Imitated or ignored? Foreign Firms in Japan

Inward foreign direct investment (FDI) has often been touted as a possible source of economic growth for Japan. For years, economists have argued that an influx of foreign capital and operations would have a positive effect, not only due to a direct increase in competition, but also as a result of the more indirect effects of knowledge spillovers from foreign firms to domestic competitors. To the extent that some foreign firms had superior techniques that enabled them to take market share away from indigenous Japanese firms, it was hoped that this competitive pressure would induce Japanese firms to emulate them, just as American and European companies have felt compelled to emulate the best practices of foreign firms coming to their soil.

Inward FDI into Japan is so low— standing at one-third the level of Korea and China, and one-tenth the level of OECD countries—that promoting it would seem to be a case of “low hanging fruit.” Little wonder that the Abe Cabinet has set an official target of doubling inward FDI to ¥35 trillion ($330 billion) by the year 2020.