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Increased Inward FDI May Impact the Sheltered Japanese Market

The past months have been significantly important to the Japanese electronics market. Struggling tech giant Sharp Corporation, one of Japan’s largest electronics manufacturers has undergone a ¥389 billion ($3.5 billion) takeover from Taiwan's Hon Hai (Foxconn). Hon Hai is currently the world's largest contract electronics manufacturer. Toshiba corporation is also looking to sell majority stake in its home appliance business to Chinese owned Midea Group Co.

The Sharp takeover represents the first major Japanese electronics company to be under foreign ownership. This however is an economically progressive step forward for a nation that has previously been sheltered from inward foreign investment due to tight government regulation.

In order to stimulate economic growth and curb the imminent effects of Japan’s ageing population, the current Government's objective is to double inward FDI stock to 35 trillion yen by 2020 (17.8 trillion yen in 2012). Efforts to ameliorate the market have already been enacted in several respects, including the establishment of the Japan Investment Council, amendments to trade law, and the introduction of tax breaks and reforms to improve the M&A climate.

While traditionally being one of the leading outward FDI investors, Japan has historically had a reactionary stance on inward investments, ranking outside the global top 20 nations for net inward FDI. This has contributed significantly to Japan’s corporate homogeneity and management practices, allowing for cultural values and norms to transfer over into the workplace with minimal foreign influence. Over time this has shaped a unique way of doing business that is very much their own.

The important issue to consider is how this planned increase in inward FDI stock may affect corporate governance in Japan. Moreover, current corporate culture along with management practices in Japanese firms could have a reactionary effect when incorporating foreign practices and cultural norms, particularly from the West.

A telling study conducted by Faulkner and Pitkethly concluded through their empirical study of 201 subsidiaries in various countries, that in all cases, target firms acquired by foreign firms change their corporate and management practices to those of the acquirer in some way. Varying degrees of institutional isomorphism were apparent across the board with reference to Japan.

The importance of this finding is that for a country like Japan, foreign investment in the form of M&A will likely sees the acquiring foreign firm impose their own practices, goals and performance measurement. This in turn may negatively affect corporate integration and potentially result in a failed venture.

Of the three largest acquisitions of Japanese companies by EU companies, only one—Renault’s investment in Nissan—has been deemed to be successful. Vodafone’s acquisition of J-phone and the DaimlerChrysler/Mitsubishi merger, on the other hand, are both considered to have had strategic issues and failed to integrate with the Japanese companies.

In these instances it’s not solely managerial disparity but the differences in national culture between organisations that can be contributed to such failures. In Japanese society trust and perso

nal relationships are highly valued and this is no different in the office as these qualities will often be valued over facts and numbers. Management has a long-range focus on competitive strategy as opposed to a short-range focus on the bottom line.

When looking at foreign ownership over the Japanese firm, emphasis should be placed on how to better understand cultural diversity as opposed to preventing coercive isomorphism. By understanding cultural dimensions in areas including long-term orientation, uncertainty avoidance, individualism and masculinity, foreign organisations can better manage and account for differences in corporate management and governance.

Japan’s newly deregulated market will be particularly interesting to follow over the coming years, as greater inbound FDI incentives are pushed by the Abe government and the 2020 Tokyo Olympics near, foreign investment will continue to increase. Although the drive for increased foreign investment is economically necessary, the repercussions on a previously protected market may be unfavourable if not correctly managed. Greater strategic management, employment of market experienced managers and outsourcing to firms specialising in inbound investment consulting are fundamental in helping ensure successful integration.

Wesley Harding is a Finance and Information Systems graduate currently living in Japan, with particular interests in Asian markets, Japanese management and fintech.

This article can be republished with attribution under a Creative Commons Licence. Please email with any questions or for more information.

Image credit: Moritz Hager (Flickr: Creative Commons)

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