One hundred ninety-sixth out of 196 countries. Just behind North Korea. That’s how Japan ranked in 2019 when the United Nations Conference on Trade and Development (UNCTAD) measured the cumulative stock of inward foreign direct investment (FDI) as a share of GDP. FDI ranges from foreign companies setting up new facilities to them buying domestic companies. What a shocking result considering the 20 years Tokyo has spent trying to increase its cumulative stock of FDI.
Unless policymakers understand why past efforts have failed, Tokyo is unlikely to realize the new goal it announced in June: to hike inward FDI to 12 percent of GDP by 2030. That would triple today’s ratio. The main hurdle is Japan’s impediments to carrying out the primary form of FDI, namely, foreign companies buying healthy ones to gain a built-in labor force, customer base, brand name, suppliers, and so forth. Typically, in a rich country, 80 percent of inward FDI takes the form of mergers and acquisitions (M&As). In Japan, it’s only 14 percent.
The dearth of inward FDI is one of the factors in Japan’s longstanding listless economy.
There are some changes in Japan creating the potential for improvement, but without a concerted effort by leaders in government and business, Japan will continue to lag. These pieces discuss why FDI is so low and assesses the prospects for real progress. English and Japanese
(For explanation of chart, see text)