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“IMPLICATIONS OF JAPANESE FDI IN INDIA”

RESEARCH  REPORT  

Submitted in partial fulfillment of the requirements

For Award of Degree Of

“MASTER OF BUSINESS ADMINISTRATION”  

By

Mr. AMIT KUMAR ROY (Reg.No: 1014370005)

Under  the  guidance  of  

Miss. Punjika Rathee

LECTURER, DEPARTMENT OF MBA

DEPARTMENT  OF  MBA  

SCHOOL  OF  MANAGEMENT  

IMS  ENGINEERING  COLLEGE  

MAY 2011

 

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CERTIFICATE

Certified that the project report entitled “IMPLICATIONS OF JAPANESE FDI IN

INDIA” submitted by “AMIT KUMAR ROY (1014370005)” is a record of project work

done by him under my supervision. This project has not formed the basis for the award of any

degree, diploma, associateship, or fellowship.

Internal Guide Head Of The Department

 

 

For  the  purpose  of  viva  voce  

 

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2.  

 

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DECLARATION

I do hereby declare that the dissertation entitled “IMPLICATION OF JAPANESE FDI IN INDIA”

is a record of original work carried out by me under the supervision of Miss. PUNJIKA RATHEE,

Lecturer, Department of MBA, IMS ENGINEERING COLLEGE, Ghaziabad. This project has not

been submitted earlier in part or full for the award of any degree, diploma, associateship or

fellowship.

Ghaziabad,

Date AMIT KUMARROY  

 

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ACKNOWLEDGEMENT

I hereby acknowledge all those who are related to this work either directly or

indirectly. I express my deep sense of gratitude to my project mentor Ms. Punjika Rathi for

her expert guidance, stimulating discussions throughout the period of this project.

I gratefully convey my utmost regards to , Under whose exhilarating, inspiring, and precious

advice the exploration was carried out. His immutable solacing, uniform enlivening, even

motivating and painstaking deadlines decided by him have shaped it feasible to accomplish

the project successfully.

I express my deep sense of gratitude to Mrs. ANJU NANDRAJOG, Department of MBA,

IMSEC, Ghaziabad, for her encouragement and support.

Last but not the least I am thankful to the almighty and I will be failing in my duty if I do not

express my indebtedness to our Department Staffs, Parents, and Friends for their support and

encouragement.

AMIT KUMAR ROY

 

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TABLE OF CONTENTS

Chapter No. Subject Page No.

1.0 Introduction 6

a. Objectives 10

b. Reason for Choosing the topic 10

2.0 Literature review 11

3.0 Hypothesis and Area of Study 25

4.0 Scope of Study 26

5.0 Research Methodology 27

a. Collection of Data

i. Primary data

ii. Secondary data

b. Data Analysis 28

6.0 Findings on the topic chosen 29

7.0 Discussion and interpretation of findings 51

8.0 Conclusions, Implications and Recommendations 66

9.0 Limitations 67

10.0 References/Bibliography 68

 

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LIST OF FIGURES

NAME OF FIGURE PAGE NO:

Share of Top Sectors Attracting FDI Inflow

from Japan 1991-1999

35

Cumulative Outward Flows of Japanese FDI

into Asia: 1990 -1999 36

Japanese Foreign Direct Investment in India 37 Japanese FDI outflow into China and India 39 Comparison of Japanese FDI outflow into

Asia, China and India 40

India import & export from Japan 60

 

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1: Introduction:

Foreign direct investment (FDI) is often used as an engine of growth by developing countries.

For a developing country, it is the vehicle through which capital is provided and efficiency

induced in the industrial sector. The firm in the country of origin is encouraged to invest in

the developing country because of the lower resource costs, a growing market and restrictive

import policies. Foreign direct investment is, therefore, an intertwining of interests of both

the host and the home country. A firm that undertakes foreign direct investment gets involved

in the purchase of an existing enterprise or facilities, establishing and managing new ones

and/or participating in the management of an enterprise in a foreign country. It therefore

requires the firm to conduct operations in the foreign country either through overseas

subsidiaries or through joint ventures. Studies conducted so far have concentrated mainly on

studying trends, patterns and location issues with respect to FDI, and therefore, have dwelt on

the macro factors and policy orientations of both the host country as well as the country of

origin. Though these dominate the movement of FDI into the host country, a neglected area

of research, as pointed out by Meyer (2003), has been an analysis at the firm level of the

conditions and externalities that help/deter the FDI flow.

Until recently, Japanese foreign direct investment into India has been significantly lower

when compared with FDI in other Asian countries. At the firm level, this means that a large

number of companies have shied away from investing in India. One reason that is often

quoted for this is that India is not perceived as a viable destination for investment by Japanese

firms. This study is a modest attempt to understand the implications of Japanese FDI in India.

In India, FDI operates through subsidiaries or joint ventures with Indian partners. At the firm

level, FDI goes through three specific phases, and to understand the firm’s experience, each

phase has to be scrutinised separately. The first phase is when a firm initiates the process of

targeting the Indian market. There are various reasons for entry into a market - for a Japanese

firm, it is primarily access to the local market and to expand it for its own product(s). One

focus area of this study is to understand the entry strategy of Japanese firms, and especially,

how they identify their Indian partners.

 

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The second phase is the period of establishment and commencement of operations. This

usually lasts for one to five years. During this period, the manufacturing unit is constructed

and commercial production is started. This period is the toughest, as firms have to contend

with external obstacles as well as establish a fruitful relationship with their Indian partners.

How the firms (that were studied) responded to and dealt with the obstacles can be held as

examples for other Japanese companies seeking to test Indian shores.

The third phase covers the time beyond the first five years. During the first two phases, the

firms have learnt lessons from their exposure to the host country. Having harnessed their

understanding of the Indian market, they are now well established in their operations. It is in

this period that they venture to expand their business. However, certain policies and obstacles

continue to bother them. Understanding the ground realities could provide an insight into the

problems being faced by the firms and help policy makers find solutions to them.

Since 1990, Japanese business arena is experiencing and enjoying an “Indian Boom”, with a

high level of expectations for business opportunities here in India and activating further

investments in Indian market. Recent surveys by Japan external trade organisation (JETRO)

and Japan Bank of International Co-operation (JBIC) on Japanese companies operating

abroad concluded that India is considered to be the second most prospective investment

destination abroad next to China for the Japanese business circles especially in sectors such

as automobiles, IT, infrastructure, steel, power and pharmaceuticals.

The Japanese foreign direct investment (FDI) in India tripled to $5.4 billion (nearly Rs

25,160 crore) in 2008 from $1.78 billion (nearly Rs 8,290 crore) in 2007, overtaking the

Japanese FDI in China. The key reason for increasing the momentum of Japanese

investments in India is the growth potential of the local market, Japanese automobile and

general machinery companies were the most interested in India as an investment destination,

Joint efforts by India and Japan in research and development (R&D) facilities, especially

during economic difficulty such as the global meltdown, Need for more Japanese investments

in India’s infrastructure companies at a time when India had proposed an investment of $500

bllion. Also some more reasons includes that Japan could tap investment opportunities in

power, clean technologies, nuclear energy, energy efficiency, university linkage and human

resource development, Japan can reduce its cost of healthcare by sourcing generic drugs from

India, Need of more Japanese investment in India’s consumer goods industry.

 

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Facts about India:

India has been ranked at the third place in global foreign direct investments in 2009 and will

continue to remain among the top five attractive destinations for international investors

during 2010-11, according to United Nations Conference on Trade and Development

(UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects

Survey 2009-2011' released in July 2009.

India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative

amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million,

according to the data released by the Department of Industrial Policy and Promotion (DIPP).

The services sector comprising financial and non-financial services attracted 21 per cent of

the total FDI equity inflow into India, with FDI worth US$ 4.4 billion during April-March

2009-10, while construction activities including roadways and highways attracted second

largest amount of FDI worth US$ 2.9 billion during the same period. Housing and real estate

was the third highest sector attracting FDI worth US$ 2.8 billion followed by

telecommunications, which garnered US$ 2.5 billion during the financial year 2009-10. The

automobile industry received FDI worth US$ 1.2 billion while power attracted FDI worth

US$ 1.4 billion during April-March 2009-10, according to data released by DIPP.

Japan ranked seventh in terms of cumulative foreign direct investment (FDI) in India,

accounting for US$ 3,714 million in the period from April 2000 to March 2010, of which

US$ 1,183 million came in the period April 2009-March 2010, according to the latest data

released by the Department of Policy and Promotion (DIPP). According to investment

bankers, India may witness US$ 20 billion worth of Japanese investment by 2012. India's

exports to Japan in the period 2008-09 stood at US$ 3025.70 million while imports totalled

US$ 7886.27 million for the period. During April to December 2009, India exported goods

worth US$ 2,479.38 million to Japan. India imported merchandise worth US$ 4823.66

million from Japan during April-December 2009-10. Major Japanese funds have been coming

into India by way of offshore funds, with many Indian houses such as SBI Capital, UTI and

DSP Blackrock raising money from the Japanese markets to invest in India.

India and Japan have decided to jointly develop one city in India as a 'solar city'. The project

aims to reduce its projected demand of conventional energy at the end of five years, through

 

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energy efficiency measures and generation from renewable energy installations. The two

sides also agreed to strengthen cooperation in research and development for promoting

renewable energy. As part of the exchange programme, a ten-member delegation from India

participated in the Japan-India New and Renewable Energy Seminar in Tokyo in January

2010. Further, in May 2010, India and Japan agreed to set up a working group on civilian

nuclear energy. The working group is being seen as a first step towards potential civilian

nuclear cooperation between the two countries

Despite all these factors, In order to increase the Japanese FDI , Japan PM promises to link

rupee with yen to boost FDI expecting that it would allow Japanese companies to invest

directly in India, rather than the current norm of coming through Singapore and Mauritius.

 

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a. Objectives:

1. To better understand the trend of Japan’s FDI in India in recent years and to study the

reasons behind the interest of Japan’s FDI in India

2. To gain knowledge and analyse the contribution of Japan’s FDI towards Indian

economy and the manner in which it has been diversified in various sectors

3. To analyse the implications of the Japan’s FDI in India – Restricting the focus to

automobile sector

4. To analyse whether the recent recalls in huge numbers by Japanese Auto makers has

affected their FDI in India despite the demand in Auto industry rising to it peak.

b. Key reasons behind choosing this topic:

Through the above said context, it is evident that the Japanese FDI is majorly contributed

through their Auto manufacturers for years and it continues at an increasing rate as time

progresses due to the rising demand in India. More over the Japanese are more famous for

finding their edge in this Auto segment across globe through their quality and reliability

of their product offerings. But recent recalls in huge numbers by the major Japanese

players like Toyota, Honda, Suzuki, Nissan and Mitsubishi made me go for this topic to

find “Are they losing their edge globally in this particular segment”. If so, how it is going

to impact on their FDI in India in terms of their investments and in terms of contributions

to Indian economic growth?

 

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2.0: Literature review:

1. Economic Liberalization in India and Japan’s Wavering Response –

K.V.Kesavan

The end of the cold war coincided with the introduction of wide-ranging economic

liberalization measures in India. The Indian economy, which had operated within a

narrow framework thanks to the rigid socialist philosophy, started opening up from

1991. Since then numerous measures have been adopted to remove unnecessary

restrictions on the role of private enterprise in India. Similarly, for too long a time,

India had pursued an economic strategy based on import substitution. But now,

export-led growth has become a major thrust of India’s strategy. As a result of these

economic reforms, India’s manufacturing industries have witnessed dramatic growth

leading to the accumulation of huge foreign exchange resources. To what extent has

Japan taken advantage of the prevailing favourable economic climate in India? While

Japan’s evaluation of India’s economic prospects has been positive, it has still not

tapped India’s potential fully. Whereas other countries like the US and UK have gone

far ahead in strengthening their economic ties, Japan is still rather wavering in its

approach. To be sure, Japan was one of the earliest countries to invest in India even

during the 1960s. Many of the economic surveys done by the Japanese firms have

considered India as a very attractive investment destination both in the medium and

long-term perspectives. Yet, for a variety of reasons, Japanese investments have not

grown in an appreciable manner. The time has come for both countries to seriously

examine their relations in terms of building a long-term partnership that can

contribute to the stability of Asia.

http://www.ritsumei.ac.jp/acd/cg/ir/college/bulletin/e-vol.2/kesavan.pdf

Critical Review: In this Article, Mr. Kesavan brings into limelight how the trade

relations between India and Japan emerged after post cold war period providing the

year on year statistical figures. But he has raised a point that Japanese has not tapped

India’s potential fully.. But this point has to be considered this way that though

Japanese are interested to do lot more investment in India, is that our nation’s

economic policies that are restricting them to invest beyond a limit.?

 

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2. Japanese FDI in India and its impact – An evaluation by Satinder Bains -

Wednesday, 05 December 2007

Japan has emerged as one of the economically dominating forces on the global map in

the decade of the eighties. Japan's FDI has to date been 'trade oriented'. The major

part of investment has been directed towards natural resources' development in which

the Japanese economy is comparatively disadvantaged. In the decade of 90s, business

environment is more conducive to increase FDI to Asian economies than in the

decades 60s, 70s, and 80s and there is a great potential to attract such investment to

the region.

http://punjabnewsline.com/content/japanese-foreign-direct-investment-india-and-its-

impact-evaluation

Critical review: As Satinder says, it is agreed that the Japanese FDI in recent days are

highly trade oriented. But when it comes into the picture of their FDI in India their

interests are more into the segments of IT and Electronics ad into automobiles. They

are also aligning with India through many projects in Energy and Transportation

sector.

3. Japan retailers want India to remove FDI restrictions – PTI / NewDelhi/ April 02

-2010:

Terming India as one of the most vibrant and potential markets, the Japan Retailers

Association (JRA) today said over a dozen players from the East Asian nation are

willing to invest here, provided the government relaxes foreign direct investment

norms in the sector. It said that at a time when said the home market in Japan has

saturated, major players are ready to invest up to $10 million individually in India but

mainly in the multi-branded segment where FDI is currently prohibited.

In the last few years, the retail scenario in India has become most promising but we

will be even happier if current restrictions on FDI are removed. The big Japanese

chains are interested in entering India's multi-brand retail trade," JRA Director Jun

Omi said.

http://www.business-standard.com/india/news/japan-retailers-want-india-to-remove-

fdi-restrictions/90155/on

 

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Critical review: AS per this article, Japanese claim India to remove FDI restrictions.

Incase if that is done, what would be the scene of the domestic players? By relaxing

the FDI regulations it will certainly encourage Japanese to invade Indian market.

Once it happens it would certainly hit the growth rate of domestic players in various

sectors and make them face a tough competition.

4. India-Japan Investment Relations: Trends & Prospects – ICRIER working

paper 245, Geetanjali Nataraj, January 2010

Though Japan had been one of the top five investors in India for long, its share in

India’s total FDI inflows has been dwindling since 2000. Other countries have

surpassed Japan in terms of their investment and market share in the Indian economy.

In this context, this study attempts to analyse the constraints on Japanese investment

in India. The study finds that poor infrastructure, taxation system, procedural hassles

in customs clearance, and red tapism are important factors deterring Japanese

investment in India. Further, many Japanese companies have lost out to stiff

competition from South Korean companies, which have been able to understand the

price-sensitive nature of the Indian consumer better. It is expected that the completion

of the on-going negotiations on the Comprehensive Economic Partnership Agreement

(CEPA) will boost Indo-Japanese investment relations. There exist huge opportunities

for Japanese investors in sectors such as biotechnology, agriculture, hydrocarbon fuels

and information and communication technology.

http://www.icrier.org/pdf/WorkingPaper245.pdf

5. Japanese FDI in India – A weak link in Ties – Arpita Mathur – Issue no 1, 19th

March 2010

http://www.rsis.edu.sg/publications/policy_brief/RSIS%20-%20PB%20-

Issue%20no%201%20-%202010%20(pdf).pdf

 

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6. India and Japan: Increasing interest, Declining inflows – Geetanjali Nataraj,

09/09/09

Japan and India are two of the largest democracies in Asia, sharing a commitment to

the rule of law and respect for human rights. They are also leading economies in Asia.

In recent years, the two countries have strengthened bilateral ties through new

initiatives and programmes ranging from economic and cultural linkages to defence

and security. Japan gives 30 per cent of its overseas development assistance to India

and is, even in this period of global economic downturn, committing more than $4

billion to the Delhi-Mumbai Industrial Corridor. But our economic relationship is still

far below its potential. Two-way trade ($10.18 billion for 2007-08) has risen in the

last five years, but still remains considerably low when compared with the China-

Japan trade or even the India-China trade (respectively, $237.193 and $37.931 billion

in 2007-08). Similarly, Japan’s foreign direct investment in India for March-April

2008 ($0.82 billion) ill compares to its investment in smaller Asian countries such as

Vietnam ($0.41 billion), not to mention China ($1.9 billion).

According to a recent survey conducted by the Japan Bank for International

Cooperation, India has become the most favoured investment destination for long-

term Japanese investments. While nearly 70 per cent of Japanese manufacturers

regarded India as the most attractive country to do business in over the next 10 years

or so, only 67 per cent preferred China. Russia came third, with a 37 per cent rating,

followed by Vietnam at 28 Per cent.

India’s robust economic growth in recent years has not gone unnoticed on the

Japanese radar. It’s now the sixth-largest FDI facilitator in India. Although Japan’s

 

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contribution to India’s FDI inflow was only 4.29 per cent between 1991-2007, the

quantum of investment is rising steadily, especially in the Indian financial market.

In 2006-07, the share of Japan in the total inflows was 0.54 per cent. Next year, it

increased to 3.32 per cent but dwindled to 1.07 per cent in 2008-09. In fact, over the

years, the share of Japan in total inflows of India has been declining. This can be

attributed to several factors including the failure of the Japanese investor to

understand the Indian consumer.

The analysis of sector wise inflows from Japan shows that the automobile sector has

received the most FDI during 2000-07, constituting nearly 41 per cent of the total FDI

inflows from Japan. Other favoured sectors include electrical equipments, trading,

services sector and telecommunications. These five sectors together constitute nearly

72 per cent of the total FDI inflows from Japan.

As far as technology transfers are concerned: 863 technical collaborations have been

approved for Japan, which accounts for 10.93 per cent of the total collaborations

approved from August 1991 to November 2007. The highest technical collaborations

have been in the transportation industry, followed by the electrical equipments

(including computer software & electronics) industry and chemicals (other than

fertilisers).

Japan has been one of the top five investors in India for a long time. However, since

2000, many countries have surpassed Japan in their investment in the Indian

 

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economy. This can be attributed to several reasons. In a recent report submitted to the

Department of Industrial Policy and Promotion, GoI, the Japan Chamber of

Commerce and Industry in India (JCCII) has termed the Indian business environment

as tough. JCCII has listed 61 issues related to infrastructure, the taxation system and

customs clearance that need to be settled before more Japanese investors look to

India. Japanese investors describe the tax system in India as being too complicated

and difficult to understand. India’s land acquisition and utilisation procedures have

been termed complicated and non-transparent. Further unresolved issues include

intellectual property rights, regulation of foreign capitals and visa concerns. Many

clauses in contracts with industrial parks are not honoured, such as those concerning

supply of power, water and drainage. Japanese companies have also requested

simplification and speeding up of various application procedures related to

construction. Language is a major barrier and restricts easy interaction between the

business representatives of India and Japan.

Further, Japanese firms like Toshiba, Sanyo and Sharp (with the exception of Sony)

have lost out to the competition posed by Korean products. The Koreans appear to

have better served the price-sensitive nature of the Indian market. Perhaps Japanese

business would do better if it establishes 100 per cent subsidiaries in India, instead of

setting up joint ventures with local partners in India. For the many Japanese

companies currently in the sunset plane, where current economic compulsions render

them non-competitive, there could be a better future in relocating elsewhere. India is a

first-class option. Here, there is ample availability of skilled labour at a reasonable

cost, a huge domestic market and a potential base for exporting to other countries.

Even catering to Japanese needs.

The completion of the Comprehensive Economic Partnership Agreement (CEPA) is

expected to enhance Japan-India investment relations. Steps being considered include

setting up Japanese language teaching cells across Indian universities and using

Japanese investment for promoting SME clusters in India.

In the new Asian era, Japan and India need each other. India’s interest in Japan is also

attributable to its ‘Look East policy’. What cannot be overemphasised is that stronger

Indo-Japan ties could help counterbalance China’s growing power in the region.

 

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http://www.eastasiaforum.org/2009/09/09/india-and-japan-increasing-interest-

declining-inflows/

7. Japanese are Eyeing Indian IT for Acquisition

TNN, Jan 26, 2011, 08.09pm IST

BANGALORE: Japanese IT companies are aggressively looking at technology

companies in India to acquire. Three Japanese IT majors - Fujitsu, NTT

Data and Hitachi Consulting - were amongst the early bidders to acquire Patni

Computers, though all of them eventually backed off.

But they have been successful in some others. NTT Data acquired US-based IT

services firms Keane International and the US-based Intelligroup in 2010, and Hitachi

Consulting acquired another US IT company called Sierra Atlantic in January 2011.

Over three-fourths of employees in these companies are based in India.

"In the next 18 months we could expect a lot more action from Japanese companies,"

said Partha Iyengar, V-P at research firm Gartner. According to IT industry body

Nasscom, the Japanese IT services market, pegged at $108 billion, is the world's

second largest after the US. A shortage of skilled manpower and increasing cost

pressures are driving the Japanese IT majors to explore cheaper offshore buys in

India. The demand for IT services in Japan is driven by the banking, financial services

and insurance (BFSI) and manufacturing industries, which together account for over

40% of the IT services market. Local companies like Fujitsu, Toshiba, NEC and NTT

Data and the US-headquartered IBM are the top players in Japan.

According to Raja Lahiri, director - transaction services at KPMG India, Japanese

companies are looking at acquiring mid to large sized IT services companies in India.

"It makes sense to have a presence in India to service global clients, as also the large

Japanese market. With an ageing population they lack the manpower skills that India

can offer," he said.

Most Japanese enterprises continue to operate the legacy mainframe and more than

53% of Japanese IT services constitute customized software development. These

applications, developed primarily using the IBM family architecture, require

 

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extensive manpower skills to maintain and enhance them. Japanese companies are

now beginning to modernize and migrate their legacy applications in view of the high

maintenance cost, low flexibility and non-availability of legacy skills. As the top-tier

Japanese vendors who developed these systems will get the biggest pie of the

migration opportunity, it makes sense to have offshore centres in countries like India

to gain scale and reduce costs.

There's also another reason why the Japanese are interested in Indian IT. As Sameer

Dhanrajani, country head of Fidelity National Financial India, points out, Japanese

companies have been primarily servicing the APAC, China and South Korean regions

due to cultural affinity. They miss out on large opportunities in the more lucrative

European and US markets. India has a first mover advantage in capturing the US and

European offshoring markets. Thus acquiring Indian companies with blue-chip clients

is an attractive option.

Like European firms, Japanese firms have been reluctant in the past to take decisions

on M&As due to the difference in cultures. "However they now realize that as

countries like China and India threaten to eat into their own client base at home as

well as globally, not having an offshore presence in India puts them at a

disadvantage," Gartner's Iyengar added.

Fujitsu president Masami Yamamoto recently said that the company intends to

increase its focus on IT services through acquisitions of software firms particularly in

the area of cloud computing. A paper titled `The competitiveness of Japan's software

industry' by Tatsuo Tanaka, a faculty fellow at the Research Institute of Economy,

Trade and Industry (RIETI) in Japan, indicates that Japan excels in producing custom

and embedded software, but lags when dealing with packaged business and online

software. Custom software is said to be inefficient in terms of cost and quality

because it can't derive economies of scale and compete globally against packaged

business and online software.

Fidelity's Dhanrajani added that Japanese companies are involved in high-end

software development, engineering and R&D work. They do not have the IT services

capabilities at the lower end of the value chain, which constitutes the mass segment of

IT services demand. "To offer services across the value chain it becomes essential for

them to make acquisitions in India. Moreover, several small and mid cap IT services

 

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companies are now coming at good valuations as they continue to struggle with lower

margins and growth," said Dhanrajani.

Siddharth Pai, MD of IT consulting firm TPI India, said that Japanese companies have

been looking at acquisitions for sometime now but the interest is greater today as the

Indian IT sector has matured significantly. Pai also added that there may not be a

dramatic increase in acquisitions, as even today most Japanese companies are

conservative in outsourcing contracts.

Currently less than 10% of Japanese outsourced IT services are offshored. Of the

offshored amount, more than 50% goes to China, and 13% to India. All IT

development work is first contracted only to large system integrators like NTT and

Fujitsu, who then breakup large projects and outsource to secondary and tertiary

players. Indian and Chinese vendors often serve as tertiary service providers.

http://timesofindia.indiatimes.com/business/india-business/Japanese-are-eyeing-

Indian-IT-for-acquisition/articleshow/7367416.cms

8. Japan PM promises to link rupee with yen to boost FDI:

This promise would allow Japanese companies to invest directly in India, rather than

the current norm of coming through Singapore and Mauritius. The Japanese foreign

direct investment (FDI) in India trippled to $5.4 billion (nearly Rs 25,160 crore) in

2008 from $1.78 billion (nearly Rs 8,290 crore) in 2007, overtaking the Japanese FDI

in China.

The key reason for increasing the momentum of Japanese investments in India is the

growth potential of the local market. Japanese automobile and general machinery

companies were the most interested in India as an investment destination.

-­‐ Joint efforts by India and Japan in research and development (R&D) facilities,

especially during economic difficulty such as the global meltdown.

-­‐ Need for more Japanese investments in India’s infrastructure companies at a

time when India had proposed an investment of $500 bllion.

-­‐ Japan could tap investment opportunities in power, clean technologies, nuclear

energy, energy efficiency, university linkage and human resource

development.

 

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-­‐ Japan can reduce its cost of healthcare by sourcing generic drugs from India.

-­‐ Need of more Japanese investment in India’s consumer goods industry

http://www.singhanialaw.com/images/FDI%20final1%201%202010%20pdf.pdf

9. Japan March auto sales slump in quake aftermath

Published on Fri, Apr 01, 2011 at 18:23 | Updated at Sat, Apr 02, 2011 at 09:09 |

Source : Reuters

Vehicle sales in Japan fell by more than a third in March as a devastating earthquake,

tsunami and resultant nuclear crisis wreaked havoc on assembly plants, parts

manufacturers and the global supply chain. Sales, excluding 660cc minivehicles, fell

37 percent for the industry overall, and industry leader Toyota Motor Corp saw sales

for the month tumble 46 percent, the Japan Automobile Dealers Association said on

Friday. It was the industry's biggest monthly percentage fall since February 1974.

Nissan Motor Co's Japan sales slumped 38% and Honda Motor Co retreated 28%. The

figure for Toyota excluded the Lexus brand.

The latest numbers give the first indication of how Japan's car makers are faring in

their home market after the March 11 earthquake and tsunami that devastated

northeast Japan and triggered power outages and the worst nuclear crisis since

Chernobyl.

Many of Japan's auto plants are closed in the wake of the disaster, unable to get parts

from suppliers. All but two of 18 factories that assemble Toyota and Lexus vehicles in

Japan remain idle. Toyota Motor Corp President Akio Toyoda said on Friday that the

devastating earthquake and tsunami in northeast Japan would hurt the company's

earnings, but said that was not on his list of priorities. "We're not thinking about

numbers right now," Toyoda said at the company's headquarters in Toyota City,

adding he could not estimate the scope of the impact. Deutsche Securities this week

slashed its forecast for Toyota' operating profit by 84% to USD 1.7 billion for the

current business year due to production outages.

Toyoda repeated the company's stance that it is uncertain when it can resume full

production after the March 11 disaster disrupted its supply chain. Honda and Mazda

Motor Corp said on Thursday they would resume some production in Japan. Honda

said it would resume production of parts for overseas use on April 4 and production at

all its car factories on April 11. Honda also said production cuts at its plants in the

 

 22  

United States and Canada would last through April 15. Mazda Motor Corp said it

plans to restart limited production of vehicles from April 4 at its Hiroshima and Hofu

plants. A decision on the resumption of full-scale production of both parts and

vehicles has not been made.

PMI record decline

As might be expected, Japanese manufacturing activity slumped to a two-year low in

March and posted its steepest monthly decline on record after the disaster disrupted

supply chains and production operations, a survey showed on Thursday.

The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) fell to a

seasonally adjusted 46.4 in March, the lowest since April 2009 and down from

February's 52.9. The data provided one of the first quantitative assessments of the

severe damage to production from the March 11 quake and tsunami in northeast

Japan, which triggered a nuclear safety crisis and widespread power shortages. "The

impact from the power outage, supply chain disruption and a halt of many factories'

activity after the quake is large. There is a possibility that the PMI index will further

weaken," said Takeshi Minami, chief economist at Norinchukin Research Institute in

Tokyo. "It is a major issue now how the nuclear crisis develops, and stock market

players are also closely watching it. The outlook for business activity depends on

progress in reconstruction and recovery." The Bank of Japan's closely watched

Tankan survey showed Japanese manufacturers' business sentiment improved slightly

in the three months to March, but analysts anticipate a downturn in confidence this

quarter because of the disaster. The BOJ's quarterly Tankan survey showed the

headline index for big manufacturers' sentiment improved to plus 6 in March from

plus 5 in December, compared with a median market forecast of plus 7. But 72% of

replies for the survey came in before the earthquake, which means it did not much

reflect the impact of the earthquake, the tsunami and the world's worst atomic crisis in

25 years.

http://www.moneycontrol.com/news/world-news/japan-march-auto-sales-

slumpquake-aftermath_533543.html

 

 23  

10. Japan carmakers see return to full output taking time

Published on Tue, Mar 29, 2011 at 19:11 | Updated at Tue, Mar 29, 2011 at 19:52

Source : Reuters

Japanese automakers including Toyota Motor Corp and Nissan Motor Co said on

Tuesday it would be some time before they could return to full production after

Japan's devastating March 11 earthquake and tsunami disrupted supplies to their

plants. With some 500 parts affected, a Toyota spokesman said it was impossible to

say when production would resume in full. A source with knowledge of the matter

told Reuters that the automaker had told its main suppliers not to expect production to

restart until at least April 11 -- exactly a month from the quake.

All vehicle assembly has been halted at the 18 domestic factories that build Toyota

and Lexus cars except for two plants that began producing a limited number of three

hybrid models, including the Prius, on Monday. Meanwhile, Nissan CEO Carlos

Ghosn told workers at one of the company's factories in the stricken northeast he

wanted to bring the site back to full production levels by early June at the latest.

Speaking at an engine factory in the city of Iwaki, about 50 km (30 miles) from the

stricken Fukushima Daiichi nuclear plant, where workers are battling to control

radiation leaks, Ghosn said he had no intention of closing the site, a Nissan

spokesman said. Ghosn said he wanted to have the factory ready to start production

by the end of April and to resume full production in June, while keeping an eye on

suppliers. The No. 2 Japanese automaker earlier told Reuters it aimed to manufacture

on a "normal process" basis, with deliveries to come from suppliers from mid-April,

but added that deliveries of some parts may take longer to return to normal.

The earthquake off Japan's eastern coast damaged some assembly and parts factories

in the northeastern region, causing an industry-wide production loss of at least

400,000 vehicles to date in Japan. Analysts expect the effect to ripple across overseas

production and non-Japanese automakers will also be hit as inventories of parts dry up

in the coming months.

A spokesperson for Honda Motor Co said on Tuesday that car production would be

suspended until the end of the week and that the company was considering when it

could re-start output.

Honda said it needed to examine when suppliers will able to resume deliveries of

parts and what their inventory levels are. The company has suspended exports of

 

 24  

parts. Toshiyuki Shiga, Nissan's chief operating officer and the chairman of the Japan

Automobile Manufacturers Association, told the Wall Street Journal the auto industry

should be able to get a full picture of the parts-supply network by mid-April.

http://www.moneycontrol.com/news/world-news/japan-carmakers-see-return-to-full-

output-taking-time_532756.html

11. Japan fund managers' equity weighting 12-yr low: Poll

Published on Thu, Mar 31, 2011 at 10:08 | Updated at Thu, Mar 31, 2011 at 14:55

Source : Reuters

Japanese fund managers reduced their global stock weighting to a 12-year low in

March, while raising their bond weighting to an all-time high as they lightened risk

positions after a devastating earthquake in Japan, a Reuters survey showed. Fund

managers increased their cash position in March to the highest level since November

2009 after the March 11 earthquake and tsunami in northeastern Japan severely

damaged Tokyo Electric Power's Fukushima Daiichi nuclear power plant. Money

managers also had to actively cut their risk positions as increasing unrest in the

Middle East and North Africa bolstered global oil prices.

"The massive disaster in Japan was the major factor. But even leaving that aside,

uncertainty was already building due to unrest in the Middle East and North Africa,"

said Yoshinori Nagano, a senior strategist at Daiwa Asset Management.

"The market was relatively stable despite many uncertainties. There are expectations

that investment conditions will improve potentially, but this doesn't mean that the

market can ease its caution towards taking risks." Fund managers' average weighting

for global equities in March fell 3.4 percentage points from the previous month to

42.6% -- the lowest since January 1999. The weighting for bonds climbed to the

highest since the survey was first compiled in February 1995. It jumped to 49.5% in

March from 47.6% a month earlier.

"Shares prices are expected to be under selling pressure for a while as the market is

still not sure about the impact of the nuclear problem and power shortages," said

Yuichi Kodama, an economist at Meiji Yasuda Life Insurance. "Stocks are likely to

be supported later in the year as we are expecting to see demand related to

 

 25  

reconstruction in the damaged areas, but gains are likely to be limited due to

uncertainty over potential economic growth in the country." Japanese money

managers piled into more cash positions, with exposure to cash jumping 0.9

percentage point to 5.1% -- the highest since November 2009.

Their weighting for alternative assets rose by 0.6 point to 1.5% in March, while the

weighting for property inched up by 0.1 point to 1.4%. The Reuters poll was based on

responses from 12 Japan-based institutional investors, instead of the usual 13 as one

company was unable to finalise its allocation due to the earthquake. The poll of asset

management companies was conducted March 14-24 when Japan's benchmark Nikkei

average rapidly plunged to a two-year intraday low of 8,227.63 on March 15.

The Nikkei regained some strength, climbing to around 9,500 this week as foreign

investors flocked to purchase oversold Japanese shares, but the market lacked the

energy to post convincing gains amid views that the nuclear crisis in Japan was far

from over, equities fund managers said. In terms of regional allocations, fund

managers have lowered their weightings for Japanese stocks and bonds. The equities

weighting for Japan fell 0.4 percentage point to 28.4% in March and the bond

weighting dropped 1.0 point to 34.8%.

http://www.moneycontrol.com/news/world-news/japan-fund-managers-equity-

weighting-12-yr-low-poll_533122.html

 

 26  

3.0: Area of study:

Being interested with International business and Finance, I wished to take my dissertation

topic across the area of Operations too. And that is the main reason for electing this topic

through which I can understand the real scenario of India – Japan relations in terms of

Finance. But when we speak about the relationship between both the companies the major

investments of Japanese in India are mainly through setting up their manufacturing operations

in India or either through joining hands with Indians in upcoming projects. Some basic strong

facts that support my area of Interest include:

• India found as the most interested destination for FDI of Japanese

• Japanese FDI in India finding a good growth in past 3 years

• Japanese who proved themselves for decades as pioneers in Auto manufacturing –

Found losing their edge through recalls. Also there are two major M&A deals coming

to an end – Between MUL and Suzuki which is named as MSIL right now and

between Hero and Honda. How do all these affect the Japanese FDI in India?

 

 27  

4.0: Scope of Study:

Scope of study includes:

-­‐ Trend of FDI in India

-­‐ Japanese FDI in India (in different sectors)

-­‐ The major players and the investments involved

-­‐ How much it adds to Indian economy

-­‐ Forecoming projects & Mergers and Acquisitions

-­‐ Current scenario

-­‐ Positive and negative impacts

 

 28  

5.0: Research methodology:

a. Data collection:

The data required for performing the analysis on the above mentioned objectives was

gathered using the reports from the official government websites, using the discussions made

in forums, latest facts and figures, using magazines and other articles as reference. Also the

details related to the recalls and the M&A among the top Japanese companies with the Indian

industry were obtained from company websites and by interviewing personnel of Japanese

car manufacturers.

In process of Data collection, the data collection is done using

i. Primary data:

The primary data used for this analysis was obtained from Japanese Embassy and

from the Department of Industrial Policy and Promotion, Ministry of commerce and Industry,

Government of India. This process is on progress by correspondence through mails with Mr.

Shyamal Mishra, Deputy Secretary – DIPP in gathering information regarding the same and

also will be carried out through interview with embassy people. Also the details related to the

recalls and the investments were tried to be obtained from the companies directly.

ii. Secondary data:

The sources of secondary data includes websites, E-books, Magazines, Articles

related to recalls and Japanese investments and books about both the Nation’s economy.

Major facts and figures related to this FDI of Japan in India are mainly from the Japan Bank

for International Co-Operation, DIPP – Ministry of Commerce and industry in India, India

Brand Equity foundation, Embassy of Japan in India and Economy watch. The details

referred from these sites include:

• Cumulative FDI flows

• Share of Japan in FDI flows

• Sector and Year wise FDI flows into India

 

 29  

b. Methods of Analysis:

The analysis will be carried through hypothesis testing when it comes for the final

objective. For rest other objectives mentioned, it will be carried out using the graphs, charts

and tables. Will be including tools like histograms, scatter and pareto diagrams in the areas

demanding. Some of the results of analysis includes the below mentioned Graphs and tables.

 

 30  

6.0 Findings on the topic chosen:

History of Japanese Foreign Direct Investment into India

Japan’s participation in FDI in India is conditioned by Indian foreign investment policy as

well as its industrial policy. A chronological study of Japan’s foreign direct investment into

India can be divided into two phases - one, the post liberalisation phase-I, that is from 1991 to

2000 and second, the post liberalisation phase-II, which is from 2000 till date. In the first

phase, the Government of India had allowed a maximum of 49 per cent equity participation

by foreign companies in a limited number of sectors. Over a period of time, the cap on equity

participation by foreign companies as well as the sectors in which foreign companies could

participate was increased. The division of the liberalisation phases is essentially linked to the

direction taken by the Indian government towards equity participation by foreign companies

and the opening up of different sectors in which foreign companies have been allowed to

participate.

India followed a restrictive foreign private investment policy until 1991, relying more on

bilateral or multilateral loans with long-term maturity. The Foreign Exchange and Regulation

Act (FERA), 1974, stipulated that foreign firms could have equity holdings only up to 40

percent. The government could use its discretion to make exemptions. The law also

prohibited the use of foreign brands. However, one did see some hybrid domestic brands like

Hero Honda operate in the Indian market. By the 1980s, some relaxation was made in the

foreign investment policy, and this saw the setting up of Maruti, a central government joint

venture with Suzuki Motors of Japan, in 1982. A crop of Japanese companies followed, who

gained entry through technical collaborations or by getting exemptions. Sanyo and JVC used

the technical collaboration route.

The Post Liberalisation Phase-I:

In 1991, with the initiation of the industrial liberalisation policy, a significant change came

about in the FDI climate. Foreign investment came to be regarded as supply of scarce capital,

technology and managerial skills. India, having observed the development gains made by

south-east Asian countries through foreign investments, benchmarked its own policies to help

attract FDI. Over the decade, India permitted foreign investment in almost all sectors.

 

 31  

Table 1: Japanese Investment in India 1991-2000

Year Investment in US$ million

1991 21.5

1992 233.2

1993 84.0

1994 127.8

1995 482.3

1996 432.8

1997 531.5

1998 324.8

1999 379.7

2000 279.8

2001 150.8

2002 149.6

2003 125.9

2004 139.8

2005 254.7

2006 515.5

Source: Government of India Statistics

The cumulative FDI inflow received from Japan during the period 1991-1999 was US$2.6

billion. This placed Japan in the fourth position among the countries which were investing in

India. A closer look at the top ten investing countries in India (Table 2) shows that a fifth of

the investment came from the US alone. Mauritius and the U.K. put together, made up almost

 

 32  

another one fifth of the total investment. Thus, Japan with a 4 per cent share of the total FDI,

had not taken advantage of the opening up of the Indian economy.

Only by totaling 27 FDI projects reported in Japanese media, Japan’s FDI to India will

amount to around US$ 5.5 billion over 5 years from 2006 to 2010

Only by totaling 27 FDI projects reported in Japanese media, Japan’s FDI to India will

amount to around US$ 5.5 billion over 5 years from 2006 to 2010. The major FDI projects

are as follows :-

Maruti-Suzuki US$ 2564 million (¥ 300 billion) Toyota Motor Corp US$ 385 million (¥ 45.0 billion) MCC PTA US$ 364 million (¥ 42.5 billion) Nissan Motor US$ 231 million (¥ 27.0 billion) Honda Siel Cars US$ 175 million (¥ 20.5 billion) Asahi India Glass US$ 111 million (¥ 13.0 billion)

   

       

 150.8 149.

6 125.9

139.8

254.9

Japanese FDI inflow into India (US$ million)

 515.5

2006

2001

2002

2003

2004

2005

 

 

 33  

India: Growing Japanese Interest

Maruti Suzuki

Toyota

MCC PTA

Nissan Motors

Honda Siel Cars

Asahi India Glass

2546

386

364

231

175

111

Major Japanese FDI Projects in the Pipeline (2007-2012)

Source: Embassy of Japan in India, New Delhi

India maintained its 2nd rank among “Promising countries/regions For business

development in the Medium term for Japanese Manufacturers’ overseas business

operations

2006 2005 2004 2003 2002 China China China China China India India Thailand Thailand Thailand Vietnam Thailand India USA USA Thailand Vietnam Vietnam Vietnam Indonesia USA USA USA India Vietnam Russia Russia Russia Indonesia India Brazil Korea Indonesia Korea Korea

 

 34  

Table 2: Top Ten Investing Countries in India 1991-2000

Rank Country/ Region % Share in FDI inflow

1 US 20.4

2 Mauritius 11.9

3 UK 6.4

4 Japan 4.0

5 South Korea 3.9

6 Germany 3.4

7 Australia 2.7

8 Malaysia 2.3

9 France 2.1

10 Netherlands 1.9

Source: Handbook of Industrial Policy and Statistics, 2001

The importance of Japan and East Asia was realised during the first stage of the initiative of

liberalising in India. Dr. Manmohan Singh, the then finance minister, launched India's ‘Look

East’ policy in 1992 to seek out and develop economic ties with the members of ASEAN and

major East Asian economies. The policy was a natural extension of the reform programme

which aimed to open up the Indian economy and expand its participation in the global

economy. There was also the hope that closer ties with the East Asian economies that had

achieved enviably high growth rates would provide helpful insights for India.

Unfortunately however, the ‘Look East’ policy did not capture Japan on its radar and failed to

stimulate Japanese investment into India. Although in the beginning, there was a surge in

Japanese companies arriving in India through joint ventures as shown in Table: 1, the flow

did not gain momentum and actually hovered around US$300 million. The sectors that

attracted Japanese investment were automobiles, telecommunications, fuel, chemicals and

 

 35  

trading. Though the number of approvals steadily increased, the average investment was

definitely low. The only silver lining was that the major approvals were technical

collaborations (around 668 approvals), which meant that that Japanese companies were

testing Indian business partners.

Honda in the automobile sector and Sony in the electronics sector were the two important

Japanese brands that made their entry in 1991. Taking advantage of the movement of the

zipper industry from being a small scale industry to becoming a large scale industry, a

company like YKK made its entry too. By the end of the decade, important brands like

Toyota, Toshiba and Panasonic had also entered the Indian market. There was also a

proliferation of companies in auto parts, fuels and chemical and industrial goods.

Figure 1: Share of Top Sectors Attracting FDI Inflow from Japan 1991-1999

Source: Government of India Statistics

 

 36  

Comparison of Japanese FDI inflow into Asia and India in Phase-I:

Statistically, Japan was positioned fourth among the countries that invested in India.

However, if one were to compare Japanese investment in India with that in the South East

Asia region, one would find that India had attracted only 2 per cent of the Japanese

investment flow into Asia in the first phase (Fig: 2)

Figure 2: Cumulative Outward Flows of Japanese FDI into Asia: 1990 -1999

Source: JETRO, Statistics: Japan Outward / Inward Foreign Direct Investment Statistics

Overseas subsidiaries of Japanese firms in South East Asia and its neighbouring states were

mainly in consumer durables manufacturing, industrial products and natural resources sector.

In the 1980s, the Government of Japan had taken positive interest in developing this region

with economic assistance. This had enticed Japanese FDI to this region, as among other

reasons, labour here was cheap and disciplined. By the 1990s, this region was growing

rapidly and providing greater opportunities. Moreover, the ease of operations due to Japan’s

long associations with these countries had generated a certain level of comfort. India, with a

diverse culture and complex socio-economic factors was a challenge to Japan. This was

reinforced by varying legal provisions, policies and regulations in different parts of India.

The labour situation in India was considered volatile. All this made Japan a reluctant investor.

 

 37  

On India’s part, no image building exercise was carried out to project India as an industrial

hub.

The Post Liberalisation Phase-II

In the second phase, 2000-2008, though there was a substantial increase in Japanese

investment in 2002, it fell to a pathetic low of US$94.4 million in the year 2003 (see Figure

3).There was some improvement between 2004 and 2006 though it was only in the last two

years of this phase that there was a significant improvement to levels above US$600 million.

Figure 3: Japanese Foreign Direct Investment in India

Sources: Compiled from data of Department of Industrial Policy and Planning, Govt. of

India, Monthly FDI fact sheet 2008.

If one looks at the country-wise flow of FDI into India, then one finds that Japan has slipped

from the fourth position in the previous decade to the sixth position in this decade. It is

noticeable that even with more liberal policy changes; Japan’s percentage share has become

3.27 per cent, while a country like Singapore, which did not figure as an investor in India in

the last decade, has taken second position to Mauritius. This shows that whereas the “look

east” policy of India did find takers in countries like Singapore, it did not impact the mind set

of Japanese investors.

 

 38  

Table 3: Top Ten Investing Countries in India 2000-2009

Source: Fact sheet on Foreign Direct investment (FDI) April 2000-July 2009, Department of

Industrial Policy and Promotion

The year 2000 saw a major policy change with foreign participation being allowed up to 100

percent in most sectors. Following this, the government rapidly relaxed conditions and

enacted FEMA. In 2005, a significant change was brought about when foreign companies

already operating in one sector were allowed to re-invest in another sector, through the

automatic route. This permitted the foreign company to be treated as the equivalent of a

domestic company, allowing it access to sectors that had so far been denied to it.

All this should have encouraged Japanese companies, especially those in retail and finance -

which are major players in Japanese outward FDI. However, one finds little presence of such

Japanese companies in India. According to the current publication (2008) of the Japanese

embassy in India, there are 550 Japanese companies operating in India through joint

ventures/subsidiaries. The sectors in which Japanese companies are operating have not

changed much from the previous decade (Table: 4). Japanese companies have made their

presence felt in the services sector but its share is only 3 per cent. In telecommunications,

Japan has dropped from the second position to the fifth position in this decade. The latest

figures are given below:

 

 39  

Table 4: Share of Top sectors Attracting FDI Inflow from Japan 2000 -2007

Source: Department of Industrial Policy and Promotion, India: A brief note on foreign

collaboration with Japan.

Comparison of Japanese FDI inflow into Asia and India in Phase-II

A comparison between India and the countries in Asia which attract FDI from Japan shows

India in an even poorer light until 2005. As Fig: 4 and Fig: 5 show, India did not find favour

with the Japanese investor. India lagged substantially behind China which was the most

favoured destination for Japanese FDI. In 2005, India attracted only US $266 million of

Japanese investment against the investment of US$6575 million in China. This was only 1.6

per cent of Japan’s total FDI flow into Asia.

Figure 4: Japanese FDI outflow into China and India:

 

 40  

Figure 5: Comparison of Japanese FDI outflow into Asia, China and India:

Source: JETRO, Statistics: Japan Outward / Inward Foreign Direct Investment Statistics

After 2005, however, the picture is quite different (Table: 5). India’s share in FDI flows from

Japan has increased from 1 per cent in 2006 to 2 per cent in 2007 and to 4.2 per cent in 2008.

It now ranks second among the Asian countries. The more popular destinations like Malaysia,

Hong Kong, Thailand and the Republic of Korea have slipped considerably.

Source: JETRO, Statistics: Japan Outward / Inward Foreign Direct Investment Statistics

 

 41  

FDI SYNOPSIS ON JAPAN - (as on 31.10.2009):

Cumulative FDI inflows during 1991-2009 (up to October):

FDI equity Inflows is US$ 124.2 billion, including amount on account of acquisition of

existing shares (upto 1999), RBI’s- NRI Schemes, stock swapped & advance pending for

issue of shares.

Share of Japan with FDI inflows:

• Japan ranks 6th

• Percentage share with total FDI inflows is 3.55%.

• Total FDI Inflows from Japan are US$ 4.4billion.

Sectors attracted FDI inflows for Japan:

Top sectors attracting FDI inflows (from April 2000 to October 2009) are:

• Automobile Industry (31%)

• Electrical Equipments (14%)

• Telecommunications (9%)

• Trading (8%) and Services Sector (7%)

Technical collaborations:

• Since 1991, total technical collaborations are 8,080 Nos.

• Of these, Japan has been granted 879 technical collaborations.

• Share of Japan with total is 10.88%.

 

 42  

Top five sectors attracting technology transfer from Japan are:

• Transportation Industry (262 nos.)

• Electrical equipment (including software & electronics (198 nos.)

• Chemicals (other than fertilizers) (77 nos.)

• Misc. mechanical & engineering (53 nos.) and

• Industrial Machinery (48 nos.)

Top inflows received during April 2000 to October 2009 from Japan through foreign

companies are:

• Matsushita Electric Works Ltd

• Suzuki Motor Co. Ltd.,

• Ntt Docomo Inc

• Panasonic Electric Works Co Ltd.

• Matsushita Electrical

• Yamaha Motor Co. Ltd

• Sanyo Electric Co.Ltd

• Suzuki Motor Corp.

• Yamaha Motor Co Ltd

• Daikin Industries Ltd.

Cumulative FDI inflows received during 1991-2009 (up to October) is 5,390.0 (US$ 124.2)

billion. Out of this, FDI inflows from Japan (Ranks 6th) is Rs. 191.28 (US$ 4.4) billion,

which is 3.55% of the cumulative inflows received from FIPB/SIA, RBI’s automatic routes

& acquisition of existing shares (from the year 2000 onwards) during August 1991 to October

2009. However, this amount does not include inflows received through acquisition route prior

to April 2000. Further, the inflows data on Sector specific in respect of Japan is available

 

 43  

only for the period April 2000 to October 2009. The amount of FDI inflows project specific

in respect of all Countries is not centrally maintained prior to April 2000.

On perusal of the sector-wise distribution of FDI inflows received from Japan from

01.04.2000 to 30.09.2009 shows that the highest inflows have been in the Automobile

Industry which accounts for over 31% of FDI inflows from Japan. Electrical Equipments with

about 14% is in the second place and Telecommunications with over 9% is in the third place.

 

 44  

As far as technology transfer is concerned, total numbers of 879 technical collaborations have

been approved for Japan, which accounts for 10.88% of the total collaborations approved,

during August 1991 to September 2009. The highest technical collaboration has been in the

Transportation Industry followed by Electrical Equipments (including computer software &

electronics) and Chemicals (other than fertilizer)

 

 45  

Another aspect of growing India-Japan investment relations is the increasing number of

projects in India where the Japanese are involved, especially in the automobile sector. Recent

FDI projects involving Japan include:

• Honda, the Japanese auto major, has announced its foray into the compact car

segment in India and is going to invest $205.25 million in its Rajasthan plant.

• Maruti Suzuki India Ltd (MSIL) will invest $1.8 billion for research and development

(R&D) at a new facility in Haryana.

• Toyota, another Japanese car major, is going to spend $680 million on a planned

second car factory in India where it will begin producing its new compact car and the

Corolla sedan, from 2010.

• Japan’s second-largest lender, Mizuho Financial Group, has tied up with one of

India's top banks, the State Bank of India. The tie-up will include cooperation in

various areas including syndicated lending and infrastructure finance.

• The $63 billion Toshiba Corporation has entered into a joint venture with the JSW

group to manufacture turbines for large power plants.

The Indian government has established the Foreign Investment Implementation Authority

(FIIA) to facilitate implementation of FDI projects by helping investors get the required

clearances. The Indian government has also set up a dedicated “Japan Cell” in the

Department of Industrial Policy and Promotion to promote and facilitate Japanese

investment in India.

 

 46  

Cumulative amount of FDI flows into India:

 

 47  

 

 48  

 

 49  

As per the World Investment Prospect survey of UNCTAD, Japanese TNCs, like those

of the United States, show lower levels of internationalization than their European

counterparts. Respondent TNCs, in particular, indicated relatively low levels of

internationalization for some business functions, such as R&D, headquarters and back-office

activities. On the other hand, they have a fairly wide geographical spread, with a presence in

4.6 regions, on average. Compared to other TNCs,, they focus more, in terms of actual

presence, on their own region: South, South-East and East Asia, and also on “other

developed”; but a large percentage of them are also present in EU-15 and North America.

Regarding future FDI plans, respondents expressed less preference for Europe than average,

and a greater preference for Asia in their location strategies. Japanese TNCs also reported

their intention to increase their focus on developing regions (notably South, East and South-

East Asia, Latin America, and, to a lesser extent, Africa) and on transition economies over

the next few years. These results are largely consistent with those of a survey of Japanese

TNCs conducted by the JBIC.

According to the data from the Ministry of Finance in Japan, bilateral trade between Japan

and India has been on the steady rise since the year 2003, and the amount was more than

doubled from US$ 4.0 billion in 2002 to US$ 8.6 billion in 2006, which increased by 27%

from US$ 6.8 billion in 2005.

Effects of Mergers and Acquisitions and Recent Recalls:

When it comes to the topic of Recalls, the recent recalls includes from major players of Japan

like Toyota, Honda, Nissan, Mitsubishi and few more.

Before the hue and cry, perhaps a raised eyebrow: There are a few strange things

about Toyota's worldwide recall of 1.7m vehicles, announced on January 26th.

First, the breadth: no fewer than 21 different models are affected. Second, the dates: ranging

from 2000 to 2009. Third, the problems: they include everything from the tightness of fuel-

pressure sensors in 245,000 Lexus cars in North America to faulty spare-tyre carriers on

exactly 6,175 Daihatsu mini-trucks in Japan. The recall comes just as Toyota retained its

crown as the world's biggest carmaker, having sold 8.4m vehicles in 2010 despite the dent to

its reputation. American sales were largely flat, at 1.8m cars, European sales dropped 11%,

but sales in Asia outside Japan roared ahead by 24%.

 

 50  

In Tokyo, Toyota's shares barely budged, falling a mere 1.9% on a day that the overall market

dropped 0.6%. The Japanese might be excused for feeling a bit more uneasy. Unlike a year

ago, when Toyota's recalls mostly affected cars in America and the Japanese comforted

themselves that domestically-produced vehicles were manufactured to higher standards with

Japanese parts, the latest recall mainly involves 1.3m Japanese vehicles.

The other recalls includes recalls of about 6 Lakh cars from Honda and 2 Lakh cars from

Nissan which lead to the market fall of both the companies..

Hero Honda Split – Honda Exits Joint Venture:

It's finally splitsville for Hero Honda, one of corporate India's oldest and most successful

joint ventures , with the two founding partners—India's Munjal family and Japan's Honda

Motor Corp—agreeing to part ways and terminate the 26-year-old relationship due to

unresolved differences and ambitious independent plans. Sources in the know said most of

the terms of the deal, which will see Honda selling its 26% stake to the Munjal family, have

been finalized and the matter will now be taken up by Hero Honda's board on Thursday. Top

officials of Honda are arriving here to attend the board meeting, a source said.

The sources added that the Japanese auto major will exit the JV through a series of offmarket

transactions by giving the Munjal family—that currently holds 26% stake in the company—

an additional 26%. Honda, which also has an independent fully-owned twowheeler

subsidiary—Honda Motorcycle and Scooter India (HMSI)—will exit Hero Honda at a

discount and get over $1 billion for its stake. The discount will be between 30% and 50% to

the current value of Honda's stake as per the price of the stock after the market closed on

Wednesday. The Munjal family plans to compensate Honda through high royalty payouts,

which could double to nearly 6% of net sales. However, key financial institutions have

objected to this move, saying that the deal could favour the Munjals but be detrimental to

other shareholders. Spokespersons for Hero Honda and the Munjal family refused to

comment on the development. Sources said as per the arrangement , it will be a two-leg deal.

In the first part, the Munjal family, led by Brijmohan Lal Munjal group, will form an

overseas-incorporated special purpose vehicle (SPV) to buy out Honda's entire stake, which

will be backed by bridge loans. "The PEs will take between 50-60 % stake in this entity ,

giving them just under 15% stake in the main company Hero Honda, which would soon sport

a new name," the sources said.

 

 51  

Japanese FDI inflows picking up at slow pace:

Foreign direct investment by Japan in India has been extremely modest in comparison with

Japanese investment elsewhere in Asia, notably China, but has shown signs of picking up

steam recently, though moving in fits and starts–India FDI inflows from Japan were worth

$400 million in 2002-03, but hovered between a quarter and half that level over the next four

years before spiking to $800 million in 2007-08 then plunging to $200 million in 2008-09.

Foreign technology transfer approvals are perhaps a more stable indicator of the upward trend

in Japanese businesses' interest in India–permission had been granted for 878 such

technology collaborations through May 2009, placing Japan third in the list behind Germany

and the United States.

Car manufacturer Maruti Suzuki is the bestknown success story among Japanese firms tying

up with Indian partners. Now in its 29th year in India, the company makes one in every two

cars sold in India. Other big hitters among the approximately 700 Japanese firms with

operations in India are Asahi Glass, Honda, Marubeni, Mitsubishi, Panasonic, pharmaceutical

maker Ranbaxy (bought for $5 billion by Daiichi Sankyo in 2008), Sony and Toyota. Among

Japanese small and medium-sized enterprises with a presence in India, rice-milling machine

manufacturer Satake is prominent.

Potholes, Power Cuts and Paperwork

The long-standing hesitancy of Japanese firms to invest in India can be put down to four main

problems: bureaucratic red tape, in the shape of complicated taxation, customs clearance and

land acquisition and utilization systems; backward infrastructure, including unreliable power

supply, poor roads and port facilities; pro-labor policies resulting in numerous labor disputes;

and chronic security risks from ultra-left-wing and Pakistan-linked terrorist groups.

 

 52  

7.0: Discussions and Interpretations of findings:

Scenario of Japanese FDI in India as on date:

As per the report of Reuters, Japanese foreign investment and companies "are increasingly

turning their attention to such (emerging) markets as India and Vietnam," JBIC economist

Toshiharu Mimura told Kyodo News agency. The survey conducted in the summer of 2010

shows that 74.9 percent of the 605 Japanese companies selected India as their investment

destination over the next 10 years, while 71.7 percent chose China. Last year, China was in

the first position followed by India.

The survey reflects increasing aversion among the Japanese manufacturers to invest in China

due to some frequent strikes last year in Chinese auto manufacturing units followed by bitter

diplomatic row between the two nations over the disputed Senkaku islands in the East China

Sea which both claim. But in an annual survey conducted by JBIC, India for the first time

topped the list as the most attractive destination, overtaking China. The new ranking was

made in the 22nd survey carried out by JBIC in 2010, said a release on Thursday. The reason

for China lagging behind was attributed to increasing labor cost and recent anti-Japan protests

in China in the wake of the boat incident in the Senkaku islands in September, and China's

move to delay exports of rare earth minerals.

The contribution of Japan in flagship projects like Delhi Mumbai Industrial Corridor (DMIC)

would enable Japanese entry into many other areas. Presently India-Japan bilateral trade

stands at $12 billion and hoped that the target of bilateral trade of $20 billion by 2014 would

be achieved on time. As regards, Japanese FDI in India, it stood at $8 billion in 2008, the year

when it surpassed Japanese FDI in China, and since then it is continuously growing.

Comprehensive Economic Partnership Agreement (CEPA) between India and Japan was

signed in February this year. Past one decade has witnessed qualitative and also quantitative

movement forward in the relationship between India and Japan. He expressed that Indian –

Japan CEPA would cover various areas including Trade in Goods, Investment, Trade in

services, and Movement of Natural Persons to Intellectual Property, Competition,

Improvement of the Business Environment and Bilateral Cooperation. India is on a steady

growth path of 8.5% to 9% GDP and invited Japanese enterprises to participate through

increased trade and investment for mutual benefit.

 

 53  

Forth coming India-Japan Global Partnership Summit in September this year aims at

strengthening economic ties between Indian and Japan and would lead to greater regional

integration and multilateral trade. Six sectors has been identified for cooperation between

India and Japan: Energy, Clean and Green Technologies, Infrastructure, Small & Medium

Enterprises, Agriculture Services (ICT, Healthcare, Education & Banking)

The number of Japanese companies with business operations in India has doubled in three

years. Japan presently ranks sixth in cumulative foreign direct investment flows into

India.According to latest available statistics Japanese companies have made actual

investments of US$ 4.083 billion between April 2000 and May 2010. The sectors attracting

Japanese investment are automobile industry, electrical equipment, trading, service sector

(financial & nonfinancial), and telecommunications

Number of companies in India:

Source: Embassy of Japan, India

Japan ranked seventh in terms of cumulative foreign direct investment (FDI) in

India, accounting for US$ 3,714 million in the period from April 2000 to March 2010, of

which US$ 1,183 million came in the period April 2009-March 2010, according to the latest

data released by the Department of Policy and Promotion (DIPP).

According to the Japanese External Trade Organisation, (JETRO), Japanese firms

increasingly prefer India as an investment destination over China. The number of Japanese

 

 54  

companies in India has grown three fold over the last three years from approximately 100

companies in 2006-07 to 300 in 2009-10. "More Japanese companies would enter the Indian

market in the coming years," said Naoyoshi Noguchi, retired director-general of JETRO.

According to investment bankers, India may witness US$ 20 billion worth of Japanese

investment by 2012. India's exports to Japan in the period 2008-09 stood at US$ 3025.70

million while imports totalled US$ 7886.27 million for the period. During April to December

2009, India exported goods worth US$ 2,479.38 million to Japan. India imported

merchandise worth US$ 4823.66 million from Japan during April-December 2009-10.

Major Japanese funds have been coming into India by way of offshore funds, with many

Indian houses such as SBI Capital, UTI and DSP Blackrock raising money from the Japanese

markets to invest in India.

India and Japan have decided to jointly develop one city in India as a 'solar city'. The project

aims to reduce its projected demand of conventional energy at the end of five years, through

energy efficiency measures and generation from renewable energy installations.

The two sides also agreed to strengthen cooperation in research and development for

promoting renewable energy. As part of the exchange programme, a ten-member delegation

from India participated in the Japan-India New and Renewable Energy Seminar in Tokyo in

January 2010.

Further, in May 2010, India and Japan agreed to set up a working group on civilian nuclear

energy. The working group is being seen as a first step towards potential civilian nuclear

cooperation between the two countries.

Government Initiatives

During Japanese Prime Minister Yukio Hatoyama's visit to India in December 2009, the

prime ministers of India and Japan discussed cooperation in infrastructure projects, climate

change and security and renewable energy. The two countries also agreed to work out

funding and logistical issues relating to the Dedicated Rail Freight Corridor.

 

 55  

In the course of the visit, the governments of India and Japan also agreed to relax visa rules in

a year's time in order to facilitate improved trade and widen cooperation between the two

nations. In the last week of December 2009, India and Japan signed two important

agreements for implementing the ambitious US$ 77.16 billion Delhi-Mumbai Industrial

Corridor (DMIC) project which seeks to create integrated investment regions and industrial

areas across six states.

The agreements included collaborating in the development of eco cities that are

environmentally and ecologically sustainable along the corridor and setting up of a project

development fund to undertake activities like master planning & feasibility studies, preparing

project reports and obtaining approvals and bid process management for projects. Top

Japanese consultants, including Mitsubishi, Nikken Sekkei and IBM Japan, have joined hands

with three state governments and the Delhi-Mumbai Industrial Corridor Development

Corporation (DMIDC) to develop eco-friendly infrastructure for new cities planned along the

DMIC.

The first phase of the project which was launched in 2006 will be completed by 2018. The

corridor will run through six states —Haryana, Uttar Pradesh, Madhya Pradesh, Rajasthan,

Gujarat and Maharashtra—and is being developed as a global manufacturing and trading hub.

The Japanese consultants will launch feasibility studies to set up the first set of eco-friendly

cities in Manesar-Bawal region of Haryana, Dahej, Changodar in Gujarat and Shendra

industrial region in Maharashtra, as per the agreements entered into by them, the three state

governments and the DMIDC.

In the first phase, seven cities, each entailing an investment of around US$ 9-10 billion, will

be developed. Moreover, according to the Japanese ambassador to India, Hideaki Domichi,

the Government of Japan is keen to extend financial assistance to the proposed Chennai-

Bangalore corridor project. “This project is another strategic area from our point of view. Big

Japanese companies like Toyota are already here, and the Chennai area is also attracting a lot

of Japanese investments. We will soon work out the exact amount of financial assistance the

Japan government will provide for this project,” he said at the 33rd annual general meeting of

the Bangalore Chamber of Industry and Commerce in June 2010.

Once the free trade agreement or the Comprehensive Economic Partnership Agreement

(CEPA) is signed and operationalised, 9,000 products—ranging from steel and apparel to

 

 56  

drugs and machinery—are expected to be traded either without duty or at substantially

reduced tariffs. The CEPA is expected to be signed by the end of the year.

Further, in order to attract Japanese investments, the Karnataka Government is planning to set

up a 1,000-acre 'Japanese village' which will house Japanese industrial and business

establishments. The proposed village would be set up near Tumkur.

Investments & deals

• The initiatives of the Ministry of Trade and Economy, Japan and the Japan External

Trade Organisation (JETRO) have helped rope in Japanese companies into investing in

India's first exclusive industrial parks for Japanese firms in Rajasthan. The companies include

majors such as Daikin Industries Ltd, Nissin Kyogo Ltd and Mitsui Chemicals.

• Tata Steel, India's largest steel producer, has entered into a joint venture (JV) with

Japan's Nippon Steel for production and sale of automotive cold-rolled flat products at

Jamshedpur. The JV is expected to invest US$ 400 million towards setting up of an

automobile venture in India.

• Hitachi Transport System, an offshoot of Japan's Hitachi, has acquired Flyjac

Logistics for nearly US$ 54.61 million, giving it a firm footing in India's logistics and

warehousing sector. The deal propels Hitachi to the top 10 Indian logistics companies.

• Japan's JR Kyushu Group and Patni Computer Systems, have announced a 51:49

venture to provide information technology (IT) and product engineering services to the

Japanese enterprise market. The venture is being formed with a capital of US$ 1.09 million.

The factors that have contributed to the change of perception regarding the Indian economy

include:

• Impressive growth despite the global economic downturn

• Robust domestic demand

• Projections of expansion of India’s working population aged 15-64 over the long term

• Strengthening ties with other East Asian economies particularly Singapore, Thailand,

South Korea, and China

 

 57  

• Geographically strategic position to develop as a production and export base for the

growing market in the Middle East and Africa

The governmental support has come in the form of the Special Economic Partnership

Initiative (SEPI). This has several high visibility flagship projects like Western Corridor of

the Dedicated Freight Corridor (DFC) and the Delhi-Mumbai Industrial Corridor (DMIC).

The total volume of Japanese ODA loan committed for the first phase of the Western

Corridor is about 405 billion Yen. The DMIC is projected to attract foreign investment worth

about US$92 billion and will be built around DFC and will include cooperation in

development of sea ports on the west coast and industrial estates and Special Economic

Zones with high quality physical and social infrastructure through collaboration between

private and governmental sectors of India and Japan. A consortium of Japanese private sector

companies is already collaborating with the DMIC Development Corporation as well as the

Governments of the concerned states, in developing eco-friendly townships in the DMIC

zone using Japan’s best practices.

In this context two agreements have the potential be the “game changers” for India-Japan

economic relations - the India-Japan Comprehensive Economic Partnership Agreement

(CEPA) and the Civil Nuclear Cooperation Agreement. The focus of both these agreements is

on providing the essential institutional framework to further accelerate and consolidate

business activities between India and Japan.

As part of the CEPA, India will eliminate tariffs on 90 per cent of its imports from Japan, and

Japan will remove tariffs on 97 per cent of Indian imports on a trade value basis within 10

years. In addition the CEPA will relax barriers on investment, trade in services and

movement of professionals, competition and improvement of the business environment by

both sides, besides enhanced cooperation on protection of intellectual property. With tariffs

slashed on more than 8,000 products including generic drugs, apparel, agricultural products

and machinery the bilateral trade between both countries is expected to reach US$20 billion

by 2012-13. The CEPA is also expected to address the balance of trade which is currently

heavily tilted in favour of Tokyo.

The Civil Nuclear Cooperation Agreement is similarly crucial for enhancing economic

relations between India and Japan. India’s civil nuclear market opened up in 2008 after the

landmark agreement between the United States and India. And given the rising demand for

 

 58  

electricity by rapidly growing India the government has set up an ambitious aim to supply 25

per cent of electricity from nuclear power by 2050. To enable Japanese companies like

Mitsubishi, Hitachi and Toshiba, all having advance civil nuclear energy technologies, to

enter the Indian nuclear energy market, estimated to be US$150 billion, the negotiations for

the civil nuclear agreement were launched on June 28, 2010. There is strong business and

political support for the agreement in Japan wherein it is likely that it will be concluded soon.

In the context of the deep rooted nuclear sensitivities in Japan this is a remarkable

development.

Thus economics is the driving force in contemporary relations between India and Japan. With

the domestic economy in severe turmoil India’s economic growth is extremely favourably

placed in Japanese perspectives. This is generating strong imperatives for Japan to engage

with India in a substantial manner and enlist it as an important partner in its long-term growth

strategy. India needs to encourage and foster this positive engagement. It is bilateral relations

based on economic cooperation and not balance of power formulations viz China that will

better withstand the test of time.

Effect of Destructive Earthquake in Japan in Indian Economy:

Japan, the World's 3rd largest economy had been jolted by the strong earthquake on 11th

March 2011. The resultant Tsunami and Nuclear Power Plant disasters have caused

destructions North East Japan.

Japanese Investment in India: In short term the investment of Japan in emerging and fast

growing economies like India will decline as there will be internal pressure to invest in own

country to build lost plants and infrastructure.

Oil Prices: International Oil prices fell to a two week low after the earthquake on the

speculation that the fuel demand will come down. But this is not going to live for long as few

of the Nuclear power plants in the region got destroyed, demand for alternate fuel is expected

to increase.

 

 59  

Indo-Japanese Trade: Lets look at the trade between the two countries.

Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

EXPORT 2,481 2,868 3,858 3,026 3,630

%Growth 15.59 34.53 -21.58 19.96

India's Total Export 103,091 126,414 163,132 185,295 178,751

%Growth 22.62 29.05 13.59 -3.53

%Share 2.41 2.27 2.37 1.63 2.03

IMPORT 4,061 4,600 6,326 7,886 6,734

%Growth 13.26 37.53 24.67 -14.61

India's Total Import 149,166 185,735 251,654 303,696 288,373

%Growth 24.52 35.49 20.68 -5.05

%Share 2.72 2.48 2.51 2.6 2.34

TOTAL TRADE 6,542 7,468 10,184 10,912 10,364

%Growth 14.14 36.38 7.14 -5.02

India's Total Trade 252,256 312,149 414,786 488,992 467,124

%Growth 23.74 32.88 17.89 -4.47

%Share 2.59 2.39 2.46 2.23 2.22

India's Trade Balance -46,075 -59,321 -88,522 -118,401 -109,621

 

 60  

According to the Japanese External Trade Organisation, (JETRO), Japanese firms

increasingly prefer India as an investment destination over China. The number of Japanese

companies in India has grown three fold over the last three years from approximately 100

companies in 2006-07 to 300 in 2009-10.

According to investment bankers, India may witness US$ 20 billion worth of Japanese

investment by 2012. This investment is expected to be affected by the earthquake as domestic

pressures in Japan can force investment to be rescheduled.

 

 61  

India's exports to Japan in the period 2008-09 stood at US$ 3025.70 million while imports

totaled US$ 7886.27 million for the period. During April to December 2009, India exported

goods worth US$ 2,479.38 million to Japan. India imported merchandise worth US$4823.66

million from Japan during April-December 2009-10.

Major Japanese funds have been coming into India by way of offshore funds, with many

Indian houses such as SBI Capital, UTI and DSP Blackrock raising money from the Japanese

markets to invest in India.

The effect in India, could be a little less obvious. A government economic advisor says the

biggest impact will be in foreign direct investment.

C. Rangarajan, Chairman of Indian PM's Economic Advisory Council said "Well, the impact

will be somewhat indirect. To some extent Japanese investment in India will be affected

because there will be so much of demand for investment within the country and there will be

very little available to invest outside. So that would be warning fact. And the other is impact

on trade which may perhaps weaken our exports to Japan, but the impact that I see, it is only

to the investment route."

Although it is too early to predict, the re-building of damaged areas and required healthcare

facilities in Japan may provide some opportunity for Indian companies, mainly

pharmaceutical and steel companies. Japan is the second largest market for pharmaceutical

companies after the US. The Japanese generic market is expected to grow at about 9%-13%

to $8-$11 billion, with the government target of 32% generic prescription by 2012. After the

recent earthquake and tsunami, Japan is going to witness a rise in health problems related to

gastro-intestinal, post-traumatic care and infections.

"Given their established presence, Ranbaxy Laboratories and Lupin are expected to be the

major winners who can tap the Japanese opportunity. The increasing healthcare demand after

the Japanese crisis would lead to a favourable opportunity for Lupin as the demand for anti-

inflammatory (AI), neuro-psychiatric treatment and gastrointestinal (GI) drugs would see a

rise," said Sharekhan Ltd, in a research note.

India has been a major supplier of iron ore to Japan. However, in recent years, many Japanese

companies have set up joint ventures with Indian steel makers. During 2010, JFE Steel

bought about 15% stake in JSW Steel, India's largest private steel maker for $1 billion.

Sumitomo also bought 40% stake in Bhushan Steel's project in West Bengal, while Nippon

 

 62  

Steel formed a joint venture with Tata Steel to make auto grade steel in India. Kobe Steel,

which already has an existing agreement with state-run Steel Authority of India (SAIL),

signed an umbrella agreement with Essar Steel.

Those Japanese steel producers who have a joint venture or plant in other countries are likely

to have an upper hand while catering to local demand, as almost all companies from the

earthquake-affected areas have stopped production owing to the tsunami and the disruption of

power supply.

While the overseas investments from Japan are expected to be lower in the near term, there

are chances of more outflows over a longer term. "In the near term, Japanese companies are

likely to delay overseas direct investment (ODI) plans. However, longer term, we could see

greater demand from Japanese companies to diversify production bases in geologically more

stable countries," said Citigroup, in a report.

Japan accounted for around $3.7 billion, or less than 2% of India's total exports of $175

billion during 2009-10. Over the past ten years, foreign direct investment (FDI) from Japan

has been around 4% of the total FDI inflows in India.

Earlier in February, both the countries signed a Free Trade Agreement (FTA), which will

eliminate tariffs on 94% of bilaterally traded goods in the next 10 years. Following the FTA,

it was expected to boost bilateral trade between Japan and India. The temporary halt in

Japan's export to other countries may also provide an opportunity to other countries.

However, India may not be a beneficiary.

According to Citigroup, Malaysia, Singapore and Thailand look relatively more vulnerable to

a sharper slowdown in exports to Japan. "However, slower exports to Japan could be offset

by stronger exports for product segments where Asian countries compete directly with Japan.

Korea and Taiwan have export structures most similar to Japan," the report added.

The earthquake-related economic and fiscal impact on Japan is significant, but, given the

unfolding situation, Standard & Poor's (S&P) Ratings Services said it believes it is too early

to judge the implications for the unsolicited sovereign credit rating, which currently stands at

AA- with stable outlook.

 

 63  

"The key factors determining the future trajectory of the sovereign credit rating on Japan

include the overall macroeconomic impact of the earthquake, the pace and duration of

reconstruction, and the impact on fiscal deficit," said S&P's credit analyst Takahira Ogawa.

"In addition, we need to assess the government's ability to pursue its economic and fiscal

reform agenda once reconstruction is well underway."

According to a report from Citigroup, near term economic damage in Japan is likely to give

way to a reconstruction boost in the second half of 2011. "The boost from Japan's

reconstruction in 2H2011 could offset 1H economic weakness, boosting overall FY2011

growth by +0.2 point to 2.1%," the report said.

The total cost of the reconstruction and recovery programme in Japan is still unclear. It's

likely, however, to be significantly higher than that in the aftermath of the Kobe earthquake

in 1995. The Kobe disaster cost Japan $159 billion (about 16.3 trillion yen) over 1995-2000.

The costs are again likely to be spread out over several years and funded from a number of

sources, S&P said.

Following the Kobe earthquake, Japanese imports from Asia only slowed for about six

months before rebounding, and Japan's share in Asia's exports has fallen significantly since

then to a 7.3% share in 2010 from 12.3% in 1995. The slowdown in Japan's imports post-

Kobe was more pronounced in industrial materials and consumer goods, while capital

equipment imports posted a strong rebound. Indonesia and India also have a large share of

industrial material exports to Japan, but exports matter less to these domestic-driven

economies, Citigroup said.

"Given the sheer magnitude of the current disaster, the rating on Japan could be affected if

the debt burden were to increase materially above our pre-earthquake expectations, due to a

significant economic impact and reconstruction costs," Mr Ogawa added.

 

 64  

Comprehensive Economic partnership agreement:

In a far-reaching strategic move, India and Japan signed the much-awaited comprehensive

economic partnership agreement (CEPA) on 16 February. Under this agreement, India agreed

to remove tariffs on 94 per cent of goods over the next 10 years. The deal will facilitate trade

growth and enable both parties to reach the target of US$25 billion worth of bilateral trade by

2014 from its present US$10.3 billion. This deal has special significance. Barring a similar

deal with Singapore and South Korea, this is the first trade deal India has signed with a major

industrial country. Further, it will help India to fix its outstanding trade imbalance with Japan.

Imports from Japan currently account for almost 60 per cent of India’s total trade.

After over a dozen rounds of negotiations, the agreement was finalised by Prime Minister

Manmohan Singh and his Japanese counterpart Kan Naoto in October 2010. This process

began with the instigation of a Joint Study Group in November 2004, and progressed with 14

rounds of negotiations between January 2007 and September 2010. This was the third CEPA

signed by India after Singapore and South Korea. Japan has concluded 12 such agreements,

but this is the first such pact with a BRIC country.

India stands to gain significantly from the deal. About 95 per cent of Japan’s 9,000 tariff lines

are covered (about 90 per cent of India’s). On a trade value basis, while Japan has consented

to reduce 97 per cent of its tariffs on goods trade, India has agreed to reduce 90 per cent.

India’s sensitive sectors are fully protected. These include agriculture, fruits, spices, wheat,

basmati rice, edible oils, wines and spirits and also certain categories of industrial products

such as auto parts. The CEPA will pave the way for increased Japanese FDI flow into Indian

projects. The number of Japanese firms doing business in India has increased exponentially,

to 725 in October 2010 from 362 in February 2007. Increased FDI may be the most attractive

part of the deal in the coming years.

The basic principles of the CEPA include liberalisation and facilitation of trade in goods and

services, protection of intellectual property rights, and corruption prevention measures.

Among the sectors in India that will stand to gain market access following CEPA are textiles

and pharmaceuticals. The textile sector will get duty-free access to the Japanese market

immediately. Japan has also agreed to give the same treatment to the Indian generics (off-

patent drugs) in line with its domestic pharmaceutical industry. India accounts for just over 1

per cent of Japan’s textiles and garments imports (from a total value of $31 billion), while

 

 65  

pharmaceuticals from India constitute a miniscule 0.06 per cent of Japan’s import market.

With Japan’s tariff set to become zero or substantially reduced for Indian exports, India can

expect to gain from this.

India also obtained concessions from Japan in the services sector. Japan is a net importer of

services, amounting to US$147 billion. It is also facing serious aged-care sector challenges,

as demographic change has led to a shortage of professional care givers. The CEPA will

create opportunities for Indian nurses and care givers in Japan. Other professionals who

would have new access to Japanese service sectors include accountants, researchers,

management consultants, computer engineers, engineering services professionals, chefs and

English language teachers.

The language barrier remains an impediment for the Indian service sector, as the target of

creating a pool of 30,000 Japanese-speaking people in India in 2010 remains unfulfilled.

Japan is now behind China, as the world’s third-largest economy. It is hoped that the CEPA

will, by giving Japan increased access to the second-fastest growing economy in the world,

help spur Japanese growth. Among those imports from Japan to India that will be duty-free

immediately after the pact is implemented are SIM and memory cards, LCD and LED panels,

calculators and battery chargers.

India’s exporters are upbeat about prospects, and hope that India’s total exports to Japan will

increase from US$3.63 billion in 2009-10 to US$15 billion by 2014-15. After India’s

agreement with South Korea took effect India-South Korea trade jumped over 70 per cent in

the first year. If this example is repeated in the India-Japan case, a US$25 billion target by

2014 might not be difficult to achieve. Additionally, if current talks on civil nuclear

cooperation are fruitful, nuclear commerce may unfold as a new trade front to the tune of

US$100 to US$150 billion in the next decade. Japanese companies such as Toshiba, Hitachi

and Mitsubishi have high hopes for a shot at the Indian market with their big ticket civilian

nuclear power projects.

India and Japan have also agreed to the creation of a joint revolving fund of US$9 billion for

kick-starting the ambitious 1,483-kilometre-long Delhi-Mumbai Industrial Corridor Project.

When implemented, this single project will dramatically transform the nature of economic

ties between the two countries. Apart from its immediate payoff, CEPA should facilitate the

smooth execution of both of these flagship development projects.

 

 66  

The Road Ahead

Japan looks at India as a frontier in the future with its strength in technology. Besides

automakers, Japanese investments have diversified to include areas such as power plant,

pharmaceuticals, home electronics, life and non-life insurance and telecommunication,

according to the Ambassador of Japan, Mr Hideaki Domichi. He added, "Our strength is in

manufacturing, and more and more Japanese companies are expecting opportunities in the

area of environment-related business in which they have competitive edge, or consumer

goods and distribution, infrastructure and civil nuclear."

 

 67  

Conclusion and recommendations:

Through the observations of secondary data found and the interpretations and discussions

made on those data it is clear that Japanese FDI in India is growing at a good pace. But, the

focus is more towards automotive sector since many years. CEPA signed between India –

Japan will open up the investments of Japanese in the Services, Textile, machinery and

agriculture to the major extent. Though the natural disasters prove to be challenge for them

still it is not found to bring on any adverse effect on the FDI inflows in India and other

ASEAN nations where they prefer to invest a lot.

As major contribution of Japanese FDI comes from the Auto companies, the split up of the

mergers between Maruti – Suzuki from MSIL and Hero Honda to happen soon will bring a

huge impact not just in terms of the money inflow, but also does when it comes for the

technology sharing which has made these two companies stand way ahead in four wheeler

and two wheeler segments respectively.

When we consider the recent recalls from the Auto pioneers from Japan like Toyota, Honda,

Nissan and Mitsubishi, these companies have not faced much negative impact in India as they

suffered in US. And the domestic demand in India when it comes for Automobiles is higher

than the supply which makes these companies invest a lot in expanding their plants and

creating new manufacturing facilities to cater the needs of the customers.

Recommendations:

Since years Japanese government as many other nations is asking Indian Government to open

up for FDI in Retail sector. If that government initiative has been taken, then a healthy

competition would prevail in the domestic retail arena as Japanese focus much more into the

quality aspects of the products they supply. This will bring us close in reach with a high

quality retail goods at a competitive price in market.

 

 68  

Limitations:

a. It is restricted to Automotive segment as this segment hold the major share in terms of

percentage and value of FDI in India

b. Time constraint – that makes me focus a lot into usage of secondary data

 

 69  

References:

Websites:

1. http://www.in.emb-japan.go.jp/Japan-India

relations/JapanActiveEngagement2007.html - Official Site of Embassy of Japan in

India

2. http://www.ibef.org/india/indiajapan.aspx - Official site of India brand equity

foundation

3. http://dsbb.imf.org/pages/sdds/DQAFBase.aspx?ctycode=JPN&catcode=BOP00 –

Official website of IMF

4. http://www.boj.or.jp/en/index.htm - Official website of Bank of Japan

5. http://www.jbic.go.jp/en/finance/ - Official website of Japan Bank for International

co-operation

6. http://dipp.nic.in/japan/japan_cell/FDI_Synopsis_Japan_31October2009.pdf - Official

site of Department of industrial policy and promotion

7. http://www.commerce.nic.in/ - Website of Indian Department of commerce

8. http://www.eastasiaforum.org – This is the blog page about the Economics, politics

and public policy in East asia and Pacific.

Books:

1. Research Methodology – Research and Techniques by C.R.Kothari

2. Cooper, Donald R and Schindler, Ramela (2000) Business Research Methods, Tata

Mc Graw Hill

3. http://www.orfonline.org/cms/export/orfonline/modules/occasionalpaper/attachments/

india_japan_1275545633112.pdf

4. Japanese foreign direct investment in South Asia: A case of India by Badar A Iqbal

5. Japanese subsidiaries in the new global economy by Paul W. Beamisel.

 

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