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Tuesday, June 12, 2001

Osaka still investment 'black hole'

Foreign firms unimpressed by package of tax breaks, other incentives

Staff writer

OSAKA — With Osaka's economy still in the doldrums, city and prefectural officials are renewing efforts to bring more foreign direct investment to the region.

Local foreign diplomats and business officials remain highly skeptical of these efforts, claiming that measures taken by local governments to attract foreign investors remain half-baked compared to those being implemented in other Asian business centers.

The contrasting strategies deployed by Osaka officials and those in foreign communities to attract foreign investment were most visible at a recent meeting of nearly 30 business and consular officials from 19 countries.

There, prefectural officials from Osaka showcased several proposals aimed at attracting more foreign investment, including corporate tax breaks of up to 90 percent and a 50 percent reduction in the applicable real estate tax.

Municipal officials meanwhile presented a 50 percent subsidy, worth up to 1 million yen, to help offset the cost of feasibility studies and cover expenses such as those for lawyers, certified public accountants and interpreters.

The city is also offering rent-free space in its World Trade Center building for up to six months.

All of these incentives are contingent upon the foreign investor not being involved in either the retail sector or the adult entertainment sector.

The exclusion of the first sector provoked criticism, however, among those who attended the gathering.

"I'm disappointed to see the retail sector has been excluded. I understand there are political reasons for this, but it's a very important sector," said David Chapman, commercial consul at the British consulate in Osaka.

Officials of both the prefectural and city governments failed to explain why retail businesses had been excluded from the incentives package.

Kenneth Reidbord, the principal commercial consul at the U.S. consulate, suggested that large local department stores were probably opposed to measures that would further intensify competition in the sector.

"Hanshin and Hankyu department stores have a lot of power," he remarked, citing the two major department store operators in Osaka.

Although some of the financial incentives offered by the local authorities are new, most of the participants at the meeting were skeptical, describing the measures as insufficient.

"I see nothing here that would be attractive to major American firms looking to invest in Osaka," said Thomas Flippen, vice president and chairman of the Kansai chapter of the American Chamber of Commerce in Japan.

As several prominent foreign businessmen have observed, Osaka has long been something of a "black hole" for foreign direct investment.

A study released last year by the Ministry of Economy, Trade and Industry showed that the number of registered foreign-affiliated companies in Osaka has fallen from 209 in 1995 to 186 as of 1998.

By contrast, the Tokyo metropolitan area was home to nearly 2,909 foreign companies as of the end of 1998, up from 2,732 in 1995.

Overall, the number of foreign firms with a presence in Japan totaled 3,321 in 1998, compared with 3,182 in 1995, according to the survey.

Many experts say that Osaka's failure to attract non-Japanese investment cannot be fully attributed to the fact that it is not an administrative or political center like Tokyo.

Many Kansai-based foreign diplomats and businesses continue to point to more fundamental problems in the Osaka business world.

The foreign community here warns, for example, that Osaka's leaders have failed to address what many believe is now a major blight on the quest to attract foreign investment — the high costs incurred by Kansai International Airport.

Having been the pride of the Kansai region when it opened in 1994, the airport's sky-high landing fees — a cool 830,000 yen for a fully loaded Boeing 747 — are 21/2 times that being charged at South Korea's new airport near Inchon.

This has led many airlines to cancel or suspend flights, especially to the U.S.

The situation has deteriorated to such an extent that Osaka's domestic-only airport, which is located in the city of Itami, conducted an advertising campaign in March, promoting itself as the "Gateway to North America."

According to the campaign, a passenger could reach 18 cities in North America by flying from Itami through Narita airport in Chiba Prefecture.

By contrast, Kansai International Airport serves less than half that number of North American cities.

Another foreign investment barrier is said to be the lack of facilities such as international schools and clubs, a sphere in which the neighboring city of Kobe is prolific.

Critics also maintain that Osaka's less-than-adequate living environment may be a reason why many foreign investors shun the city and the prefecture.

With few public parks and a dense smog that hangs over the city almost all year around, most overseas business people prefer to live in Kobe or Kyoto, for example, they say.

Even with the new package of financial incentives, many in the international community have repeatedly warned that, should these issues fail to be addressed, it will remain difficult for the city and prefecture to attract a suitable quota of foreign direct investment.

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