Foreign investment viability in China versus Japan

Best Practices Investment Promotion

It's common knowledge in the business arena that eastern nations are developing at a rapid and wild pace. Countries like China and Japan have experience a tremendous amount of development in the past few decades and the growth has been steady, making them formidable opponent and allies on the world stage. But on closer examination one knows that growth is not the singular reason to invest in a given country. One needs to look at the entire climate of the country in order to assess if that's a viable option, examining each factor of the country's make up and dynamics. This paper will attempt to do exactly that, comparing the viability of China vs. Japan in terms of the factors which will directly influence the soundness of foreign investment.

China's Political and Economic Climate

"Thirty years ago, China was one of the world's poorest countries, with 80% of its population having a daily income of less than one dollar per day and an adult literacy rate of one-third" (Zimmerman, 2010). This was a result of living under the ideas of Chairman Mao where communist values prevailed. These values focused upon totalitarianism, egalitarianism and poverty with no legal system in China as late as the 1970s and a paltry amount of laws and regulations when compared to developed countries; in fact, there were no private businesses (Zimmerman, 2010). All of this changed when Deng Xiaoping came to power in 1978 after the Mao Zedong died, setting into motion reforms which privatized agriculture and industry, loosening the controls on prices, welcoming foreign investors in a massive attempt to decentralize all economic and political decision-making (Zimmerman, 2010). "Thereafter, the country's average annual growth rate increased to approximately 8 to 10% per year, and in several peak years, the economy grew by 13%. Today, literacy is 93.3% compared with 20% in 1950, consumption has increased exponentially, and the poverty rate has declined to roughly 10% of the population (from over 60% in 1978)" (Zimmerman, 2010). The aggressive and strategic changes made by Deng Xiaoping helped attract foreign investment which had a huge impact in sparring the economic growth and development. While this is indeed a fact, this doesn't necessarily mean that the political climate is still welcoming for foreign investment or still ideal for foreign investment.

In fact, in recent times, China has received a great deal of bad press regarding their political climate. For example, just last year, "U.S. Ambassador to China Gary Locke has told National Public Radio (NPR) in the U.S. that the political situation in China is "very, very delicate" and the country's human rights record had worsened" (Harjani, 2012)… Locke said there is growing frustration among the Chinese people over the "operations of government, corruption, lack of transparency" and he referenced China's "Jasmine Revolution" last February, which was modeled on the pro-democracy demonstrations seen across the Middle East" (Harjani, 2012). While other members of the U.S. government have chided Harjani for his candidness and for the such a negatively focused remark, others can't help but agree that corruption and the bureaucratic actions of the government are a massive problem in China today and which are souring the entire political climate.

The soured political climate is connected to the economic slowdown. China's economic slowdown is of course connected to the financial turmoil in both China and the United States which resulted in a weak domestic investment growth. However, part of this issue is enmeshed in the fact that exports and investment make up 30 to 40% of China's GDP and the economy is particularly at risk to dwindling external demand and the build-up of non-performing loans as a result of overspending on fixed assets (Pei, 2012). But even that is not a complete picture. "But China's vulnerability to these factors, as serious as they are, is symptomatic of deeper institutional problems" (Pei, 2012). Such a sentiment is perhaps the most accurate appraisal of China to date. One of the biggest reasons responsible for China's macroeconomic imbalance is the overt and unhealthy dependence on exports for development as that's a flagrant indication of a weak demand within the country. China's poor political and economic institutions play a large role in why there's such a need for exports: the heavy export dependence is an accurate snapshot of how trying it is to do business in China. "Official corruption, insecure property rights, stifling regulatory restraints, weak payment discipline, poor logistics and distribution, widespread counterfeiting, and vulnerability to other forms of intellectual-property theft: all of these obstacles increase transaction costs and make it difficult for entrepreneurs to thrive in domestic markets" (Pei, 2012). Thus, the political climate is having a clear and indelible impact on doing business in China and the economic viability of the nation as a whole.

Japan's Political and Economic Climate

Technically speaking, Japan is behind China in GDP size (Remak, 2010). Even so, Japan is still going through a time of great change, as marked by a decreasing birthrate, an elderly population which is growing, the globalization of corporate activity, and the advancement and growing use of all information technologies (alibaba.com, 2010). Even so, Japan (like much of the rest of the world) is dealing with a marked sluggishness with its economy. "Buoyed by a recovery in corporate earnings, capital investment in the private sector is on a sustained uptrend. In addition, the recovery in share prices has dispelled much of the uncertainty about the financial situation, and that should have a positive effect on capital investment and consumer spending" (alibaba.com, 2010). The real GDP growth of Japan's fiscal year is at 2%, but many experts feel that if the American economy starts to experience even more bolstered economic recovery, Japan should be expected to experience a growth also at that rate (alibaba.com, 2010). There has also been a marked appreciation of the yen, which will hopefully be continued to be restored to exchange rates for the general sake of the entire nation (alibaba.com, 2010).

The Japanese economy has recovered with in a consistent fashion, but not in a manner which could be considered "sound and steady." "That is because the social and economic systems that underpinned Japan's postwar period of rapid economic growth have ceased to function effectively amid changes such as the declining birthrate, the aging of society, globalization, and the pervasive spread of information technologies" (alibaba.com, 2010). For growth to continue adequately the political climate needs to see both government and private industry work in conjunction to help change the nation's socioeconomic systems so that the new economy has a greater level of autonomy (alibaba.com, 2010). There are three overwhelming ways in which this can be achieved: the first would be by fortifying the competitive base that is absolutely vital for Japanese firms to excel in order to properly deal with global competition (alibaba.com, 2010). Secondly, there needs to be greater freedom in the private sector, so that companies feel like they can adequately exercise their creativity and innovation so that the nation can break away from such a bureaucratic society; finally, sweeping away the anxiety about the future is also a priority as this is something which riddles the Japanese people with fear and anxiety.

Japan: Infrastructure and Natural Resources

Unlike China, Japan's interior infrastructure is a picture of modernity and efficiency and absolutely attractive to the discerning investor. The infrastructure of Japan is consistently being expanded and upgraded and represents a paragon of advancing technology. The best example of this is Japan's shining network of roads and expressways which wind throughout the country. "It consists of 1,152,207 kilometers (715,981 miles) of highways, of which 863,003 kilometers (536,270 miles) are paved. They include 6,114 kilometers (3,799 miles) of expressways. The number of motor vehicles increased from 70,106,536 in 1995 to 73,688,389 in 1999. Major development projects to expand the Japanese highway network include a $32-billion project for the construction of a second Tomei-Meishin Expressway, connecting Tokyo and Kobe via Nagoya. The length of Japan's railways is 23,670 kilometers (14,708 miles), more than half of which is electrified" (nations, 2013). There's a reason why Japan is world famous for its high speed trains. These trains are dazzling an efficient and represent a truly cost effective and environmentally sound way to travel around the country. This is not to imply that Japan has not taken advantage of the fact that the country is surrounded by water and has thus created a highly advanced sea transportation system with ports and harbors all over its perimeter along with a roust fleet of merchant marines (nations, 2013). Furthermore, Japan also has an advanced and truly comprehensive air transportation system which serves all the major cities throughout the nation; Japan continues to update and expand these airports, making them safer and more accommodating (nations, 2013).

On the other hand, Japan does not have the wealth of natural resources that a country like China has. When it comes to agriculture and forestry, Japan generally has small farms, with just a portion of the land in the entire country idea for farming, with mountains covering the rest. Another issue with agriculture is that the bulk of the land that is useable for farming is in areas where many industrial sectors call their home, leading to fierce rivalries. "Japan was largely self-sufficient in rice up to World War I, but rising population pressure and poor soils combined to increase the need for food imports. Such imports came initially from the Japanese colonies of Korea and Taiwan, and elsewhere since World War II" (Healy). Though Japan has limited space for farming, the soil that is useable is very productive, growing cash crops like wheat, barley and oats; the land which is covered in forests makes forestry a major industry and an important import. However, fundamentally one can summarize that Japan has a poor amount of natural resources and its overall success depends on the raw materials which are imported. For instance, resources connected to energy are a major need for Japan; the nation has to import the bulk of its crude oil from the Persian Gulf (Healy). Oil is a major resource that Japan relies upon but which does not occur naturally in the country.

On the other hand, some scholars explain that one resource that Japan has that is superior to most nations around the world is that it has an educated and willing labor force. The country is populated by some of the brightest and most innovative minds on the planet, and all these people are committed to working hard and advancing the nation.

Rights of the Investor

The country that offers best investor protection is Japan. While Japan is a smaller country, with limited national resources, they have the track record of history to demonstrate progress, advancement and ease of business. One can base these criteria on the categories examined already, legal climate, business climate, regulatory bodies, natural resources and infrastructure. Japan is a country which simply doesn't have the developmental roadblocks that China is facing. While China has made improvements in leaps and bounds, it is still a developing country. The fact that it is still transforming means that it's more of a risky investment. However, in spite of the inherent risk of China, it could offer much more substantial returns. This is because China is a larger country which has so much more to offer in terms of natural resources and geography. However, the rights of the investor would be substantially compromised because China still has a treacherous amount of corruption at the governmental and local level, making anything from starting a business to investing in a business a frustrating process fill with bureaucratic issues.

Regional and Global Economy Issues

China, while still a developing nation, is truly ensconced in the global economy of the world and the regional economy of Asia. "Analysts and observers fear that China may not be able to bear the short-term slowdown and may turn back to the traditional model of growth" (Singh, 2012). Part of these concerns are as a result of the fact that China has invested so heavily in its infrastructure projects, just as its growth fell to a truly low point (Singh, 2012). "In recent months, China's economy has seen a 'rebound' engineered by looser lending and a renewed surge in investment… Markets have cheered, but others worry that China's new leaders may be shying away from the tough choices that must be made to get China's economy back on track" (Singh, 2012). China is a large enough country and dependent on exports enough that the rest of the world will acutely feel their highs and lows. China's economic decisions cannot help but influence the world economy.

Japan is incredibly integrated in the regional and global economy. The economic moves of Japan could have either devastating or uplifting impacts on the rest of the world, depending on what that country decides to do. For instance, just a few months ago, "the new governor of the Bank of Japan (BOJ), Haruhiko Kuroda, announced that the central bank would double the monetary base of the country -- adding an additional $1.4 trillion -- by the end of 2014 in an attempt to end the deflation plaguing the economy. To achieve that, Kuroda will buy government bonds and other assets to inject cash into the economy -- what has now become familiar as quantitative easing, or QE -- to bump inflation up to a targeted 2%" (Schuman, 2013). Some experts support this bold move, claiming that even unconventional monetary policies can help boost advanced economies and spur economic growth, something that the drastic measures proposed by the Bank of Japan might do (Schuman, 2013). This example just serves to show how truly ensconced Japan is within the global economy: any move it makes is felt by the rest of the world. This is important to the foreign investor as ultimately it means that any investment that's carefully strategized could benefit the world economy and have true trickle down and trickle around effect. The foreign investor needs to examine both how large a part each respective country plays in the regional and global economy and how well they have fulfilled that role in the past: with stability or not.

Final Recommendation

For a medium-sized company to find a foreign location for processing fruits for creating marmalade to export to international markets, China would be the best option, actually. While China is a developing country, they simply have more physical space for a foreign country to set up shop. In Japan all the industrial space is in heated contention with the agricultural space. While there is corruption and a mind-boggling amount of bureaucratic red tape in China, the company would just have to hire a liaison or a team of liaisons who were experienced with dealing with these obstacles. Furthermore, such obstacles would just be temporary ultimately. Finally, with China, given the wealth of agricultural possibilities, it's highly likely that the company would be able to use fruits and other natural resources grown within the nation rather than shipping them from overseas, a fundamental benefit which will save tremendous money in the long-term.