Ralph Paprzycki

Overcoming Economic Stagnation in Japan: The Importance of Total Factor Productivity and the Potential Contribution of Foreign Direct Investment

The 1990s have been a decade of minimal growth for the Japanese economy. Examining this record from a growth accounting perspective, this paper argues that a major factor underlying Japans disappointing growth performance in recent years has been a marked slow-down in total factor productivity (TFP) growth. It is suggested that, given present population trends and low returns on capital, any sustained increase in overall economic growth will require an acceleration in TFP growth. In this context, foreign direct investment (FDI) can potentially make an important contribution by increasing the degree of competition in the economy and, if foreign firms are more productive than domestic ones, by raising average TFP levels in Japanese industry.

What Caused the Recent Surge of FDI into Japan

In recent years, foreign direct investment (FDI) in Japan has jumped to unprecedented levels. This paper examines the underlying reasons, looking at both the international factors - the global boom in FDI and mergers & acquisitions(M&A) during 1998-2000 - and domestic regulatory, structural and other changes. It is argued that while domestic changes created the necessary conditions for Japan to participate in the global M&A boom, FDI inflows failed to develop a momentum of their own. Thus, rather than the result of a sudden transformation of the country into a major destination for global FDI flows, the recent surge in Japan was primarily driven by global trends.

The Impact of Foreign Direct Investment in Japan: Case Studies of the Automobile, Finance, and Health Care Industries

Having historically received very little foreign direct investment, Japan has experienced a substantial increase in such inflows in recent years. This paper analyzes the impact of the growing presence of foreign firms on the Japanese economy through detailed case studies on the automobile, finance, and health care industries. The wholesale & retail and the telecommunications sector are also briefly examined. The case studies show that in the sectors considered, foreign firms in one way or another are contributing to a greater degree of competition, are exposing domestic firms to global best practice, and are increasing the range of products and services available in Japan. In many of the sectors, they are also contributing to changes in industry structure and employment practices. The case studies thus illustrate that foreign direct investment - even at its present levels, which, although large by Japanese standards, are still low in international comparison - can be an important catalyst for change and hence help to reinvigorate the Japanese economy.