Surprises loom large over Japanese investment in India, which plummeted in 2020 against the spurring growth in investment by global riche countries like USA, Singapore, UK and the Netherlands. Analysts were agog with the Japanese volte-face to India’s FDI potential, despite the fact that total FDI flow in India spurred during COVID 19 pandemic. It increased by over 19 percent in 2020-21.
ASEAN and China are the hotbed for Japanese investors in Asia. Even though Japanese investment in these areas fell during pandemic, the magnitude of the fall was lower than in India. Japanese investment in ASEAN and China fell by 34.4 percent and 7.5 percent respectively in 2020 over 2019. Against these numbers, Japanese investment in India collapsed by over 54 percent during the same period. This is against the backdrop of India emerging a strong challenger to Thailand in the preceding year – a conventional hotbed for Japanese investors in Asia. In 2019, Japanese investment in Thailand was marginally higher by 5.5 percent than in India. In 2020, Japanese investment in Thailand was four times higher than India. One reason could be the re-shoring of Japanese investment from China to Thailand, in the event of large Japanese government incentive to decouple from China.
US investment skyrocketed in India, negating the COVID 19 impact. It spurred by over 290 percent in 2020. This was followed by other major foreign investors, excepting Japan. Singapore, the Netherlands and UK – all sustained their investment growth in 2020. They all reposed confidence in India’s expected bounce back in the growth in 2021, which was forecasted by IMF and World Bank.
Why has, then, Japan reacted differently in India during pandemic? The crux of the situation is the difference in the investment direction between Japan and the major foreign investors in India. USA, the trigger for the FDI surge in India, adopted a new pattern of overseas investment, keeping in view to decimate the COVID 19 impact in the economy. It splurged investment in digital economy which works well during pandemic. But, Japan refrained from any new mode of overseas investment in the wake of pandemic. It preferred to be circumscribed by supply chain connectivity as the core business activity in Asia.
The predominance of Japanese investment in ASEAN and China was geared by supply chain connectivity in the backdrop of cost competitiveness. They are linked to both for procurement of raw materials and parts as well as export to the region. Majority of raw materials and parts suppliers for Japanese companies in Asia and Oceana are located in ASEAN, China, S. Korea and partly in India. According to a JETRO survey, over 85 percent of the procurement of raw materials and parts for Japanese affiliates in ASEAN and Ocean is from these nations.
Vis-à-vis, the important export markets for Japanese affiliates in Asia and Oceana are ASEAN, China and South Korea. The three nations and the region account for 75 percent of the market for Japanese affiliates located in S. Korea and Thailand. Eventually, ASEAN , China and S. Korea are both important sources for procurement of raw materials and parts as well as export markets for Japanese affiliates.
Having established strong networks of supply chain connectivity, it seems it was an uphill task for the Japanese investors to outdo the connectivity and shift to a new mode of investment. Japanese investors also pinned big hope to reap the benefits of RCEP( Regional Comprehensive Economic Partnership) and other FTAs in Asia, which provide higher potential to strengthen the supply chain connectivity. RCEP, the biggest multilateral FTA, comprising of 15 members of ASEAN-10, China, S. Korea, Japan, Australia and New Zealand, is scheduled to be in force in January 2022. It represents approximately 30 percent of global GDP. Intra-RCEP trade accounts for 40 percent of the members total trade.
Demand for digital services increased rapidly with COVID 19 lockdown to reduce the human contract . US investors were allured by India, which will provide 1 trillion US Dollar digital market by 2025. India is the second largest internet connection nation in the world. With nearly half a billion internet connections and the second most smartphone users, India has emerged a global leader for digital economy.
Japanese rate of increase in digital transformation is slower than the USA, China, EU, S. Korea and even India, according to a McKinsey survey. One of the reasons for the Japanese slow pace was a lack of adaptability to digital transformation. They do not feel that they are sufficiently prepared for digital transformation. The barriers, which restricted Japanese challenges for digital transformation, were lack of digital talents and understanding among the senior corporate managers. The survey focused that cultural entrenchment of the senior managers (such as seniority by age, lifelong employment in one company) deflated the understanding of the benefits of digital economy. Eventually, the lack of support from the senior managers shadowed the challenges to digital transformation in Japan, according to the survey.
Junked by lack of digital talents, Japan should rope in Indian digital talents. India is one of the biggest pool for digital talents. It has nearly a 1.17 million digitally skilled employee base, according to NASSCOM. Thanks to the Japanese government for easing visa rules in April 2019. It should poise for a new direction in India-Japan investment and economic cooperation.