Japanese firms expect lower profits from overseas plants
Japanese firms expect lower profits from overseas plants
TOKYO (Reuter): Japanese firms earn less than they had hoped from their factories overseas, the government said in a report.
Even more galling is that U.S. and British companies are bringing home bigger profits from such operations.
While cautioning firms to study costs and local labor practices more carefully before setting up plants overseas, the report also urged them to be more adventurous in going to developing countries and emerging markets.
After a decade of boosting overseas production, "profits Japanese firms earn from their direct investment are still less than those earned by overseas units of U.S. and British companies," said a Trade White Paper published by the Ministry of International Trade and Industry (MITI).
The yen's sharp rise against the dollar since the mid-1980s and the need to ease trade friction with major partners have prompted firms to move factories to cheaper locations overseas.
Japanese direct investment is now concentrated in emerging Asian economies and the United States rather than in Europe and other parts of the world. Cumulative direct investment by Japanese firms up to mid-1995 totaled US$485.3 billion.
"Expansion of Japanese business through direct investment has caused a big change in Japan's export and import structures. New problems associated with direct investment are now emerging," the report said.
Production shifts overseas have helped curb Japan's exports, resulting in a substantial fall in its trade surplus, which has often been a source of tension with trading partners.
MITI's survey of 250 Japanese companies found that more than 30 percent of them have either withdrawn from overseas production or cut back overseas operations.
More than half the firms that have withdrawn from overseas production said they did so because they could not expect any improvement in earnings.
Reforms
The report called for aggressive reforms in Japanese business structures so as to promote new industries and thus to create new jobs to make up for losses of many jobs in Japan caused by increased production shift abroad.
"It is inevitable for Japan to carry out economic structural reforms to make investment inside Japan more attractive by rectifying its costly system and promoting innovations," the report said.
Increased overseas production could also create a problem in the quality of research and development as products which will be manufactured at overseas plants are still developed mainly at research facilities based in Japan.
"If relations between overseas production units and development centers become loose, they could adversely affect the level of technology," it said.
The report called on Japanese firms to make more thorough studies of conditions of other countries before moving to them, including local labor practices and suppliers of materials and components needed for production.
"It is sometimes pointed out that Japanese firms tend not to pay due consideration to local business practices compared with European and U.S. companies," it said.
As an example, it said Japanese firms do not appoint enough local people to executive jobs at their overseas units.
The report also said Japanese direct investment is too concentrated in a small number of countries in which the presence of other foreign firms shows there is no risk in such investment.
"Japanese firms now lag behind European and U.S. companies, which have been very active in investing in so-called emerging economies such as those in central and Eastern Europe, Latin America and India," it said.