Japanese Direct Investment in Southeast Asia 9789814376440

Citation preview

The Institute of Southeast Asian Studies

Established as an autonomous corporation by an Act of the Parliament of the Republic of Singapore in May, 1968, the Institute of Southeast Asian Studies is a regional research centre for scholars and other specialists concerned with modern Southeast Asia. The Institute's research interest is foc ussed on the many-faceted problems of modernization and social change in Southeast Asia. The Institute is governed by a 24-member Board of Trustees on which are represented the University of Singapore and Nanyang University, appointees from the Government, as well as representatives from a broad range of professional and civic organizations and groups.

A ten-man Executive Committee oversees

day-to-day operations; it is ex officio chaired by the Director. the Institute's chief academic and administrative officer.

"Copyright subsists in this publication under the United Kingdom Copyright Act, 1911 and the Singapore Copyright Act (Cap. 187). No person shall reproduce a copy of this publication, or extracts therefrom. without the written permission of the Institute of Southeast Asian Studies, Singapore."

Japanese Direct Investment in So utheast As i a

by

Kunio Yoshihara

Occasional Paper No. 18 Institute of Southeast Asian Studies

Price: $4 . 00

PREFACE Japan is looming ever larger and larger in Southeast For instance, it is estimated that Asian affairs Japanese overseas direct i nvestment (excludin g retained earnings and disinvestm ent) in Southeast Asia would reach some US$5 billion by the year 1980 . Despite the importanc e of such massive investmen t, little or nothing is known of such basic factors as the forces that motivate this investmen t and influence the types of activity It would seem superfluo us establish ed or products produced. to stress that without a proper study and analysis of the overall character of Japanese overseas investmen t in Southeast Asia, it would be impossibl e to arrive at any worthwhi le understan ding of the phenomena , or assess its full implicati ons for the individua l host countries or the In this light, the following paper by region as a whole. Professor Kunio Yoshihara on Japanese Di rec t Investmen t In In wishing Southe a st As i a is all the more welcome . Professor Yoshihara all the best, it is clearly understoo d that responsi bility for facts and opinions expressed in the work that follows rests exclusive ly with Professor Yoshihara , and his interpret ations do not necessari ly reflect the views or policy of the Institute itself or its supporter s .

17 November 1973

Kernial s . Sandhu Director

I o

INTRODUCTION

There are four types of economic relat ionsh ips between Jap anese corporations and Southeast Asian countries. They are tl )

trade,

(2)

licensing,

( 3)

direct investment, and

(4 )

indirect lnvestment ,

These relat ionshlps can be mutually independent as well as lnterdependent . A Japanese corpora tion may be faced with the exclusive That is, if it decides to export choice of the first thre e . from the home bas~ lt has t o forgo the opportunities of receiving royaltles for technical know-how . The possibility of settlng up a subsidi a ry to produce the same good for the loc al market and gett ing prof i ts remitted has to be also If it decides to draw up a licensing agreement and forgone . technology and /o r let a Southeast As i an co r poration provlde to use its brandname, it receives royalties . But in this case lt forgoes the opport un ities of exporting its product fr om Japan to that country or setting up a subsidia ry there o Similarly, if it sets up a subsidiary and sells its pro duct to the local market, it refrains from exporting from Japan; nor does it give technical a ss ist ance to another co rpo ration in the same country. These economl c r e lations do not h ave to be mutually excluslve, and some of them can be c ombined . For example, Th i s trade and indirect investment can b e complement ary . is the case when a corporation provides credit for its sale s abroad or glves loans to a foreign mining company on the understanding that they will be off-set against the Or, dire ct export of its product over a period of time. inves tment and indlrect investme nt can be complementary . When a Japanese corpo ration sets up a 100 % owned subsidiary, a loan agreement is often d rawn up . This is usua lly to t i de over difficulties ln its i n itial period, but somet imes , lo ans supplement pai d-up capital and are withdrawn when enough re se rves are a ccumulated . Wh at we are concerned with mostly in this paper is the case where di rec t i n vestmen t is tied to trade. At thls

point, we should make clear what is meant by direct investment, to avoid confusion later on. Direct investment is the acquisition of shares. To be exact, it is the amount of direct investment = the number of acquired shares x the market value of shares. But, since the shares of most Southeast Asian corporations are not traded in the stock market, par value, in practice, is used as a substitute for market value. When shares in an existing corporation are acquired, the value ~er share Japanese corporations have paid may differ from the par value. Therefore, the amount of Japanese investment discussed in the following sections may not exactly be the amount of capital used to acquire shares. But since Japanese direct investment usually takes place in connection with setting up new companies, the difference is small. Direct investment tied to trade can be classified into three types: (a) import substitution, (b) resource exploitation and (c) export oriented. The import substitution type of direct investment takes place when host countries impose barriers against the importation of finished goods. For example, a Japanese car manufacturer might set up an assembly plant if it becomes difficult to export finished cars. The reason why this investment is related to trade is that the investment in an assembly plant is motivated to supply automobile parts, which can still be imported from the Japanese corporation. When the 1mportation of finished cars is barred, the Japanese corporation might lose the entire market if it does not invest in an assembly plant. From the Japanese viewpoint, it is an export promotion type of investment. But for host countries, even to be engaged in the finishing stage of production is to produce a good which was imported earlier, and thus this type of investment is usually classified as an import substitution type. The resource exploitation type of investment takes place when corporations invest in agriculture, mines, forestry and fishing. This investment is to increase the production of natural resources which are needed for an investing country, such as Japan . This is, in essence, the investment which enhances the flow of natural resources from Southeast Asia to Japan. When direct investment is not allowed or is difficult as in the Philippines, indirect investment is made to play the same role .

-

3 -

The export oriented type of investment is rather a new phenomenon as far as Japan is concerned . Its purpose is to produce industrial goods, but, unlike the case of the import substitution type of investment, the products are not sold to the domestic market. In this case, the host country is used as the export center . The Japanese corporation may bring back its product to the Japanese market or export it to a third country . South Korea and Taiwan were once Japanese colonies, and many people, especially of an older generation in these countries speak Japanese . This factor made it easier for Japanese corporations to move to these countries first . But because of their political climate, it became unwise to i nvest heavily there . Furthermore, Southeast Asian countri es, especi ally Singapore, seem to offer better e c onomic opportun i ties. These are some of the main reasons why the export oriented type of investment began to flow to Southeast As i a . In the fol l owing sections, we shall be concerned with h ow we can classify Japanese direct investment in Southeast. As i a, t he type of industries established, the average size o f i n vestment, the typical pattern of equity shares, and changes i n the investment flow over time . In sect1on II below, we briefly explain the sources of d ata and the research methodology employed. In section III are shown the results of our investigation . In secti on IV, based on these results we make several observations and some analys i s. In section V, we discuss the trend of Japanese d i rect i nvestment in Singapore in the past two or three years . Sect i on III is based on the research the author undertook i n Japan, while section V is based on the result of the a u tho r 's research on fore1gn corporations in Singapore's manufactur i ng sector which is still under progress . I I.

DATA SOURCES AND METHODOLOGY

As explained i n secti on I, we restricted our investigat i on to the amount of investment, equity shares, the types of industry, and the year in which the investment took place . There are many other aspects of Japanese direct i nvestmen~ such as the extent to which raw materials are procured i n the local market, the way of selecting partners for joi nt ventures, technological transfer, the method of train i ng local employees, etc . , but research on these aspects of direct investment was difficult in Japan . Therefore, this

- 4 -

paper does not cover all problems associated with Japan's direct investment in Southeast Asia, but is concerned with several specific aspects. As a first step in our research, we had to obtain a list of Southeast Asian corporations with Japanese direct investment. Let us first discuss how this was done. The Philippines: The list for the Philippines is included in the report of the Japanese government's economic mission to the Philippines, which was published in July, 1971 by Keidanren. The list is up-dated to June 30th, 1970. Malaysia: The list for Malaysia was obtained from Kaigai Sh i jo Hakusho: Wag a Kuni no Kaigai Toshi no Genjo (A White Paper on the Overseas Market: The Present Situation of Japanese Overseas Investment) by the Japan External Trade Organization. The list was compiled at the end of February, 1972. There were a few other lists on Malaysia, but the list of the Japan External Trade Organization was considered the most up to date and reliable. Although the monograph contains lists for other Southeast Asian countries, they were not used since we could find better ones , Singapore: "Singapore Gaikan 19 72" (A Survey of Singapo r e: 1972) by the Bank of Tokyo contains the list we wanted. It was compiled at the end of December, 1970. This was judged to be the most comprehensive and reliable for Sing.:J.p-:·re . Thailand: The list for Thailand was obtained from "Taikoku Keizai Gaikyo 1972" (An Economic Survey of the Thai Economy: 1972) by the Japanese Chamber of Commerce and Industry of Bangkok. The list was compiled at the end of November 1971 , Indonesia: There were at least a few lists of Indonesian corporations with Japanese participation in January, 1972 . We used the list compiled by the Jakarta branch of the Bank of Tokyo towards the end of 1971, since it is the most comprehensive. The list for the Philippines, Malaysia, Singapore and Thailand contains all the necessary information: That is, the information on the amount of investment, equity shares, goods produced, and the years in which investment took place o There were some obvious errors, but they were negligible, and could be corrected through contacting Japanese parent companies. But the information on the investment in Indonesia was more difficult to obtain. The list contained some information

·- 5

~

we were looking for, but it appeared incorrect. After a few telephone calls to parent companies, it was found that the size of investment in the list, for example, was the amount of authorized capital, not of paid-up capital. Also, the information on Japanese equity shares was missing. Therefore, we decided to send out questionnaires to all Japanese corporations which appeared in the list. On each questionnaire, we wrote down the names of Indonesian companies, so that Japanese corporations knew for which investment information was solicited. Many corporations received several questionnaires since they made several investments in Indonesia. The returns were surprisingly good. About two thirds of the corporations sent back the questionnaires within a few weeks. For the rest, we made telephone calls to their Indonesian divisions. All gave the information we wanted. Then, we checked figures to see whether they were consistent. This could be done s1nce in many cases more than one Japanese corporation 1nvested in the same Indonesian corporation . In the questionnaires, for example, we asked about the amount of paid-up capital, Japanese shares, and the shares of individual corporations. Therefore, if more than one Japanese corporation was involved, their returns should show that the amount of paid-up capital and Japanese shares should be the same, and the sum of individual shares should add up to the total Japanese shares. Several returns turned out to be incons1stent. For these cases, we made corrections by mak1ng telephone calls to the corporations in question. The quest1onna1res were sent out at the beginning of October, 1972, and the necessary information became complete by the end of the following month . III .

RESULTS

The results of our investigation are summarized in the following five tables . Before we make observations based on these tables, let me briefly touch on the problem of industrial classification. There were a large number of commodities produced with Japanese investment, but the problem we had to face was how to classify them into homogeneous groups. We did not want to have too many or too few groups. A natural choice seemed to be the U.N. scheme, but it turned out that if we did so, we would have too many industrial groups with no Japanese investment . Thus, the industrial classification adopted is

- 6 Tci:>le I:

'nle Distributi.cn of Japc.!lese Direct Invest:nents by Industzy

~ try

.Agriculture , Forestry, Fishing Mining Manufacturing A. Food, beverages & td:>acoo B. Textiles 1. Spinn~g & weaVl.Ilg 2. Garrrent 3. Industrial textiles c. Olemicals 1. Paint, ink 2 . Fertilizer, insecticide 3 . Drugs 4. Soap & ccsnetics 5 . Batteries 6. Plastic products 7. others D. ~tal fabricaticn E. Household appliances F. Machinery & ~prent

l Q General madlinery 2. Transport 3. Shi};Duilding & repairing G. others 1. Paper & paper prcducts 2 . Rubber 3. Glass 4 . Cerrent 5. Ccnstructicn materials (not classified elsewhere) 6 . Printing 7. others Total

'nlailand

Sing~

3 6

Malaysia

Incknesia

PhiU.Wines

16 1 42

4 10

89

37

4 46

5 27

3 6

4 3

4 12

1 1

17 7

2 3

2 1

10

1

3 16 5

1 7 2

2 8 2

1

2 1 2 1 5 17 9

2 1 2 7 1

16 1 2 2 3 1 4 3 8 4

7 2 5 3 2

1

4

l

7

3

7

1

3 1 2

8

2 10

8

1 1

2

2

l

1 2 1

2 2 2

4

98

37

3 1

3 1 1 1 1 2 3

1

1

1 2

1

50

59

14

... Table II:

'-

'Ihe Average Size of Japanese Investrrent by Industry (lhit: US$l,CXX))

~ ry

Agriculture, Forestry, Fishing Mining

'Ihailanc Singapore

Malaysia

Indrnesia

Philippines

835

128 51

811

450

895

Manufacturing

578

528

586

1,184

638

A. Focrl, beverages & tooacco

715

556

sen

543

513

B. Textiles ~,147 1 0 Spinning & \ttleaving ~,623 265 2 o Gament 3. Industrial 510 textiles c. Chemicals 144 154 1. Paint, ink 2 . Fertilizer, 118 insecticide 3. Drugs 120 4. Soap & ccsnetics 5 . Batteries 115 6. Plastic products 188 7. Others 389 D. ~tal fabricatirn E . Household appliances 172 F. Machinery & 524 equiprent 1 . General machinery 2 . Transport 524 3. Shifbuild.ing & repairing G. Others 351 1. Paper & paper products 2 . Rubber 604 428 3. Glass 4. Cenent 5 . Crnstructirn materials (not classified 302 elsewhere) 34 6 . Printing 198 7. others

984

840

2,890

l,SCD

2,6a> 182

780 119

3,138

l,SCD

1,650 363 170

137

All Industry

532

149 98 146

244 35

216 142

977 SOJ 81 25 68 120 515 224

1,533

33 44 142

613 2CD 340 185 538 363

137 1,844 154

400

441

22

413 483

22

95

80 360

2,252 500

1,691

525

62

85 1,773

33 999

632

12,416

508 394 38

241 84

561 270

62

528

604

l,CD7

712

.. I ..

Table III:

'Ihe Distributicn of Japanese Shares

Japanese Shares

'Ihai1and

0- 9%

Singapore

Malaysia

1

1

Indcnesia

Philippines

4

10- l9

2

2

2

1

20- 29

5

3

2

1

30- 39

6

4

6

40- 49

27

5

20

4

50- 59

l9

13

10

8

60 - 69

7

3

1

9

70- 79

8

3

2

4

80-89

7

1

2

15

90- 99

9

2

1

10

100

8

3

7

3 3

3

1

Total

98

37

50

59

14

Madian (%)

50

50

49

80

30

- 9 -

Table IV:

'lhe Distributicn of Japanese Investnent by Size

Japanese Invest:nen t

Philippines

'Ihai.land

Singapore

Malaysia

Indcnesia

28

12

23

4

4

100 - 199

22

6

6

5

1

200 - 299

7

6

5

4

1

300 - 399

9

2

5

4

400 - 499

5

4

2

4

500 - 599

6

1

4

600 - 699

3

700- 799

1

1

1

2

800 - 899

1

1

1

6

900 - 999

2

1

3

1

l,CXX) - 1,999

10

3

3

7

3

2,cm- 2,999

2

1

3

1

less than 100 thousand US$

8

3,cm - 3,999

Total

Median (thousand lE$)

1

2

1

3

1

1

4,CXX) - 4,999 over 5 ,em

2

2

98

37

50

59

14

214

328

122

601

510

Table V:

10 -

'1he Annual Distributicn of Japanese Invest:Irents

Before 1960

Malaysia

Singapore

2

1

Indcnesia

Philippines

1

1 1

1960

2

2

1961

1

1

1962

2

1

4

1963

1

1

6

1964

2

6

8

1965

5

5

6

1966

4

1

12

1967

7

5

7

1

6

1968

7

4

7

1

2

1969

8

3

2

7

2

1970

8

8

20

16

2

1971

1

2

14

17

3

11

5

6

98

59

1972 UnknONn or at the inplenentaticn stage

Total

Note:

'Ihailand

50

37

14

1.

For Malaysia, the year of inoorporaticn was used , wtereas for Singapore, 'D1ailand and Indcnesia, the year during which operaticn started was taken. For the Philippines, the year when Japanese equity acx}Uisiticn took place was used.

2.

For the i=i_ve corporations with Japanese canital participation in Tnailand, \.ve could not find out when their operaticn3 began. For Indcnesia, six corporatia13 had not be gun their q_:Jeratims when t he inquiry was made.

basically the one the au.t hor used in "A Study of Philippine Manufacturing Corporations" (The Developing Economies, September 19 71) • IV.

OBSERVATIONS AND THEIR ANALYSIS

(1) All investments in agriculture, forestry, fishing and mining belong to a resource exploitation type of investment . Some investments in manufacturing also belong to this type. Sometimes i the corporations with Japanese capital are engaged in processing natural resources before they are sent back to Japan. Most investments in manufacturing however, belong to an import substitution type. An export substitution type of investment can be found in manufacturing, but only a few are of that type , Therefore, we could say that Japanese overseas direct investment was primarily to promote the exports of Japanese manufactured goods and the imports of natural resources to J apar1 o (2) The number of Japanese investments varies from one country to another . As shown in Table I, the largest number is Thailand's 98, and the smallest is the Philippines' 14 c The small number for the Philippines does not mean that she is not economical l y attractive t .o Japan . On the contrary, she i s one of Japan's most important source of natural resources in Southeast Asia. Thailand, on the other hand, offers l i ttle in terms of natural resources o The sum of Japanese direct investment and indirect investmen t (mostly long term loans) is larger for the Philippines than for Thai land . But as pointed out above, there are more "Japanese" corporations (corporations with Japanese equity participation) for Thailand than for the Philippines. This is primarily due to the difference in the political and economic climate . To be more concrete, until recently, control over Japanese direct investment was much less in Thailand than in the Philippines. The re l atively small number for Singapore is probably because her domestic market is small . The sma ller number of "Japanese" corporations in Indonesia than in Thailand is because the former was not politically stable until recently and her economic policies had not been conducive to foreign investors for some time. (3) There is another thing we should note in Table I, namely some concentration of investments in textiles . This is especially the case for Thailand and Indonesia . Japanese interests in textiles in Southeast Asia can be explained in the following way . The demand for textile products can be

- 12 -

fairly large even if the income level in a host country is low. Also, since production is simplified by machines, the required work-force can be unskilled. Furthermore, Japanese textile technology is one of the most advanced in the world. Thus, in general, Japanese textile corporations can produce goods more cheaply than American or European ones. Table II shows the average size of Japanese investment. If we compare the five countries, we notice that the size is the largest for Indonesia. It is almost twice as large as that for Thailand or for Singapore. (4)

(5) If we examine the industrial distribution, we find that except for a few most investments are very small. But some investments are large. Thus, the investment in textiles, shipbuilding and tyres exceeds one million u.s. dollars. The fact that the investment in textiles tends to be large partly explains the fact that Indonesia has the largest average size of Japanese investment. As is shown in Table I, a fairly large number of Japanese corporations have invested in Indonesian textiles. This fact, coupled with the relatively large size of investment in textiles, makes the average size of Japanese investment in Indonesia larger. (6) Table IV shows the distribution of Japanese equity shares . It is interesting to note here that there are not many 100% owned Japanese subsidiaries. The typical pattern for Thailand, Singapore and Malaysia is the joint venture, on a fifty-fifty basis. Japanese investors sometimes take minority shares. They prefer, however, at least 40 percent. But an important point is that Japanese investors are willing to have local partners. They prefer a joint venture type of arrangement to a 100% Japanese owned subsidiary. This presents a sharp contrast to the American pattern . (7) There are two major reasons why Japanese investors prefer joint ventures. One is the fact that most Japanese investments in manufacturing belong to an import substitution type. Therefore, the goods produced in a host country have to be marketed there. Usually, the distribution channel is locally controlled, so that Japanese investors need partners to handle domestic marketing. The second is that Japanese investors feel a little insecure in foreign countries. Local expertise is needed often in many areas. Americans and Britishers might be able to take advantage of the Anglo-Saxon cultural and institutional legacy in Southeast Asia, but there is no such advantage for Japanese businessmen " It is difficult

""' l l ... to recruit competent locals who speak Japanese and understand the Japanese pattern of thought and behavior . If they try to do everything themselves, they run into many difficulties. Thus, they would like to have partners they can depend, when the need arises . (8 ) Japanese equity shares are higher in Indonesia than in the other four countries. Th i s is because the Indones l an government is more willing to approve of projects with higher Japanese equity shares since there is a shortag-e of l oc al capital . The average Japanese shares for Thai land were h 1 gher for earlier years, but some corporations have reduced Japanese shares under the administrative guidance of the Thai Government . When more funds and entrepreneurship become available in the future, the Indonesian government will probably ask Japanese corporations to reduce their shares. (9 ) Table IV shows the distribution of investment sizes . As shown in Table I, the number of corporations with Japanese capital is impressive, but, as Table IV shows, the a verage amount of Japanese investment is small o In the case of Thailand, more than 50 percent of Japanese joint ventures contained an amount of investment less than 220,000 u. s . dollars. In Malaysia, Japanese investment is smaller . About a half o f Japanese investments in the country are less than 122,000 U. S . d ol lars. (10) There are three major reasons why the average s1ze of Japanese direct investment is small , As pointed out ab ove, Japanese invest o rs prefer joint ventures ., Then, t he financial ab1lity of local partners has t o be taken into account when the amount of paid-up capital is determined . Often, the inability of partners to raise a large sum of money r educes the amount of p_aid-up capital , The second reason is that even if the scale of operation is similar to that of other foreign investors and the amount of paidup capital can be roughly the same , joint ventures reduces the average amount of Japanese investments . The third reason is that, unlike American and European countries , Japan has many smal l and medium-sized corporations wh ich are in vesting abroad . Because of their f inancial constraints, their investment size tends to be small . (ll) The small size of investment is not necessarily undesirable . In the case of an import substitution type of investment, the small size of the domest i c market necessitates a small scale of operation. We have also to note the fact that when Japanese small and medium-sized companies invest, they play the role of "feeders" to the corporations engaged in the finishing stages of operations .

: 14 Large investors tend to concentrate 1n the production of finished goods ~ Japanese small- and medium-sized investors provide various servi ces to the large investors, and p lay an important role in reducing the import content of manufactured goods . Furthermore, the income distribution aspect of small Large investors tend to investors should not be ignored. tie up with well established businessmen in a host country . But somet i mes Japanese small investors choose less well established bus i nessmen as partners, and the benefits of foreign investments spread more widely. (12) There are six Japanese investments which exceed five the five are in textiles, and one million u.s. dollars: is in the cement i ndustry. (13) Table V shows when corporations with Japanese capital participation were set up or began operations , It is intended to show the time pattern of the Japanese investment stream to Southeast Asia . There were some investments before 1960, but it wa s in the 1960's that investment began to increase . The increase became particularly noticeable in the sec on d half of the For Malays i a, Singapore and Tha iland, there were 1960's . many investments before 1966, but for Indonesia, there was no investment before that year . The investment spurt began In the Philippines, six investments were made in in 1969. 1967 when the Ph ilippine government took a favourable attitude towards Japanese i nvestment < But Fi l ipino economic nati onalism became an impediment to foreign investment, and most Japanese corporations avoided the Philippines after that d a t e. {14) There 1s another thing we should note in Table V. Japanese ec o n omic relationship with Southeast Asian If investment countries has been i n the form of trade. was involved, it was i ndirect investment (loans) which was given for exports or, in the case of imports, for the fu t ure But the imposition of the l mport subst i delivery of goods. tution po licy of Sout heast Asian coun t ries, in particular, made it necessary for Japanese corporations to make direct investments n This led to the outflow of Japanese engineers and managers, with their families, to Southeas t As ia e And this began to create tension not only within companies The problems have been but also in the local community. partl y because the Japanese direct investment is rather a recent phenomenon and Japanese are not well exper ienced in On the other hand, American corporations , doing business abroad. for example, have had many years of bus iness experience overseas.

- 15 -

(15) One character i st i c o f J a p ane s e direct i n ves tme n t , which is not shown i n any o f the f ive t ab l e s , is that trading companies are often i nvolved. Someti me s , J ap anese corpo ra tions set up j o i nt ventures wi th loc a l partners without tak in in trading compan i es as co- inves to rs. But in man y cases trading companies part i c i pate. A quest i on na t ura l ly ar i se s as to wh y t rading companies Th i s i s th e pattern wh i c h cann ot b e play such a role. observed in Amer1.c a n and Eu r opean cases. A clue to th i s unique pattern i s f o und i n a r e mark by one distri c t manager of trading compan i e s th at J a p anese industriali sts a re Japanese i n dust r i alists h ave th e t echn o l ogy , "country boys". but they have ne1. ther the information ne t wo r k nor the pe ople who speak fore i gn languages and can wo rk overseas, whic h trading companies have . We might be able t o gene r aliz e tha t Japanese industriali sts are insular where as t r ad i ng companies Th us, when it becomes have a more c osmopolitan outlook. necessary for i ndustrialis ts to inve st ove r seas , they nee d help from tradi ng companies . This is the modus op e ran di for J a p anese busi nessmen at Tr adi n g c ompan ies , present, but it i s not the ideal way. though they may deny it, have a commer cial me n tal ity i n general . And they are not mu ch familiar with t h e meth od of producti on . On the other hand, American co rpo r ation s ha ve internation al divisions wh ich assess econ omi c opp o rtunit ies Often, they can move fa ster and Japanes e by themselves. corporation s follow their trodde n track . What J apanes e industrial corporation s need to d o i s to pla ce a higher priority on the overseas training of their emp loyees and t o send out an inv estigation team periodicall y . Th ey should grab opportuniti es as soon as they arise. A few years de l ay can make a tremendous difference in profits t o be earned. V.

A MORE RECENT TREND FOR SINGAPORE

The picture of Japanese in vestment in Southeast As i a An imp o rt subst i tution and a re sour ce is changing rapidly. exploitatio n type of i nvestment are increasing, but a r a p 1.d increase in an export oriented type o f investment i s part i cularly noticeable . This type of i n ves tme nt is not made in all Southeast Asian countries, but is concentrate d in Singapore at present. From the end of 1970 to the mi dd le of 1973, there was The increase was a net increase of 40 Japanese ventures. plastic products , nt, i a p es, l texti in particularl y not i ceable and plywood .

.,.. Hi -

Wh ile no t a ll of the investments are of the export oriented t ype, many are . There are three major reasons why the export oriented type of investment has become important recently. One reason is that since Japanese wages have been going up, for a labor intensive industry to survive, it has be come necessary to set up an export center overseas . The problem of the rising cost due to wage increases has been further accentuated by the revaluation of the Japanese yen o The labor intensive industry has been facing the possibility of losing the foreign and domestic market ~ It has become more difficult to sell goods in the fore i gn market, whereas it has become cheaper to import goods from abroad o The source of cheap labor has disappeared in Japan . It can be found only in less developed countries. It is interest1ng to note, in this connection, that the Japanese industry does not necessarily move to the country which · has the lowest wage level . Indonesia's wage level is one of the lowest in Southeast Asia, but it is not chosen as an export center . The most popular export base is Singapore where the wage level is the highest in the region. This is because the "real" wage of Singapore is not much higher or even lower than that of other Southeast Asian countries. What is important is not the nominal wage but the labor cost per unit of production, which we define to be "real" wage . If the wage level is positively correlated with labor productivity, which seems to be the case for Southeast Asia, it is not clear whether the "real" wage of Singapore is higher . It is possibly lower. But there are other factors involved besides wage in the choi ce of location; namely, the availability of infrastructure and the efficiency of bureaucracy. They are again correlated with the wage level, and Singapore also fares better in t he s e respects . It is said that many Japanese investors feel it safer t o make an incremental move and prefer not to make a big jump i n the wage scale, but,as is clear from the above discussion, there is a rationale for such a move. The 1ncreasing value of land is also a factor pushing Japanese industry abroad . The Japanese manufactur ing has to compete for lan d against residential users and the rapidly expanding service industry. Furthermore, there is land speculation . As a consequence, a large sum of mone y is needed just to acquire land when an expansion plan is t o be carried out. But land can be bought or leased at a much lower p rice in Singapore . This is another attract1 on the country offers to Japanese 1ndustry. In the last two and a half years, the total amount of Japanese d irect investment in Singapo r e has increased as more

- 17 -

Japanese corporations have invested here. The average size has increased slightly since two Japanese corporations have invested over 5 million U.S. dollars each. But the median size at mid-1973 is 600,000 Singapore dollars, which is n o t much different from the amount in Table IV. Another change in the past two and a half years is the increase of 100 percent owned Japanese subsidiaries . At the end of 1970, there were only two corporations whose Japanese equity shares exceeded 90 percent . But the number increased to 14 by the middle of 1973, out of which 12 were 100 percent Japanese-owned , This increase of 100 percent ownership is clearly related to the fact that the recent investment in Singapore is an export-oriented type of investment. Before we conclude this section, let us briefly touch on the pollution problem Japan is facing today and its implications to Southeast Asia. The Japanese government has made it mandatory for industry to invest in the prevent1on of pollution of air and water. This has raised o r will raise the production costs for some industries. Such industries will move part of their production bases to Southeast Asian countries, though they will avoid Singapore where pollution control is as strict as in Japan. There is a moral question involved in this move, but we have to bear in mind that pollution is partly the problem of congestion. When too many factories are in the same place, the ecological system cannot absorb and purify the pollutants they discharge . But if they are dispersed, there may not be a pollution problem. Therefore, the countries which have unpopulated land may absorb some pollution-prone industries. Those who are opposed to it would argue that though dispersion may solve the problem to some extent, the environment will not remain the same . But this argument gives too much weight to environmental quality and too little to material gain. The industries newly established may pollute the environment to some extent, but bring material benefits. The trade-oft between the two is heavily influenced by the level of income. When people are rich, they are more concerned with the quality of the en v1ronment When they are poor, they are less particular about it . For Southeast Asian countries where there is wide expanse of open land, it does not seem to be the best strategy to keep off all pollution-prone industries and forego the possible material gain .

- 18 -

VI .

CONCLUDING REMARKS

In order As the economy grows, its structure changes. her future, the in for the Japanese economy to grow rapidly industry has to go through structural change. The industry which will remain in Japan will be a technologically intensive industry or one whose production process can be Other industries have to move overseas or automated. be phased out . These are the ones whi c h will invest heavily overseas and use less developed countr es as their export bases. They do not have to set up their bases in Southeast Asia. But prospective They can go to Africa or Latin America. investors ten to prefer East Asia (excluding the People's This is because Republ ic of Ch i n a) and Southeast Asia. they are located close r to Japan, their cultures are closer to that of the Japanese and they seem to have better prospects f o r devel o pment than Africa and Latin America . Direct investment in the pr imary and the secondary Through the (manufacturing ) sector is trade-promoting. trade 1t promo tes economic benefits are shared between an It not only increases trade lnvesting and a hos country. but lso changes the dir ction of trade. With nore J apan se investments coming t o Southeast Asia, the volume o f trade betw en Japan and Southeast Asia increases at the xpens of oth r regions . As a consequence, direct investment brings economic benefits to the region. But it gives rise t o new problems - the kind of problems which never existed when the economic relationship The new was confined to trade and indirect investment. Those problems problems are social as well as p o litical. are n o t easy to solve, but the future volume of investment flow from Japan to South ast Asia is dependent on whether or not Japan can successfully deal with those problems.

FIELD REPORT SERIES 1

Yang Mun Cheong, Conflicts within the Prijaji World of t he Parahyangan in West JavaJ l9l4 - l92?J 1973 . 42 pp $3 . 00

2

Patrick Low and Yeung Yue-man, The Proposed Kra Canal: A Cr i t ic a l Eva l ua t i on and Its Impact on SingaporeJ 1973 . 39 pp . $3.00

3

Robert Fabrikant, Lega l Aspects of Production Shar i ng Co n t r act s i n the Indonesian Petroleum IndustryJ 1973. 235 pp . $15.00

4

Th e I ndonesian Pet r oleu m Industry: Miscellaneous Sour c e Mate r ial . Collected by Robert Fabrikant, 1973. 5 16 pp . $15 . 00

5

C . V. Das and V.P. Pradhan, S ome Internat i onal Law Problem s Re gardin g t he Straits of MalaccaJ 1973. 95 pp. $10 . 00

6

M. Rajaretnam, Politi cs of Oi l 81 pp . $5 . 00

~n

the PhilippinesJ 1973 .

CURRENT ISSUES SEMINAR SERIES 1

Mu ltin a tio na l Co rpora t ions and Their Implications for Sou the as t Asia , Edited by Eileen Lim Poh Tin, 1973 . 140 pp c $10.00

2

Ec on omi c and Politi cal Trends 60 pp . $6 . 00

3

Sout hea s t As i a Toda y : 110 pp . $10.00

~n

Southeast AsiaJ 1973 .

Pr oblems and ProspectsJ 1973.

ORAL HISTORY PROGRAMME SERIES 1

Philip Hoal i m, Senior, Th e Malayan De mo crati c Uni on : Singapo r e 's Fi rs t Demo c ratic Political PartyJ 1973. 26 pp . $3 . 00

2

Andrew Gi lmour, My Role i n t he Re h ab i l i tat i on of Sin gap ore : l 946 - l953J 1973. 100 pp . $6 . 00

3

Mamoru Shinozaki , My War ti me Experiences in Sin ga p ore J 19 7 3 o 124 PP • $6.00

SOUTHEAST ASIAN PERSPECTIVES 1

U . Khin Mg . Kyi and Daw Tin Tin, Admi n i s tr at i v e Pa tte r n s in Hi s tori ca l BurmaJ 1973. 67 pp. $3.00

oeCASIONAL PAPERS

1

Harry J. Benda, Researah in Southeast Asian Studies Gratis (Out-of-print) in Singapore, 1970. 10 ppo

2

P. Lim Pui Huen, Newspapers published in the Malaysian

Area: With a union list of loaal hoLdings, 1970. 42 pp. Gratis (Out-of-print) 3

The Si ngapore Case, 1971.

4

~n

Chan Heng Chee, Nation-Building

19 pp.

Southeast Asia: $2.00

Eva Horakova, Problems of Filip i no Settlers, 1971. 24 pp . $2 . 00 (Out-of-print)

Causes and Effects of Mi nangkabau Voluntary Migrati on, 1971. 19 pp. $2 . 00 (Out-of-print)

5 . Mochtar Nairn, Meran t au:

6

Paul Pedersen, camp . , Yo uth i n Southeast As i a: A Modified and Expanded by Joseph B. B i b Z~o graphy . 69 pp. $4.00 (Out-of-print) Tamney and others, 1971.

7

J.L . S . Girling, Cambodia and th e $2 00 26 pp.

8

R.P .. Dare, Japanese I ndustr1-alization and the

S~hanouk

Myths, 1971.

Dev elo p 1-n g Countries: Model, Warning or Source o f Heal t hy Doubts ? 1971 . 18 pp. $2.00 (Out-of-print)

9

10

l948 Communist Revolt in Malaya: A No te o f Hist or i aal Souraes and Interpretations and 30 pp . $3 . 00 A Reply by Gerald de Cruz, 1971 .

Michael Stenson, The

Riaz Hassan, So ai al Status and Bureauaratia Contacts

Among t he Pub li a Ho us in g Tenants in Singap ore, 1971 , 16 pp. $2 . 00

11

Youth i n Sou t heast Asia: Edited Proaeedings of the Sem1-nar o f 5th - lt h March l9 1 l. Edited by $4.00 75 pp. Joseph B. Tamney, 1972.

12

A.W . Stargardt, Problems o f Neutrality in S o uth East

Asia: 1972 . 13

The Relevanae of the European Experi e nc e , 29 pp . $3 . 00

William R. Roff,

Au t ob~ography

Historia al Studies, 1972.

14

& Biography in Malay

21 pp.

$2.00

The Lau Teik Soon, Indonesia and Regional Seaurity: Djakarta Conferenae on Cambodia, 1972. 20 pp. $2 . 00

15

Syed Hussein Alatas, The Second Malaysia Plan l 9?Z- l9?5: A Critique, 1972. 16 pp. $2.00

16

Harold E. Wilson, Educational Policy and Performance i n Singapore, Z942 - l945, 1973. 28 pp. $3.00

17

Richard L. Schwenk, The Potential for Rural Development i n t he New Seventh Division of Sarawak: A Preliminary Background Report, 1973. 39 pp. $4 . 00

18

Kun i a Yoshihara, Japanese Direct Investment in S out heas t Asia, 1973. 18 pp. $4.00

LIBRARY BULLETINS 1

Rosa l ind Quah, Li brary Resources in Singapore on Con t e mp ora ry Ma i nland China, 1971. 11 pp. $2.00

2

Quah Swee Lan, camp., Oil Discovery and Technical Change i n S ou t heast Asia: A Preliminary Bibliography , 1971 . 23 pp. $2.00

3

P . Li m Pui Huen, camp., Directory of Microfilm Fac ili ~ i e s in Southeast Asia, 1972 . 24 pp. $2 . 00 (Out-of-print)

4

Check l~ st

30 pp.

o f Cur rent Ser i als i n the Library, 1972. $3 . 00

5

Tan Sok Joo, Li brary Resources on Burma in Si ngapore, 1972 . 42 pp . $3.00

6

Quah Swee Lan, camp., Oil Discovery and Technical Chan ge i n S out heast Asia: A Bibliography, 1973. 32 pp. $3.00

7

P . Li m Pui Huen, comp., Directory of Microfilm Fac i l iti es i n Southeast Asia, 2d edition, 1973. 32 pp . $4.00

TRE NDS I N SOUTHEAST ASIA 1

Tren ds i n I nd on es i a: Proceedings and Background Pap e r , 1971 . 58 pp. $3.00 (Out-of-print)

2

T r en ds in Malays i a: Proceedings and Background Pape r . Edited by Patrick Low, 1971. 120 pp. $5 QOO

3

Trends in the Philippines " Edited by Lim Yoon Lin o (Singapore University Press), 1972 . 136 pp . $7 . 00

4

Trends i n Indones i a . Edited by Yang Mun Cheong. (Singapore University Press), 1972 . 140 pp. $7 . 00

5

Tre n ds i n Tha i land . Edited by M. Rajaretnam and Lim So Jean. (Singapore Univers i ty Press), l973 c 142 pp. $10.00

INTERNATIONAL CONFERENCES l

Ne w Di r e ct ion s i n th e I n t e r nati on a~ Relations o f S outhe as t As i a . 2 vols . (Singapore Un i versity P res s ) , 19 7 3 . Economi c Rel a tio ns . 13 5 pp . $ 8 • 50

Edited by Lee Sao Ann .

The Great Po we rs and S o uth ea s t As i a . Lau Teik Soon . 208 pp. $10.00 2

Edited by

Modern i zat i on in S o u t h e as t Asi a " Edited by HansDi eter Evers. (Oxford University Press), 1973. 2 4 9 pp . $ 3 5 . 00

The above publications, except those pub li shed by Oxford University Press, a r e availab le for sale at the Institute of Southeast Asian St.udies , Cluny Road, Singapore 10 . Telephone: 514211 .

THE AUTHOR Dr. Kunio Yosh ihara 1s Associate Professor of Economics at the Centre for Southeast As ia n Studies, Kyoto

University, Japan .

He is

currently

a

Visit ing Fellow at the Department of Economics, University of Singapore.