Business with China de-emphasized in favor of diversifying to emerging marketsBy Peter A. Buxbaum, AJOJTForeign companies plan on expanding their operations in Japan, while Japanese companies are placing a greater emphasis on international, rather than domestic, markets. Those were two of the key findings of two studies released by the Japan External Trade Organization (JETRO) earlier this year, one on foreign-affiliated firms operating in Japan and the other on the international activities of Japanese companies. Another interesting result of the second study was that expansion by Japanese firms in China may be leveling off, in favor of a more diversified approach to international expansion. According to the first study, 63.1% of respondents plan to expand their business in Japan in the future, up six points from last year’s survey. This is the highest level since the survey began in 1996, reflecting current favorable economic conditions in Japan. The percentage of companies reporting increased year-on-year sales was 65.1%, according to the survey, the highest figure since the survey began, while the percentage reporting decreased sales was 15.7%, the lowest figure yet recorded. Paradoxically, the second JETRO study showed that the percentage of Japanese firms planning to expand their business domestically stood at 50.2% while those planning new investments overseas in the next three years was 66.4%. Three times as many foreign companies expect the Japanese economy to get better rather than worsen, explained Manabu Saito, a JETRO director who was involved in conducting the studies. “This illustrates the positive assessment of foreign-invested companies of the Japanese economy,” he said. “Additionally, expectations of future company performance are generally strong. Almost half of the responding companies expect their performance to improve over the next one to two years,” while less than seven percent expect their performance to worsen. As for the increased emphasis by Japanese companies on overseas rather than domestic expansion, Saito said that this reflects the intensions of Japanese firms to exploit growth opportunities in emerging markets. “Japanese firms are recognizing that growth potential of Japanese market would likely to be limited in comparison with those of emerging markets due to maturity and declining population,” he said. This may reflect a disconnect in the perceptions among Japanese and foreign firms about the future growth prospects in the Japanese economy, or there may be another explanation. According to the JETRO study, research and development is one of the areas being targeted by foreign firms for expansion in Japan. “Firms are increasingly eyeing R&D functions - compared with other functions such as manufacturing, distribution or services - for their business expansion in the country,” the survey said. Three-quarters of foreign companies conducting R&D in Japan are doing so, “…to strengthen development of products for the Japanese market,” according to Saito. Other major reasons involve establishing or continuing relationships with Japanese knowledge workers and to strengthen dealings with existing customers in Japan. JETRO research indicates that chemical and pharmaceutical companies are among the biggest investors in R&D facilities in Japan, Saito said. “The automotive and IT industries are also engaged in product development,” he said. Among the companies planning to expand business in Japan, the highest proportion originate in Belgium, Austria, the Netherlands, India, Italy, China, Israel, Spain, Sweden, and Germany, Saito said. Among industries seeking expansion in the Japanese market, companies involved in pharmaceuticals, cosmetics, information technology, and business services ranked highest. Another factor accounting for the increased interest among foreign firms in Japan involves legislation that became effective in May 2007, which allows foreign firms to use the “triangular merger” method to acquire stakes in Japanes