SEMINARS

Training and education in international affairs:
Japan, Palestine and the Middle East (1999)

Promotion of Private Investment in the middle East

I would like to explain the issue of private Japa­nese investment in the Middle East by extracting important points from an article titled “Japanese-Arab Economic Relations.” The article was writ­ten by Professor Yasumasa Kuroda of Ha­waii University and myself and published in The Journal of Arab Affairs in 1991.

There is a strong desire in the Arab countries to attract foreign direct investment in joint ven­tures. Particularly in the last decade, capital-rich countries in the Gulf region such as Saudi Arabia and Kuwait, whose economies are not so diversi­fied, have started asking their oil-buying clients in the West to provide them with various tech­nological know-how, not only at operational but also at managerial levels through small and me­dium-sized manufacturing joint ventures. Non-Arab countries in the Middle East are also seek­ing direct investment. Iran and Turkey, for ex­ample, two extremely large countries are re­garded by Western businessmen as being sub­stantial markets for many goods whose produc­ers are trying extremely hard to attract capital and technology from the West. At the same time, many countries in the region have started pri­vatizing their economies to varying degrees. Even Syria, whose economy is still based on the public sector, has started asking private investors to play a more positive role in its economy as part of a bid to attract foreign capital.

I know that Palestinians are equally interested in acquiring foreign technology, knowledge and expertise through cooperation with foreign busi­nessmen and governments. I also know that it is necessary for the Palestinians to formulate an accurate idea of how Western countries regard the Middle East as a prospective area for invest­ment. I sincerely hope that this seminar will contribute to the understanding of Palestinians regarding many aspects of Japan, including the way in which Japanese corporations decide how and where to invest their money.

Motives for Japanese Investment Abroad

Total investment abroad by Japanese manufac­turers at the end of 1997 had reached US$187 billion, of which US$163 billion had been re­corded since the year 1986. The decision of companies to switch to producing their products abroad, at lower cost and avoiding a foreign cur­rency risk, was the main reason for the sudden increase in overseas investment during the last ten years or so. Japanese companies had started facing price competition due to the rise of the yen from the middle of 1985, and Japanese in­vestment abroad, particularly in Asia, began to increase in 1990. From then onwards, many Japanese companies, which by then were facing worldwide competition and the continued rising of the yen, became eager to transfer some of their production facilities to other countries in order to improve their profit base.

In looking at Japanese investment abroad region by region, one discovers that most of the invest­ment involves North America (45 percent) and Asia (30 percent). In contrast, the percentage of Japanese investment in Europe is rather low, being 15 percent. The reasons for the relatively low level of investment in Europe are as follows: the absence of cost competitiveness in Europe, its geographical distance from Japan, and the small market size of the various European coun­tries. The European Union (EU) as a whole, of course, promises to be a huge market, but only once it succeeds in establishing a single common market. It seems to me that Japanese companies, for the meantime anyway, consider it too early to prepare for investing in Europe.

It is known that until the mid-1980s, Japanese companies had still tried to manufacture most products domestically. It was the technological capabilities of certain Asian countries that en­cour­aged Japanese companies to have some of their production facilities in Asia. Since then, many Japanese companies have built up com­plemen­tary production networks with Asian countries and have created an extensive hori­zontal divi­sion of labor. During the early days of invest­ment in Asian countries, this horizontal division of labor involved mainly low value-added items, but Japanese firms have gradually started to trans­fer the manufacturing of technol­ogy-inten­sive items as well. Japanese investment in Asia, however, still has features that differ from those of its investment in North America.

Firstly, the grade of commodities manufactured in North America by Japanese companies is al­most the same as that of commodities produced in Ja­pan. In the case of Asia, however, the initial trans­fer of manufacturing involved low-level tech­nological products. Secondly, more than 90 per­cent of the products manufactured in North Amer­ica by Japanese firms are usually sold lo­cally, whereas nearly 20 percent of the products manu­factured in Asia by Japanese companies are either imported to Japan or exported to other countries.

As for Japan’s manufacturing investment in the Middle East region, the area accounts for just 1.1 percent (US$2,049 million) of total direct in­vestment overseas as of 31 December 1997.

According to the survey conducted among more than 12,000 companies in March 1995, the fol­lowing five reasons are essential factors behind the decision of Japanese companies to invest abroad:

1.     A desire to hold on to or expand the local market: 29 percent;

2.     Lower costs (making the prices more competitive): 27 percent;

3.     Joining their mother companies (in the case of subcontractor companies): ten percent;

4.     A desire to hold on to or expand the mar­ket in third-party countries: ten percent;

5.     To produce goods destined for the Japa­nese market: six percent.

Factors Affecting Japanese Investment Abroad

Although, as previously stated, Arabs, Israelis, Iranians, Turks and others in the region have all expressed their eagerness to attract Japanese investment, the Middle East region has not re­ceived much attention from Japanese investors in the past. The Japanese are keenly aware of their dependence on the Middle East region for 82 percent of their oil supply, and they know that they must help the region to achieve politi­cal stability and regional peace. However, al­though the Government of Japan and various Japanese organizations are aware of the need to strengthen ties with the Middle East, Japanese businessmen are still reluctant to invest in the region, although some have recently started to show some interest.

It could be said that the Government of Japan could play a more positive role in bringing pri­vate investors to the region. The Japanese econ­omy may still be guided somewhat, but, it is free of government control and intervention. The gov­ernment is in no position to instruct or direct private investment activities to what it sees as being vital to the national interest, and the fact is that Japanese investors go any place that ap­pears safe and profitable.

Before dealing further with the question of why Japanese investment in the region is still low, one should consider why Japanese investment is high in the United States. One reason for this is the fact that more than 30 of the 50 states in the United States have offices in Japan to attract Japan’s direct invest­ment. Very few of the Arab countries have similar offices, and those that do exist were opened fairly recently.

Contrary to what some people believe, since the early 1970s, a number of Japanese companies have invested in Middle Eastern countries. One example is the Alexandria National Iron and Steel (ANSDK) plant in Egypt. ANSDK has consistently been increasing its production vol­ume and is planning to expand the plant in the very near future. There are, of course, several other examples. Nevertheless, the overall level of Japanese investments in the Middle Eastern countries is still not very high. Let me try to ex­amine the reason behind this.

When Japanese businessmen think of investing abroad, they always take into consideration three main factors: the size of the market, available manpower (both quality and quantity), and the social cultural, climatic, traditional and other institutional aspects of the host country. This is why the majority decide against investing in the Middle East, especially in the Mashreq region. I believe that understanding the problems and ob­stacles facing the Japanese companies that are already doing business in the Middle East will contribute to the Palestinians’ understanding of the Japanese way of thinking and will help them to develop a better approach toward the Japanese business society. I have discussed this topic with many Japanese businessmen over the last 20 years and the following is what I have discov­ered from our many conversations.

The first thing that has to be clarified is that a very simple economic theory does exist. This theory states that there are no borders facing private capital, and that it goes to any place in the world where profit can be expected; in other words, it moves according to its efficiency. We should always bear in mind the words ‘capital efficiency’ and ‘capital rationality’, as they are the principle and common language of private businesses all over the world, especially in the era of the ‘global’ village.

The second thing is that there are many business and investment opportunities in the world today. Other areas in the world such as the United States, Europe, transforming countries, South­east Asia, and so on are also equipped with good investment circumstances, climates, and systems and are welcoming foreign investment. Thus, a strong motive for Japanese businessmen to in­vest in the Middle East is still lacking.

The third thing is the difference in the nature of European, American and Japanese enterprises. Generally speaking, the Japanese are very cau­tious and sometimes take a very long time to reach final decisions. On the other hand, how­ever, they do precisely what they decide to do and are famous for keeping their promises. Peo­ple should keep this in mind when considering the Japanese business attitude towards the Mid­dle East region. I would note here that the Japa­nese became more careful in investing in the Middle East after their experience with the Iran-Japanese large-scale petro­chemical project, which finally fell through and caused heavy losses among the Japanese parties involved.

It seems to me that the Europeans and the Ameri­cans are bolder and do not take a long time to reach final decisions, but this is some­thing that could apply to both the advancing and withdraw­ing phases. It is difficult to determine which nature is ‘better’, the Japanese or the Euro­pean/ American, as it is all related to the differ­ences in cultures, societies, histories and so on.

With regard to the general conditions that must exist before anyone will invest capital abroad, the first one is, of course, politi­cal stability in the prospective investment coun­try. Other important conditions are mainly related to the policies of the host country. Policies considered beneficial by investors usu­ally include the free flow of capital, various kinds of tax incentives such as a sufficient pe­riod of tax holiday, low-cost utili­ties, such as electricity, water and so on, and the existence of infrastructures, work forces, and a social climate that is favorable to foreigners and foreign busi­ness activities.

In addition to these, the host country should have an office that is totally responsible for foreign investment at the relevant ministry. It is also desirable for those countries to have offices that specialize in giving necessary information re­garding investment. In addition, it is vital that the countries have information offices abroad to appeal to potential investors, bearing in mind the current level of competition to draw investment. Any answers or services provided by these of­fices to foreign potential investors in addition to foreigners who are already investing in the re­gion concerned must be provided in a rapid and accurate manner, thereby facilitating the making of final decisions regarding new investment or an increase in the current level of investment and helping to attract new investors.

The world, especially since the collapse of the former Soviet Union, has been moving toward privatization, deregulation and a market-oriented economy. ‘Globalization’ is now a commonly re­ferred to term, even in those countries that were closed to the outside world during the Cold War period. If the Arab World wants to be com­peti­tive in attracting foreign investment, then it needs to encourage entrepreneurs and give more free­dom to the private sector throughout the re­gion.

Other problems that Japanese busi­nessmen, econo­mists, and re­searchers specialized in the Middle East encounter is the lack of accurate, consistent and recent statistical data on the na­tional econ­omy upon which they can base in­vestment deci­sions or consider expanding cur­rent activities. It is much easier for them to con­vince their superi­ors in Japan to go ahead with a new project or a new expansion plan when they can strengthen their compelling opinions with reliable agreeable data.

What has been mentioned above thus far is ap­plicable to all or at least the majority of foreign investors from all over the world. There are, however, some unique factors involved in at­tracting Japanese investors.

First, Japan is a remote country physically and culturally in relation to the advanced nations of the West, which are usually far more familiar with Americans and Europeans than they are with the Japanese. If Japanese investment activi­ties are to increase and succeed, the Japanese and the people of this region must get to know each other better.

Second, the Japanese are much slower than many people imagine in making decisions, which, I admit, can be extremely annoying. However, as I mentioned before, once the Japa­nese make deci­sions, they are far more likely than many other businessmen and governments to carry out what they planned and are also far more likely to place a high priority on long-term rather than short-term interests. Japanese man­agement style is often different from Western management style, as it calls, amongst other things, for the develop­ment of communication channels from the bottom to the top, encourag­ing workers to take part in making management decisions to improve their efficiency.

Third, unfortunately, most Japanese investors in the Middle East are large corporations, which makes it difficult to find good counter­parts or joint-venture partners in the region. Smaller in­dustries in Japan do not have the need to ex­pand abroad nor did they have, until very re­cently, enough expertise to invest abroad. Of course, things have started to change, even in Japan, during the last few years and these small indus­tries today are more positive in considering in­vestment abroad. Their target region, however, is still limited mainly to nearby Asian countries or North America. I hope that the Palestinians will take into account these factors regarding the Japa­nese and start to take a new approach in commu­nicating with them concerning future in­vestment relations between the two.

Possible Cooperation Between the Two Parties

A cooperative relationship between Gaza, the West Bank and Japan in such fields as trade promotion, technical collaboration and invest­ment promotion in the near future might be pos­sible. However, to ensure that further progress is made, the parties concerned on both sides much work together towards the alleviation and elimi­nation of potential problems.

In the final analysis, the basis of the economic relationship between the two consists of the de­cisions arrived at on a commercial basis by pri­vate-sector companies. The role of the govern­ment, governmental institutions, and organiza­tions should be limited to providing support and, in some cases, the necessary environment. There are three basic forms of support worthy of men­tion, which are as follows:

1.     Publicity support, for example, concerning information on the business environment:

Unfortunately, there is still insufficient concrete information on Gaza and the West Bank in Japan to ensure that Japanese businessmen and compa­nies gain a proper understanding of facts con­cerning the business environment in general. If the Palestinians wish to publicize information on specific projects widely among Japanese compa­nies, they should consider using trade journals specialized in business promotion.

2.     Support for the personal interchange:

The future promotion of interchange between the private sectors will be the most essential prereq­uisite for the promotion of specific projects in the future. In my opinion, small-scale missions limited to specific industrial categories should be sent to Japan, thereby enabling projects to be widely publicized.

3.     Support for holding of seminars etc.: