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Tuesday, Jan. 25, 2011
HOTLINE TO NAGATACHO
So you want Japan to be a true Asian business hub?
By ROBERTO DE VIDO
Dear Economy, Trade and Industry Minister Banri Kaieda: Last month your ministry published "Current Policies to Make Japan Asia's Center for Business."
In the PowerPoint presentation available on your website, you note that from 2007 to 2009 Japan slipped badly as an Asian business investment destination for Western and Asian companies, while unsurprisingly, China made huge gains.
Now we all know there are three kinds of lies: lies, damned lies and statistics, but these are your statistics, so presumably you've had your people present these numbers in the best possible light.
As a possible location for an Asian headquarters, Japan slid from second among six countries to a tie with India for fourth. Only South Korea is viewed as less attractive.
And while Japan ranked first in 2007 as a possible location for an Asian research and development center, by 2009 it had fallen behind China and was only ahead of India by the width of a silicon chip.
It is on these two areas that your ministry has chosen — quite sensibly, given Japan's lack of competitiveness as, for example, a production center — to focus its ¥2 billion "Asia Business Location Promotion Project Subsidy" budget.
Your policy document starts off with a statement of intent: "To motivate global companies to locate in Japan, the government will create a favorable environment for businesses through cross-cutting efforts and implement a policy package consisting of incentives, such as location subsidies and corporate tax cuts."
Certainly it's true Japan has one of the least friendly tax regimes in Asia for both corporations and individuals, and certainly any offered location subsidies will be welcomed by companies setting up operations here, but will a few tweaks to the tax code and a handful of subsidies really transform Japan into an "Asian business hub"?
Will a few tweaks to the tax code — i.e. reducing "certified" companies' tax rates to 28.5 percent for five years — really persuade companies to set up in Japan rather than, say, Hong Kong, where the corporate tax rate is 16.5 percent?
Let's look at Hong Kong for a moment, as I would suggest it is and has been Asia's pre-eminent "business hub" for decades (though recently it has lost quite a bit of ground to the many Chinese cities and provinces it once served exclusively).
Hong Kong does have an enormously attractive tax regime for businesses and their employees, but tax is far from the former colony's only attribute as a location for a regional headquarters. Hong Kong's government — both before and after the handover from Great Britain to China in 1997 — makes it delightfully easy to set up and operate a business.
One legacy of its history as a British colony is an English-friendly business environment. Another is a school system that offers expatriate workers high-quality English-language educational options for their children. And yes, housing is expensive — though no more expensive than Japan's — but many other costs are relatively low.
The biggest factor in Hong Kong's success, however, is geographic. It is located, in the best tradition of hubs, near the geographic center of Asia. In the years before China's important cities were livable (a relatively recent development) for foreign executives with families, Hong Kong was the ideal base from which to conduct China business. From Hong Kong it is easy to catch the first flight of the day to Shanghai, conduct eight hours of meetings downtown, and return home for a late dinner. Hong Kong shares a culture with mainland China, and it offers a large pool of workers who have China-relevant business experience and language ability.
Hong Kong is also close to Thailand and Vietnam, and not far from Japan, Korea, Malaysia, Indonesia and Singapore. For companies that include Australia and New Zealand in an "Asia-Pac" structure, Hong Kong is not nearly as close as Singapore, but a lot closer than Japan.
To position Japan as an Asian business hub, you're not going to win on geography, Minister, barring a series of very dramatic tectonic plate shifts. And to be frank, the tax holiday you offer still leaves you far from competitive with Hong Kong.
So let's forget about trying to make Japan attractive to global companies doing business in Southeast Asia. You're just too far away. China is the flavor of the month, and if you believe some pundits, it's the flavor of the century.
The good news is that Japan is close to China. The even better news is that Japan has a lot to offer businesses that want to do business in China.
Perhaps most important, it offers intellectual property security, which is the primary concern of nearly every global company doing business in China. Can you position Japan as the R&D hub for businesses producing goods in China? That's what I'd do.
What do those companies need from you in addition to a secure environment in which to develop intellectual property? They need locations in Japan that are convenient to airports that provide access to a broad swath of Chinese cities. They'd also like those locations to be relatively near to urban centers that offer employees attractive housing, dining and entertainment options.
They need those tax breaks you've offered, but they need greater assurance from your government that the deals they cut in establishing operations here will last longer than, well, your party's likely tenure in power. The cost of setting up a regional research and development center makes the tax holiday you're offering a very minor inducement, especially as your offer has an imminent expiration date.
They need immigration policies that will let them decide what employees are required to staff their facility, and if you run into your counterparts at the ministries of education and justice, you might let them know that English- and other foreign language-speakers may be required, which may disqualify many of the Japanese citizens you'd like to see get jobs. And of course, they'll need a streamlined visa procedure for any foreign workers, even if those workers are brown-skinned Asians.
They need you to create a business environment that is quickly and easily navigable by foreigners, i.e. in English, and that is, above all, flexible. Businesses need to be able to do whatever they need to do to operate, survive and thrive, without stumbling over bureaucratic obstacles all the time.
What they don't need, Minister, is a Japan "that can say 'no.' " Business investors need to hear "yes" and "no problem" and "we can get that done for you yesterday."
You can do it, I'm sure, and your efforts will pay large economic dividends for decades to come.