Why Japan’s “capital isolation” will not be resolved just by establishing Nvidia’s research base and TSMC’s factory

Giant tech companies are expanding into Japan one after another, including the establishment of a new research base by image processing semiconductor giant Nvidia. Will this move become the spark for Japan’s economic regrowth?

Jensen Huang, CEO of U.S. semiconductor giant Nvidia, which is expected to have a market capitalization of over $1 trillion by mid-2023 and become one of the seven giant tech companies known as the “Magnificent Seven,” announced in December At the beginning, he met with Minister of Economy, Trade and Industry Yasutoshi Nishimura and announced his intention to establish a research and development base in Japan.

The Kishida administration said,Achieve the balance of inward direct investment (investments in Japanese companies including acquisitions, establishment of branches and factories in Japan, etc.) to 100 trillion yen by 2030.” and is promoting an “action plan” to attract human resources and funds from overseas.

Although it is not yet clear how successful this plan has been, there is no doubt that changes triggered by inward direct investment are becoming visible. A symbolic development is the tightening of employment and wage conditions reported in some regions.

Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), which is building a production base in Kikuyo Town, Kumamoto Prefecture, has a starting salary of 280,000 yen for university graduates (joining the company in spring 2023), which is 40% higher than the local average, and Maebashi City and Meiwa Town, Gunma Prefecture. Costco, an American membership-based wholesale and retail store located in the prefecture, attracted attention after it posted a job offer with an hourly wage of 1,500 yen or more, which is more than 1.5 times the prefecture’s minimum wage.

I hear that Japanese companies based in the above regions are already having difficulty securing human resources, and are forced to raise wages.

Although it is not strictly an inward direct investment, in Niseko, Hokkaido, which is popular with skiers and other foreign tourists visiting Japan, the hourly wage for part-time facility cleaning workers has been set at a maximum of 2,200 yen, which is twice the average hourly wage in the area. A common pattern can be seen in the sense that a region is forced to change in response to demand from overseas.

“3rd from bottom” out of 198 countries

Even though such hot topics continue, Japan’s inward direct investment stock still remains at a low level.unusually low compared to the rest of the world” in the situation.

That is why the government’s recent policy of reinforcing this can be said to be based on a very natural idea.

According to data from the United Nations Conference on Trade and Development (UNCTAD), as of the end of 2022, Japan’s inward direct investment stock is approximately 46 trillion yen, which is approximately 46 trillion yen, which is approximately 46 trillion yen (about 46 trillion yen). This is less than one-fifth of the 275 trillion yen.

By the way, when looking at this inward direct investment balance as a percentage of nominal GDP (gross domestic product), it is 5.4%, and the figure has been published.3rd from bottom out of 198 countriesbecomes.Below Japan are Nepal and Bangladesh, just above Japan is Burundi, and above that is North Korea.This is the order[Chart 1].

Diagram 1

[Chart 1]Inward direct investment stock of major countries as of the end of 2022 (unit: %, ratio of nominal GDP). Among the 38 member countries of the Organization for Economic Co-operation and Development (OECD), Japan ranks last.

Despite the unique barriers detailed below, Japan’s standards are markedly low by international standards.isolation of capitalThere is no doubt that the situation continues to be one where it cannot be helped even if people are ridiculed.

By the way, if the Kishida administration is able to achieve a stock of 100 trillion yen in inward direct investment by 2030 as intended, it is expected that the share of nominal GDP will rise to just under 20%. It will be ranked alongside Germany and Italy in the Group of Seven (G7) countries, so the sense of strangeness will lessen.

However, the average for the 38 member countries of the Organization for Economic Co-operation and Development (OECD) is in the 50% range, and if one wonders if just under 20% is appropriate, it seems that there is still room for improvement, and the government There is also a possibility that it will be born soon after achieving the goal.

Why isn’t direct investment in Japan increasing?

Although no definitive conclusion has been reached as to the reasons why Japan’s inward direct investment stock is lagging behind that of other major countries, there are some clues.

The Japan External Trade Organization (JETRO) published in March 2023, “Summary of the Results of the 2022 Business Situation Survey of Foreign-affiliated Companies,” is particularly useful.

Regarding “Items in particular that you would like to see improved when doing business in Japan,” the highest percentage of respondents answered “Securing human resources””Simplification and digitalization of administrative procedures””Communication in foreign languages”, and these three accounted for 50%.

Regarding “Securing human resources,” which had the highest response rate at 25.5%, specifically, “Difficulty securing human resources who can speak foreign languages ​​at a business level””There are very few technical personnel with English proficiency.””It is difficult to secure human resources in local cities (especially young people)” problems were pointed out.

As mentioned above, “communication in a foreign language” also accounted for 9.1% of respondents as an item they expected to improve, and the suspicion that Japanese people’s poor English proficiency is directly linked to the slump in inward direct investment cannot be denied. Can not.

By the way, regarding the issue of “securing human resources,” there was an opinion that “It is more difficult than ever to secure young human resources, not because we are a foreign-affiliated company, but just like domestic companies,” and the exact reality is that “Not only are there no human resources in the first place, but there are even fewer if you ask for English proficiency.’Maybe it should be expressed as ‘.

“Simplification and digitalization of administrative procedures”, which ranked second in terms of response rate at 14.4%, may be improved or resolved through government measures, but the lack of English proficiency and labor shortages will not be resolved overnight. do not.

In that respect, accepting immigrants from overseas seems to be a way to solve both the lack of English proficiency and the shortage of human resources, and it is understandable that there is a long-awaited opinion (although, of course, the problem is not that simple). .

There are few M&As of Japanese companies by foreign companies.

When considering direct investment in the form of foreign manufacturing companies building factories in Japan, hiring workers, and getting production activities back on track, the lack of English proficiency and human resources as pointed out in the previous section will likely become a barrier.

However, this does not mean “direct investment equals new factory construction.” Companies have two options for making direct investments overseas: establishing a new company in the country of investment or acquiring an existing company.

The former is called new investment (greenfield investment), and the latter is called cross-border M&A (brownfield investment).

In the case of new investment, there are significant costs associated with starting up the business, such as acquiring land and hiring local workers, as well as procuring parts and developing a sales network. In the case of cross-border M&A, such time and financial costs are significantly reduced.

In other words, if you acquire a Japanese company that already has workers available from the beginning, you will be less likely to face issues such as labor shortages and market development. This problem may also be alleviated to some extent.

However, direct investment in Japan is known for its lack of cross-border M&A.

Looking at global inward direct investment trends, cross-border M&A is more mainstream, and it definitely outnumbers new investment, especially in developed countries.. On the other hand, new investment exceeds cross-border M&A in many developing countries[Chart 2].

Diagram 2

[Chart 2]World inward direct investment composition. It shows the ratio of new investment (greenfield investment, blue) and cross-border M&A (orange) in major countries, developed countries, and developing countries.

In Japan’s inward direct investment, the ratio of new investment to cross-border M&A is about 6:4, which is higher than the developing country average of 8:2. This is the exact opposite of “4 to 6”.Japan has an image of being somewhere between a developing country and a developed country.

There may be reasons such as the significance and effects of M&A not being fully understood, but if I may add my own speculations, I would say that, just like the blockbuster TV drama and movie “Vulture,” acquisitions and restructuring by foreign capital This may be due to the fact that many business owners have allergic reactions to the situation.

Promotion of M&A in Japan remains weak

In order to achieve the goal of “100 trillion yen by 2030”, it is necessary to create a different trend than before, and to achieve this, there is a constant flagging that “not only new investment but also cross-border M&A” will be used. seems to have the effectiveness of

However, in the 23-page “Action Plan to Attract Human Resources and Funds from Overseas,” released by the government’s Council for the Promotion of Foreign Direct Investment in Japan in April, the phrase “M&A” appears in only two places.

These two sites also provide “Analysis of the effects of management improvement and reform in case studies of M&A with foreign companies and collaboration with foreign companies” and “Analysis of the effectiveness of business improvement and reform in case studies of M&A with foreign companies and M&A with foreign companies” and “Analysis of dissemination and awareness of local companies that are unaccustomed to collaboration with foreign companies and utilization of M&A with foreign companies.” It is only vaguely described as “advice and mentoring support from professionals,” and it is unclear what policies will actually be implemented.

From the perspective of overseas buyers, cross-border M&A can be a great way to save significant time and money if successful, but there are various barriers to business integration and the time and money required to select an acquiring company. The financial cost is also considerable.

What kind of policy measures will be taken to provide support in this regard? We need to dig deeper into the discussion without being satisfied with just moving in or attracting giant companies, as I mentioned at the beginning.

*Contributions are personal opinions and have no relation to the organization to which I belong.

Source: BusinessInsider

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