The emergence of Japan as a single largest investing country in the world in the decade of the eighties has been possible because of the several reasons- the considerable strengthening of Japan's balance of payments, liberalization of controls on capital outflow, real wage increases which rendered many labour intensive industries uncompetitive, land scarcity and pollution considerations which led to the relocation of certain activities, resource scarcity needs, and finally a more liberal attitude towards foreign investment by some Asian economies. A more recent reason is the rapid appreciation of the Yen since September 1985 which by reducing the competitiveness of industries in Japan has provided impetus for relocation of Japanese firms abroad (Iqbal, 1997).
Japanese outward investment is located in every geographical region, ranging from very high stable, free market countries to those nations occupying the bottom of the development, wealth and political stability rankings. Japanese firms located in high income economies are larger, both in number and capital value, than those in the less-developed hosts. Host countries that serve as export platforms to their regional markets also appear to receive larger amounts of FDI, both in value and number, than countries that serve mainly the Japanese home market and the host's non-regional markets (Tadesse and Ryan, 2004).
Japanese FDI outflow was insignificant in the amount and also as a share in world total FDI until the 1980s when the Japanese economy began to accumulate trade surpluses and foreign reserves. While Japanese FDI had increased substantially during the 1980s, it reached its peak at $67.5 billion in 1989, and then began dropping throughout 1990s as the bubbled Japanese economy burst out in 1990. Bottoming out at $34.1 billion in 1992, it was on a recovery path until 1997, when the Asian financial crisis occurred (Park, 2003).
Japanese FDI showed remarkable improvement in the year 1999 as JFDI increased from $41.2 billion in 1998 to $67.5 billion in 1999. Afterwards JFDI followed the declining trend except the year 2002. It decreased from $49.0 billion in 2000 to $35.5 billion in 2004. Table 1 clearly shows that the percentage share of JFDI outflow has declined from 0.43% in 1991 to 0.13% in 2004. Moreover the percentage share of Europe, Asia and Latin America in total JFDI outflow has improved significantly. The significant beneficiary of JFDI outflow has been Europe during the above-mentioned period. The percentage share of Europe in JFDI outflow has increased from 0.23% in the year 1991 to 0.36% in the year 2004.
Trends in Japanese FDI in India
Worldwide FDI flows entered a renewed period of sharp growth in 1984, after the relative stagnation of the early 1980s. Annual average flows expanded from $41billion in 1981-83 to $45 billion in 1983-85 and increased more than twofold to $95 billion in 1985-87 (IMF, 1988). This growth was accompanied by a shift in the relative importance of selected areas as a source or destination of foreign investments. In overall terms, the share of developed and developing countries has remained relatively stable since 1975. Among developed countries, however, the US declined significantly as a source of FDIs, becoming the primary destination of such flows at the expense of the Western Europe (though this tendency has at least partially reversed). Japan became a significant international investor, expanding from 6 to 12 per cent of total outward FDI stock. Among developing countries, Latin America was able to substantially retain its share while Asian countries grew in the face of a decline of FDIs to African countries (Pio, 1990).
In standard economic theory net FDI inflows to developing countries increase their stock of capital and technological know-how which, in turn, raises the host country's labour productivity and incomes, a process that eventually translates into higher levels of output and potential tax revenues; the latter derived from taxing the foreign investment income generated by TNCs (Ramirez, 2000).
The 1980s witnessed a gradual relaxation of the foreign investment rules-perhaps best symbolized by the setting up of Maruti, a central government joint venture small car project with Japan's Suzuki Motors in 1982. It was followed by Pepsi's entry in the second half of the decade, to primarily export processed food products from Punjab, and also to bottle its well known beverages for the domestic market (Nagraj, 2003). In 1991, there was an intensification of reforms in India's trade, technology and industrial policies. The long-term objective being to make Indian industry competitive by deregulating it while instilling a dose of liberalization (Kathuria, 2002).
A recent study (Banga, 2003) based on firm level data for the period 1993-94 to 1999-2000 showed that Japan-affiliated FDI firms have higher average productivity growth as compared to domestic firms and US-affiliated firms. Moreover, US-affiliated firms rely mainly on technological improvements to achieve productivity growth while the major thrust to productivity growth in Japan-affiliated firms emanates from efficiency improvements (Gupta, 2006).
Reasons for Investing in India and their Impact
India has become one of the hotspots of Investment for the foreign investors. After 1991 reforms programme, this potential is being kinetised and a reasonably good response has come from the rest of the world in terms of investment inflow (Gupta, 1998). There are several good reasons for investing in India, which are given as under:
Ø One of the largest economies in the world.
Ø One of the largest manufacturing sectors in the world, spanning almost all areas of manufacturing activities.
Ø One of the largest pools of scientists, engineers, technicians and
managers in the world.
Ø Rich base of mineral and agricultural resources.
Ø Long history of market economy infrastructure.
Ø Well developed R&D infrastructure and technical and marketing services.
Ø Policy environment that provides freedom of entry, investment, location, choice of technology, production, import and export.
Ø Well-balanced package of fiscal incentives.
Ø A sophisticated legal and accounting system.
Ø English is widely spoken and understood.
Ø Rupee is convertible on Current Account at market-determined rate.
Ø Free and full repatriation of capital, technical fee, royalty and dividends
Due to the above stated reasons and the various bold initiatives undertaken by the Government of India the situation of FDI inflows has shown a remarkable increase in the recent years. Investors are showing their growing confidence in the immediate and medium term prospects of the Indian economy. A recent confidence survey by global consultancy AT Kearney rated India as the third most favoured FDI destination, next only to China and United States. As per the World Investment Report (2004), Global FDI inflows have declined significantly from the peak of US$ 1.4 trillion in 2000 to US$ 560 billion in 2003. FDI inflow to India, on the contrary, has shown a rise from US$ 2.496 billion in 2000 to US$ 4.269 billion in 2003 [http://Indiabudget.nic.in ].
Hence it is very much clear that to become as a big emerging market India has to go miles and therefore, future growth would build up through higher growth rate with an added boost from major economic process. It is pertinent to note here that role of Government is sine-quo-non in making the economic policies successful. Hence, Government must extend whole hearted support to foreign investors and domestic entrepreneurs so that they could not feel uncared and unwanted (Iqbal, 1998).
Conclusion
This paper has attempted to assess the emerging trends in Japanese FDI in India and its impact on the Indian economy. An extensive study has been conducted, extending the previous ones with more recent data set. It has been found that JFDI has shown a significant upward shift from US$2.3 Million in 1991(Aug.-Dec.) to US$116 Million in 2004. On analyzing Sector wise JFDI inflows it becomes evident that during January 2000 to December 2004, transportation industry received maximum FDI, followed by Electrical equipments, Services sector, Ceramics and Rubber goods. JFDI has contributed a lot in the economic growth of India, but the amount of JFDI needs to be augmented further to priority sectors like infrastructure and agriculture so that untapped potential of these sectors may be tapped to the maximum possible extent. Moreover to encourage JFDI in these sectors, reasonable incentives must be offered to the Japanese firms, so that they may be motivated to invest in these priority sectors. It will certainly boost the Indian economy and also increase the employment opportunities in these sectors. The major problem of unemployment may be reduced to a large extent as approximate 70% of the Indian population depends on the agriculture.
