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White Paper on International Economy and Trade 2012 (Part 2) Extending the Frontiers of Growth through Global Linkages | Policy Planning and Research Office Trade Policy Bureau Ministry of Economy, Trade and Industry [Date of Issue: 31/October/2012 No.0212-0867]

Date of Issue: 31/October/2012

White Paper on International Economy and Trade 2012 (Part 2)
Extending the Frontiers of Growth through Global Linkages

Policy Planning and Research Office
Trade Policy Bureau
Ministry of Economy, Trade and Industry

3-1 Widening overseas business operations and seizing growth opportunities

The offshore expansion of Japanese companies’ business operations is beginning to widen beyond the usual image of global supply chain development by manufacturing majors. Exports and foreign direct investment are spreading out as far as small and medium enterprises and medium-ranked businesses, while even in the non-manufacturing sector, which has previously been regarded as driven by domestic demand, firms in certain areas are now proactively engaged in offshore expansion (Figs 10 and 11). Geographically, the share of investment in North America and Europe is declining even as investment in China and elsewhere in Asia soars. Reflecting the growing importance of the Asian countries as regional markets, a marked offshore expansion has been underway in the wholesale and services industries, along with wholesale functions in the manufacturing industry.

Fig. 10 No. of local operations offshore by industry Fig. 11 No. of companies with offshore subsidiaries (manufacturing industry; by payroll scale) Back in Japan, with businesses strongly aware of the country’s deteriorating business environment, currently characterized by six major difficulties, and a growing trend toward foreign direct investment (FDI) among Japanese firms that includes offshore M&As, the potential hollowing-out of industry is causing increasing concern. FDI and domestic business activities are generally seen as complementary rather than as substitutes for each other, and at this stage, there is little clear evidence of FDI linking to a drop in domestic production or employment. However, we also need to be aware that if the growth capacity of the domestic economy diminishes without a greater shift to new job opportunities, the fear that domestic industry could hollow out as domestic business activities are taken offshore could well become a reality. At the same time, offshore expansion can also boost the productivity of domestic business and promote innovation thanks to factors such as the more efficient allocation of in-house resources, technology and knowhow ripple effects and greater R&D incentive. Widening the scope of offshore expansion to include more types and scales of businesses in the future could create new growth opportunities.

3.2 Possibilities for the offshore expansion of the service industry

Looking specifically at the service industry, the value of both exports and imports is still limited compared to other countries, and on in terms of the balance of payments, industry remains in the red. However, that deficit is on the decline and the balance is already back in the black for Asia, so signs of change are certainly emerging (Fig. 12). In recent years, some areas of Japan’s service industry have gained a solid reputation offshore by using unique Japanese values to differentiate themselves. There is clearly room for Japan’s service industry to communicate offshore the intangible value which it has built up over the years in the form of knowhow and brands. The added value and competitive advantage of products could be boosted by linking service functions and the manufacturing industry.

Fig. 12 Trends in the services balance of payments with key countries 3.3 German and Korean efforts to improve the business environment

Feeding the offshore expansion of business operations into domestic growth capacity requires improving the domestic business environment. German and Korean initiatives offer some useful lessons in this regard. Rather than simply enjoying the merits of the single European market with its absence of exchange risk, Germany has worked to advance business conditions by, for example, reforming its labor market, lowering corporate tax and promoting R&D, contributing to the greater competitiveness of German firms. Korea too is actively supporting the offshore business operations of domestic firms, including not only large firms but also small and medium enterprises, helping to increase their presence in international markets. Korea has also boosted domestic business conditions by reducing corporate tax, concluding free trade agreements and promoting startups, as well as actively supporting the upgrading of domestic industry. Japan is working to improve domestic business conditions by promoting economic partnerships and offering incentives to firms setting up in Japan, while the five percent cut in the effective corporate tax rate as part of the FY2011 tax reforms was designed to boost the competitiveness of Japanese firms. Other countries are also advancing various initiatives apart from these from which Japan stands to learn much.

4.1 Developing the trade and investment environment to support efforts by Japanese business

To further strengthen the links between the Japanese economy and the global economy and capture offshore demand, Japan needs to develop its trade and investment environment through, for example, the pursuit of free trade agreements and economic partnership agreements and global- and regional-scale rule formation through vehicles such as the World Trade Organization.

4.2 Offshore business expansion support geared to changing needs

Of the various aspects of foreign demand, it remains vital to address the demand for infrastructure development in Asia and other emerging markets by pursuing package-type infrastructure development in overseas markets as a means of linking other countries’ growth to Japanese growth. ‘Cool Japan’ business, which takes advantage of the attractiveness of the country fostered through Japan’s traditions and culture, could also be further developed overseas as a new growth engine for the Japanese economy.

In recent years, small and medium enterprises have been expanding their offshore business operations, but support measures need to be developed to lower the hurdles to launching such operations, while global human resources need to be secured and developed to counter the current shortfall of which companies are complaining.

4.3 Immediate steps to boost Japan’s competitiveness as a business location

As well as widening growth opportunities offshore, Japan also needs to strengthen its competitiveness as a business location. To that end, in addition to the lower corporate tax rate introduced as of 2012, global companies need to be encouraged to locate themselves in Japan in order to establish Japan as an Asian hub, and steps must be taken to bolster locational subsidies.

Over the medium- to long term, it will be vital to develop problem-solving industries (health care, child raising services, medical equipment, energy efficiency), creative industries (tourism, culture) and leading-edge industries (next-generation cars, aircraft and space industries) as new growth areas that will lead the Japanese economy.

Conclusion: Modern significance of Japan as a nation built on trade

These days Japan is often described as a nation built on trade. This concept originally emerged as part of the discussion on the direction Japan’s rehabilitation effort would take after the war, and the emphasis at the time was on resolving the problems of one economy on a world scale. ‘One economy’s problems’ can of course change over time. The 1976 White Paper on International Trade looks in-depth at this concept of a nation built on trade, noting the stable development of trade as essential to the stable development of the Japanese economy and the improvement of national living standards. It also argues that, as a nation built on trade, Japan needs to respond dynamically to trends in the domestic and international economies and to achieve a more sophisticated international division of labor.

The year 2011 proved to be exceptionally harsh in terms of trade conditions, but even so, moves to communicate Japan’s unique value offshore through goods and services and build growth capacity into the Japanese economy shifted onto a wider base. We hope that this year’s White Paper will assist in deepening understanding of the modern significance of being a nation built on trade.

(original article : Japanese)

(For the Japanese version of this article)

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