A Study on the Entry into Japanese Market by Foreign Firm and its Entry Mode

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Foreign direct investment in Japan had started to grow in late 1980's. Since then, it experienced ups and downs, but its rapid expansion has occurred in late 1990's. The ratio between inward and outward direct investment has now become comparable with other advanced countries. However, the presence of foreign-owned companies is still low overall.As the reason why the level of foreign direct investment in Japan has low, it is often pointed out the existence of various barriers to accept them in the Japanese market. But some factors including legal restrictions or keiretsu are banned or rather alleviated by now. Moreover, the location advantages in the Japanese market, which had rather been poor for a long time, has now been improved greatly due to the fall of real estate price and the creation of labor market with high level of mobility.It is not appropriate to measure the influence of foreign-owned companies in Japan only by means of the inward direct investment level. Because there ar … More e many other ways of entering the Japanese market such as licensing technologies to Japanese firms, alliances the field of sales, production, and R&D, and they had been and even now are playing quite important roles.The rational behind the preference of alliances with Japanese firms over direct investment by foreign firms is the saving of transaction costs. On one hand, the internalization costs in Japan is high because the reliance on the long-term relationship among related firms and the high level of business costs play as entrance barrier to the Japanese market. On the other hand, the transaction costs in the market tend to be low due to the relationship based on trust. The historical effect from the long restricted era also affected to suppress the level of transaction cost low.Nowadays, the role of the foreign-owned firms has been greatly changed in Japan. It had long been merely the subsidiary with the main role being to maximize the rent form the Japanese market by using the competitive advantages created by the parent company overseas. However, the Japanese subsidiaries of the American and European firms play important roles in the field of R&D by progressively transporting technologies acquired in Japan to other affiliated companies, and now acting as the strategic leader in the group companies.In order to vitalize the Japanese economy, it is required to encourage aggressively the inward direct investment from other countries and to improve the business environment so that the Japanese subsidiary will be able to become an even more critical member in the multinational firm. Less