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Globalization of Japanese Companies in East Asia
WASHIO Kiyoshi
Contents
Introduction
1. Characteristics of globalization in the Japanese economy after the late 1980s
(1) Transitions to the floating exchange rate system and the appreciation of the yen
(2) Increasing shift to the East Asia in terms of trade and advance of Japan’s industrial structure
2. Characteristics of overseas production development
(1) Establishment of an export-import network
(2) Development of vertical intra-industry trade in Asia
3. Advancement of Triangular Trade
(1) International competitiveness chart
(2) Triangular trade structure
4. Japan’s direct investment trends in East Asia and evaluation of the investment environments
(1) Direct investment trends of Japanese companies in East Asia
(2) Evaluation of the investment environments
5. Promotion of Economic Partnership, including FTA
(1) Initiative of Economic Partnership
(2) Effect of Economic Partnership
Global Business of Japanese Companies in East Asia
Abstract
This paper aims to explain the characteristics of globalization in Japanese economy led by the expansion of overseas
production after the 1990s and overseas activities of Japanese companies.
First, Characteristics of globalization in the Japanese economy after the late 1980s are explained. The continuity of the yen
appreciation affected greatly Japanese trade structure and foreign direct investment of corporate activities.
Second, I point out that vertical intra-industry trade structure has been built in the East Asian region. This vertical intraindustry trade was made possible by the building of international corporate activity networks.
Third, I describe the development of “Triangular Trade Structure” with separate locations for production, assembly, and
final consumption.
Forth, I look at Japanese direct investment trends in East Asia. Japan’s direct investment towards East Asia accelerated its
speed since the 1985 Plaza Accord. But some countries and regions in East Asia are characterized by poor evaluations for
infrastructural elements.
Finally, the importance of promotion of economic partnership is shown. Economic Partnership Agreements (EPA) will
bring significant benefits to both Japan and Asian countries.
Keywords: Globalization, Vertical intra-industry trade, Triangular trade structure, Economic Partnership Agreements
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Global Business of Japanese Companies in East Asia
Introduction
structure in Japan, the focus on the U.S.A. as a trading
partner and foreign direct investment destination gradually
Japanese direct investment has increased since the 1985
shifted to the East Asian regions. These developments are
Plaza Accord and international trade has expanded through
result of vigorous corporate activities which took place as
the development of overseas production by companies. One
Japan deepened economic relations with overseas region.
of the characteristics of globalization in Japanese economy
after the 1900s is that the focus on the United State as a
The following will explain the background of these
characteristics.
trading partner and direct investment destination gradually
shifted to the East Asian region.
Within the East Asian region an e xp o r t-imp o r t
(1) Transitions to the floating exchange rate system and
the appreciation of the yen
network has been built by dispersing overseas production
Majo r countries inc luding J ap an shifted the fix
base as a result of these developments the East Asian
exchange rate system to the floating exchange rate system
region became more competitive.
in 1973. Since then, these countries have used a system
In the East Asian region vertical intra-industry trade
within same industry is taking place between Japan, China,
where exchange rates are decided in a foreign exchange
market.
ASEAN and NIEs reflecting e ac h countr y’s facto r
After World WarII, the inter national community
conditions, overseas production development undertaken by
developed global economy through nondiscriminatory and
Jap anese companies and this vertical intra-industry
free trade, and made adjustments to eliminate various
network is characterized as advancement of triangular
barriers to trade, such as tariffs and restrictions on exports
trade.
and imports.
This Paper will explain the advancement of vertical
As the basic economic conditions of countries began to
intra-industry trade and triangular trade within the East
change, these changes caused the balance of payments
Asian region as a result of e xp ansion of J ap anese
disequilibrium because the fixed exchange rate system was
companies’ overseas development centered on the Asian
used. For example, if competitiveness of a country declines
region and describe the imp o r tance of Economic
comparatively and the exchange rate does not devaluate in
Partnership Agreements including FTA.
response to the competitiveness, then its exports will be
relatively expensive, whereas imports from other countries
1. Characteristics of globalization in
the Japanese economy after the late
1980s
will be relatively inexpensive. The trade deficit will grow as
a result of the decline in exports and increase in imports.
Conversely, in case where the competitiveness of a country
rises compared to other countries, the trade surplus will
Char acteristics of globalization in the J ap anese
economy after the late 1980s were explained as follows.
grow. Therefore major countries began controlling their
balance of payments disequilibrium using the market
First, it is the continuity of the appreciation of the yen
function and reflecting the basic economic conditions in the
and its economic impact. After making the transition to a
exchange rate. And major countries tried to cut off the
floating exchange rate system, Japan was faced with a
effects of shocks such as economic fluctuations, rising
r apid appreciation of the yen in the late 1980s and
prices and so on which occurred in other countries. Under
experienced a long-term appreciation of the yen, though
these circumstances Japan also shifted to the floating
modest, in the early 1990s. This appreciation of the yen had
exchange rate system.
a substantial impact on the Japanese economy.
Second, with the advancement of industrial and trade
As we look at trends in the yen/dollar exchange rate
after the transition to the floating exchange rate system, we
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Global Business of Japanese Companies in East Asia
can see that the exchange rate level changed dramatically
Next, as for traded goods, a look at changes in import
in the mid-1980s (Figure 1-1). This change continued for
and export items shows that they reflect the industrial
about one year, between the signing of the Plaze Accord in
advancement of Japan in the past 30 years. Regarding
September 1985 and the Louvre Accord in February 1987.
export items, as exports of high value-added manufactured
The yen/dollar exchange rate was on average about 252 yen
goods increased, the share of machinery and equipment-
from beginning with the adoption of the floating exchange
related machinery grew substantially. Whereas, concerning
rate system to signing of the Plaze Accord, while the
import items, intermediate goods and products replaced
yen/dollar exchange rate was on average about 121 yen
raw materials, the products with relatively lower added
from the signing of the Louvre Accord until April 2004.
value compared to export have been imported.
Hence the yen appreciated by about more than 50%. The
As mentioned above, it is apparent that in the field of
appreciation of the yen in the early 1990s continued for long
trade, (a) merchandise trade of Japan has shifted its focus
time, the yen appreciated about 48% during this time.
from the United State to the East Asian regions, and (b)
This continuity of the yen appreciation affected greatly
Japanese trade structure and foreign direct investment of
industrial structure of Japan has advanced in terms of the
export and import items.
corporate activities.
(2) Increasing shift to the East Asia in terms of trade and
2. Characteristics of overseas production
development
advance of Japan’s industrial structure
One of the distinctive changes in trade in the past 30
Japanese export companies have advanced overseas
years is that the biggest trading partner shifted from being
production development overall since the late 1980s mainly
the United State to the East Asian regions. Behind this shift
due to the appreciation of the yen. But changes in overseas
is the rise of the ASEAN and China. With regards to the
business activities by Japanese companies occurred form
total of exports and imports, Asia surpassed the United
the late 1990s.
State as a trading partner after 1988 and China by itself
exceeded the United State with regards to imports in 2002.
The follow will examine the characteristics of the
approach that these exporting companies took in overseas
Figure 1-1 Trends in the Yen/Dollar Exchange Rate
Note: End-of -the month spot central rates in the Tokyo Interbank Market.
Original Source: Bank of Japan.
Source: Cabinet Office (2004), p. 195
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Global Business of Japanese Companies in East Asia
business development, taking up thre e industries –
collapse of the IT bubble.
transport machinery, electric machinery, and general
At the same time, the regional sales rate in the Asian
machinery as Japan’s leading export industries. We will
region dropped during this period, unlike in the case of the
point out two characteristics.
North American and European regions. This is a sign that
the export ratio to regions other than Asia is rising and
(1) Establishment of an export-import network
Since the late 1990s, transport machinery and general
suggests that the Asian region is strengthening its position
as an export base (Figure2-1 right).
machinery which have high local sales rate have declined
This analysis shows the following:
its local sales rate, with the exception of electric machinery
(a) The 1990s model of establishing overse as
which has a high export to third countries (Figure 2-1 left).
production bases in the Asian region and specializing in
This trend is evident on a regional basis as well (Figure 2-1
local sales and exports to Japan became less effectiveness
center). This means that the number of companies that have
because of the Asian financial crisis and economic
high exp o r t ratio to J ap an and of third countries is
stagnation of Japan, and instead an export-import network
gradually increasing. That is to say, until the mid-1990s
was built by dispersing overseas production bases within
Japanese companies went overseas, built production bases,
the Asian region.
and produced and sold finished products in local areas. But
(b) The Asian region became more competitive by this
since the late 1990s a specialized production through
establishment of export-import network and turned into a
export-import networks among different countries has been
stronger export base for North America and Europe and so
developed gradually after the Asian financial crisis and the
forth.
Figure 2-1 Downward Trends in Local Sales Rates
Low local and regional sales rates in the Asian region
Notes: 1. Local sales rate by industry is a median value for local sales rate of each company affiliated with the respective industry.
Local sales rate by region and the sum of local sales and regional sales are based on total amount realized by local affiliates of
companies in the manufacturing industry.
2. “Local” refers to a country, etc. where a Japanese company has entered and established business. “Regional” refers to the
region of the county, etc. where a Japanese company has entered and established business, excluding the country of entry, etc.
Original Sources: Basic Survey on Overseas Business Activities (data from specific charts) and 33rd Survey on Overseas Business
Activities (July 2003), Ministry of Economy, Trade and Industry.
Sources: Cabinet Office (2004). p. 230
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Global Business of Japanese Companies in East Asia
(2) Development of vertical intra-industry trade in Asia
International production network in Asia shows the
following trends in recent years.
consumption market.
Trends in trade between East Asia, the United State,
and Europe organized by production stage are explained
The progress has been made not only in the traditional
below (Figure 3-1). Trends in the trade value from Figure 3-
form of trade where labor-intensive products produced
1 shows that: (a) trade in intermediate goods is increasing
against a backdrop of relatively low wages are traded with
both between Japan and the NIEs and between China and
technology-intensive products reflecting the achievements
ASEAN, (b) there is a striking increase imports of final
of rese arc h and development, b ut also in ver tical
goods, especially consumer goods, from China and ASEAN
specialization of the manufacturing process of similar
to the United State and Eu rop e , and (c) e xp o r ts of
goods (vertical intra-industry trade). Under vertical intra-
intermediate goods and final goods are growing steadily
industry trade, labor-intensive processes are shared by
from Japan and the NIEs to the United States and Europe.
developing countries, on the other hand technology-
These trends in trade goods by production stage reflect
intensive processes are allocated to advanced countries.
the development of the East Asian vertical intra-industry
Therefore parts and intermediary goods are exported to a
trade netwo rk. Here we will use the inter national
particular country, where they become finished products,
competitiveness and analyze vertical intra-industry trade in
which are then re-exported to other countries. It is believed
East Asia.
that this type of vertical intra-industry trade structure has
been built in the Asian region.
If we evaluate the international competitiveness of
intermediate and final goods of industries, we see that
The vertical intra-industry trade structure in the Asian
industries generally follow a clockwise path from the third
region was developed when companies specializing in the
quadrant as industries mature. Figure3-1 indicates that
production of high value-added products sub-divided their
each quadrant in the chart of international competitiveness
production processes in response to improved technological
index shows the characteristics of industries in that
and management capacity and dispersed each process to a
quadrant. The growth path of an industry can be explained
different country or region.
based on the following characteristics.
The current vertical intra-industry trade in the Asian
First, an industry which began in domestic supply
region was made possible by the building of international
takes advantage of cheep wages and gradually develops
corporate activity networks.
strength in the assembly area, then shifts to an assembly
This issue will be closely examined after the following
section.
production type structure in which intermediate goods are
imported and final goods are exported. Next, the industry
builds competitiveness in intermediate goods in addition to
3. Advancement of Triangular Trade
final goods by improving the level of its technology and
grows to develop into a domestic overall production type
(1) International competitiveness chart
industry which is internationally competitive for both types
The East Asian production network has a basic pattern
of goods. However, once the industry which has passed the
that regions where wages are low conduct labor-intensive
height of its maturity loses competitiveness in assembly
processes. That is to say, We can say that Japan and the
due to factors such as increasing wage levels, and then
NIEs produced the high added-value parts, components,
begins to specialize in intermediate goods, which are more
and processed goods and China and ASEAN, where wages
capital-intensive. Finally, the industry as a whole loses its
are low imported as these intermediate goods. Then these
comparative advantage, begins to import a surplus of
countries and regions made intermediate goods into final
intermediate goods. This shows that trends in trade for the
goods through assembly goods and exported to final
industry as a whole, looking at the overall industry, imports
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Global Business of Japanese Companies in East Asia
Figure 3-1 How to read the Chart of International Competitive Index
Note; International Competitiveness Index (ICI) = (Export - Import)/(Export + Import)
Source: METI (2005), p. 241
of the both final goods and intermediate goods will exceed
(2) Triangular trade structure
exports, but it is possible to maintain competitiveness for
According to the above analysis by country of the
certain products and fields within the industry through
international competitiveness (METI, 2005, pp. 248-251), it
specialization. Normally an industry which has entered this
was observed that J ap an and the NIEs have many
stage will compete in domestic and world markets by
industries with overall production type or intermediate
specializing and differentiating products with high quality
goods-specialized production type structure, on the other
and high function utilizing the established brand and
hand, China and ASEAN have many industries with
advanced technology.
characteristics of assembly production type. From this
This hypothesis suggests that industries proceed in a
point a picture will be drawn below.
circular, clockwise path around the chart of international
Parts, components, and processed goods produced in
competitiveness index1, but at the same time industries
Japan and the NIEs are imported as intermediate input
actually become more sophisticated through the process as
goods by China and ASEAN, then China and ASEAN
they improve their technology.
assemble intermediate goods, and export the assembled
goods to the final consumption markets of the United State
1 The international competitiveness index is defined as a numeric value which shows trade balance (exports-imports ) as a proportion of trade
amount (exports + imports).
Indexes range from – 1 to 1, with values close to 1 indicating strong international competitiveness and values close to – 1 indicating weak
international competitiveness.
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Global Business of Japanese Companies in East Asia
Figure 3-2 Model of Triangular Trade Structure
Source: METI (2005), p. 257
and Europe. That is to say, a “Triangular Trade Structure”
advancement of local procurement within China and
with separate locations for production, assembly, and
ASEAN would normally mean a decrease in imports of
consumption has probably taken form (Figure 3-2). Based
inter mediate goods from J ap an and the NIEs and
on this analysis, it may be assumed that (a) China and
weakening of the Triangular Trade Structure. However,
ASEAN have strength in labor-intensive processes, (b)
according to the Triangular trade index (METI, 2005,
Japan and the NIEs produce capital and technology-
pp.258-259), the Triangular Trade Structure is strengthened
intensive, high added-value intermediate goods, (c) the
in almost all of the industries. This is because although
assembly process for final goods is generally more labor-
local production of inter mediate goods is increasing,
intensive than the production stage for intermediate goods,
exports of intermediate goods from Japan and the NIEs are
and (d) production costs in China and ASEAN are
focused on China and ASEAN, and exports destined for the
sufficiently cheaper than production costs in Japan and the
United State and Europe are increasing relatively. This
NIEs even including trade - related cost.
means that as the East Asian economy developed multiple
Hence the above model defines that China and ASEAN
are locations for the assembly of intermediate goods. But
ties, the Triangular Trade Structure formed as the basis for
growth of this highly-specialized, open economic region.
actually because technology transfer has prog ressed
rapidly due to direct investment from Japan and the NIEs,
procurement of the intermediate goods needed for assembly
production in China and ASEAN are incre asingly
4. Japan’s direct investment trends in
East Asia and evaluation of the
investment environments
dependent on production with the region, rather than on
imports. According to 34th Basic Survey of Overseas
Business Activities, betwe en 2000 and 2003 the local
(1) Direct investment trends of Japanese companies in
East Asia
procurement rate of Japanese companies doing business in
Direct investment of Japanese companies towards East
China and ASEAN increased from 40.1% to 51.3%. The
Asia accelerated its speed since the 1985 Plaza Accord and
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Global Business of Japanese Companies in East Asia
has increased 10.8 times over the past 15 years. In the 1990s
warehousing was 4.7% in composition ratio.
the number of cases of direct investment incre ased
Looking at regions with similar industry compositions
particularly in Southeast Asian countries. Investment in
of Japanese company located in East Asia according to
China greatly increased with the full-scale introduction of
cluster analysis2, Vietnam and China (regions of western,
foreign capital into China after the adoption of socialistic
central and northeastern) are characterized by a high
market economy system of 1992. After the Asian financial
presence of labor- intensive industries such as the textile
crisis new investment in Southe ast Asia decre ased
industry. In Korea and Malaysia chemicals, electrical
dramatically, but sign of recovery was observed in the 21st
equipment and wholesale industry were located relatively
century. On the other hand investment in China has been
large. Similarly Hong Kong and Singapore had distribution,
increasing since the membership of WTO of China.
finance, and insurance more than other countries.
During the same period, other countries around the
Here we will look at profit of J ap anese overse as
world as well as Japan have been steadily increasing their
affiliated companies who have made direct investments.
direct investment in the East Asian region. Looking at the
According to a survey conducted by JETRO (2003), many
number of establishment of foreign capital in the East
ASEAN and China-based Japanese affiliated companies
Asian region, we see that since the 1997 Asian financial
have been making profits in recent years.
crisis the number of such establishments in Indonesia,
And according to the actual profit ratio of Japanese
Thailand, and Singapore has either decreased slightly or
overseas affiliated comp anies in the Basic Sur vey of
leveled off, but the number of companies entering China has
Overseas Business Activities (METI), the ordinary income to
increased by more than 10.000 over four years from 27.000
sales ratio for Japanese overseas affiliated companies was
in 1990 to 39.000 in 2003.
lower in China than in other countries and regions until the
Next looking at the situation in the location of Japanese
companies by country and region, there are 4.864 Japanese
mid-1990s, but in recent years it has surpassed profit ratio
in other regions, with the exception of ASEAN (Figure 4-1).
companies operating in China, 1.432 in Thailand, 1.113 in
Hong Kong, and 1.071 in Singap o re. The number of
(2) Evaluation of the investment environments
companies in China stands out as particularly large.
We examine the investment environments for Japanese
Regarding the are a of industr y, 59.0% of J ap anese
companies who have made direct investment according to
investment in the whole of East Asia was accounted for
the survey of the Japan Industrial Policy Research Institute
manuf actu ring industr y. Within the manuf actu ring
(JIPRI).
industry, the comp osition ratio of manufactu rers of
First, we look at the survey results for Japanese head
electrical equipment was 12.6%. Hence it is clear that
offices which have made direct investments. Japanese head
Japanese companies of electrical equipment have led foreign
offices consider items such as infrastructure concerning
direct investment. Similarly, the composition ratio of
production, administr ative resp onses, and living
manuf actu rers of c hemical was 9.5% and that of
environment a relatively high importance to the expansion
transportation equipment manufacturers was 6.4%. On the
of their business overseas. While they consider business-
other hand within the non-manufacturing industries, the
related items suc h as tec hnical coop eration with
wholesale industry accounted for 20.4% in the composition
neighboring companies, industrial accumulation, and
ratio and had a high share in the NIEs in particular. Next
distance to Japan a relatively low importance. But as
the service industry was 5.8%, and transportation and
already mentioned, in East Asia regional enterprises and
2 Cluster analysis is a method in which subjects are divided into several groups (clusters), based on measurements of similarities and dissimilarities
of date gathered from questionnaires and other sources (METI, 2005, p. 211).
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Global Business of Japanese Companies in East Asia
Figure 4-1 Trends in the ordinary income to sales ratio for Japanese overseas affiliates
Notes: 1. Ordinary income to net sales ratio = ordinary income/sales x 100 (%)
2. Hong Kong was included NIEs until fiscal year 1997 and in China since fiscal year 1998.
Original Source: Basic Survey of Overseas Business Activities (METI).
Source: METI (2005), p. 226
supp o r ting industries are g rowing and the local
receive poor evaluations for labor costs and potential for
procurement rate of Japanese companies is on the rise.
future market expansion for the intermediate goods market.
Therefore the importance of business-related items in the
localities will increase in the future.
Next we look at the evaluation of local affiliated
5. Promotion of Economic Partnership,
including FTA
companies based on the above survey of JIPRI. Many
affiliated comp anies resp onded that infrastr uctu ral
(1) Initiative of Economic Partnership
elements suc h as electricity, water and sewerage ,
The economic development of Japan was achieved
telecommunication, roads and ports are important to
through the advancement of multilateral liberalization
current investment environments. Labor costs and labor
centered on GATT/WTO. In recent years, movements
force quality followed. And they also replied that political
towards establish FTA (Free Trade Agreements) have
and social situations and the local market are important
vigorously witnessed among specified countries and
relatively.
regions in the fields of liberalization of international trade
Looking at the characteristics of countries and regions,
and investments. Japan concluded the Japan-Singapore
each of China’s regions and Thailand is characterized by
Economic Agreement for a New age Partnership in 2002,
poor evaluations for prevalence of English and high
and largely re ac hed EPA (Economic P ar tnership
evaluations for production costs such as rent for industrial
Agreements) with Mexico in March 2004. Japan is also
complexes and land costs. Hong Kong, Singapore, and
positively carrying forward consultations on conclusion of
Taiwan are highly evaluated in most categories, whereas
bilateral agreements ROK (Republic of Korea), Thailand,
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Global Business of Japanese Companies in East Asia
Philippines and Malaysia and on establishment of EPA with
betwe en the countries conc luding an FTA due to
the entire ASEAN.
elimination of tariffs between them.
FTA is a form of regional trade liberalization and
Second is the improvement in productivity that
agreements based on elimination of tariffs among the
accompanies the realization of an economy of scale, as a
participating countries. FTA includes an exception from the
result of the elimination of regional trade and investment
principle of MFN (Most Favo red Nation) in p oint of
barriers and integration of markets.
liber alization within a limited are a, while it has
Third is the incre ase of productivity due to
characteristics of an advancement of liberalization by
competitiveness and transfer of technology. The inflow of
eliminating tariffs within the specified area.
low-priced goods and services, the participation of foreign
Since the 1990s there has been a remarkable increase in
companies and the entrance in Japan of foreign managers
the number of FTA. A total of 150 (effective) economic
and engineers stimulate competition, which in turn triggers
partnership have been reported to the WTO. In resent years
a rise in productivity based on the diffusion of outstanding
in particular, an increasing number of developing countries
management know-how and skills.
have concluded FTA.
As already mentioned, currently Japan is advancing
The following factors will be showed as reasons behind
efforts for conclusion of FTA with Asian countries. These
the remarked increase in FTA from the late 1990s: (a) the
countries actually are deepened economic relations with
wide spread awareness that rapid consensus-building
Japan, so it is expected that conclusion of FTA will have
within the WTO has become difficult; (b) the emergence of a
significant positive effects on the economy. The share of
trend for countries with a common interest to go a step
exports for Asia has increased to more than 40% in 2004.
ahe ad and establish bilater al relationships to take
Such relations also reflect the advancement of Japanese
advantage of the benefits of liberalization; (c) motivation to
companies in Asia.
promote FTA as part of a country’ international political
strategy.
As the latest trends, the areas for application of FTA
have expanded from the traditional trade liberalization
The tariff ratio in the Asian countries is generally high
comp ared with develop ed countries, therefo re tariff
elimination through liberalization will bring significant
benefits to both Japan and Asian countries.
(such as elimination of tariffs and so on) to include
investment, competition policies, intellectual property,
government procurement, smooth movement of human
resources, e-commerce, environment and harmonization of
labor-related systems, etc. These areas are new even for the
Additional note
This paper is written mainly based on the results of
METI (2005) and Cabinet Office (2004)
WTO itself. Hence this recent agreement (including not
only tariffs but also the above mentioned wide rage of
areas) are called economic partnership agreements (EPA)
Reference
and distinguished from the tr aditional fre e tr ade
Cabinet Office (2004) Annual Report on the Japanese Economy
agreements.
and Public Finance (2003-2004), National Printing
Bureau.
(2) Effect of Economic Partnership
Trade liberalization through conclusion of FTA has
effects as follows.
First is trade creation effects. The direct and positive
static effects of trade liberalization are creation of trade
K awasaki, Kenichi (2003) The Impact of Fre e Trade
Agreement in Asia, RIETI Discussion Paper Series 03E-18.
JETRO (2005) JETRO White Paper on Trade and
Investment 2005.
105
Globalization of Japanese Companies in East Asia
Ministry of Economy, Trade and Industry (2005) White
Paper on International Economy and Trade 2005.
Ministry of Economy, Trade and Industry (2005) The 34th
Basic Survey of Overseas Enterprise Activities.
106