Japan has thousands of mid-size companies with good technologies. Combining with Indian manufacturing, those technologies can contribute to the foundation of a new uptick in Indian and Japanese growth.

 

The announcement by Japan’s Prime Minister Shinzo Abe that a new program with $2.2 billion to shift factories of Japanese supply chains away from China to Japan and other countries caught the imagination of the investment community. The worries about risks associated with over-concentration in China in the Covid era are understandable. Yet, the fine print showed that 91% of the money is to shift Japanese factories back to Japan, with only 9% or $200 million being available to induce factories to be located in partner countries. That itself was described as missing the mark by Shigenobu Nagamori, founder of Japanese precision motor maker Nidec, among the few self-made manufacturing billionaires, since Japan is an earthquake-prone island and therefore not ideal for concentration of manufacturing facilities, especially given its declining population. Nidec has invested in India, but in the past decade many Japanese companies have preferred to locate in Vietnam, Cambodia, the Philippines, Thailand, that are much smaller economies than India’s. Why is that so, and what can be done to encourage more Japanese investment to India?

Japan and India have much in common, with even schoolchildren being able to describe Buddhism links from the 6th century onwards, the heroics of Netaji Subhas Chandra Bose whose Indian National Army was among the very few allies in Asia that Japan had in the World War against European colonial powers, later led by the US. They can additionally speak eloquently of the wisdom of Indian Justice Radhabinod Pal in the Tokyo Tribunal who enunciated the principle that victors in a war cannot judge the vanquished, rather there should be an independently functioning international judiciary, especially to examine complex aspects on the origin of the War. The refusal by post-Independence India to accept Japanese war reparations further endeared it. It was to India that Japan made its first post-War yen loan in 1958, and became its largest bilateral lender, and the largest humanitarian assistance provider both directly, and indirectly through multilateral agencies. Even today, the loans for the Delhi Metro, Bullet Train, and other projects are among the lowest interest loans given by Japan to any nation, and far lower than the interest rate insisted upon by another major Asian lending nation. Japan’s and India’s Prime Ministers meet annually and share much warm geniality.

When it comes to foreign direct investment (FDI), apart from the automobile industry that Japan dominates and a few others like the electronic camera, there is little by way of Japanese leadership. Japan has run large surpluses for decades and has huge foreign reserves. Yet its companies are reticent to invest and appear to take an endless amount of time in deciding, despite hoarding large retained earnings. The stagnation and decline of the Japanese stock market since 1989 and the bursting of the asset price bubble in 1992 appear to have taken a toll. PM Abe has tried hard using his “Abenomics” approach of fiscal stimuli and the Japanese Central Bank has been very cooperative with monetary policy. The actual implementation of “Abenomics” is left to Japan’s powerful bureaucracy. Until recently, they mostly focused on financing and supporting large companies, sometimes at the cost of small business or those large companies’ sub-contractors, believing that large-company centred industrial policy would protect the large employment base of Japan. Those companies, however, are often ponderous and currently filled with comfortable corporate bureaucrats who have become risk-averse and are mostly concerned about protecting themselves against criticisms. In fact, it is often the case in Japan, that government bureaucrats are more aggressive in promoting risk-taking by providing more significant risk money than private-sector corporate bureaucrats. It is a far cry from the immediate post-War era, when the devastation due to the dropping of nuclear weapons on Hiroshima and Nagasaki, and carpet fire-bombing of major cities like Tokyo and Osaka left the Japanese with both an eerie foreboding as well as a belief that there was no way to go except to strive to rebuild. And reconstruct that generation did. To the extent that in the 1970s and 1980s, there started to be great fear in the US and Europe that the Japanese would take over every industry.

It is also important to remember that Japan has thousands of mid-size companies with good technologies but that are currently not being marketed well worldwide. Combining with Indian manufacturing, those technologies can contribute to the foundation of a new uptick in Indian and Japanese growth.

It is also a fact that foreign investors are confronted with Indian infrastructure that is only in the process of being built with multiple lacunae visible, yet also great highways in some locations, a few modern airports and marine ports, and nationwide fibre-optic broadband that have been priorities in both the NDA and the earlier UPA governments. Further there is great complexity in Indian land-access and labour issues that foreigners find baffling. Land purchased from an “owner” or even through a state agency later becomes a matter of dispute, with litigation initiated by multiple alleged relatives. Clarity on those fundamental issues is essential.

The steady decline in the value of the rupee is a genuine dampener for FDI. Since profits are recorded in foreign currency, like the yen or dollar, each time the rupee declines, it erodes profitability of the investor. One reason the rupee is weak is because of lack of growth in exports. Indian exports are competitive but exporters face multiple hurdles and much inefficiency, and there are reported cases of what appear to be harassment. A dramatic shift to efficiency would wake up the investing world—for example, the abolition of income tax would be a good start as advocated for decades by a leading light of the ruling party, followed by broad-based simplification of procedures. One factor that Japanese corporate executives obsess about is unit price that stands tall obstructing the investment decision to locate in India. In hyper-mega-volume markets like India (10 times the population of Japan), analysis should not merely use unit price but rather the multiplication of that with huge volume, and therefore business theory necessitates volume discounts. It is a fact that business education in Japan is a more recent phenomenon, and most executives were trained in-house in companies after graduating from college and so are yet to imbibe global principles of risk-reward finance.

Investment decisions are taken using a mix of factors including economic stability and growth, labour costs, capital costs, local support services, incentive schemes and strategic location. Other factors include quality of life for expatriate managers and their families, access to quality healthcare, professional and blue-collar worker competencies, quality of local partners and co-financing, cultural affinity, personal relationships, spirit of entrepreneurship, dynamism and flexibility. Attracting large, medium-size and small industries require entirely different approaches and levels of support. So too sectors like defence, electronics, medical devices, agriculture, etc.

Having been responsible for the usage of the Internet by the World Bank Group’s first system to promote foreign direct investment, as early as 1993, because of my previous familiarity with the Internet in the “young scientists’ network” that was using Internet to communicate between American universities even in the 1980s (at first designed by DARPA to ensure continuity despite a then-expected nuclear attack from the USSR), it is amusing to see the extent of faith placed by Indian government bureaucrats in the much later developed “Doing Business” annual report of the World Bank. It is almost as if officials expect investment to cascade-flow magically each time the country goes up a few rungs on the inter-country ladder. At best, the ranking is merely one factor in investment decision-making. Due diligence requires that the company send people to look at on-the-ground factors.

In the case of NIDEC, unlike many Japanese companies with diffuse leadership, Shigenobu Nagamori took direct responsibility in the decision-making, and personally interacted with key Indians and thereby built his own comfort level, confidence and led a team to build a winning plan to invest in India to the tune of $100 million. He received encouragement and support from Japan’s government officials who broadly follow the lead of PM Abe in supporting investment to India. There are not too many similar dynamic leaders and examples, however. There is an unstated factor often overlooked: Japan and many countries in South-East Asia, broadly were in the US sphere of influence in the post-World War era, while India chose to be ambivalent about foreign direct investment perhaps under influence of the USSR. Domestic monopolies and monopsonies were encouraged amidst stirring rhetoric of self-reliance. After the 1991 reforms, there was transformation, but even then outreach to surplus-capital Japan, for example, was deficient, perhaps because of language and related reasons. In the meantime, comfort level grew between Japanese businesspeople and Thais, Vietnamese, etc., that has not yet developed generally with Indians. Meanwhile, the infrastructure deficits in India, lack of Indian business representation of all sizes in Japan, and speed of decision-making especially in comparison with some East Asian nations, continues to grate.

All of the above point to the need for integrated multi-systemic major reforms, not merely one-off announcements that are applauded by the media elite and twitterati. That will require extraordinary leadership, akin to what India put together in 1991 to create a tectonic shift essential for an upward economic pathway for teeming millions of young aspirational Indians hungry for change.

Dr Sunil Chacko holds degrees in medicine (Kerala), public health (Harvard) and an MBA (Columbia). He was Assistant Director of Harvard University’s Intl. Commission on Health Research, served in the Executive Office of the World Bank Group, and has been a faculty member in the US, Canada, Japan and India.

 

One Reply to “Japanese investment to India: Possibilities and constraints”

  1. Nice and well analsyed article. As India and Japan have good relationship and if govt of india took its atmost efforts to make the connection stronger by facilitating and setting up required infrastructure in its territory, it is for sure that indian economy will be flourishing in upward direction and unemployment could be mitigated.

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