JETRO Invest Japan Report 2021
Chapter2. Japan's Business Environment and Foreign-Affiliated Companies
Section1. Strategy for Promoting FDI in Japan and Japan's Business Environment

Targeting to double the FDI stock in Japan by 2030

As seen in Chapter 1, the FDI stock in Japan at the end of 2020 was 39.7 trillion yen, and the ratio to GDP increased to 7.4%. As a result, the policy target of 35 trillion yen in FDI stock by the end of 2020*1 has been achieved. In June 2021, the Council for Promotion of Foreign Direct Investment in Japan setected the FDI stock in Japan as a KPI (Key Performance Indicator) It stipulated a new target of 80 trillion yen with its ratio to GDP: 12% by 2030. Also, the interim target was set at "60 trillion yen with its ratio to GDP at 10% by 2025” and an interim evaluation will be conducted at an appropriate time. (Chart 2-1).

Chart 2-1: Trends and Targets in FDI Stock in Japan
Column graph and line graph showing the Trends and Targets in FDI Stock in Japan. The column graph shows the figures of FDI Stock. 18.7 trillion yen in FY2010, 24.8 trillion yen in FY2015, 39.7 trillion yen in FY2020, 60 trillion yen in FY2025 (target), and 80 trillion yen in FY2030 (target). The line graph shows the ratio of FDI stock to GDP: 3.7% in FY2010, 4.6% in FY2015, 7.4% in FY2020, 10% in FY2025 (target), and 12% in FY2030 (target).

Note: The balance of direct investment in Japan is based on the 6th edition of the Balance of Payments Manual
Source: "International Investment Position of Japan" (Ministry of Finance, Bank of Japan), "National Accounts of Japan" (Japan Cabinet Office)

The development of the business environment needs to be accelerated to achieve this policy goal. The Strategy for Promoting Foreign Direct Investment in Japan, stipulated along with the new targets at the Council for Promotion of Foreign Direct Investment in Japan on June 2, 2021, has three pillars:
(1) Creatiing a new digital green market and building innovation ecosystems.
(2) Accelerating the development of business environments in response to global changes.
(3) Developing investment grounds through public-private partnerships utilizing regional strengths.

In addition, it has set out the following three indicators as supplementary indicators. The first is value added*2 created by business activities of foreign-affiliated companies*3 from a macroeconomic perspective. It targets to doubled from 17 trillion yen in 2018 to 34 trillion yen by 2030 with an ongoing follow-up.

At present, 42.9% of foreign-affiliated companies*4 are concentrated in Tokyo. The second supplementary indicator is the number of foreign-affiliated companies by prefecture. From the perspective of expanding the impact on the economy into regions, the target for the number of foreign-affiliated companies in prefectures outside Tokyo has been set at 10,000 by 2026.

The number of highly skilled foreigners entering Japan has become the third supplementary indicator to promote innovation. The target is to achieve 200,000 business management personnel to enter the country by 2030.

  1. *1

    Japan Revitalization Strategy (Cabinet decision on June 14, 2013)

  2. *2

    Value added = Operating income + Total salary + Depreciable Assets + Welfare expenses + Rent of movable property and real estate + Taxes and dues

  3. *3

    Companies stipulated in the Basic Survey of Corporate Activities (METI), in which the number of shares held or the ratio of the amount of investment by foreign investors to the total number of outstanding shares or the total amount of investment of the company exceeds one-third.

  4. *4

    Enterprises with a foreign ownership ratio of one third or more according to the 2016 Economic Census for Business Activity (METI)

Indicators of business environment

In 2020, there were many special business environment analyses in the COVID-19 pandemics. The World Economic Forum published rankings in 11 priorities (scored 0 to 100 points) in the four broad areas for business environment transformation for 37 countries and regions in place of the usual Global Competitiveness Index ranking.

The first area has three indicators of an effective business environment: "Public institutions trust," "Energy transition and broaden access to IT," and "Shift to more progressive taxation." Japan ranks second in the shift to more progressive taxation. The second area relates to human capital, and Japan ranks in the middle for all indicators, including "Update education curricula for jobs in markets of tomorrow," "Rethink labor laws and social protection," and "Expand eldercare, childcare, and healthcare." The third area is related to markets and includes indicators such as "Increase incentives for long-term investments," "Rethink competition in the Fourth Industrial Revolution," and "Facilitate public-private collaboration." Japan ranks third in the public-private collaboration. The fourth area is related to the innovation ecosystem, with "Incentivize and expand patient investments in research, innovation and invention" and "Incentivize firms to embrace diversity" as indicators. Japan ranks second in the incentives for research, innovation and invention investments. The only area in which Japan scored below 50 was "Expand eldercare, childcare, and healthcare" (49.3 points, 15th place), and the scores were all above average except for "Energy transition and broader access to IT" (76.9 points, 24th place) , “Incentivize firms to embrace diversity”(56.0 points, 30th place), and “Update education curricula for jobs of tomorrow”(51.3 points, 22nd place) (Chart 2-2).

Chart 2-2: Japan’s Ranking of the 11 Indicators
Radar chart showing Japan’s Ranking of the 11 Indicators. 13th for Public institutions trust, 24th for Energy transition and broaden access to ICT, 2nd for Shift to more progressive taxation, 22nd for Update education curricula for jobs in markets of tomorrow, 19th for Rethink labour laws and social protection, 15th for Expand eldercare, childcare and healthcare , 5th for Increase incentives for long-term investments, 18th for Rethink competition in the Fourth Industrial Revolution, 3rd for Facilitate public-private collaboration, 2nd for Incentivize and expand patient investments, and 30th for Incentivize firms to embrace diversity.

Source: Global Competitiveness Report (World Economic Forum)

Tokyo ranked ninth in the environmental Indicators for Startup Companies

On September 22, 2021, US research firm Startup Genome released the “Global Startup Ecosystem Report (GSER) 2021.” This report covers and ranks more than 150 cities around the world. Tokyo ranked ninth by moving up six positions from 15th in 2020 making it one of the top 10 cities for the first time. There was no change in the top five (Chart 2-3).

Chart 2-3: Top 20 Cities in GSER
Rank 2021 Country City Rank 2020 Country City
1 USA Silicon Valley 1 USA Silicon Valley
2 USA New York City 2 USA New York City
2 UK London 2 UK London
4 China Beijing 4 China Beijing
5 USA Boston 5 USA Boston
6 USA Los Angeles 6 Israel Tel Aviv - Jerusalem
6 Israel Tel Aviv Rank down 6 USA Los Angeles
8 China Shanghai 8 China Shanghai
9 Japan Tokyo Rank up 9 USA Seattle
10 USA Seattle Rank down 10 Sweden Stockholm
11 USA Washington DC 11 USA Washington DC
12 France Paris Rank up 12 Netherlands Amsterdam
13 Netherlands Amsterdam-Delta Rank down 13 France Paris
14 Canada Toronto-Waterloo Rank up 14 USA Chicago
15 USA Chicago Rank down 15 Japan Tokyo
16 Korea Seoul Rank up 16 Germany Berlin
17 Sweden Stockholm Rank down 17 Singapore Singapore
18 Singapore Singapore Rank down 18 Canada Toronto-Waterloo
19 China Shenzhen Rank up 19 USA Austin
20 USA Austin Rank down 20 Korea Seoul

GSER evaluates six success factors on a scale of 1 to 10 and ranks the top 40 cities according to its own calculation method. Looking at the scores for the top three cities, Silicon Valley scored a perfect 10 for all factors, and New York and London, which ranked second, scored 10 or 9 on all except R&D. Tokyo scored highly for "funding," "human resources," and "R&D," each of which received 9 points. On the other hand, Tokyo received a single point for “connectedness.” More cooperation among regional networks is required (Chart 2-4).

Chart 2-4: Comparison of Tokyo and Top Three Cities in GSER
Radar chart showing the Comparison of Tokyo and Top Three Cities in GSER (an index with six evaluation items; performance, funding, connectedness, market reach, knowledge, and experience & talent, on a 10-point scale. Tokyo; 9th, Silicon Valley; 1st, New York; 2nd, and London; 2nd.

Note: Figures in each item refer to the score in Tokyo.
Source: GSER2021 (startup genomes).