changes in the regulatory environment and in the
pharmaceuticals industry which is currently being globally
restructured. The U.S. government is stimulating domestic
competition so as to improve the competitiveness of American
firms and is taking steps to create the environment for use of
this competitive strength overseas. The Canadian government, on
the other hand, is working to attract foreign investment such as
with the establishment of a new agency called, "Investment
Parterships Canada," and is publicizing the superiority of
its investment environment to other countries.
[3] Direct Investment With Japan
Japanese direct investment in the U.S. (flow) declined 4.8
percent in 1995 to US$4.1 billion due mainly to the net outflow
of funds from American subsidiaries to the parent firms. While
new investments by Japanese companies have fallen, investment has
been increasing in the form of expansion of existing factories,
acquisitions, and other reinvested earnings. U.S. direct
investment in Japan on the other hand fell across the board in
commerce, oil, manufacturing, etc. and dropped 54.8 percent in
that year to US$2.5 billion. Japanese direct investment in Canada
fell sharply in automobiles, construction, chemicals, etc. and
tumbled 63.2 percent overall in 1995 to C$150 million. Canadian
investment in Japan shifted from a net outflow of C$600 million
the previous year to a net inflow of C$372 million (due to return
of capital to Canada).
Source: Survey of Current Business, U.S. Commerce Department.
Source: Canada's International Investment Position, Canadian Bureau of Statistics.
[1] Trends in Direct Investment
Foreign direct investment in the major countries of Latin America
has been rising steadily since 1988 due to the investment made by
American and European companies to take advantage of debt equity
swap schemes and privatization. In anticipation of the
liberalization and stable growth of the Latin American market,
further, American and European companies have actively invested
in a broad range of fields such as automobiles and auto parts,
resources and energy, information and communications, consumer
goods, and commerce. At the same time, the progress in formation
of broader regional economies through integration has been
accompanied by greater intraregional investment by Latin American
multinationals and increased investment by Asian, mostly South
Korean, firms as well. Foreign direct investment by the private
sector in Latin America (net value based on international balance
of payments) fell sharply in 1995 from the previous year in
Mexico, Argentina, Peru, and elsewhere, but continued rising in
Brazil, Colombia, Chile, Venezuela, etc. so only edged down 2.6
percent to US$17.692 billion. With Mexico and other countries
poised for economic recovery and Brazil and others making
progress in privatization, foreign direct investment in Latin
America should continue at a high level in the future as well.
[2] Changes in Investment Environment
Due to the commitment of Latin America to liberalization and
opening up of markets, macroeconomic stability, and the
consequent ability to formulate medium-term investment plans,
American and European companies have been forging strategic
tie-ups with Latin American firms and entering the growing Latin
American integrated market. The economy of Latin America has
sustained steady growth since 1991. In 1994, it grew 5.1 percent,
the highest growth since 1980, but in 1995 fell to 0.7 percent
growth. The average growth for the region after excluding Mexico
and Argentina, both of which were hit hard by financial crises,
reached 4.4 percent. Inflation continued to be calmed with the
average rate of inflation falling from the 17.6 percent of 1994
to 16.7 percent in 1995. The Inter-American Development Bank
projects growth of 3 percent and inflation of 11 percent in 1996.
[3] Direct Investment by Japan
Direct investment by Japan in Latin America, according to
notifications to the Ministry of Finance, fell 25.9 percent in
fiscal 1995 to US$3.877 billion. The cumulative amount of direct
investment in Latin America as of the end of fiscal 1995 stood at
US$59.026 billion or 11.5 percent of the cumulative amount of all
Japanese foreign direct investment.
Investment in Latin America soared 55.2 percent in fiscal 1994
from fiscal 1993 due in part to the auto related investments in
Mexico accompanying the start of NAFTA and the loans to Brazil
attendant upon the merger of a shipbuilding subsidiary, but was
stagnant as a whole in fiscal 1995 due to the lull in NAFTA
related investment, and the Mexican currency crisis and the
subsequent deterioration of economic conditions there. On the
other hand, Japanese companies are reassessing the value of the
Latin American market and are adopting new methods of investment
such as tie-ups with their subsidiaries in the U.S.
[1] Trends in Direct Investment
Foreign investment in China, in terms of contract value, peaked
in 1993, then fell in 1994. While recovering 10.4 percent in
1995, it has yet to return to the 1993 level. In investment in
the ASEAN region, which recovered strongly in 1994, there was a
decline in investment in the Philippines and Malaysia and record
highs were set in investment in Thailand, Indonesia, and Vietnam
in 1995. Investment in the Asian NIEs was particularly brisk.
Investment from Japan, Europe, and the U.S. grew strongly in the
Republic of Korea, Taiwan, and Singapore - in all of which record
highs were recorded. Hong Kong also enjoyed relatively smooth
growth in investment. In Southwest Asia, India saw incoming
foreign investment balloon 42-fold in the five years since its
1991 economic reforms. Investment also rose sharply in Pakistan
(up 2.5-fold in FY1995 from previous year) and Bangladesh (up
3.3-fold); in both cases, record highs were set. Investment in
Australia climbed 39.0 percent in 1994/1995 compared with the
same period of the previous year due to the assessment by western
firms of its importance as a bridgehead to Asia. Investment in
Mongolia held at about the same level as the previous year. North
Korea saw the flow of investment stop after the 1993 crisis over
its nuclear weapons program and has had zero receipts in the
three years since. On the other hand, foreign investment by ASEAN
countries and the Asian NIEs has been gearing up in earnest. In
particular, ASEAN countries and the Asian NIEs are the largest
investors in Vietnam, Cambodia, Laos and Myanmar (with Taiwan
being the biggest investor in Vietnam, Malaysia the biggest in
Cambodia, Thailand the biggest in Laos, and Singapore the biggest
in Myanmar). Taiwanese investment in China fell for the first
time, however.
[2] Changes in Investment Environment
China, as in the previous year, speeded up its reassessment of
incentives for foreign investment to meet the criteria of
nondiscriminatory treatment of domestic and foreign nationals
required for entry into the WTO, and also made revisions in its
tax code. On the other hand, it came out with a policy of
encouraging foreign investment in its inland regions with the aim
of reducing regional economic differences in the country. Some of
the ASEAN countries, despite the general movement toward
deregulation and liberalization, were seen to take steps running
counter to liberalization and to exercise greater selectivity.
Indonesia saw a problem arise with its concept of a national car,
which eventually escalated to a complaint before the WTO, and
political riots in Jakarta in July 1996. This has spread
uncertainty about the general elections scheduled for the end of
May 1997. Malaysia, which suffers from labor shortages, has
limited entry of labor intensive industries and is becoming more
selective of the industries it promotes, for example, offering
unprecedented incentives for investment in the information and
communications sector. Vietnam has been pushing forward with the
establishment of a proper legal framework for investment, for
example, amending its investment laws, but mercurial changes in
policies and the disregard for business profitability in its
foreign investment policies have forced some foreign affiliates
to modify their initial plans. On the other hand, steps have been
taken to redress regional imbalances such as offering special
benefits for investments in underdeveloped areas. Thailand has
also been making incentives for companies setting up operations
in Zone 3 that is, areas most distant from Bangkok, more generous
since September 1995. Hong Kong is considered by most to be a
positive environment for investment, judging from the findings of
questionnaire surveys run by the government there and the
Japanese and American chambers of commerce, but much clamor was
raised over the problem of soaring labor costs and office rents.
In Myanmar the system of dual exchange rates, considered by many
the greatest obstacle to investment, was revised in December
1995. Cambodia and Laos in turn have been deregulating faster
through the enactment and revision of the 1994 investment laws,
etc. Mongolia also took speedier action in opening up its economy
along with the change of administrations in July 1996. In April
of the same year, direct flights were started between Japan and
Mongolia. The investment environment is gradually improving
there.
[3] Direct Investment by Japan
Viewing the statistics of the recipient countries, investment by
Japan in the countries of Asia was generally steady in 1995 in
all but a few cases such as the Republic of Korea. Investment in
China increased in the electrical machinery sector and in the
inland regions and as a result rose 71 percent in value from the
previous year. Investment in the ASEAN region (except Brunei)
rose from the prior year in all member states. Thailand, in which
Japan led in terms of investment in 1994 and 1995, was the site
of numerous large scale projects and recorded a 3.1-fold gain in
investment. Indonesia greatly improved the investment environment
for small and medium enterprises by its 1994 deregulation and
received 2.4-times the investment of the year before. In the
Asian NIEs, there was strong investment in Taiwan in the
electronics and electrical machinery sectors and in Singapore in
electronics and petrochemicals. Steady growths of 45.6 percent
and 26.1 percent were recorded there, respectively. On the other
hand, investment in the Republic of Korea and Hong Kong declined
slightly. India registered a 3.7-fold gain in investment, but
three-quarters of the overall investment was due to an NTT
project for laying a regional telephone network. On the other
hand, in Oceania, investment in both Australia and New Zealand
fell.
(1) Western Europe - Growing Dispersion of Investment from Previous Orientation Inside Region
[1] Trends in Direct Investment
Foreign direct investment by European Union countries was strong
as a whole, but there was a lull in investment by the EU in Asia.
This, coupled with the large rise in investment in Central and
Eastern Europe, resulted in Central and Eastern Europe rising to
second place after the U.S. as EU investment targets.
Germany has been increasing its foreign investment every year, but has seen domestic investment falter. The difference between foreign and domestic investment has been widening. Foreign investment climbed sharply in 1995 as well. This has led to mounting fears of a gutting of German industry. The government has come out with a strong stance to deal with this. The UK on the other hand has drawn investment from the U.S. and Japan, of course, and also from other countries within the EU, reflecting the improvement in the investment environment there, such as the relatively low labor costs and the depreciation of the pound. European headquarters and distribution centers are in addition being set up in the Netherlands and Belgium.
[2] Changes in Investment Environment
The European economy has continued slowing due to the slump in
domestic demand. There are concerns over growing structural
unemployment. The governments of the member states, which give
priority to EU monetary union, have been pursuing a policy of
fiscal austerity for the purpose of reducing fiscal deficits.
Much about the issue of currency union remains uncertain, such as
the number of participating states and the terms of their
participation, but if realized this would promote the free
distribution of goods, money, and services inside the EU, and
stimulate their economies and competition. At the same time,
however, the fiscal austerity programs being followed by the
member states may well hamper the European economy in the future.
[3] Direct Investment between EU and Japan
In the late 1980s, Japanese investment in the EU soared as
companies sought to set up operations therefore in advance of
European market union scheduled for the end of 1992. Since 1992,
however, Japanese investment in the EU has been sluggish.
Investment by the EU in Japan, on the other hand, has been even
lower. This has caused an imbalance in investment with Japan (see
table).
Statistics on direct investments (proposal basis) from the
Ministry of Finance show that Japanese direct investment in the
EU remained at under six-tenths of the peak of fiscal 1989 in
fiscal 1995. Reaching US$8.0 billion, however, it was over 33
percent higher than fiscal 1994, thereby suggesting a recovery
was under way. In fiscal 1994, however, Japanese investment in
Asia surpassed investment in the EU in value for the first time
ever. The gap widened in 1995.
(2) Central Eastern Europe and Russia
[1] Trends in Direct Investment
Central and Eastern Europe, which achieved positive economic
growth in 1994 and has, with some exceptions, been enjoying
steady economic growth since then, has seen direct investment
from other countries rise along with the progress made in
privatization. In particular, the Czech Republic, Hungary, and
Poland, which successively joined the OECD since the end of 1995,
have received initial and additional investments from Germany and
the U.S. in the fields of automobiles, electrical machinery, etc.
The attraction of these countries lies in their political and
economic stability and geographic superiority and, further, their
low cost labor forces - good in quality and costing about
one-tenth that of Germany.
Some public services began being privatized in 1995.
Communications, for example, which had been ill equipped up until
then, offered the promise of high growth for infrastructural
investment. Western companies consequently embarked on
large-scale investments. The quieting of inflation has in
addition led to a rise in real income and growth in domestic
consumption. Investments aimed at a larger share of the domestic
market increased in food and beverage and other consumer good
fields.
[2] Japanese Investment in Central and Eastern Europe
The investments made by Japanese companies in Central and Eastern
Europe previously had been primarily through joint ventures or
Japanese affiliates based in Europe. Starting in 1996, however,
signs of full-scale investment by Japanese companies in the
manufacturing industries have started appearing such as with the
announcement by Matsushita Electric of a fully owned factory in
the Czech Republic and by Sony of a fully owned factory in
Slovakia.
A look at the state of investment in Central Europe in the
manufacturing industries shows Hungary in first place (US$370
million, 11 projects), followed by the Czech Republic (US$160
million, 8 projects) and Poland (US$83 million, 6 projects, JETRO
estimates).
(3) Russia - Gradual Establishment of Legal Framework
[1]Trends in Direct Investment
The number of foreign affiliates registered in Russia rose from
21,061 at the end of 1995 to 22,623 at the end of June 1996.
Cumulative investment reached US$4.7 billion as of the end of
June 1996. Of the companies, about 7,600 were actually operating.
First place among the investors was held by the U.S. at US$1.7
billion, followed by the UK at US$500 million, and Germany at
US$400 million. The largest field of investment was food
processing at US$1.0 billion, followed by fuel (US$700 million)
and distribution and food service (US$600 million).
The year 1996 being a year of presidential elections, etc.,
direct investment was sluggish, but a joint share company law,
commercial law, and other laws were set up and therefore the
legal framework for commercial activities under a market economy
started to form in earnest. Further, the republics and states
started offering their own incentives for foreign investment.
[2] Japanese Investment in Russia
Japanese investment in Russia reached US$154.13 million in 332
projects as of the end of June 1996. This was 3.3 percent of the
cumulative total of foreign direct investment. Two-thirds of the
projects, 219 in all, concentrated in the Far East.
The contracts have been signed for sharing the production of a
joint Japanese, American, and Russian project (Sakhalin 1) for
development of offshore oil and gas in Sakhalin and promise to
lead to greater investment in the future. Further, the Japanese
government plans to encourage investment by Japanese small and
medium sized enterprises, including Japanese affiliated joint
ventures, for projects assisted by the Far East-Eastern Siberian
Investment Fund - a joint effort with the EBRD (European Bank for
Reconstruction and Development).
(1) Middle East - Peace Process Governing Future Investment
[1] Trends in Direct Investment
Direct investment in the Middle East started growing as the mood
in the Middle East shifted to one of peace after the Madrid Peace
Conference of November 1991, but peaked in 1993 and retreated
somewhat in 1994 and 1995 (UN report on global investment).
Investment in Israel was particularly strong among the countries
involved in the peace process. Investment grew steadily aimed at
the sophisticated level of technology of that country. Investment
was also seen aimed at the housing shortage there. Egypt also saw
the flow of foreign investment, which had been stagnant at the
start of the 1990s, stabilize as activities by Islam extremists
quieted down. Turkey also found foreign investment turning upward
as the political and economic turmoil there died down.
[2] Changes in Investment Environment
Turkey and the EU launched a customs union in January 1996. In
November 1995, a conference of foreign ministers of the EU and 12
Mediterranean countries agreed on the idea of establishing a free
trade region encompassing them all by the year 2010. The EU has
already concluded free trade agreements with Tunisia, Morocco,
Israel, and other countries. If further progress is made in
establishment of a broader free trade zone in the EU and
Mediterranean region, including the tariff alliance with Turkey,
then new developments will be seen in investment activity in
Europe and the Middle East. On the other hand, a Mid East-North
Africa summit conference was started in 1994 as an American
initiative. The birth of the Netanyahu administration in Israel
and the accompanying step backward in the peace process prevented
any progress being made in the ideal of a unified Middle Eastern
market, including the Persian Gulf and North Africa, at the Cairo
Conference of 1996.
[3] Direct Investment by Japan
Japanese investment in the Middle East is entering a new phase as
a result of the enthusiasm of the Middle Eastern nations over
attracting investment. JAIDO (Japan International Development
Organization, joint stock company) set up a Gulf Cooperation
Council (GCC) industrial investment company in February 1996 as a
wholly owned subsidiary for the purpose of encouraging investment
in the Gulf states. This has promoted medium and small sized
projects in non-oil industries - something the GCC states have
long desired. Along with the organization for promotion of
investment in Saudi Arabia set up in May 1995, this is expected
to contribute to inviting investment from Japan in the Middle
East.
Direct investment in the Middle East in fiscal 1995 (not
including North Africa, but including Turkey), according to
statistics on investments notified to the Ministry of Finance,
totaled 24.7 billion yen in six projects or far lower than the
38.2 billion yen in 18 projects of the year before. Turkey's
share of direct investment entering the middle east region has
been rising in recent years, accounting for 40 percent in fiscal
1995.
(2) Africa - Growing Number of Countries Receiving Investment
[1] Trends in Direct Investment
Direct investment in sub-Saharan Africa remained at a high level
in both 1994 and 1995. Contributing to this were the new
stability of political systems in the African countries and the
effects of economic liberalization. The biggest recipients of
investment were Nigeria, Angola, Gabon, Cameroon, and other oil
producing countries. The shares of these countries, however, have
been declining since 1993. Investment has gradually been
redirected to other countries such as Botswana, the Ivory Coast,
and Ethiopia. Direct investment in Africa has in recent years
centered in the field of resource development, but political
stabilization and brisker private consumption have prompted
investments in the production and sale of consumer goods and
processing of primary goods. Investments from the Asian countries
have become more active with each passing year. The beneficiary
of this has been the southern region of Africa, in particular,
South Africa.
[2] Changes in Investment Environment
Behind the brisk pace of foreign investment has been the
political stabilization and progress made by the countries in the
region in improving the environment for foreign investment, for
example, the establishment of investment laws, the easing of
regulations on participation of foreign investors in securities
exchanges, and progress made in privatization. Zambia has already
privatized 140 of its scheduled 235 companies. Unilever, CDC,
Lonlo, and other leading British investors have participated in
this process. The privatization of Ashanti Goldfields by Ghana
created a ripple effect in the market contributing to the
revitalization of the Akra securities exchange.
[3] Direct Investment by Japan
Direct investment in Africa (including North Africa) by Japan
totaled 36.7 billion yen in 37 projects. Both the value and
number of the projects held at about the same level as the
previous year. Of this, as in other years, the majority of the
investment, 29.8 billion yen in 27 projects, was in Liberia, the
country providing flags of convenience for foreign shippers.
Investment in South Africa picked up in 1995 and 1996 and totaled
5.5 billion yen in four projects in fiscal 1995. South Africa
will probably drive the direct investment in Africa in the
future.
Notes: