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Foreign Direct Investment Essay

Case Discussion Questions:

1. Why, historically, has the level of FDI in Japan been so low? The relatively low FDI stock in Japan is partly the result of a history of official inhibitions on FDI. In some industries, inward FDI penetration, as measured by the share of employment accounted for by foreign affiliates, in Japan in fact is on par with the United States. However, a large number of “sanctuaries” with almost no foreign involvement remain, so that FDI penetration overall is still very low. While to some extent, this can be explained by Japan’s relatively isolated geographic location, historical factors play an important role. Throughout the centuries and until quite recently, Japan’s rulers have viewed foreign involvement in the economy as a threat and consequently erected various barriers to FDI.

2. What are the potential benefits to the Japanese economy of greater FDI? The potential benefits to the Japanese economy of greater FDI are the ones listed below:

• Faster revenue growth than domestic firms;
• Significantly higher profitability and sales margins than domestic firms;
• Greater capital investment per employee than domestic firms;
• Higher total factor productivity than domestic firms;

• Higher spending on research and development per worker than domestic firms; and
• Higher average wages than domestic firms.

3. How did the entry of Wal-Mart into the Japanese retail sector benefit that sector? Who lost as a result of Wal-Mart’s entry?

It helped restructure Japan’s retail sector- boosting productivity, gaining market share, and profiting in the process. Wal-Mart implemented its cutting edge information systems, adopted tight inventory control, leveraging its global supply chain to bring low cost goods into Japan, restraining employees to improve customer service, and extending opening hours. It was more difficult than Wal-Mart had hoped. Wal-Mart’s entry prompted local rivals to change their strategies.

4. Why has it been so hard for Wal-Mart to make a profit in Japan? What might the company have done differently?

The company’s global marketing strategy has many flaws. Wal-Mart failed to grasp the consumer and retail environment in Japan. With a population of 127 million, the highest per capita income and the second largest economy in the world, Japan is a very attractive market for retailers. Perhaps more research into their cultural values and patterns could have helped avoid some of these mishaps.

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