Is Japan a globalization champion?

Friday, 25 September 2009 11:04

When you come to think of it, it is difficult to imagine a country being more globalized than Japan.  It has showered the world in high tech exports, be they automobiles, microelectronic products or gadgets.  Japanese companies have invested all over the world.  Toyota even invested in an automobile plant in France with all of its labour laws!  And Japanese tourists are everywhere to be seen -- from the Empire State Building to the Champs Elysees and on to the golf courses of Hawaii.


But is Japan really a globalization champion?  This is a topic that the OECD picked up a couple of years ago, and is of even greater relevance today.  The steady rise in its share of world trade until the 1990s was a key aspect of its rapid post-war development.  But, contrary to what you would think, the OECD basically concludes that Japan is perhaps the least globalized of its 30 member countries. 

Take foreign direct investment which has been the driver of globalization in recent decades, as multinational companies have been establishing global production systems and supply chains.  According to the UNCTAD World Investment Report, global FDI flows reached an historic peak of $1800 billion in 2007, prior to the onset of the current crisis. 

But Japan has essentially missed out on the boom in FDI.  In 2004, its stock of FDI amounted to only 2% of GDP, by far the lowest of all the OECD countries!  Digging deeper into FDI, we find that mergers and acquisitions account for 60% of FDI flows.  However, in 2004, Japan accounted for only 2% of the value of world M&As, while the US represented 22% and the EU 47%.

Let's move on to trade.  Once again, Japan is the outlier.  Its share of imports in total domestic demand (essentially consumption and investment) is the lowest of the OECD bloc. 

A similar story emerges on tourism where Japan is a puny global destination with just 3 1/2 million foreign tourists in 2005 (less than 10% of China, and not even in the world's top 20 destinations); over 17 million Japanese travelled overseas.  And while global skills are essential for succeeding in globalization, a very low number of Japanese study abroad -- only 80,000 students in 2002.

Turning now to immigration, we find that Japan has for a long time had very small inflows and outflows, leaving net migration close to zero.  Foreign residents with work permits totalled 180,000 in 2002, accounting for a mere 0.3% of the labour force in 2002 -- the lowest in the OECD area and well below the OECD average of 9%.  And nearly one-third of that total comes from the "entertainers" category!   

Why is Japan such a poor performer in the globalization race?  In the trade and investment areas, Japan's barriers at the border are not so high, except for the appalling case of agriculture (agriculture protection is almost twice the OECD average).  And efforts have been made in recent years to reduce these barriers (although not enough, as Japan is behind the rest of the world in negotiating free trade agreements, despite recent efforts).  It turns out that the real barriers between Japan and the rest of the world are behind-the-border barriers like product and labour market regulations, and rules limiting cross-border M&As. 

Taking trade, investment and migration barriers together, Japan seems to be almost conspiring against globalization.  Much of today's globalization revolves around global production systems for which multinational enterprises need the freedom to invest, trade (especially intra-firm trade) and hire foreign workers.  And by blocking the lot, Japan has created a vicious circle. 

There is no country which needs globalization more than Japan.  With its ageing and declining population, Japan needs to boost productivity to maintain its prosperity.  And FDI can do that.  Labour productivity in foreign affiliates in Japan was 60% higher than the national average in the manufacturing sector and 80% higher in the service sector in 2002.  And migration can be very helpful in filling labour shortages, particularly for health care where demand is growing rapidly due to population ageing.   

All things considered, one is tempted to conclude that Japan has practiced one sided globalization -- exporting more than its imports and investing massively overseas but blocking inward investment.  A telling statistic is the following.  Employment in the foreign affiliates of Japanese parent companies in the manufacturing sector reached 2 million in 2002, equivalent to 16% of Japan's domestic manufacturing employment.  In contrast, only 0.2 million workers were employed by foreign affiliates operating in Japan -- only 1% of manufacturing employment in Japan.

But one-sided globalization is not a smart game, either for Japan or its East Asian friends.  East Asia is taking a massive hit from the financial crisis.  And a good way to provide a tonic for the region would be for Japan to boost demand by lifting some of those barriers, especially regulations on services to the elderly, who are sitting on three-fifths of the nation's massive savings.       


"Strengthening the integration of Japan in the world economy to benefit more fully from globalization" by Randall S. Jones and Taesik Yoon.  Economics Department Working Paper No. 526 --