Figure II Changes in the number of foreign visitors to Japan. Source: JNTO, CEIC database.

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1 Section 2 Competitiveness in attracting people and enterprises In this section, from the perspective that enhancing competitiveness in attracting people and enterprises will lead to Japan s economic growth and improvement of competitiveness, we will analyze the trends in the number of foreign visitors to Japan and their consumption in the country and backgrounds to the trends with regard to people. With regard to enterprises, we will analyze the selection of business location. 1. Attracting people (the balance relating to travel) (1) Increasing number of foreign visitors to Japan In 2014, the number of foreign visitors to Japan came to a record high of million people (up 29.4% from the previous year). This was much higher than the previous record high, million visitors in Japan is attracting visitors particularly from Asia, with Asians accounting for 80.7% of all foreign visitors to the country in Of the top 10 countries/regions in terms of the number of visitors to Japan, seven were in Asia. The annual rate of increase was particularly high for visitors from China (up 83.3% from the previous year), the Philippines (up 70.0%), Vietnam (up 47.1%), Thailand (up 45.0%) and Malaysia (up 41.4%) (Figure II ). Figure II Changes in the number of foreign visitors to Japan (10,000 people) Source: JNTO, CEIC database. (Year) Others Africa Other Oceanian countries Australia Other European countries United Kingdom South America Other North American countries United States Other Asian countries Malaysia Singapore Thailand Hong Kong China ROK Taiwan Meanwhile, the number of international tourists worldwide has been on an uptrend after falling in 2009 in the wake of the Collapse of Lehman Brothers (Figure II ). In the global ranking of countries in terms of the number of incoming foreign tourists in 2013, Japan was ranked, 23rd, not a high position. However, in terms of the rate of increase in the number of incoming foreign tourists, 307

2 Japan was ranked first among major countries in 2012 and 2013, with the share of visitors to Japan in international tourists worldwide rising (Figures II and II ). In line with the increase in the number of international tourists worldwide, expenditure relating to travel has expanded to 1.3 trillion dollars (equivalent to 9% of global GDP). In Japan s case, although the amount of receipts in the balance relating to travel as a share of nominal GDP is not necessarily large, it is growing slightly (Table II ). Figure II (Million people) Number of international tourists worldwide and ratios of foreign tourists to Japan Number of international tourists worldwide Ratios of foreign tourists to Japan (right scale) Source: UNWTO, JNTO. 308

3 Figure II Number of international tourists by country (10,000 people) France United States Spain China Italy Turkey Germany United Russia Thailand Kingdom Japan Notes: Data for France in 2013 is based on those from the Directorate General for Enterprise. Source: Tourism Highlights, 2014 Edition (UNWTO), Directorate General for Enterprise, CEIC database. Figure II Growth rate of international tourists 2013/2012 Growth rate (%) 2012/2011 Growth rate (%) Japan (23) Thailand (9) Greece (15) Russia (8) ROK (20) Notes: 1. Figures show top ten countries by rate of increase in the number of incoming foreign tourists among countries at which 10 million or more international tourists arrived in Ranks of the number of incoming foreign tourists as of 2013 are shown in parentheses following country names. Source: Tourism Highlights, 2014 Edition (UNWTO). Hong Kong (11) Ukraine (13) Morocco (24) Poland (17) United Kingdom (7) 309

4 Table II International comparison of the amount of receipts in the balance relating to travel as a share of nominal GDP ( ) Thailand Spain France ROK United States China Japan % 4.0% 1.9% 1.0% 1.0% 0.7% 0.2% % 4.1% 2.0% 1.1% 1.0% 0.6% 0.2% % 4.3% 2.0% 1.1% 1.0% 0.5% 0.3% Source: IMF database. (2) Improving the tourism environment Various policy measures have been implemented in order to attract tourists to Japan. Presumed major factors behind the abovementioned increase in the number of foreign tourists include active promotion campaigns and efforts to encourage visits to Japan, expansion of the aviation network and development of attractive tourist areas. In addition, institutional improvements intended to attract foreign tourists are also presumed to have had positive effects. One example of such institutional improvement is the introduction of tourism-promoting measures such as the simplification and relaxation of visa requirements and visa exemption, which will be the focus of observation in this section. Japan has relaxed visa requirements for Asian countries/regions from which the number of visitors to Japan is increasing, and this is believed to have had some positive effects. Below, we will look at changes in the number of visitors to Japan from East Asian countries/regions, including China and some ASEAN member countries, before and after the relaxation of visa requirements since First, we will take a look at East Asian countries/regions. The top three in the ranking of countries/regions in terms of the number of visitors to Japan are Taiwan (2.83 million visitors; a share of 21.1%), the Republic of Korea (2.76 million visitors, a share of 20.5%) and China (2.41 million visitors; a share 18.0%), which together account for around 60% of the total number of foreign visitors to Japan. The growth in the number of visitors from these three countries accelerated as a result of the visa exemption, implemented for Hong Kong in 2004 and for Taiwan and the Republic of Korea in Subsequently, the number of visitors decreased in 2009, immediately after the Collapse of Lehman Brothers, and in 2011 when the Great East Japan Earthquake occurred. However, thanks to the yen s weakening since late 2012, the number of visitors to Japan has been growing at a higher rate than at the time of the implementation of visa exemption (Figure II and Table II ). 310

5 Figure II Changes in the number of visitors from East Asian countries and regions to Japan Visa exemption (Taiwan, ROK) Collapse of Lehman Brothers Great East Japan Earthquake Visa exemption (Hong Kong) Start of the Visit Japan initiative World Taiwan Hong Kong ROK Source: JNTO, CEIC database. (Year) Table II Relaxation of visa requirements to visitors from East Asian countries and Sep Tourists nationalities and regions China regions Apr Hong Kong Visa exemption Details of relaxation of visa requirements Start of issuance of group tourist visas (residents in Beijing, Shanghai and Guangdong Province) Sep China Expansion of areas for issuance of group tourist visas (residents in Liaoning and Shandong Provinces, Tianjin, and Jiangsu and Zhejiang Provinces) Mar ROK Provisional visa exemption (shifted to limitless visa exemption from March 2006) Mar Taiwan Provisional visa exemption (shifted to limitless visa exemption from March 2006) Jul China Start of issuance of group tourist visas throughout Japan Jul China Start of issuance of individual tourist visas (at diplomatic establishments in Beijing, Shanghai and Guangzhou) Jul China Start of issuance of individual tourist visas throughout Japan Jul China Start of issuance of multiple visas to tourists to Okinawa Jul China Start of issuance of multiple visas to tourists to Iwate, Miyagi and Fukushima Prefectures in Tohoku region. Notes: Countries in yellow columns are those for visa exemption. Source: MOFA website, White Paper on Tourism in Japan

6 In China s case, it is clear that the issuance of individual tourist visas made significant contributions to the increase in the number of visitors to Japan against the backdrop of a rising Chinese income level. As for the trend since 2000, while the number of visitors to Japan from China had already been growing at a higher rate than the overall number of foreign visitors, the Visit Japan initiative, launched in 2003, accelerated the growth starting in The number of visitors from China increased slightly even in 2009, the year after the Collapse of Lehman Brothers. Following the start of issuance of individual tourist visas in 2009, the number of visitors from China rose steeply in In 2011, the number fell due to the impact of the Great East Japan Earthquake, but in 2011, it recovered close to the level in Although the number fell again in 2013 compared with the previous year, it increased by 1.09 million visitors (up 83.3% from the previous year) in 2014 (Figure II ). Figure II Changes in the number of Chinese visitors to Japan Start of issuance of group tourist visas Start of the Visit Japan initiative Expansion of areas for issuance of group tourist visas Start of issuance of group tourist visas throughout Japan Start of issuance of individual tourist visas Collapse of Lehman Brothers Great East Japan Earthquake Start of issuance of multiple visas to tourists to Okinawa Start of issuance of multiple visas to tourists to three prefectures in Tohoku region World ROK Source: JNTO, CEIC database. (Year) Finally, in the case of ASEAN countries, the relaxation of visa requirements, coupled with the yen s weakening, made significant contributions to the increase in the number of foreign visitors to Japan. In the second half of 2013, Japan relaxed visa requirements for some ASEAN countries. Specifically, the requirements were relaxed for Thailand, Malaysia, Indonesia, the Philippines and Vietnam in July 2013 and for Cambodia, Laos and Myanmar in November. For some of these countries, visa requirements had already been relaxed in 2012, and thanks to the combined effects of the relaxation and the yen s weakening, the number of visitors from each of them registered a higher rate of increase in 2013 than in and before 2008, the year of the Collapse of Lehman Brothers (Figure II , Table II and Figure II ). 312

7 Figure II Changes in the number of visitors from ASEAN member countries to Japan World Malaysia Thailand Indonesia Philippines Viet Nam Relaxation of visa requirements (Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam) Relaxation of visa requirements (Indonesia, Malaysia, and Thailand) Start of the Visit Japan initiative Great East Japan Earthquake Collapse of Lehman Brothers Source: JNTO, CEIC database. (Year) Table II Relaxation of visa requirements to visitors from some ASEAN member countries Tourists nationalities and regions Details of relaxation of visa requirements Jun Thailand Start of issuance of multiple short-term visas Sep Malaysia Start of issuance of multiple short-term visas Sep Indonesia Start of issuance of multiple short-term visas Jul Thailand Visa exemption Jul Malaysia Visa exemption Jul Indonesia Extension of the term of multiple visas from 15 days to 30 days Jul Philippines Start of issuance of multiple visas Jul Viet Nam Start of issuance of multiple visas Nov Cambodia Start of issuance of multiple visas Nov Lao PDR Start of issuance of multiple visas Jan Myanmar Start of issuance of multiple visas Notes: Countries in yellow columns are those for visa exemption. Source: MOFA website, White Paper on Tourism in Japan

8 Figure II Changes in international currencies and nominal exchange rate 2010=100 Depreciation of currencies (appreciation of yen) Thailand Appreciation of currencies (depreciation of yen) Taiwan United States ROK China Source: EIKON (Thomson Reuters). (3) Consumption trend of foreign visitors to Japan and spreading of the benefits to various regions While the number of foreign visitors to Japan rose to a record high in 2014, the amount of their consumption exceeded 2 trillion yen in the same year, also hitting a record high and increasing by 500 billion yen from the previous year. Sales to foreign tourists at department stores grew at a higher rate than the rate of increase in the number of foreign visitors. This indicates that the impact of the increase in the number of foreign visitors to Japan on the Japanese economy is growing rapidly (Figure II ). 314

9 Figure II Changes in sales to foreign tourists at department stores Sales to foreign tourists at department stores (duty-free application basis; excluding expendable supplies) Sales to foreign tourists at department stores (duty-free application basis; including expendable supplies) Number of foreign tourists in Japan Source: JNTO, Japan Department Stores Association. * In October 2014, the scope of duty-free items was expanded to include expendable supplies such as cosmetics and food. The Economy Watchers Survey (March 2015), compiled by the Cabinet Office, also increasingly makes references to the rising number of foreign tourists. Apparently, the increase in the number of foreign tourists is contributing to economic growth in a wide range of regions, from Hokkaido to Okinawa, mainly in the tourism, lodging and retail industries. Specifically in which regions and in what way are foreign tourists conducting consumption activities? Of travel-related consumption, we will look at expenditure in Japan by category 55, which reveals the specific amount of consumption. The total amount of expenditure in Japan by category came to around 1.72 trillion yen in Of the amount, shopping accounted for the largest portion, billion yen, followed by accommodation (441.3 billion yen), eating and drinking (339.7 billion yen) and transportation (162.4 billion yen) 56. As for the margin of change, shopping accounted for billion yen of the increase of 480 billion yen (an increase of 38.6% compared with the previous year) in the amount of travel-related consumption in Eating and drinking made up the second largest portion of the increase (105.9 billion yen; up 45.3%), followed by accommodation (56.6 billion yen; up 14.7%) and transportation (46.8 billion yen; up 40.5%) (Table II ). 55 Expenditure in Japan by category does not include package tour fees, which are part of travel-related consumption. However, as package tour fees include domestic inn and hotel lodging fees, transportation fees, eating and drinking expenses and domestic air fare, expenditure in Japan by category fails to capture part of the actual spending in Japan. 56 Expenditure by item was calculated through the following formula: The number of foreign visitors x purchase rate x purchases amount per purchaser. 315

10 The shopping expenditure amount not only represents a large portion of the amount of travel-related consumption, but its growth rate is also high. It can be said that the recent growth in travel-related consumption is attributable in substantial part to the increase in the shopping expenditure amount. The growth rates of eating and transportation expenses are also higher than the growth rate of the number of foreign visitors, meaning that per-capita consumption is on an uptrend. The growth rate of accommodation fees is lower than the growth rates of other items. However, given the increasing usage of package tours 57, the lower growth rate does not necessary mean that per-capita expenses are declining. Table II Expenditure in Japan by category Expenditure amount (100 million yen) Growth rate of expenditure amount (year-on-year change; %) Total of travel-related consumption 7,312 9,737 12,436 17, Shopping expenditure 2,506 3,566 4,805 7, Accommodation fees 2,376 3,127 3,847 4, Eating and drinking 1,455 1,849 2,338 3, Transportation expenses ,156 1, Leisure service expenses Others Source: Consumption Trend Survey for Foreigners Visiting Japan (JTA), Honichi Gaikyakusu no Doko (JNTO). While the overall shopping expenditure amount accounts for most of the amount of travel-related consumption, specifically, expenditure on cosmetics and pharmaceuticals grew strongly in 2014 (up 82.5 billion yen, or 90.2%, from the previous year) 58. Presumably, the expansion of the scope of duty-free items to include expendable supplies such as cosmetics is a factor behind the steep increase. Other items for which expenditure is growing at a high rate include western clothing, bags, shoes (up 55.1 billion, or 51.9%, from the previous year), consumer electronics (up 37.2 billion yen, or 100.7%) and cameras, video cameras, watches (up 29.2 billion yen, or up 54.2%). Concerning these products, some people point out that sales increased because of strong confidence in Japan in terms of product quality and absence of counterfeit goods, in addition to the yen s weakening, which makes Japanese products less expensive for foreign tourists. The high growth rate of expenditure on manga comics, anime, character merchandise (up 7.6 billion yen, or 75.7%), is an indication of the high reputation of Japanese contents abroad, although the increase is not large in absolute terms. The growth in the amount of expenditure on fashion items, foods and contents can be generally regarded as 57 According to the Consumption Trend Survey for Foreigners Visiting Japan, the purchase rate of package tours has been on an uptrend, rising from 28.1% in 2012 to 30.4% in 2013 and 34.1% in The medicine, health goods, toiletries category, which was used until 2013, was divided into two categories, cosmetics, perfume and medicine, health goods, toiletries, starting in the first quarter Here, comparison was made between the total sum for these two categories and the figure for the medicine, health goods, toiletries category that was used until

11 an achievement of the Cool Japan strategy (Table II ). Table II Expenditure in Japan by shopping expenditure Expenditure amount (100 million yen) Growth rate of expenditure amount (year-on-year change; %) Shopping expenditure 2,506 3,566 4,805 7, Confectionery Other food, beverages, alcoholic beverages, tobacco Cameras, video cameras, watches Household electric appliances Medicine, health goods, toiletries , Japanese clothing (kimono), folkcraft articles Western clothing, bags, shoes ,061 1, Manga comics, anime, character merchandise Other shopping expenditure Source: Consumption Trend Survey for Foreigners Visiting Japan (JTA), Honichi Gaikyakusu no Doko (JNTO). Next, we will look at the trend in expenditure by foreign visitors by region. The Consumption Trend Survey for Foreigners Visiting Japan includes a question concerning the amount of expenditure in the main place of overnight stay, making it possible to identify to a certain extent the amount of expenditure by foreign visitors to Japan by the region of destination. In addition, from the Statistics on Overnight Travel, it is possible to identify the number of foreign visitors who make overnight stays in regions. The results of these two surveys enable rough estimation of expenditure by the region of overnight stay. First, we will look at changes in the number of foreign visitors by region 59. In terms of the cumulative number of days of overnight stay by foreign visitors, foreign tourists stay longest in the Kanto region, which includes Tokyo, as might be expected. As foreign visitors include business travelers, the number of days of overnight stay is by far the largest in Tokyo among prefectures, with around a third of foreign visitors to Japan spending nights there. The Kanto region is followed by Kinki, Hokkaido, Kyushu, Chubu and Okinawa. In Hokkaido and Okinawa, the growth rate of the number of visitors has been particularly high in recent years. While the total number of days of overnight stay by foreign visitors to the whole of Japan in 2014 was up 143% compared with 2011, the growth rate for Hokkaido was higher, 155%. Moreover, the number of visitors to Okinawa more than 59 The regions used here correspond to the regions where regional Transport and Tourism Bureaus of the Ministry of Land, Infrastructure, Transport and Tourism are located in accordance with the regional classification used in the Consumption Trend Survey for Foreigners Visiting Japan and the Statistics on Overnight Travel. 317

12 quadrupled, growing 312%. Kyushu is attracting many visitors from the Republic of Korea and Taiwan, which are geographically close to the region. Meanwhile, the number of foreign visitors who spend nights in the Chubu region is growing presumably because of the presence of a large international airport there and also because the region is often included in package tours due to its location between the Kanto and Kansai regions (Table II ). Table II Number of foreign tourists by region Number of visitors who spend nights in total (10,000 people; per night) Growth rate (year-on-year change; %) Total across Japan 1,842 2,631 3,350 4, Hokkaido Tohoku Kanto 828 1,175 1,391 1, Hokuriku and Shinetsu Chubu Kinki , Chugoku Shikoku Kyushu Okinawa Source: Shukuhaku Ryoko Tokei Chosa (JTA). Table II shows the amount of expenditure by foreign visitors by region, which was calculated by estimating the number of foreign visitors by region and multiplying the amount of expenditure in the main place of overnight stay by that number. Table II Estimated amount of expenditure by foreign tourists by region Total across Japan (100 million yen) Hokkaido Tohoku Kanto Hokuri ku Chubu Kinki Chugoku Shikoku Kyushu Okinawa , , , , , , , , , , , , Source: Consumption Trend Survey for Foreigners Visiting Japan, Shukuhaku Ryoko Tokei Chosa (JTA), Honichi Gaikyakusu no Doko (JNTO). Notes: Total values in Total across Japan are not the same as those shown in Consumption Trend Survey for Foreigners Visiting Japan or the balance relating to travel (receipt) in Balance of Payments because the total values are estimates based on the expenditure amount of major accommodation shown in Consumption Trend Survey for Foreigners Visiting Japan and they do not include the expenditure amount of package tours. 318

13 Based on the estimated amount of expenditure by region, the total amount of consumption by foreign visitors in the whole of Japan in 2014 came to around 1.39 trillion yen, which is equivalent to around 80% of the expenditure during stay in Japan, which was approximately 1.72 trillion yen. This figure is also equivalent to around 70% of the travel-related consumption, including package tour fees, which was approximately 2 trillion yen. The trend in the amount of expenditure by region is mostly in line with the trend in the cumulative number of days of overnight stay by foreign visitors by region. The Kanto region accounts for more than half of the total amount of expenditure, followed by Kinki, Chubu, Hokkaido, Kyushu and Okinawa in that order. However, as the size of economy varies from region to region, the impact of the increase in the number of foreign visitors cannot be measured based on the amount of expenditure alone. To better capture the impact, Figure II shows the amount of expenditure by foreign visitors by region relative to nominal GRP (gross regional product). Figure II Amount of expenditure by foreign tourists by region relative to nominal GRP Amount of expenditure by foreign tourists by region relative to GRP Share of foreign tourists in overall tourists who spend nights in the region Hokkai Tohoku Kanto Hokuri Chubu Kinki Chugoku Shikoku Kyushu Okinawa do ku Source: Consumption Trend Survey for Foreigners Visiting Japan, Shukuhaku Ryoko Tokei Chosa (JTA), Honichi Gaikyakusu no Doko (JNTO), Kenmin Keizai Keisan (CAO). This figure indicates that the impact of the increase in the number of foreign visitors is large not only in the Kanto and Kinki regions, where both the number of foreign visitors and the amount of their consumption are large, but also in Hokkaido and Okinawa. In regions where the impact is large, the proportion of foreign visitors in the total number of tourists who spend nights there is high. It can be said that regions successful in communicating their attractive points to other countries and attracting foreign visitors are enjoying substantial economic benefits. 319

14 (4) Summary This section explained the policies underpinning the increasing number of foreign visitors to Japan and described the consumption trend, which shows spreading benefits of foreign tourist expenditure. As the income level of neighboring Asian countries is projected to rise, demonstrating Japan s attractive points in various ways through combinations of initiatives such as Cool Japan and Visit Japan, for example, is expected to lead to an increase in the number of foreign visitors in a wide range of regions in Japan. 320

15 2. Competitiveness in attracting enterprises from the perspective of the choice of business location by multinationals In the previous paragraph, we looked at the ongoing improvement in Japan s competitiveness in attracting people through an analysis of the uptrend in the number of foreign visitors to Japan, the underlying policies and the consumption trend of foreign visitors. In this section, we will examine Japan s competitiveness in attracting enterprises while looking at the choice of business location by multinationals for reference. First, we will review existing theories concerning the perspectives from which enterprises make location choices. Next, we will look at an overview of how multinationals choose business location from the viewpoints of the actual location of multinationals business bases as classified by function and the requirements considered by them when making the choice. And then, we will identify challenges for Japan in improving its competitiveness in attracting enterprises while referring to the business environment in Japan and the country s unique superiorities. (1) Position of locational competitiveness in location choice by enterprises Here, we will review several theories with a focus on the elements of the location environment to which enterprises pay attention when making location choices. Dunning (1998) examined changes in the influencing factors of the location behavior of multinational enterprises between the 1970s and the 1990s. According to Dunning, in the 1970s, enterprises placed priority on the price and usability of natural resources and manufacturing, transportation, raw materials and wage costs when making location choices, whereas in the 1990s, in order to adapt to a shift to a knowledge economy, they placed emphasis on the usability of skilled workers and experts with relevant knowledge, proximity to users of knowledge-intensive divisions and the usability of assets which, if combined with their own assets, can be expected to bring synergetic effects. This means that the behavior of enterprises shifted in priority from cost factors in general to the acquisition and utilization of strategic assets 66 such as advanced technologies and knowledge. Porter (1998; translated into Japanese in 1999) argued that in a knowledge-based society in which factors such as the presence or absence of natural resources and labor and capital costs have lost significance amid globalization and in which knowledge drives social and economic development, an environment that encourages business growth by inducing innovations 67 has come to play a large role in locational competitiveness. Furthermore, Porter and Rivkin (2012) described location choice as a referendum on a nation s competitiveness. They argued that when an enterprise chooses a country/region as a business location, it favors a country/region with a business environment that enables its operations and functions to make the best performance in the global marketplace and that 66 According to Kojima (2012), strategic assets are those necessary for formulating business strategies at both company and project levels. Strategic assets are unique to the companies to which they belong and they turn the companies business capabilities into the source of their competitive advantage (the essential element for the companies businesses to have a competitive advantage in the market). 67 Porter, M. (1998) (translated by Hirotaka Takeuchi, 1999) pointed out that a cluster, which refers to the accumulation of interrelated companies, universities, research institutions, local governments, etc. in specific fields and spurs innovation, has come to play a significant role in locational competitiveness. 321

16 chosen countries have a competitive advantage (locational competitiveness). They indicated several actions that should be taken by countries/regions to maintain their locational competitiveness, including protecting their core strengths and constantly improving their business environment in order to address weaknesses in the business environment 68. Takahashi (2011) contended, based on the examination of existing representative theories concerning location choices made by multinational enterprises that such enterprises concentrate their business operations in locations where their advantages can be effectively exercised or where new strategic assets can be used. He also argued that when multinational enterprises choose locations for overseas subsidiaries that conduct research and development or manufacture high-value added products, they need to find locations with attractive features, such as the presence of effective clusters 69, in order to make use of their advantages and to gain benefits that outweigh trading, research and development and manufacturing costs. These theories suggest that in recent years, companies have been making location choices not only from the traditional viewpoint of seeking superiority in the general business environment in terms of business cost and other elements but also from the viewpoint of seeking an environment that enables companies to improve their competitive advantage by using strategic assets. In other words, from the standpoint of countries/regions that seek to be chosen as business locations, if they want to invite businesses, they need to constantly improve the general business environment in order to address weaknesses in the environment, including tax reforms and revision of institutional systems concerning establishment of companies and also need to develop an environment that enables investing companies to produce synergetic effects locally and to improve their competitive advantage by maintaining and strengthening their core strengths and by continuing to create new strengths through innovations. As shown above, roughly speaking, companies make location choices from the following two viewpoints: (A) seeking superiority in the general business environment and (B) seeking an environment that enables companies to improve their competitive advantage by using strategic assets. Therefore, to identify the influencing factors of the choice of business function locations by multinationals, we use these two viewpoints. (A) Viewpoint of a country s (a business location s) superiority in the general business environment, which is represented by the horizontal axis of Table II This is a viewpoint of a business location country s superiority in the general environment in terms 68 According to Porter, M. and Rivkin, J. (2012), all countries make active efforts to improve the business environment and implement measures to attract businesses in order to become chosen countries because they can expect to secure jobs, investments, tax revenue and economic development if they are chosen as business locations. In their analysis, several perspectives for becoming chosen countries (maintaining locational competitiveness) are cited, including making continuous improvements to resolve the weaknesses of the business environment, such as tax system reforms, and preserving core strengths (creation and commercialization of new ideas, in the case of the United States). 69 Takahashi (2011) argued that successfully functioning clusters are highly effective in creating innovations and enhancing productivity and that the presence of such clusters attracts investments from multinationals. 322

17 of the country s economic growth rate, business cost, geographical location, state of infrastructure development, common language (hereinafter referred to as superiority in the general business environment ). (B) Viewpoint of a country s individual elements that, if the country is chosen as a business location, can improve the investing company s competitive advantage, which is represented by the vertical axis of Table II This is a viewpoint of individual elements whereby the investing company improves its competitive advantage by making use of its own assets, such as outstanding technological prowess, the presence of high-quality accumulation of companies, highly-skilled human capital capable of taking advantage of companies strategic assets, the presence of business models with a high level of novelty and originality (hereinafter referred to as individual elements ). Below, we will examine multinationals business locations and attractions offered and challenges faced by Japan while keeping the above two viewpoints in mind. Table II Perspective of the choice of business location by multinationals (picture) Superiority in the general business environment (High economic growth rate, abundant population, low wage cost, common languages, geographical proximity, public safety, well-developed infrastructures, etc.) Individual elements that, if the country is chosen as a business location, can improve the investing company s competitive advantage (Cutting-edge technology, personnel with advanced skills, innovative business models, etc.) (2) Foreign multinationals business locations Here, we will look at the specifics of the location of business functions by multinationals. In a survey program commissioned by the Ministry of Economy, Trade and Industry 70, a desktop survey was conducted with 54 major U.S., European and Asian multinationals (excluding Japanese multinationals) 71 based on publicly available reference materials in relation to trends in the location of 70 Deloitte Tohmatsu Consulting (2015). 71 Here, Japanese companies were excluded because the survey is intended to examine foreign multinationals location trend and the possibility of their choosing Japan as a business location. The survey subjects were selected in consideration of criteria concerning global business achievements, such as simultaneously having large consolidated sales and having an international sales ratio of 20% or higher, as 323

18 business functions, and a hearing survey was conducted with around 10 such multinationals with respect to the requirements on which they place priority when making location choices. The survey asked the respondents about nine business functions: R&D, regional headquarters, marketing, procurement, production, distribution, sales, after-sale service and back office/it service. However, it was difficult to obtain sufficient results to enable evaluation, since information that can be collected was limited not only through publicly available reference materials but also through hearings. Therefore, below, we will mainly look at R&D, production, and regional headquarters, concerning which information was relatively readily available with respect to the actual location status 72. (A) R&D and Production Functions (a) Policy for location and priority requirements Table II shows the policy for location of business functions revealed by companies through the hearing survey. Regarding the R&D function, there were such tendencies as concentrating core technologies at the headquarters or in major markets with a large scale of sales, dispersing applied R&D operations intended to meet local needs across locations close to demand regions and placing priority on human resources, languages and costs. Regarding the production function, there were such tendencies as following the principle of local production for local sales, concentrating production of labor-intensive products in low-cost countries and concentrating production of high-value added products at own factories. Table II Policy for location of R&D function and production function. Business functions Policy for location and priority requirements - Development of core units are concentrated in the home country R&D bases are located a region-by-region basis due to on-site development. Abundance and quality (sufficiency of education) of personnel are most prioritized in determining location countries by region. - Technical headquarters manage the entire business. Application research R&D institutes are established in most countries in which projects are being developed and fundamental research institutes are established in markets with large sales. - Personnel, cost and languages are considered important in particular. Bases are concentrated in India since the country can provide an environment where abundant of personnel with academic experience can be hired at low cost. - In principle, the practice of local production for local sales is conducted. In some cases, overseas production is conducted as an exception, such as concentration of production bases in China as for products with high labor Production cost. - All the low-value-added tasks, such as assembly, are commissioned to outside companies, and production of core units is concentrated in own plants. well as the degree of information disclosure concerning business locations and functions. 72 Although a certain amount of information was obtained with respect to the sales function, no reference is made to it here because no particular trend was observed, with the location of sales bases dispersed across the world as they are presumably located where there is demand. 324

19 Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). (b) Actual location status The surveyed multinationals were classified into seven industries: general electrical equipment (mainly heavy electrical equipment), general consumer goods such as foods and daily necessities, automobiles, chemicals, pharmaceuticals, information and communication (high-technology) and general electrical equipment (mainly home electronics). They were also classified according to the characteristics of location distribution into three types: dispersion type, concentration type and hybrid type 73. Described below are the results of analyses based on these classifications. <Type 1: Dispersion type> This type includes many industries which deal with a wide range of products and which face needs reflecting cultural idiosyncrasies and regional preferences. As it is highly necessary for such industries to incorporate local needs and customize products, the locations of their business bases tend to be more dispersed compared with other industries. (i) General consumer goods such as foods and daily necessities <R&D bases> While the largest number of R&D bases is located in the United States with its huge market, the location of such bases is dispersed relatively widely across other countries/regions as well (Table II ). It is presumed that localization of applied R&D operations intended to incorporate cultural idiosyncrasies and regional preferences and needs and to customize products accordingly is advanced. <Production bases> Priority from the viewpoint of location is placed on proximity to a demand region. The largest and second largest numbers of production bases are located in the United States and China with their huge markets, respectively. However, many production bases are also dispersed across other countries/regions, indicating that the principle of local production for local consumption is being followed (Table II ). 73 The distribution of business function bases is classified by the trend of dispersion or concentration, which is easy to identify visually. Presumably, the distribution reflects the perspective of choosing business locations in light of the balance between superiority in the general business environment, such as cost, and individual elements, such as high-level technological prowess and innovative business models. 325

20 Table II Policy for location of R&D function and production function. <Type 1> i) General consumer goods : R&D bases : Production bases : R&D bases (bases in home countries) : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). R&D Country Total Number of bases Bases in overseas countries Bases in home countries Production Country Total Number of bases Bases in overseas countries Bases in home countries United States United States United Kingdom China Germany Mexico China Germany France Russia India 7 7 Brazil Mexico 5 5 Indonesia France Italy India <Type 2: Concentration type> This type includes many industries that provide relatively uniform products and services around the world. Both R&D and production bases are concentrated in a small number of locations, while sales bases are located on a country-by-country basis. (i) Pharmaceuticals <R&D and production bases> 326

21 A high level of technological prowess, institutional systems and laws and regulations are important elements from the viewpoint of business location. Both R&D and production bases are most heavily concentrated in the United States, which possesses a high level of technology in the fields of healthcare and life sciences. Many R&D and production bases are also concentrated in developed European countries, including the United Kingdom, Switzerland, France and Germany. Meanwhile, some multinationals have located bases in India, which is a major production foothold for low-price generic drugs, in view of the country s cost advantage (Table II ). Table II Location status of multinationals (general consumer goods) <Type 2> ii) Pharmaceuticals : R&D bases : Production bases : R&D bases (bases in home countries) : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). R&D Production Country Number of bases Number of bases Bases in Bases in Country Bases in Bases in Total overseas home Total overseas home countries countries countries countries United States United States United Kingdom France Switzerland United Kingdom France Germany China China Germany Italy Canada 8 8 Canada 8 8 Japan 5 5 Spain 7 7 India 7 7 Ireland 7 7 Japan

22 (ii) Information and communication (high technology) <R&D bases> From the viewpoint of business location, individual elements, such as a high level of technological prowess, IT personnel and accumulation of information, rather than superiority in the general business environment, are presumably regarded as important. By far the largest number of R&D bases are located in the United States, with most of them established by U.S. multinationals. Israel, which is sometimes called the Silicon Valley of the Middle East, has attracted many R&D bases of multinationals from other countries 74. Many R&D bases are also located in India and China, where personnel with knowledge in advanced technology fields are available in abundance for employment (Table II ). <Production bases> Many production bases are located in China. Presumably, countries with a high level of technological prowess (individual element) are chosen as production bases for high-value added components, while location choice concerning assembly operations is made mainly from the viewpoint of cost. The trend of concentration of production bases from these viewpoints can be observed (Table II ). Table II Location status of multinationals (information and communication) <Type 2> ii) Information and communication (high technology) : R&D bases : Production bases : R&D bases (bases in home countries) : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). 74 For information concerning Israel, see Chapter 2, Section 2, 2. Israel. 328

23 R&D Country Total Number of bases Bases in overseas countries Bases in home countries Production Country Total Number of bases Bases in overseas countries Bases in home countries United States China India United States China Australia 2 2 Israel Mexico 2 2 United Kingdom 7 7 Viet Nam 2 2 Germany 5 5 Canada 4 4 Russia 4 4 Japan 4 4 (iii) General electrical equipment (mainly home electronics) <R&D bases> While many R&D bases are located in developed countries which maintain a certain level of technological prowess, some are located in China and India, where demand is huge (Table II ). <Production bases> As multinationals seek production at an optimal location, China is host to by far the largest number of production bases, followed by emerging countries such as Mexico, Vietnam and Thailand (Table II ). As cost is a significant factor in location choice for assembly, some Japanese companies are moving to bring production bases back to Japan in response to the recent improvement in the business environment in Japan See the Ministry of Economy, Trade and Industry, the Ministry of Health, Labour and Welfare and the Ministry of Education, Culture, Sports, Science and Technology (2015) Part I, Chapter 1, Section 2 2. Domestic Business Locations Responding to Changes in the Business Environment. 329

24 Table II Location status of multinationals (general electrical equipment (mainly home electronics)) <Type 2> iii) General electrical equipment (mainly home electronics) : R&D bases : R&D bases (bases in home countries) : Production bases : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). R&D Country Total Number of bases Bases in overseas countries Bases in home countries Production Country Total Number of bases Bases in overseas countries Bases in home countries ROK China United States ROK China Mexico 5 5 Japan 4 4 Viet Nam 5 5 India 4 4 India 4 4 United Kingdom 4 4 Thailand 3 3 Germany 4 4 Poland 3 3 Italy 3 3 Brazil 3 3 Netherlands United States 3 3 France 2 2 <Type 3: Hybrid type> Industries classified as hybrid type are those for which production and service needs vary significantly from region to region but in which basic technologies and raw materials are widely common. As a result, these industries tend to concentrate basic research bases and production bases from the viewpoint of individual elements, while they tend to disperse the location of applied research bases and product assembly bases. (i) General electrical equipment (mainly heavy electrical equipment) 330

25 <R&D bases> Although many R&D bases are located in developed countries such as the United States and Germany, the location is relatively dispersed across other regions as well (Table II ). As advanced basic technology and raw materials are involved in many cases, R&D bases are concentrated among a handful of countries with a high level of technological prowess. In addition, the location of applied R&D bases, which are intended to adapt to regional characteristics, is relatively dispersed. <Production bases> Many production bases are located in developed countries such as the United States, France (where two bases established by non-french multinationals are located) and the United Kingdom. Presumably, location choice for production of high-function products is made from the viewpoint of technology, while choice for assembly is made from the viewpoint of business cost (Table II ). Table II Location status of multinationals (general electrical equipment (mainly heavy electrical equipment)) R&D : R&D bases : Production bases Country Total : R&D bases (bases in home countries) : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). Number of bases Bases in overseas countries Bases in home countries Production Country Total Number of bases Bases in overseas countries Bases in home countries United States United States Germany France Spain United Kingdom China 6 6 China

26 India 5 5 Germany Russia 4 4 Sweden Portugal 3 3 India ROK 2 2 Italy Canada Spain (ii) Automobiles <R&D and production bases> Both R&D and production bases are concentrated in Germany, the United States and China, each of which has a large automobile market. In particular, U.S. and German enterprises locate many bases in their home countries 76. As product preference varies significantly from region to region in the automobile industry, the practice of local production for local sales from the viewpoint of tariff and business cost is well developed. However, the practice of production at an optimum location, including production in a large market for export, is also well developed in the automobile industry (Table II ). Table II Location status of multinationals (automobiles) <Type 3> ii) Automobiles : R&D bases : Production bases : R&D bases (bases in home countries) : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). 76 As Japan s technological prowess is highly appreciated in the automobile industry, Japanese companies have established many R&D and production bases in their home market (Japan). However, as this survey was intended to examine multinationals business location trends, Japanese companies were excluded from among the survey subjects. 332

27 R&D Country Total Number of bases Bases in overseas countries Bases in home countries Production Country Total Number of bases Bases in overseas countries Bases in home countries Germany United States United States China China Germany ROK Russia Brazil 4 4 Brazil Mexico 3 3 Mexico Italy 3 3 ROK India 3 3 Poland Japan 3 3 United Kingdom South Africa 9 9 (iii) Chemicals <R&D bases> The largest number of R&D bases are located in the United States. However, if bases set up by multinationals in their home countries are excluded, China, Japan and India are also host to many bases (Table II ). It is presumed that because Japan maintains competitiveness in the functional chemicals industry 77, the country is chosen as a location for R&D bases due to individual elements, such as the presence of a deep technological base and coordination capability. <Production bases> While production bases are mostly concentrated in the United States and China, there are many bases in Germany and France as well (Table II ). Presumably, the United States has in recent years been attracting production bases because of reduced energy cost due to the unconventional energy revolution. 77 The Ministry of Economy, Trade and Industry (2013a) refers to the chemical industry that increases the added value of customers products by presenting, in coordination consultation with customers, solutions to potential challenges of which even they are unaware by adding special functions through original technology. 333

28 <Type 3> iii) Chemicals Table II Location status of multinationals (chemicals) R&D : R&D bases : Production bases Country Total : R&D bases (bases in home countries) : Production bases (bases in home countries) (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). Number of bases Bases in overseas countries Bases in home countries Production Country Total Number of bases Bases in overseas countries Bases in home countries United States United States China China Germany Germany Japan France Brazil Brazil India 8 8 ROK ROK India France 4 4 Spain Australia 4 4 Italy Singapore 4 4 (A) Regional headquarters Next, we will look at the location status of regional headquarters. (a) Policy for location and priority requirements Some multinationals have a policy of not creating regional headquarters in the form of a corporation while possessing the function of integrated command and control over individual business functions across multiple countries within regions or while making regional managers in charge of individual business functions perform the function of a regional headquarters. As for policies concerning Japan, a relatively large number of multinationals locate business operations in the country 334

29 as a separate market to be tackled, rather than as a base from which to exercise integrated command and control over operations in the rest of Asia, because Japan itself, as well as China, is a large market. Regarding location choice, some multinationals replied that they choose countries with good access to a whole region and countries adopting preferential tax measures 78 for regional headquarters, such as Singapore (Table II ). In many cases, business function bases simultaneously serve as regional headquarters. When regional headquarters are established in the form of a corporation, multinationals presumably tend to place priority on the superiority of the general business environment (tax and other cost factors, geographical factors, etc.). Table II Policy for locations of regional headquarters Policy for location and priority requirements - Hosts of functions of integrated command and control over regional headquarters vary depending on functions. For example, Japan is a host to regional headquarters of personnel function in the Asia-Oceania region. - No bases are provided as headquarters having a function of integrated command and control over regions in the form of a corporation, but possessing the function of integrated command and control over each function across multiple countries within regions. For example, in Japan there are regional managers in charge of personnel functions for integrated command and control over the East Asian area, Japan and ROK. - There are functions of integrated command and control over regional headquarters. However, the functions belong to individual persons rather than to bases in the form of an organization or corporation. (Offices for which persons having functions of integrated command and control over regional headquarters work play a role of a base to perform the functions.) - Basically, hosts of such functions are often determined based on the geographical factors. As a basic role, bases, when established on a country-by-country basis, provide management guidance to the regions with unstable business management, and such bases cannot make decisions independently from parent companies. - Preferable countries for establishing bases are those in which the burden of business cost is small, preferential treatments are well-organized, and there is an easy access to other Asia Oceania regions. Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). (b) Actual location status In the Asia-Oceania region, Singapore is host to by far the largest number of regional headquarters, followed by China. In the Americas, the United States is host to the largest number of regional headquarters. It was also found that in Europe, the Middle East and Africa, there are many 78 Singapore provides an incentive in the form of tax reduction to companies that have set up their regional headquarters for the Asia-Pacific region there and have been recognized by the government. 335

30 headquarters in the United Arab Emirates, the Netherlands, Germany and Switzerland (Table II ). Table II Location status of multinationals' regional headquarters (all sectors) Regional headquarters (all sectors) : Regional headquarters (Figures show the number of bases.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). Europe, the Middle East and Africa region Asia-Oceania region Americas region Country Number of Number of Number of Country Country bases bases bases UAE 4 Singapore 10 United States 9 Netherlands 3 China 4 Brazil 3 Germany 3 Japan 3 Panama 1 Switzerland 3 India 2 Canada 1 France 2 Viet Nam 1 Colombia 1 Russia 2 Malaysia 1 South Africa 2 Hong Kong 1 United Kingdom 1 Egypt 1 Turkey 1 Ukraine 1 Belgium 1 (c) Other functions (distribution, back office, etc.) Below, we will look at the findings concerning business location policy regarding other functions 336

31 (distribution, back office, etc.) as reference information (Table II ) 79. For example, concerning the back office function, there is little difference across regions or across business types, so the location of this function tends to be concentrated. Regarding location choice, priority is presumably placed on superiority of the general business environment, such as geographical factors, including time zones, and language and cost factors. As for the distribution function, distribution bases are established on a country-by-country basis in principle, while there are also moves to concentrate the distribution function at hub bases. Regarding location choice for hub bases, priority is presumably placed on superiority in the general business environment in terms of business cost, transportation infrastructure development, geographical access, etc. Table II Policy for location of bases with other functions Business functions Policy for location and priority requirements - As for a marketing function, a marketing team at the global headquarters determines the brand concept of brands while teams established in regions determine policies for specific processes of promotion. Marketing - Persons in charge of product marketing and those in charge of enterprise marketing are in different departments. Bases of product-base marketing are established in the business department while those of enterprise marketing are in the headquarters. - In some cases, central purchasing is conducted, but in principle, bases are established for a purchasing function on a country-by-country basis. - A procurement function belongs to a head office in the headquarters and Procurement and divisions in charge of procurement are established in each base. Suppliers purchasing are standardized across units to the extent possible. For example, temporary staff service agencies and suppliers of office supplies are determined based on the instruction from the global headquarters. - A distribution function is established on a country-by-country basis in Distribution principle, but Singapore is a main distribution hub as a base of South-eastern Asia. - A back office/indirect department service function is concentrated in multiple bases taking into consideration time zones, including commissioned services, enabling ceaseless operation worldwide at all hours. - Among shared services such as accounting, globally-harmonized services using English are concentrated in India while services only utilized in the areas using Japanese, Korean or Chinese are concentrated in China. - As for an IT function, the function of the headquarters is established in a home country, and operation centers are established in a country-by-country basis. Back office/it service - As for establishing bases for the indirect department services, enjoying preference tax treatment is not a prioritized matter, but quality of personnel, staff cost and proximity to large markets are important elements. - IT infrastructures are considered to have few differences between countries, including emerging countries, and they are not prioritized as a criterion of establishing bases. - Cost of a back office function is a most prioritized element. - Functions of back office and IT are being concentrated, and major destinations are India and China since they are excellent in cost effectiveness 79 It should be kept in mind that a sufficient amount of information for conducting evaluation was not obtained. 337

32 and language ability. Selling Bases are dispersively established in areas with high demand. Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). (d) Choice of business location by multinationals (summary) As shown above, the trend in geographical distribution of multinationals business function bases varies from function to function and from industry to industry. Presumably, multinationals are making location choice in a strategic manner in light of the characteristics of not only relevant business functions but also their industries while taking into consideration superiority in the general business environment and individual elements (business cost, demand, regulation, technology, industrial accumulation, etc.). From the standpoint of a country seeking to be chosen, it is increasingly difficult for Japan to attract enterprises solely on the basis of its superiority in the general business environment because there is a clear business cost difference in favor of emerging countries and also because the business environment in those countries has been improving in recent years. While it is of course difficult for developed countries to attract enterprises unless they have an attractive general business environment, it is necessary for them to maintain and strengthen their attractiveness and advantage concerning individual elements, such as a high level of technological prowess, capacity for innovation and accumulation of high-level companies. In Japan s case, the Japan Revitalization Strategy identifies the health and longevity of industry as one of the strategic sectors and the government is implementing policies to develop and strengthen this industry. In response to the deregulation of the regenerative medicine sector implemented in November , several foreign companies are considering conducting R&D activity in Japan or forming business partnerships with Japanese companies, according to a media report, 81 so there are expectations for entry into Japan by foreign enterprises to conduct R&D and other business activities. This suggests appropriate deregulation enhances competitiveness in attracting foreign enterprises. (3) Attractions offered and challenges faced by Japan Here, we will examine Japan s locational competitiveness and competitiveness in attracting enterprises while taking into consideration theories concerning the location behavior of multinationals and the actual location status of non-japanese multinationals at which we have already looked. First, we will identify attractions offered by and challenges faced by Japan based on opinions 80 On November 25, 2014, the Act on Securing of Quality, Effectiveness and Safety of Pharmaceutical Products, Medical Devices, etc. was put into force, with the result that the new category of products related to regenerative medicine, etc. was created in addition to the existing categories of pharmaceutical products and medical devices. Under this law, a new system was introduced whereby non-universal products related to regenerative medicine, etc. may be eligible for fast-track approval under certain conditions and time limits if their effectiveness is presumed and safety is recognized. At the same time, the Act on Securing the Safety of Regenerative Medicine, etc. was also put into force, making it possible for medical institutions to outsource to companies the culturing and processing of cells used for regenerative medicine. 81 Nikkei Developing Regenerative Medicine Drugs in Japan, January 26,

33 expressed by non-japanese multinationals. Next, we will review the evaluation of Japan s overall business environment using international competitiveness indicators. Then, we will consider attractions offered by and challenges faced by Japan in terms of individual elements based on various indicators, questionnaire surveys, etc. (A) Views of multinationals operating in Japan We will look at the results of questionnaire and hearing surveys 82 conducted on around 30 non-japanese multinationals operating in Japan with respect to how they view Japan as an investment destination. The questionnaire survey asked respondents to evaluate Japan on a scale of 1 to 4, with 4 indicating the most positive view of Japan, with respect to the following nine items: (i) future market potential, (ii) strictness of restriction on entry, (iii) technological prowess (R&D capability, manufacturing technology, etc.), (iv) the degree of industrial accumulation, (v) degree of regulation (environmental, labor regulation, etc.), (vi) quality of human resources (people s temperament, skills, etc.), (vii) provision of public services in multiple languages, (viii) various costs and (ix) substance of preferential measures. The questionnaire results (Figure II ) and matters pointed out by respondent companies through the hearing survey (Table II ) are as shown below. While it should be kept in mind that the number of respondent companies is small, Japan was positively viewed with respect to technological prowess (average grade at 3.40), quality of human resources (3.05) and the degree of industrial accumulation (2.95). Meanwhile, with respect to future market potential (2.74), which tends to be regarded as a weak point of Japan in relation to the forecast of Japan s future population trend, the evaluation was relatively positive, with no respondent describing Japan as unattractive in this respect. Regarding strictness of restriction on entry (2.50), there were replies that restriction on entry itself is not strict and that improvement had been made compared with previously. On the other hand, regarding degree of regulation (1.95), provision of public services in multiple languages (1.90), various costs (1.90) and substance of preferential measures (2.00), the evaluation was generally negative. In the hearing survey, it was pointed out with respect to degree of regulation that Japan is imposing very strict regulation compared with other countries and there are systems and practices unique to the Japanese market 83. However, whereas the evaluation was generally negative with respect to some items, such as provision of public services in multiple languages and various costs in the questionnaire survey, positive views, such as one citing an improvement in recent years, were expressed in the hearing survey. This indicates that multinationals operating in Japan are recognizing improvements in Japan s business environment. 82 The survey commissioned by the Ministry of Economy, Trade and Industry that was mentioned earlier. 83 The Cabinet Office (2014) referred to foreign companies observation that systems and practices unique to Japan (e.g., requirement for meeting proprietary Japanese standards) as well as various regulations are constraining corporate activities and cited the presence of such systems and practices as a background factor of the low profitability of Japanese companies. 339

34 Figure II Non-Japanese multinationals' evaluation of Japan Future market potential (Market scale, opportunities of starting up new businesses, etc.) Strictness of restriction on entry Technological prowess (R&D capability, manufacturing technology, etc.) Degree of industrial accumulation Degree of regulation (environmental, labor regulation, etc.) Quality of human resources (people s temperament, skills, etc.) Provision of public services in multiple languages Various costs Substance of preferential measures Evaluation Average grade Positive Positive Positive Positive Negative Positive Negative Negative Negative Unattract ive Strict Low technologi cal prowess Low industrial accumulation Strict Bad Unsatisf actory High Unsatisf actory Average Average Average Average Average Average Average Average Average Highly attractive Approp riate High technolo gical prowess High industrial accumulation Approp riate Good Satisfac tory Low Satisfac tory Notes: Figures show the average values of indices between 1 and 4 defining 1 as the most negative value and 4 as the most positive value. When an average value reaches 2.5 or more, the answer is considered positive. Ratios (%) show the percentages of the respondents in the questionnaire of the survey. Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). Table II Non-Japanese multinationals' evaluation of Japan as investment destination Advantages Disadvantage - As for the future market potential, Japan - As Japan has a unique language and is still an attractive market regardless of service promotion in English is the declining population and aging difficult, opportunities to use its society. Per-capita purchasing power is accumulated knowledge about social Future also strong. It is considered that Japan challenges and other issues in Japan market will remain attractive for a few decades. could be limited. potential - Globalization of Japanese companies - In the Japanese market, customers have has a considerable distance to go, and such high demands for quality that the assistance business, such as IT, is headquarters' are negative concerning considered to have high growth test-marketing new products. potential for years to come. 340

35 Strictness of restriction on entry Degree of technology and industrial accumulation Degree of regulation Quality of human resources (people s temperament, skills, etc.) Provision of public services in multiple languages Various costs Substance of - Japan is considered to be an advanced market with respect to social challenges, such as aging society. - In the food sector, Japan s accumulated knowledge of food for the elderly, food processing methods, and other methods can be disseminated to the world. - Japan was used to be considered slightly strict, but we felt that it is not so strict now. - Regulations themselves are not strict. - Many customers have high technological prowess, and the degree of industrial accumulation is also considered high. We are willing to advance the collaboration with Japanese companies. - Customers are demanding in Japan, but if specifications are accepted, we can develop word-class products. - Japan s technological prowess is considered high. - The people are highly educated and many of them are faithful workers. As for the provision of public services in multiple languages, Japan has been improving it with respect to the development of services in English. - Business costs have dramatically improved thanks to the depreciation of yen, and this helps removing a feeling that cost is high in Japan. - Costs in Japan are considered not extremely higher than those in other developed countries and China. (For example, personnel expenses of newly recruited employees in Japan are relatively higher, but those of management in China are sometimes higher.) 341 The number of Japanese companies as customers has been decreasing in recent years, and it is concerned about the declining of industrial accumulation. - The degree of regulations is considered severer than those in other countries. Japan has unique systems and this would make it difficult to promote new overseas products in Japan and horizontally deploy new Japanese products. - We consider that there are challenges in people s inadequate English ability and the mindset of hesitating to claim and make discussions. The people have enough capability in serving as local staff, but we have an impression that only limited number of people are subject to global evaluation scales. - Various costs in Japan are slightly higher than those in other countries. - Japan has been engaging in preferential

36 preferential measures measures, but such measures are not sufficient enough to compensate for various costs and disadvantages. (For example, even when a special treatment is introduced in R&D special zones, it may not be useful because most of the domestic researchers do not have enough language ability to address global tasks and we have a difficulty in collecting capable members. In addition, such measures are not enough to compensate for the recruiting cost of overseas researchers.) Source: Research and Analysis on the Overseas Deployment and Methods for Risk Management of Global Companies (Deloitte Tohmatsu Consulting; a survey commissioned by METI). (B) Japan s current situation as viewed through international competitive indicators Here, we will review the objective evaluation of Japan using international competitiveness indicators. The indicators used here are the Global Competitiveness Report (hereinafter referred to as the WEF rankings ), published by the World Economic Forum (WEF), and the World Competitiveness Yearbook (hereinafter referred to as the IMD rankings ), published by the International Institute for Management Development (IMW) both of which are popularly known. The WEF rankings ( ) evaluate 144 countries/regions with respect to 111 items in terms of international competitiveness, which is defined as the set of institutions, policies and factors that determine the level of productivity of a country. Meanwhile, the IMD rankings (2014) evaluate 60 countries/regions with respect to 338 items, with international competitiveness defined as the power to create and maintain an environment that sustains companies capabilities (competitiveness) 84. This international competitiveness indicator covers both items related to superiority in the general business environment, such as macro-economic indicators and corporate tax rates, and items related to individual elements, such as accumulation of companies, presence of personnel with advanced skills and capacity for innovation 85. In the WEF rankings, after bottoming out at 10th place in , Japan rose for the two most recent consecutive years, to 9th in and to 6th in In the IMD rankings as well, Japan moved up from 27th place in 2012 for the two most recent consecutive years, to 24th in 2013 and 21st in 2014 (Figure II ). While Japan s place in the two rankings is different, the results point to an improvement in the country s international competitiveness. 84 The definition cited here is one made by Kobari (2013). Kobari also describes in detail the differences between the rankings. 85 It has been pointed out that the definition of international competitiveness as well as the evaluation items and criteria are unclear. However, the following observation by the Cabinet Office (2004) apparently provides a good explanation: A country s competitiveness depends on whether it can provide industries and companies with an environment that enables them to raise the people s living standards over the long term by supplying goods and services attractive in the global market A country s competitiveness depends on whether or not it provides an environment that realizes high international competitiveness at the company and industry level, and these factors as a whole lead to the realization of high added value productivity and high living standards in Japan as a whole. 342

37 At the same time, we can see that Japan s attractiveness as an investment destination is increasing from a survey on foreign companies interest in Asian investment destinations (Table II ), in which Japan was No. 1 as an R&D base location and a sales base location. Figure II (Ranking) Changes in countries' international competitiveness rankings (left: WEF; right: IMD) Singapore United States Germany Japan United Kingdom France ROK China Source: Global Competitiveness Report (WEF). (Year) (Ranking) United States Singapore Germany United Kingdom Japan China ROK France Source: World Competitiveness Yearbook (IMD). (Year) 343

38 F Y Table II Most attractive Asian countries and regions as business function bases for 2009 (n=91) China (33%) Japan (23%) India (18%) foreign companies (R&D, regional headquarters, sales bases) R&D bases Regional headquarters Sales bases (n=67) (n=81) (n=110) (n=121) (n=125) (n=112) (n=112) Japan, China China China Singapore China China China (48%) (41%) (33%) (27%) (47%) (34%) (20%) Japan (27%) Singapore (15%) - Singapore (17%) Singapore, Hong Kong (15%) - Singapore (17%) Hong Kong (17%) Japan (16%) Hong Kong (25%) Japan (19%) Hong Kong (14%) Singapore (12%) Japan (17%) Hong Kong (16%) Singapore (14%) 2013 (n=199) Japan (26%) China (19%) Hong Kong (13%) 4 Singapore India India Japan China Japan Singapore (7%) (6%) (12%) (12%) (15%) (8%) (12%) Hong ROK India India India 5 - Kong India (9%) - India (6%) (4%) (5%) (5%) (6%) (11%) Notes: Respondents chose the most attractive country or region as an investment destination among 21 Asian countries and regions. The figures show only the rankings of Japan, China, Singapore, Hong Kong, India, Thailand and ROK, and exclude the choices of home countries or regions that Asian companies made. Source: Oshu Ajia no Gaikoku Kigyo no Tainichi Toshi Kanshindo Chosa Hokokusho, March 2014 (Accenture) As for individual evaluation items in the international competitiveness rankings, in the WEF rankings, Japan has stayed in the No. 1 position with respect to business sophistication, which mainly comprises individual element items, such as local supplier quantity and quality. Furthermore, Japan has recently made improvements with respect to items that include the perspective of superiority in the general business environment, such as institutions and infrastructure. In the IMD rankings, Japan has been rising with respect to three of the four major factors, namely, government efficiency, business efficiency and infrastructure since Moreover, Japan moved up for two consecutive years with respect to 12 of the 20 sub-factors of these factors (Table II ). However, with respect to electricity costs for industrial clients, a sub-factor of the basic infrastructure factor in the IMD rankings, Japan, which was slumping at 45th place in 2010, fell further to 52nd in 2013 and came to 50th in 2014, indicating that high electricity cost is weighing on Japan s international competitiveness. Although Japan s international competitiveness is improving, governments of other countries are striving to strengthen locational competitiveness by improving the business environment, as the Japanese government is doing. Therefore, it is important for Japan to continue adapting to changes and making improvements with equal or higher speed. While it goes without saying that it is important for developed countries like Japan to be attractive in terms of individual elements, recent developments confirm that superiority in the general business 344

39 environment has no small influence on business location choice (Column 3). Table II Changes in individual evaluation items in international competitiveness rankings (left: WEF; right: IMD) Factors Evaluation items Basic perspectives Institutions Infrastructure Macro-economic indicators Health and hygiene and elementary education Enhanced efficiency Higher education and training Efficiency of goods market Efficiency of labor market Development of financial market Technological prowess Market scale Innovation and development factors Business sophistication Innovation Source: Global Competitiveness Report (WEF). Factors Evaluation items Economic conditions Domestic economy International trade International investment Employment Prices Government efficiency Public finance Financial policy Institutional frameworks Business legal systems Social frameworks Business efficiency Productivity/efficiency Efficiency of labor market Finance Management culture Attitudes/values Infrastructure Basic infrastructure Technical infrastructure Science infrastructure Health and environment Education Source: World Competitiveness Yearbook (IMD). 345

40 Column 3: Reshoring trend in developed countries in recent years Among companies in developed countries, there are moves to bring business operations previously transferred abroad back to their home countries based on rational business judgments made in light of relative changes in the business environment. Around 2009, some U.S. manufacturing companies started to move production bases back to the United States (reshoring), and this trend subsequently began to attract attention as many analysis reports came out 86. The reshoring trend is not limited to the manufacturing industry, with some cases of reshoring of BPO (business process outsourcing) operations from such countries as India and the Philippines reported 87. Responding to this trend, governments are apparently making active efforts to promote reshoring to their countries and inviting foreign direct investments in order to strengthen domestic industrial infrastructure and secure jobs. For example, in the case of the United Kingdom, the government made clear its stance of supporting reshoring, with Prime Minister David Cameron expressing his intention of promoting the trend in a speech at the World Economic Forum meeting in Davos in January Indeed, there are actual cases of reshoring across business sectors (Column Table 3-1) 88. Specifically, the U.K. government is striving to strengthen locational competitiveness by actively improving the business environment. For example, the UK Trade & Investment (UKTI) and the Manufacturing Advisory Service (MAS) together started a one-stop service concerning reshoring, and significant corporate tax reduction is being phased in with a view to enhancing U.K. companies competitiveness and attracting multinationals For information concerning the reshoring trend in the U.S. manufacturing industry, see the Ministry of Economy, Trade and Industry (2014), Part II, Chapter 1, Section 2, 2. Trends in the U.S. manufacturing industry. 87 A.T. Kearney (2013). 88 The UK Government Policy Paper (2014) pointed to UK Trade & Investment s confirmation that since 2011, 1,500 manufacturers had re-shored jobs to the United Kingdom and its suggestion of the possibility of more jobs being re-shored in the future, although the expected number was not particularly high. 89 UK Government Policy Paper (2015). 346

41 Needle work manufacturer The company transferred its business from China to the United Kingdom and created 20 new jobs at the head office in the country. It promoted trade with China and established plants along the coast of China in However, the business cost significantly increased five times in eight years, and it decided to transfer the product sewing business from China to the home country. Small commodity retailer The company decided to manufacture 25% of the own products in the United Kingdom and, to this end, shortened the period from designing to manufacturing to six weeks. Its CEO stated that the transfer of the manufacturing unit to the U.K. can contribute to shortening the supply chain and cutting the time required from manufacturing products to delivering them to customers by half. Automobile manufacturer The company received a financial assistance from the Regional Growth Fund* and transferred the production of one car line back to the United Kingdom. Its CEO stated that this government initiative will maintain stable employment in the U.K. and help creating additional new jobs. * The fund is being undertaken in England at the scale of 3.2 billion pounds between 2011 and 2017 in England. Electronics distributor The company announced that its subsidiary company transferred the entire production of electronic equipment from China to the United Kingdom. When it transferred the production to the home country, the company made a contract with a large Japanese company to build an electronics production facility. Column Figure 3-1 Case examples of reshoring in the United Kingdom Major bank The bank announced in 2011 that they decided to transfer all call centers from India to the United Kingdom to meet the demand of customers who are unsatisfied with the bank s services at the offshore call centers. This reshoring initiative is considered to create 500 new jobs in the country. Ventilation systems manufacturer The company opened new manufacturing lines for air blowers to transfer the product from China to the United Kingdom. It spent four years to complete the transfer of the entire production of air blowers. The cause of the transfer attributes to the increase of personnel expenditures, difficulties in inventory management, and inadequate customer services in China. It created 20 new jobs and realized an approximate 350,000 pounds-scale investment. Food machinery manufacturer The company and the local engineering company collaboratively manufacture most of its new products for restaurants in the United Kingdom. This reshoring is considered attributing to the increase in business cost in China due to transportation and personnel expenditures in China, which nearly doubled in 18 months. Paper cup manufacturer The company has been manufacturing paper cups at its own plants in China since 2007, but recently has started operating new manufacturing units in the United Kingdom by utilizing loans form the EU. The company s amount of business doubled in the last 12 months. Casualty insurance company The company announced in October 2013 that it will close call centers in India at which one third of the entire customer services is currently operated. This action is expected to create about 350 new services in the United Kingdom by the middle of The cultural difference between India and the U.K. is considered as the cause of the failure in India. Wool fabric manufacturer The company started operating wool fabric manufacturing plants in the United Kingdom. It found that reshoring the production to the home country brings about huge environmental advantages. It has been engaging in substantial reduction of greenhouse gas emissions by utilizing domestic materials as far as possible. Telecommunication service The company transferred its call center business from India to the United Kingdom. Its Indian CEO stated that this transfer will create an opportunity to revitalize the local economy and they are conscious of customers satisfaction level. Automobile parts supplier The company decided to transfer the subcontracted production from China to the United Kingdom. To this end, it invested 400,000 pounds for a new plant in the home country and started part of the production. It will further transfer the rest of the production back to the U.K. from China by the middle of The company manufactured multiple types of parts in China for eight years, but the cause of the reshoring is considered to be attributed to the rapid increase in wages and other costs in China. Fashion brand manufacturer The company has stopped manufacturing products in the United Kingdom for 15 years, but decided to transfer nearly 5% to 10% of the production back to the home country. Most of the production is still operated in Asia, but this reshoring is part of the initiative to improve the quality of products and shorten the delivery period from plants to stores 347

42 In Japan as well, cases of reshoring have been reported against the backdrop of the recent improvement of the business environment 90. Although there is the view that the reshoring trend does not have much of an impact at the macro-economic level 91, the trend can be described as a phenomenon of companies recognizing anew the superiority in the general business environment of developed countries which were defeated, mainly by emerging countries, in the race to be chosen as a business location. Aiming for optimum allocation of business functions, companies are perceptive in detecting changes in the locational environment around the world and are nimble in acting. This indicates that continuous efforts to make timely and active improvements in the business environment could be the basis for not only promoting reshoring but also attracting new investments. (C) Japan s unique attractions and strengths Until now, we have looked at international competitiveness indicators and observed the improvement in Japan s international competitiveness. From now on, we will examine Japan s attractions and strengths, focusing on technological prowess, degree of industrial accumulation, quality of human resources and future market potential, regarding which Japan was positively viewed in the questionnaire survey, while reviewing points cited by the respondent companies and various indicators. (a) Technological prowess and degree of industrial accumulation In the hearing survey, many companies showed their appreciation of Japanese companies high level of technological prowess and expressed their positive view of the depth of the accumulation of companies (Table II ). Technological prowess and degree of industrial accumulation are recognized as Japan s unique strengths, suggesting that many companies invest in Japan in pursuit of such individual elements. There are actual cases of Japanese and foreign companies jointly achieving innovation through the combination of their technological prowess and developing and selling products worldwide (Column 4). 90 See the Ministry of Economy, Trade and Industry, the Ministry of Health, Labour and Welfare and the Ministry of Education, Culture, Sports, Science and Technology (2015) Part I, Chapter 1, Section 2 2. Domestic Business Locations Responding to Changes in the Business Environment. 91 According to A.T. Kearney (2014), as a result of the examination of the rates of change in the ratio of the value of products manufactured in and imported from 14 emerging countries/regions, including China, India and Vietnam, to the overall value of production by U.S. domestic manufacturing industries, it was found that the macroeconomic impact of the reshoring trend in the U.S. manufacturing industry is not as large as it is claimed to be. 348

43 Column 4 A case of a foreign company achieving successful results through partnerships with Japanese universities and companies possessing a high level of scientific and technological prowess (chemicals/pharmaceuticals) Merck Ltd., Japan (a Japanese subsidiary of Merck KGaA of Germany) Year of establishment: 1968 Number of employees: approximately 900 Business: manufacturing and selling chemicals and life sciences-related products <Activities in Japan> Initially after its establishment, Merck Ltd., Japan mainly imported and sold products manufactured by its parent company. Later, in order to conduct business activities better rooted in the Japanese market, the company established an R&D base and gradually expanded business operations, building the Atsugi site in Kanagawa Prefecture in 1975 and the Onahama site in Iwaki City, Fukushima Prefecture in Merck s strength lies in products that provide high added value to customers and its ability to propose solutions by customizing products according to customers needs. Merck recognizes Japan as a country possessing world-leading science and technology prowess and being capable of providing unique technologies to the world. Many of the technologies used in the company s major products have been co-developed with partners including client companies and universities in Japan. For example, through Merck s partnership with a Japanese electronics maker, an 80-inch liquid crystal display with 4K high resolution was created. Merck s business in Japan occupies an important position in its entire group, as shown by worldwide sales of products developed and manufactured in Japan, such as effect pigments. Moreover, Merck has high regard for Japan and its large market size, high purchasing power, appropriate appreciation of high-quality products and intellectual property protection. The company also believes that there are many growth opportunities in Japan in the medical care and life science fields due to growing social needs for measures to cope with the arrival of the aging society and chronic diseases. Source: Prepared from information obtained from the websites of JETRO and Merck A case of a foreign company making successful achievements by taking advantage of the accumulation of Japanese automakers possessing high-level technological prowess (automobiles) Valeo Japan Co., Ltd. (a Japanese subsidiary of the Valeo group of France) Year of establishment: 1985 Annual sales: approximately 60.9 billion yen (fiscal year 2013) Number of employees: approximately 2,800 Business: Conducting research and development on, manufacturing and selling automotive systems 349

44 and components <Activities in Japan> Many Japanese automakers are conducting research and development in Japan on core units that form the basis of overseas business expansion. Therefore, Valeo has so far conducted co-development with a number of automakers and attended to their meticulous needs based on the high-level technological prowess and research and development capabilities that it has cultivated. In recent years, the willingness to introduce excellent products and technologies regardless of the keiretsu corporate relationship has been growing among Japanese automakers, so Valeo expects business opportunities to increase in the future. Valeo is interested in innovations created in Japan in relation to hybrid vehicles and mini-vehicles as well as fuel cell vehicles, which are expected to become more popular in the future as such innovations have a significant impact on the global environment. In addition, Japanese consumers are very sensitive about air quality within the vehicle cabin, so Valeo is bringing products developed in Japan to the global market. One example is a product that cleans air emitted by air conditioners with an antibacterial substance found in the wasabi plant. Source: Prepared from information obtained from the websites of JETRO and Valeo and from media reports. <Degree of industrial accumulation> While some companies praised industrial accumulation in Japan, one company expressed the opposite view, perceiving a decline in industrial accumulation along with a decrease in Japanese companies possessing sufficient technologies to work with as partners. Therefore, we will evaluate industrial accumulation and technological prowess possessed by companies in Japan based on individual evaluation items used in the WEF rankings 92. The evaluation items used here are (i) local supplier quantity, (ii) local supplier quality, (iii) state of cluster development, (iv) value chain breadth, (v) availability of latest technologies and (vi) intensity of local competition. A comparison between Japan, Germany, the United Kingdom and the United States in 2014 showed that Japan lagged behind the United States and the United Kingdom in terms of availability of latest technologies. In terms of state of cluster development, although Japan was somewhat behind Germany and the United States, its performance appears to be not bad on the whole compared with other countries with respect to industrial accumulation. However, compared with 2006, Japan s performance in 2014 deteriorated with respect to four of the six evaluation items, with a decline observed in terms of both local supplier quantity and quality in particular. This corroborates the abovementioned view that Japanese companies with sufficient technologies are decreasing (Figures II and II ). 92 The individual evaluation items were selected in reference to the ideas of the Ministry of Economy, Trade and Industry, the Ministry of Health, Labour and Welfare and the Ministry of Education, Culture, Sports and Science and Technology (2013) and the Mitsubishi Research Institute (2013). 350

45 Figure II Japan Germany United Kingdom United States Comparison of countries with respect to industrial accumulation indices (2014) Intensity of local competition Availability of latest technologies Value chain breadth Local supplier quantity State of cluster development Local supplier quality Notes: Evaluation scores are calculated after conversion to the 100 point scale. Source: The Global Competitiveness Report (WEF). Figure II Changes in industrial accumulation indices in Japan (2006, 2014) Intensity of local competition Availability of latest technologies Value chain breadth Local supplier quantity State of cluster development Local supplier quality Notes: Evaluation scores are calculated after conversion to the 100 point scale. Source: The Global Competitiveness Report (WEF). 351

46 <Technological prowess> Next, with regard to technological prowess possessed by companies, we will evaluate Japan using five evaluation items: capacity for innovation, production process sophistication, differentiated products and processes, company spending on R&D and intellectual property protection. A comparison between Japan, Germany, the United Kingdom and the United States in 2014 showed that Japan scored high on the whole with respect to technological prowess. However, in terms of capacity for innovation, Japan lagged behind the United States and Germany. Moreover, compared with 2006, Japan s performance in terms of capacity for innovation declined in 2014 (Figures II and II ). As innovation is a wellspring of competitiveness, Japan is striving to enhance capacity for innovation as its top priority under its growth strategy. In order to strengthen competitiveness in attracting foreign enterprises, enhancing capacity for innovation is essential. Figure II International comparison of technological prowess indices (2014) Japan Germany United Kingdom United States Protection of intellectual property rights R&D investment by enterprises Differentiation of products and processes Capacity of innovation Sophistication of production processes Notes: Evaluation scores are calculated after conversion to the 100 point scale. Source: The Global Competitiveness Report (WEF). 352

47 Figure II Changes in Japan's technological prowess indices (2006, 2014) Protection of intellectual property rights R&D investment by enterprises Differentiation of products and processes Capacity of innovation Sophistication of production processes Notes: Evaluation scores are calculated after conversion to the 100 point scale. Source: The Global Competitiveness Report (WEF). Now, we will look at capacity for innovation. The Global Innovation Index, jointly published by Cornel University, INSEAD, a business school, and the World Intellectual Property Organization, aims to evaluate whether innovation is appropriately being achieved in society. Although Japan declined in the innovation rankings from 2007 onwards, it bottomed out at 25th place in 2012 and rose to 22nd in 2013 and to 21st in 2014 (Figure II ). The overall rankings of the Global Innovation Index are based on input indexes, which capture economic elements that enable innovative activities, including institutions, human capital and research, infrastructure, market sophistication, and business sophistication, and output indexes, which capture the results of innovation activities, including knowledge and technology outputs and creative outputs. Japan ranked relatively high, 6th, with respect to research and development, which is an input item. Concerning output items, Japan was placed 12th, not a bad position, with respect to knowledge and technology outputs, but it was ranked low, at 46th, with respect to creative outputs. In particular, Japan was ranked very low, 99th, with respect to creation of intangible assets. With respect to ICTs and business model creation, a sub-index of the creation of intangible assets, Japan rose from 52nd in 2012 to 26th in 2013 and to 19th in 2014, while it fell from 40th in 2012 to 49th in 2013 before rebounding to 35th in 2014 with respect to ICTs and organizational model creation. Although Japan has made improvements with respect to these items, there is still ample room for further improvements (Table II ). As in the case of the United States and Germany (see Chapter 2, Sections 1 and 2), countries now place emphasis on building business models by taking advantage of their strengths and capacity for innovation as a magnet for various elements of production and capital. This suggests that 353

48 it is urgent for Japan to enhance its capability to build new business models and new organizational models through ICTs. (Ranking) Figure II Changes in world innovation rankings of countries Switzerland United Kingdom United States Singapore Germany Israel ROK Japan France China (Year) Source: Cornell University, INSEAD, Global Innovation Index (target years) (WIPO). Table II International evaluation of Japan in terms of world innovation rankings <Innovation input indexes> 2014 Factors Evaluation items (ranking) Political environment 23 Institutions Regulation environment 18 (18) Business environment 18 Human capital and research (17) Infrastructure (11) Market sophistication (13) Business sophistication Education 42 Higher education 57 R&D 6 Information and communication technology (ICT) 10 General infrastructure 25 Environmental sustainability 15 Credit 8 Investment 34 Trade and competition 18 Knowledge workers 25 Innovation

49 (17) Degree of assimilation of knowledge <Innovation output indexes> Factors Knowledge and technology outputs (12) 35 Evaluation items 2014 (ranking) Creation of knowledge 11 Influence of knowledge 65 Dissemination of knowledge 17 (Some of the evaluation items in intangible assets are extracted; annual ranking) Intangible assets 99 Intangible assets Creative Creation of business by outputs Creative goods services 24 ICT (46) Organization reform by Online creativity 37 ICT Source: Cornell University, INSEAD, Global Innovation Index; 2012, 2013, 2014 (WIPO). <Capability to connect technology to business> As Japan is superior in terms of R&D, it is ranked relatively high, 12 th, with respect to knowledge and technology outputs. However, Japan is weak in creative outputs, a finding that suggests using ICTs to create new businesses is a challenge for the country. We will look at individual indicators used by the IMD concerning business creation. The IMD changed the category of knowledge transfer (industry-academia partnerships in the form of successful knowledge transfer between companies and universities) from that of education to scientific infrastructure between 2004 and 2014, a revision that made it possible to look at industry-academia partnerships from the perspective of practical business infrastructure. However, although Japan is ranked relatively high in terms of scientific infrastructure, its position was low, 23rd in 2004 and 24th in 2014, with respect to knowledge transfer. In addition, between 2004 and 2014, a new item concerning the perspective of whether public and private sector ventures are supporting technological development was added to the technological infrastructure field. This is an indication that the presence of ventures is growing in importance as infrastructure that supports technologies and businesses. With respect to this item as well, there is room for improvement by Japan, which was ranked 27th in 2014 (Table II ). Table II IMD evaluation of Japan in terms of scientific and technological infrastructure (2004, 2014) Technical infrastructure 9 17 Investment in the communication sector Communication technology IT skills Engineers with sufficient skills 39* 13 Technology partnership among enterprises Public/private ventures - 27 Funding for technological development Scientific infrastructure

50 R&D expenditures 2 2 Share of R&D expenditures in GDP 6 5 R&D expenditures in the private sector 2 2 Number of granted patents 1 1 Protection of intellectual property rights Knowledge transfer (industry-academia partnership) 23* 24 Notes: The superior category of items Engineers with sufficient skills and Knowledge transfer (industry-academia partnership) is Education. Source: World Competitiveness Yearbook (IMD). It has been pointed out that because business opening and closure rates are low in Japan, the number of ventures in the country is small and the process of industrial renewal is not being promoted in the market economy 93. Figure II shows that in Japan, the proportion of entrepreneurs 94 in the population aged 18 to 64 is 3.8%, much lower than the proportion in other countries. According to the organization publishing this data 95, the figures are a typical indicator of the vitality of entrepreneurial activity in individual countries, so the data indicates that the level of entrepreneurial activity in Japan is very low. Figure II shows the presumed background to the low level of entrepreneurial activity in Japan. The vertical axis represents the proportion of people who believe they have the required skills and knowledge to start a business and the horizontal axis represents the proportion of people who see good opportunities to start a firm but who report that fear of failure would prevent them from setting up a business in the population aged from 18 to 64. The size of the bubble represents the proportion of people who see good opportunities to start a business. In other words, the more rightward and lower a country is located in the figure, the proportion of people who believe they have the required skills and knowledge to start a business is small and the proportion of people who are fearful of failure is large in its population. The smaller the bubble is, the smaller the proportion of people who see good opportunities to start a business. The figure shows that compared with other countries, Japan has a smaller proportion of people who believe they have the required skills and knowledge to start a business and a larger proportion of people who are prevented by fear of failure from setting up a business. In particular, the figure indicates that the mindset of Japanese people concerning entrepreneurship is at the polar opposite of that of Americans. Although the amount of R&D expenditure in Japan is large by international standards and the country s high level of technological prowess is appreciated, it is presumed that 93 The low level of business opening and closure rates in Japan by international standards has been repeatedly pointed out, including in the analysis conducted by the Small and Medium Enterprise Agency under the Ministry of Economy, Trade and Industry (2014). 94 Entrepreneurs are defined as people in the nascent entrepreneurship stage (people who are involved in setting up a new business regardless of whether it is an independent or internal business and who have received no payments from the business or have received payments for no more than three months) and people in the initial stage (people who have already set up a business and who have received payments from the business for more than three months but no more than 42 months). 95 London Business School and Babson College Global Entrepreneurship Monitor. 356

51 Japan is failing to make efficient use of such strengths in terms of business 96. Figure II International comparison of shares of entrepreneurs in the population aged 18 to 64 Japan Italy Germany France Denmark Spain Finland Norway Sweden ROK Switzerland Taiwan Netherlands Portugal Israel United Kingdom Singapore Australia Notes: Data about ROK and Israel is that in Source: Global Entrepreneurship Monitor (London Business School and Babson College). United States 96 Takahashi, et al. (2013) pointed out that the cause of the sluggishness of entrepreneurial activity in Japan is the overwhelming majority of groups that do not have an entrepreneurial attitude; but, that within groups that do have an entrepreneurial attitude, entrepreneurial activity is vigorous. In other words, they argued that in Japan, implementing policies that encourage an entrepreneurial attitude would be an effective measure. Specifically, they pointed to the effectiveness of entrepreneurship education initiatives, including increasing opportunities to become familiar with entrepreneurial activity, clarifying entrepreneurship as a career option, helping to acquire experiences and skills necessary for entrepreneurs and explaining the social and economic role of entrepreneurial activity. 357

52 Figure II International comparison of the results of an entrepreneurial activity survey Ratios of the respondents who recognize that they have skills and knowledge required to start up businesses United States Switzerland United Kingdom Netherlands Finland Taiwan Singapore Australia ROK China The size of a bubble represents the number of respondents who recognize that they enjoy opportunities of starting up businesses. Germany France Italy Japan Ratios of the respondents who have an opportunity of starting up businesses but hesitate in doing so due to the fear of failure. Notes: The subject of the survey is those aged 18 to 64. Data about ROK is those in Source: Global Entrepreneurship Monitor (London Business School and Babson College). Multinationals aim to create new business models and always seek new technologies and ideas as seeds of new models, and that is also the case when they consider locating business operations in Japan. In particular, many U.S. companies are promoting open innovation, an initiative that actively makes effective use of external resources, including technologies, ideas and personnel, based on the perception that this initiative is low-cost and low-risk and enables nimble action, so they tend to seek to commercialize new technologies and ideas and build business models through the acquisition of ventures 97. If new businesses are continuously created, attracting companies from around the world, it is expected that a virtuous cycle of innovations leading to business expansion will arise in Japan as well. The implication is that if Japan is to strengthen its competitiveness in attracting foreign enterprises, it is necessary to develop an environment that makes it possible to continuously create new companies so that the process of industrial renewal can be invigorated According to McGrath, R. (2013) (translated by Shinobu Onizawa, 2014), no company can maintain a sustained competitive advantage today, as industries are changing constantly against the backdrop of the digital revolution and globalization, so it is necessary to continuously set forth new strategic initiatives and simultaneously establish and take advantage of short-term superiority. Utilization of external resources is cited as an effective strategy for that purpose. 98 OECD (2013) also pointed out that, as energetic new companies are an important wellspring of jobs and innovations, creating an environment to enable new companies to enter markets and achieve growth is a critical challenge for Japan. 358

53 (b) Quality of human resources A positive view of the quality of human resources in Japan, as indicated by companies comments that there are many loyal workers with a high level of education, can be characterized as one element of Japan s strengths in the general business environment. As for evaluation items used by the IMD (Table II ), Japan was ranked high with respect to literacy (first) and PISA scores 99 (fifth), indicating that Japanese workers have high-quality educational backgrounds. On the other hand, Japan is ranked low in terms of development of cosmopolitan human capital as represented by the presence of senior managers with international experience (59th), student mobility outbound (52nd) and English proficiency (60th). The results corroborate companies negative view that Japanese workers have a poor command of English, are poor at asserting themselves and debating, with only a handful of them meriting high regard by global standards although there is no problem with them as local staff. Table II Evaluation items with respect to personnel used by IMD (2014) Evaluation items 2014 Labor market 30 Fulfillment of enterprises training programs 3 Utilization of skilled workers 29 Financial skills 31 Enterprises efforts to improve and maintain workers skills 7 Brain drain undermining competitiveness 32 Provision of attractive business environments to overseas personnel with advanced skills 48 Senior managers having global experience 59 Presence of capable senior managers 56 Technical infrastructure Engineers with sufficient skills 13 Education 28 High-school advancement rate 3 Ratio of population having college degree 4 Acceptance of overseas students 35 Students studying overseas 52 PISA evaluation 5 English fluency (TOFLE) 60 Education systems 27 Science field in school education 10 Quality of college education 41 Quality of management education 49 Literacy rate 1 Language ability 54 Source: World Competitiveness Yearbook 2014 (IMD). A survey conducted on foreign affiliates in Japan (Figures II and II ) shows that difficulty securing personnel is the fourth most frequently cited factor inhibiting business expansion in Japan and business communication difficulties in English is a close second to high standards of 99 PISA refers to the Programme for International Student Assessment. It is a triennial learning achievement survey conducted on 15-year-old students, mainly in OECD member countries, every three years, in order to assess reading, mathematical and science capabilities. 359

54 compensation such as salary, etc. as a factor making it difficult to secure personnel. These findings raise concerns that the attractiveness of individual elements possessed by Japan is not being fully exploited due to the country s inferiority in the general business environment in terms of a shortage of personnel with foreign language proficiency. Figure II Factors inhibiting business expansion in Japan High cost of doing business Exclusivity and distinctiveness of the Japanese market High standard that users demand from products and services Difficulty securing personnel Strict regulations, permits and license system Complicated administrative procedures Not enough breaks and incentives Concerns regarding natural disasters such as earthquakes and tsunamis Living environment for foreigners Shortage of information and support services Concerns regarding radiation exposure Difficulty securing financing Power supply concerns Underdeveloped infrastructure Other 2014 survey (N=2,896) 2013 survey (N=2,722) Notes: Multiple answers possible. Figures show the top five items. Source: Survey of Trends in Business Activities of Foreign Affiliates (METI). Figure II Factors inhibiting securing of personnel 2014 survey (N=2,894) 2013 survey (N=2,716) High standards of compensation such as salary, etc Business communication difficulties in English Lack of mobility in the labor market Recruiting and hiring costs High standards of non-obligatory welfare costs Strict labor regulations Underdeveloped employment agency services Other If we look at human capital not only from the perspective of superiority in the general business environment but also from the perspective of individual elements, it may be presumed that the presence of personnel equipped with advanced professional skills and knowledge (e.g., personnel with advanced IT skills) can be a source of competitiveness in attracting foreign enterprises. For example, in India, there is a deep pool of highly skilled personnel with English proficiency and cost competitiveness, and the country s superiority in the general business environment, combined with its 360

55 strength with respect to individual elements, is prompting multinationals to accelerate the establishment of R&D bases there 100. Meanwhile, Japan is ranked low among the OECD member countries in terms of the proportion of doctor s degree holders (people with ISCED 6 level of education) 101, raising concerns over a shortage of professionals with advanced skills and knowledge (Figure II ). In addition, among doctor s degree holders in Japan, the proportion of those who work for business enterprises is small compared with other major countries, signaling the possibility that the presence of doctor s degree holders is not being successfully used as infrastructure for the creation and utilization of innovations (Figure II ). Figure II International comparison of proportion of doctor s degree holders (2012) Switzerland Sweden Germany Finland Slovak Republic United Kingdom Denmark Austria Norway Australia Netherlands Ireland Portugal New Zealand Slovenia United States France Belgium OECD average Czech ROK Israel Italy Canada Spain Japan Greece Notes: Figures show the proportion of people who finished the level 6 of education (equivalent to doctor s degree) of the International Standard Classification of Education (ISCED). Data about France is those in The figures also show the sum of graduation rates by age. Source: Education at a Glance 2014 (OECD). 100 According to the Japan External Trade Organization (2014), the number of R&D bases established in India by multinationals quadrupled between 2001 and Among the contributing factors cited by the organization are India s abundance of personnel with English-speaking and technical skills, cost-competitiveness and expectations for an expansion of business opportunities in the country s high potential market. 101 The Ministry of Education, Culture, Sports, Science and Technology, the Council for Science and Technology and the Committee on Human Resources (2015) pointed out that doctor s degree holders are increasingly important as personnel with broad cultural education and in-depth professional knowledge who are capable of utilizing their knowledge to resolve social challenges and recommended fostering, securing and empowering of doctor s degree holders. 361