Japan is the world’s third largest economy, the United States’ fourth largest trading partner,
and was the third largest contributor to U.S. foreign direct investment (FDI) in 2018. The Japanese government actively welcomes and solicits foreign investment and has set ambitious goals for increasing inbound FDI. Despite Japan’s wealth, high level of development, and general acceptance of foreign investment, inbound FDI stocks, as a share of GDP, are the lowest in the OECD.
Japan’s legal and regulatory climate is highly supportive of investors in many respects. Courts are independent, but attorney-client privilege does not exist in civil, criminal or administrative matters. There is no right to have counsel present during criminal or administrative interviews. The country’s regulatory system is improving transparency and developing new regulations in line with international norms. Capital markets are deep and broadly available to foreign investors. Japan maintains strong protections for intellectual property rights with generally robust enforcement. The country remains a large, wealthy, and sophisticated market with world-class corporations, research facilities, and technologies. Nearly all foreign exchange transactions, including transfers of profits, dividends, royalties, repatriation of capital, and repayment of principal, are freely permitted. The sectors that have historically attracted the largest foreign direct investment in Japan are electrical machinery, finance, and insurance.
On the other hand, foreign investors in the Japanese market continue to face numerous challenges. A traditional aversion towards mergers and acquisitions within corporate Japan has inhibited foreign investment, and weak corporate governance has led to low returns on equity and cash hoarding among Japanese firms, although business practices are improving in both areas. Investors and business owners must also grapple with inflexible labor laws and a highly regimented labor recruitment system that can significantly increase the cost and difficulty of managing human resources. The Japanese government has recognized many of these challenges and is pursuing initiatives to improve investment conditions.
Levels of corruption in Japan are low, but deep relationships between firms and suppliers may limit competition in certain sectors and inhibit the entry of foreign firms into local markets.
Future changes in Japan’s investment climate are largely contingent on the success of structural reforms to the Japanese economy. Efforts to strengthen corporate governance and increase female and senior citizen labor force participation have the potential to improve Japan’s economic performance.
The Republic of Korea (ROK) is an attractive investment destination for foreign investors due to its political stability, public safety, world-class logistics and information and communications technology (ICT) infrastructure, highly-educated and skilled workforce, and dynamic private sector. Following market liberalization measures in the 1990s, foreign portfolio investment has grown steadily, exceeding 37 percent of the Korea Composite Stock Price Index’s (KOSPI) total market capitalization as of March 2020. The services sector offers new and promising opportunities for the next wave of foreign direct investment (FDI). However, studies conducted by the Korean International Trade Association and others have shown that the ROK underperforms in attracting FDI relative to the size and sophistication of its economy due to its burdensome regulatory environment.
Korea’s FDI shortfall is due in part to its complicated, opaque, and country-unique regulatory framework. The ROK’s manufacturing model is being overtaken by low-cost producers, most notably China, which threatens the country’s ability to maintain competitiveness. This is especially critical with the advent of disruptive technologies such as fifth generation (5G) mobile communications that enable smart manufacturing, autonomous vehicles, and the Internet of Things – innovative technologies that could be hampered by restrictive regulations which do not comport with global standards. The ROK government (ROKG) has taken some steps to address this over the last decade, notably with the establishment of a Foreign Investment Ombudsman to address concerns of foreign investors. In 2019, the ROKG created a “regulatory sandbox” program to spur creation of new products in the financial services, energy, and tech sectors. Industry observers recommend additional process steps to improve the investment climate, including conducting Regulatory Impact Analyses and soliciting substantive feedback from a broad range of stakeholders, including foreign investors.
The revised U.S.-Korea Free Trade Agreement (KORUS) entered into force January 1, 2019, and continues to allow U.S. investors broad access to the ROK market. Types of investment protected under KORUS include equity, debt, concessions, and intellectual property rights. With a few exceptions, U.S. investors are treated the same as ROK investors (and third-country investors) in the establishment, acquisition, and operation of investments in the ROK. Investors may elect to bring claims against the government for alleged investment breaches under a transparent international arbitration mechanism. The U.S. government continues to work closely with the ROKG to ensure full implementation of KORUS investment provisions, especially in regard to the right to mount an adequate defense in competition proceedings.
The ROK was the second global hotspot after China for the global COVID-19 pandemic, with the nation’s first case discovered on January 20, 2020 and daily new cases topping 900 by the end of February. The ROKG responded aggressively and immediately, employing its so-called “TRUST” strategy, prioritizing transparency, robust screening and quarantine, unique but universally applicable testing, and strict control and treatment. The success of this approach allowed Korea to cut daily new cases down to single digits by late April without an economic shutdown. The ROKG was also aggressive in pursuing economic stimulus, devoting more than USD 100 billion to such efforts in the first quarter of 2020. As a result, the Korean domestic economy fared better than most of its OECD peers in the early part of the year. The risk of a COVID resurgence still looms, and external shocks also pose a significant threat to Korea’s export-oriented economy looking forward. If the ROKG succeeds in augmenting its stimulus spending with regulatory reform efforts under discussion in spring of 2020, the nation’s investment climate could well benefit in the long run.