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International Business - the Foreign Direct Investment Confidence

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The Foreign Direct Investment Confidence (FDI) Index prepared by A.T. Kearney is an annual survey which tracks the impact of likely political, economic, and regulatory changes on the foreign direct investment intentions and preferences of CEOs, CFOs, and other top executives of Global 1000 companies. The report includes detailed commentary on the markets and the impact a variety of global trade issues have on their FDI attractiveness, as well as a ranking of the top 25 countries. Japan retains the sixth spot in the Index. Its steady performance is likely a result of stronger economic growth and steps taken to integrate more fully in the global economy, including several recent free trade agreements.

  1. Political economy

About the political economy of a nation , how the political, economic, and legal systems of a country are interdependent. They interact and influence each other, and they affect the level of economic well-being in the nation.

The first is political system. The Japan’s political system is based on the Japanese Constitution, which was drafted after the end of the Second World War. The Constitution was promulgated on May 3, 1974. It established a democratic state in the form of a constitutional monarchy. Like the British, it regarded the royal family as the honor of the country. The Japanese government's power is divided into three parts, namely the National Assembly, the Cabinet and the judicial department of the government, which exercise legislative, administrative and judicial powers respectively. Political control is ultimately controlled by the Diet. The political control of the Japanese government is related to how Congress and its members are involved in partisan distribution. The Liberal Democratic Party controlled the government during the majority of their lifetime.

The second is the economic system. Japan is the third largest economy in the world, rank only second to China and the United States.In Japan, the service industry is a major part of the economy. In 2012, the service sector accounted for 71.4% of GDP. Japan's services sector mainly includes banking, transportation, telecommunications, insurance and retail.In 2012, Japanese industry accounted for 27.5% of Japan's GDP. Japan's main industries include automobiles, electronic equipment, textiles, chemicals, processed foods, steel and non-ferrous metals. Japan's auto industry is second only to China in the world. In the global financial crisis in 2009, the auto industry still achieved a 10.5% increase. Japan is also the world's largest electronics manufacturer.Agriculture is a small part of Japan's economic composition. In 2012, agriculture accounted for only 1.2% of GDP. Only 15% of Japan's land is suitable for farming, so many agricultural products rely on imports, which makes the United States the third largest market for Japanese agricultural imports.

The third is the legal system. Japan’s legal system is based on the civil law system. They established their legal system after the imperial rule to japan was restored in 1868. They have a civic law approach. They have the Foreign Exchange and Foreign Trade Act (FEFTA), The Ministry of Economy (MOF) and the Trade and Industry (METI). Japan's legal system is more like the European legal system.

  1. Foreign Direct Investment

The Foreign Direct Investment (FDI) refers to the investment of a company or individual in one country for the commercial interests of another country. In general, foreign direct investment occurs when an investor conducts foreign commercial operations or acquires foreign commercial assets, including obtaining the ownership of a foreign company or controlling a foreign company. Foreign direct investment and investment portfolios are different because the portfolio is only a purchase of securities from foreign companies.

There are five reasons to invest in Japan.

The first reason is that the Japanese economy is growing rapidly. Due to the efforts of the Japanese government, Japan’s investment environment is gradually improving and Japan’s economy is developing steadily. (1) Japan's economy has recovered steadily from deflation. (2) Corporate performance is gradually improving. (3) Corporate tax rates are beginning to decline. (4) Efforts are being made to improve the business and living environment of foreign companies and foreign employees, such as eliminating Language barriers, strengthening counseling services for foreign companies

(1)Improving GDP growth rate

[pic 1]

  1. Corporate ordinary profits (all industries)

[pic 2]

  1. Effective corporate tax rate reduced to 20% level

[pic 3]

The second reason is that Japan has a complex market. The Japanese market is huge and complex. (1) Japan's GDP ranks third in the world. Japan's GDP is about 500 trillion yen. Japan is a big economic power in the world and has strong economic strength. (2) The Japanese market is very attractive to foreign companies. (3) The Japanese market is very attractive to foreign companies. Foreign companies are booming in the Japanese market, and many global companies are gathering in Japan.

The third reason is that Japan is a center of innovation. Japan has created innovation due to the accumulation of intelligence. (1) Japan has world-class research funding and the number of researchers. Japanese technical talents have a high level of expertise in technology development. (2) Japan has a very good environment for innovation, and the number of patent applications in Japan ranks first in the world. Japan’s patent system has been highly praised internationally.

The fourth reason is that Japan has a well-developed social infrastructure that can support business well. (1) The Japanese business environment is highly regarded in the 2016-2017 World Economic Forum. (2) The same IT infrastructure in Japan is also perfect. Japan provides stable infrastructure services such as the Internet, communications and more. (3) Japan's infrastructure costs are also very low, as shown in the following figure. (4) Japan has a convenient transportation infrastructure.

(3)Transportation fees

[pic 4]

High-speed internet fees

[pic 5]

  1. Japan’s convenient transportation infrastructure

[pic 6]

The fifth reason is to have a comfortable life in Japan. (1) Japan is a safe country and Japan is socially and politically stable. (2) Japan has a sound medical infrastructure and a wealth of medical staff. (3) Japan has the most liveable cities in the world, such as Tokyo, Fukuoka and Kyoto. The quality of life in Japan is also high.

  1. openness to  Regional and International Trade

The chart below shows the degree of openness of Japanese trade, which is the percentage of Japan's exports plus imports as a percentage of GDP. Japan is a developed country and has great openness to trade in Japan. But Japan is very scarce of natural resources, so they import raw materials and then export many manufactured goods.



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