National Competitiveness of Japan

ABSTRACT:
Japan is the third largest economy. It had been so successful and competitive before 1990. It has been in stagnation for two decades. This paper is going to examine if Japan still retains her national competitive advantage and as an attractive place for MNE from different internal analysis. There will be suggestions of how Japan can improve her international competitiveness.

INTRODUCTION
Japan had experienced tremendously economic growth after World War II until 1980s. Nikkei stock market index has experienced a high hit of 40,000 in Year 1989. After the appreciation of yen, mistakes in fiscal policy and a serious bubble economy in 1990s, Japan fell into recession for more than two decades. To make it worse, the economic crisis in 2008 and March 11, 2011 earthquake and tsunami in Japan were a great hit to the economy. A decline in exports and increase in imports, especially fuels and energy, made Japan has to face trade deficit and how to increase its international competitiveness. There were some signs of recovery from 2012, especially with Shinzo Abe became the Prime Minister and implemented “The Three arrow”, which is a series of fiscal, monetary policy and structural reforms, so called “Abeconomics”. The PEST model which macroeconomic environment will be analyzed and see whether it is attractive for MNE come to Japan. From Porter’s Diamond model, how Japan can increase its national competitiveness will be further discussed.

MAIN CONTENT:
For an MNE to decide whether to go to Japan, the thorough analysis of PEST model has to be done. An all-round overview of macroeconomics environment, including political situation, economic environment, social and culturally, and technological dimensions is needed.

a. Political environment
The change of political leader in Japan usually would not bring instability to Japan economy or dramatic change in policy. Prime Minister Shinzo Abe was re-elected after one year service from Year 2006 to 2007. He got majority votes from both lower house and upper house. Before Abe got reelected in December Year 2012, there was no Prime Minister could keep position more than 1 year. Though the transition is peaceful, the return of Abe regained unity and public confidence to the government. Abe's approval ratings were around 70 percent in 2013 .

The determination of having a more open Japan is getting obvious, which is a favorable factor to setting MNE in Japan. Japan has tried to build up a tighter relationship with the US and more economic and diplomatic networks with other countries. Prime Minister of Shinzo Abe has joined as a member of multiple international trade organizations such as Trans Pacific Partnership, EPAs, FTASs, APEC, WTO, OECD, the G-8 and the G-20. These 2 years, Abe visited France, India, Middle East, Africa, Latin America, Russia and Mongolia, etc. He also built a closer tie with US.

Shinzo Abe was perceived as right wing nationalism. Japan would not be an attractive place for Chinese investors. The relationship between Japan and East Asia has been getting strained because of the disputes over Senkaku islands (which China calls the Diaovus) and Abe’s visit to Yasukuni shrine. China has dropped from the first of export country to the second position in 2013 . The economic slowed down in China and the disputes with China since 2012 made an obvious drop in exports, especially automobile to China. Sales of Toyota Motor Corp export to China dropped 44% of deliveries in 2012 compared with the previous year. It is still declining of the export figure.

Among Asian countries or even around the world, corruption perceived index is low for Japan, it was the top 20 countries. MNE might not need to worry about bribery. However, in terms of government efficiency and bureaucracy were not competitive. Barriers for entry is high in Japan. Policy loans have been given to entrants, but a dominant part of them have been given to incumbent firms and to help the incumbents improve their competitiveness. Also, protectionism in Japan still prevails. Applying franchise and license is not

b. Economic situation
Economically, Japan did not perform well for more than two decades. Imports kept increasing while exports was gradually falling. Macroeconomic environment is not attractive, it ranked 124th out of 148 countries . Cost of living has been so high and yen was appreciated a great deal after 1990 , and made Tokyo as the most expensive cities for a number of years, until 2013. It implied the wages and rental are at very high cost.

Shinzo Abe tried to restore the economy and public confidence by implementing economic reform, it included several fiscal and monetary policy, and a structural reform in economy, which is so-called “Three Arrows”. The stock market has rallied 45 percent in Year 2013. Abe has an aim of achieving 2% of inflation and deflation of yen. He is trying to stimulate local consumption and increase exports. He encourages enterprises to increase salary in order to stimulate consumption. In order to increase government income, Japan increased consumption tax to 8% since April 2014. GDP in 2013 has slightly increased to 2.6% and an increase in consumption index until the first quarter of 2014 before the consumption increment started. Though GDP has slightly increased, half of it was government spending. It is still questionable whether the consumption index and economy can recover after the increment of sales tax and maintain the inflation level constantly on 2%. Japan will be too large of the economy if only reply on export orientation. A real recovery requires a real increase of income level and effective structural reform, but not a bubble economy.

The operation costs in Japan is high, including rent, energy and human resources, cost disadvantage is a concern. Yen had been inflating after 1990s, under Abenomics, yen has to depreciate around 20% after 2012 December. However, with the economic slow down in US and China, Japan’s exports still seemed not optimistic. Compared with the size of the economy, foreign direct investment inflows into Japan are the lowest among the 34 developed nations grouped in the Organization for Economic Co-operation and Development (OECD). Its own corporations are pessimistic about home markets and outflow of investment was huge. After the increase of sales tax, but the real income has not really increased due to inflation starts, the consumption of power of local market is Japan is expected to have gradually and slow recovery.

c. Social and cultural environment:
There are quite a number of cultural dimensions are different between the west and Japan. According to Hofstede cultural model, Japanese are more of a collective and high uncertainty avoidance and borderline hierarchical society. For MNE, the management has to consider it might be difficult for local middle management or individuals to take risk or with the courage to initiate totally new ideas or practices or develop individual creativity. Also, they find it very inefficient to obtain approval from each level of management. It hinders industries which require a lot of originality and innovative ideas. It also delays the response of fast changing business environment.

Also, due to Japan is a masculinity society, the declining workforce in Japan badly needs more participation of females workers. The labour cost has been already high, plus the shortage of labour, it made Japan even less attractive for MNE to set up. A problem is that women is difficult to climb up the corporate ladders with this masculine norm. With females in their 30s participate in the labor market noticeably less, which was creating a stark M-shaped curve in the participation ratio over ages in the past and in the present. Shinzo Abe has tried to encourage female to come out to work and a couple of measures to solve the problem of shortage of child care service.

For the dimension of pragmatism, Japanese enterprises perceive long term orientation is important, which includes investment in research and development. Serving the share holders and the society at large is goal of the company, MNE has to understand the perspective of the local management, supplier or partnered enterprises during decision making process. Therefore, relationship and trust has to establish.

d. Technology
Japan has been the most technological advanced Asia country since 20th century. Japan enjoys a major competitive edge in business sophistication and innovation, which ranking 1st and 5th, respectively in 2013 . Enterprises emphasis in research and development, even in times of financial difficulties. It has been leading automobile, electronics and electrical appliance industries for several decades. It has its own technology and might have strong sense of protectionism in certain areas. MNE will have the advantage if successfully partnered or through FDI to work with the corporations.

After reviewing the above facts and information about Japan, we cannot simply identify Japan is either attractive or not attractive to MNE. Rather, According to Ohmae, nation state is no longer the appropriate economic entity for decision making. For example Tokyo was regarded as the top three most competitive city in the world, which based on economic strength, technology and global influence, but country wise will not be that competitive. For different industries, there will be different determinants of industry profitability. It has to review through Porter’s 5 forces to identity if the strategic positioning and industry structure are suitable for MNE to enter. MNE has to consider its own competitive advantage and how it positioned itself in this market.

National Competitiveness
According to Porter, when we assess a country’s international competitiveness, we have to review a large number of factors on dynamic nature of country’s national competitiveness. Below is Porter’s complete system and based on this model to take a deeper look of Japan’s competitiveness and its comparative advantage over other countries.

Portel’s Diamond Model of national competitiveness

The major four pillars of this research includes factor conditions, demand conditions, related and supporting industries, firm structure, strategy and rivalry. On one hand, macroeconomics and national environment is analyzed through factor conditions and demand conditions. For the dynamics, opportunities and challenges of the industry or corporations is reviewed through “firm strategy, structure, and rivalry” and “related and supporting industries”. If there is a need to analyze specific industry itself, there will be “five forces” model which will not discussed in this paper. There are also two more important factors affecting national competitiveness which include government and chance events.

a. Firm strategy, structure, and rivalry
There are two special features of Japan’s industry history. First is Keiretsu, which previously called Zaibatsu. Japanese enterprise groups are the shareholders of each other, which seen as barriers to entry for competition or way of excluding outsiders.
The company goal is growth and expansion. It might choose diversify into different products and consider market share rather than profitability. They might still get financial support from their affiliated banks which are not based on their company performance, they enable the survival of these inefficient companies. In such a dynamic global business context, Japanese companies gradually lost its competitiveness for its response to meet with rapid changes. The institutional pressure of keireisu made Japanese enterprises unproductive , and Nakatani (1984) has similar finding from his review for the period of Year 1971–1982.

The hierarchical and bureaucratic management culture hinders the corporations to react quick enough in global competitive market. Most vivid example is the gaming industry in Japan. It was at least 5 years behind US technical quality and user interfaces, this structure discourages the middle management or individuals to take risks and initiate radical change. It made Japan has a hard battle to fight in technology and electronics industry. Many corporations still based on seniority for promotion and reward, though it is changing, not sufficient reward system for contributions from individuals to generate innovative ideas. Therefore, it is important for Japan to streamline the decision making process and how to retain the talents through compensation or promotion to motivate them to perform better in order to increase its competitiveness.

Another phenomenon in Japan is there are two extreme developments of industries. There are also industries are not efficient and with low productivity, it includes construction, retail, agriculture and medical services. There were problems like shortage in production equipment and facilities, deficiency in information and communication services. However, there is still opportunity to change the situation. Companies like Uniqlo and Costco (US wholesale), their features are efficient logistics, good quality of products, excellent service and control of cost, their new way of management and success in Japanese market revealed the potential of this market.

b. Factor conditions
Japan is lack of natural resources and fuel. After the disaster happened in Fukushima, nuclear power plants were closed in the country. Supplies of fuels became a difficult issue to handle due to immense increase in production costs and reliance on import. With the present trade deficit situation of almost 20 billion a year, more than 20% of the imports are fuels, therefore, efficiency energy policy will be very critical to retain its competitiveness.

Human resource and productivity in Japan is still competitive. Japan has high literary rate and with good universities and vocational training, though English level is not as proficient as other rising Asian countries. Employees are loyalty to employers and they maintain good relationship. However, a downward assessment of labor market efficiency, from 13th in 2011 to 20th place in 2013 . Aging problem and insufficient working force is getting worse, it is expected 33% of population will be over 65 years old by Year 2040. It counts as one of the reasons why Japan stopped growing.

Japan is the third largest economy, with 808 billion of import and $788 billion of export in Year 2012. There is efficient and advanced transportation and infrastructure which facilitate the business environment. These factors have not enable Japan to recover its economy, due to poor macroeconomic environment (only ranked 124th out of 144 countries), unattractive tax rates and inflexible government regulations and ineffective bureaucracy. Japan has high level of outflow of investment but lowest inflow of foreign direct investment among OECD countries in 2012 . It reveals the manufacturing location has changed, even local investors have to source other resources abroad. It is also related to the appreciation of yen.

c. Home Demand condition
With a large population of 126 million, Japan has a great domestic market. The median age is 45 years old while population growth is only 0.8%. Aging is an obvious situation in Japan, it will affect domestic demand, saving and investment. More need will be in health care and elderly service. The shifts in population has impact on the needs of services or products market. The older generation had a concept of lower price would not be worthy or with good quality. Therefore, when Wal-Mart entered Japan in 2005, their strategy was not successful at all. However, after the economy stagnation of two decades, there were changes in their consumption behavior. Costco has been a success to enter Japan, and also Japanese tend to stay at home and use online shopping .

Japanese is also very sophisticated in using electrical and modern electronic appliances and automobile, a demand in innovation and continuous improvement (kaizan). Companies are producing high-value-added goods and services. In automobile industry, the seven major companies include Toyota, Honda, Nissan, Mitsubishi, Suzuki, Mazda, and Subaru are all fight for the market share. Porter believed that f home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors. Japan enterprises have great potential in improving its competitiveness by operating at the highest end of the value chain, and producing high-value-added goods and services.

d. Related and supported industries
Most important thing is that the MNE need the network to get into a reliable supplier, cluster network support. Porter emphasized greatly for the importance of local cluster of related and support industries in order to ensure the competitiveness of the industry itself. It plays an important role in affecting innovation and invention in the home country. It is particularly critical in Japan as the supplier and business partner look for long term relationship and great commitment. It took time to gain their trust.

In terms of electronics, electrical appliances and automobile industries, there are many small and medium enterprises concentrated to support these industries. Japan has launched strong industrial cluster to support these industries. Since 2001, under the heading “Industry Agglomeration for the Recovery of Local Industries with respect to so-called "Industry Clusters” was implemented. Another industrial policy was “Project for Creating Knowledge Clusters”, which focus in culture, sports, science and technology. There are different industries in different region, for example, Chugoku region has the project for recycling and nuclear development, while Kinki region has project for bio-related, information related and advanced use of energy.

Therefore, if MNE related to these industry clusters, there will be a great advantage. Huawei is a good example of it. It positioned itself in IT equipment in Year 2012, and it recently provides 400 types of products including servers and storage devices. Huawei established its enterprise business sector in Japan in April 2012. It currently has 400 types of products including servers and storage devices on sale.

e. Government
In this Porter’s model, Government can influence all the other factors. Japan went from having the best debt position amongst advanced economies to the worst. It has to improve macroeconomic environment and the factor of industry structure itself desperately.

Bureaucracy and government regulation is one of the greatest weaknesses of Japan’s competitiveness. For example, New drugs are approved faster in Indonesia or Turkey, according to the OECD. Few data are collected on how patients respond to treatments. The government maintains a certain degree of protectionism in some local industries. Based on the research of Michael E. Porter and M. Sakakibara, they found that less government intervention and vigorous local competition situation has a positive relationship with the performance of the industry. Nishimura, Yasushi and Ariga (1999) also have similar finding. Relying on government protection and subsidy would not be helpful to these industries to grow and be competitive. Agriculture will be obviously to be affected by trade liberalization in the coming years. Farming faced even more serious aging and lack of labour problem. While health care, there are lack of good quality hospitals and clinics.

f. Chance
External environment and chances also have impact on national competitiveness. With the momentum that Prime Minister Abe brought a new page to Japan economy, the Japanese starts to restore their confidence. With the fiscal and monetary policy changes, and structural reform, Japan regained the attention around the globe of its economic recovery.

Olympics and Paralympics in Year 2020 will bring about great opportunities to stimulate Japan economy and enterprises can expand their business . The government is now actively to stimulate through local construction and infrastructure. Japan has great potential in its tourism industry, there is a trend of increasing tourists visiting Japan after 2011 . Tokyo is voted as the best city in the world to visit, different business potentials exist.

CONCLUSION AND RECOMMENDATION

In term of microeconomic competitiveness, industry and corporations need reinvent and innovation. In the age of globalization, the structural reform for corporations and financial institutons which facilitate them to accommodate enough flexibility and innovation in order to cope with the rapid changes of world competition. It will be important Japan has continued to open its domestic and international competition. Japan has to promote a business friendly environment that supports competition, efficiency and corporate governance. Japan should welcome skilled labour and expatriates from abroad, encourage women join the workforce and promote mobility in order to solve its shortage of labour problem. Japan has to embrace internationalization of knowledge, and realize the changing management style. The structural reform of the corporations and industries will bring about a much more competitive country.

Potential of non-manufacturing industries
Japanese has been famous for their politeness culture, and their emphasis of artistic production, gifts and even food, it urges for better quality and process improvement. Japanese food is one of the most popular food in the world. These are the prerequisites to develop its tourism and related service industries. Japan has to raise its language skills will be needed. Non-manufacturing sector need deregulation and a reform in bringing advanced logistics and information technology for the hardware, and be effective and strategic orientation on management level.

In terms of macroeconomic competitiveness, Japan should concentrate its openness to international competition and adopt effectiveness monetary and fiscal policies, rather than politics. Japan should move away from her image of protectionism to economic partnership, for example, TPP and Regional Comprehensive Economic Partnership (RCEP) which expecting next year. Japan has been one of the world leaders in technology, automobile and electronics industries. Japan has to focus her own advantage of knowledge based activities, human quality and advanced technology. It has a lot of opportunities of technology transfer and export to China and the rapidly growing developing countries in South East Asia. It has to develop knowledge human resources to cope with the changing business climate.

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