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Kenneth Fukuda

"Time and the world do not stand still. Change is the law of life. And those who look only to the past or the present are certain to miss the future."
U.S. President John F. Kennedy



China - Japan - U.S. Foreign Investment Issues

Increasing China - Japan Foreign Investment  
China - Japan and the United States are critical strategic partners in the world economy.  In order to improve that relationship, China and Japan’s economies needs to be robust and the their governments need to complete various reforms to encourage growth and corporate restructuring.  It is essential for China and Japan to promote entrepreneurs and job creation in modern business sectors.

China and Japan’s economic growth and recovery have been steady in large measure because reforms have made China and Japan a more open business environment.  In recent years, corporate earnings have improved in technology, manufacturing and service industries.  The liberalized rules for new businesses has made it easier for foreign businesses to penetrate the China and Japanese markets.   China and Japanese capital investment and consumer consumption have increased.

The China Model For Growth          
The spectacular growth of China has been largely a result of the enormous foreign investment in its economy.  Japan certainly lags behind China in inbound foreign investment.  Foreign investment in Japan represents only a tiny portion of its entire economy.

Foreign investment in China and Japan, both inbound and outbound, increased significantly in recent years.  This increase occurred for several reasons, including an increase in joint ventures and alliances with foreign firms to achieve global competition, business reorganization and restructuring in China and Japan and reforms in government regulations that encouraged foreign investment.

In the past few years, cross investment between China and Japan and the U.S. has been promoted by the governments of the U.S. and both China and Japan.  It is essential for large-scale Chinese and Japanese companies as well as for smaller businesses and individuals to increase investment in the U.S.

Inbound foreign investment in China and Japan increases options for consumers, promotes the introduction of American technology and management systems and creation of new jobs.  It is clear that foreign investment in the U.S. has increased employment opportunities and improved productivity in American states, including many disadvantaged areas in the U.S.     President Obama has initiated U.S.-China-Japanese investment initiatives to increase business cross-fertilization between the countries.  Each country recognizes the inherent need to exchange leading edge technologies and new management practices and innovation.

In response to proposals from the Japan investment initiatives and requests from foreign companies in Japan, the Japanese government have implemented responsive regulations.  Japanese regulations acknowledge mergers in exchange for parent company shares and/or cash.  Foreign companies may purchase and reorganize Japanese companies using their own shares or cash in exchange.

The U.S. acknowledged these modernization efforts by Japan.  Since tax concerns are essential to American companies in their decisions to participate in mergers or acquisitions, the U.S. government has focused upon the availability to foreign investors of tax provisions similar to the U.S. such as deferral of capital gains taxes in stock swaps to promote M&A activity.  Liberalization of Japan’s Commercial Code will encourage M&A activity.

With regard to Japan’s Commercial Code, the government has proposed changes, including making triangular mergers using foreign shares and cash mergers.  The Japanese government has proposed other modern features to encourage corporate restructuring and foreign investment in Japan.

Japan targeted doubling of foreign investment in the recent 5 year period.  Tthe Japanese government passed a series of measures to promote foreign investment in Japan.  A Support Center was established in the Japan External Trade Organization (JETRO) to provide support to foreign companies desiring to enter the Japan market.  The Support Center offers consultative services to establish a business in Japan, and assists foreign companies with new start-ups in Japan.  This program has assisted a significant number of new foreign business operations in Japan.

Legislative Measures in Japan
Japan has taken several legislative measures to improve its investment climate for foreign businesses.  However, more reform is required, particularly to encourage Japanese business investment outside Japan, including in the U.S.  Increased inbound investment in the U.S. will offer mutual benefits for Japan and the U.S. for a variety of reasons.

Japan has encouraged outside investment for the past decade through financial reform and other governmental means.  In order to encourage foreign investment, Japan has adopted changes to business law and accounting principles which have motivated foreign investment in Japanese business.

In 2003, in order to reduce impediments to foreign combinations, triangular mergers and cash mergers were approved in order to encourage mergers in Japan by foreign parent companies.  Such cross-fertilization will reap substantial benefits for Japan and its trading partners.

Mergers & Acquisitions
The American economy benefited greatly from legislation that encouraged M&A activity commencing over 20 years ago.  The global leadership position of the U.S. derived in large measure from its liberal M&A regulations.

The United States and other western countries permit acquisitions through stock swaps.  The U.S. authorizes triangular mergers under which a target company is merged into a subsidiary formed by the buying company.  The buying company issues its own shares to the shareholders of the target firm in consideration for the purchase, with the result that the target company becomes a wholly-owned subsidiary of the buying company.

For American and other international businesses, the Japan market offers many attractive features.  Japan’s domestic market represents a significant portion of its worldwide GDP;  Japan offers a skilled, dedicated workforce and a high technology industrial environment and advantages as a focal point for the Asian market.  Japan’s well organized business infrastructure offers strong intellectual property protections.

M & A Transactions in Japan
 International mergers and acquisitions (M&A) remain a matter of increasing interest for both the U.S. and Japan.  The American government has worked with the Japanese government to expand the range of M&A techniques to include triangular mergers and cash mergers as tools for foreign companies seeking to invest in Japan.

Japan has created Special Zones in order to apply deregulation measures in various sectors to encourage foreign investment.  The forces of inertia have slowed the progress of implementation.

 There have been a number of high-profile American M & A transactions in Japan inrecent years.  For example, Ripplewood restructured the Seagaia project in Kyushu; Colony Capital invested in the Daiei Fukuoka project in Fukuoka; Kodak invested in Nagano; Walmart joined Seiyu in Japan.  These restructuring transactions have created and saved Japanese jobs and revitalized local economies in Japan.

The U.S. Model
In order to achieve globalization and regain its potent position in the world marketplace, Japanese businesses needs to invest substantially in the U.S. through new business, mergers and acquisitions.  Many other European (UK, France, Netherlands) and other countries have continued to recognize the benefits of America’s open conomy, strong growth and high rate of return.  Foreign investment into the U.S. from these countries and others has increased dramatically in the past several years.     
For many years, the U.S. has recognized that foreign investment is a significant contributor to the long-term growth of its economy.  Foreign investment in the U.S. accounts for a growing and significant share of its private sector GDP.  Japan’s U.S. contribution is largely affected by American employment by Japanese automakers such as Toyota and Honda.  Japanese businesses at all levels need to participate in this globalization effort.

Many American States have offices that promote foreign investment.  Many States offer incentives such as tax exemptions and provide investment in essential infrastructure.  Certain States have foreign offices which have attracted Japanese business.  Foreign investors in the U.S. benefit from its supportive institutions, its open economy, its productive employment pool and its welcoming attitude.

U.S. Opportunities for Japanese Businesses and Investors
The U.S. offers major business opportunities because of its wealth, market opportunities and transparency.  However, for various reasons, Japanese ompanies have been reluctant to invest in the U.S. after their experience in the 1980’s and early 90’s.  The U.S. has taken quick and appropriate actions to remedy problems in its corporate regulatory systems in order to regain buoyancy in the investment community.            

The American government model is rapidly adaptive since it continually seeks to restore and improve confidence in the U.S. economy and institutions to motivate trade and investment inflows.  The U.S. government quickly implements new methods to encourage new business opportunities and to improve the functioning of all U.S. businesses, whether domestic or international.
American business great vast experience in adopting the usage of information technology and other emerging technologies to constantly improve the flow of trade and business transparently.  It is well known that American business and government is very adaptive to the needs of private business and foreign governments to implement new measures and methods to solve problems and maximize business opportunities.
Japan has persuaded the U.S. to take several steps to encourage inbound Japan investment.  Practical measures have included improved visa procedures, easier driver license requirements in the U.S. and reduced surcharge tax requirements for foreign investment.     Other measures are necessary.  For example, the additional U.S. anti-terrorism inspections and other measures in the U.S. have caused cargo delays and difficulties for Japanese shippers and businesses.

Working Together to Make Improvements
The U.S. government has advised Japan that relatively few investment opportunities are available in Japan to American investors.  That quandary has hindered foreign investment in Japan.    The U.S. has discussed its concerns regarding the implications for the status of foreign university branches in Japan in terms of immigration status of students, taxes and related matters.  Additional flexibility is required in Japan.
The U.S. has requested that foreign university campuses in Japan be recognized as authorized schools in order to promote broader educational integration.  The U.S. has also requested provision of visas conferring immigration status covering the full term of studies for students at foreign university campuses not authorized as Japanese universities.  The Japanese government’s study group has made certain proposals, including allowing the foreign university branch being treated as a foreign university operating in Japan.    The Japanese Government explained that the current treatment of foreign university branches is related to Japan's educational system and immigration law and proferred additional study in the matter.
Japanese citizens required to move to the U.S. for business reasons have noted the difficulties of applying for visas to the U.S., including the lengthy backlogs.  It has been requested that the U.S. permit Japanese citizens who apply for Treaty Trader or Investor (E-1 and E-2) visas to be exempt from personal appearance requirements.  The U.S. consulates have added visa officers in Tokyo and Osaka and improved flexibility for applicants to reduce backlogs.
Chinese and Japanese citizens have expressed concerns regarding issuance of state driver's licenses for Japanese citizens in non-work status i.e. those not holding Social Security Numbers.  All U.S. states have taken measures to facilitate this process for Chinese and Japanese without social security numbers.
The Chinese and Japanese governments have expressed concerns about the Sarbanes-Oxley Act relative to Japanese firms and auditors.  For example, the Securities and Exchange Commission (SEC) adopted an exemption for Japan businesses with boards of independent auditors authorized by home country requirements.  Firms using an audit committee must have an audit committee with 100% independent directors.  The Public Company Accounting Oversight Board and the SEC administer accountants who audit financial statements of public companies in U.S. markets.  Foreign firms must register, but informational requirements are somewhat reduced and confidential information in Japan may not be required to be disclosed.    

Chinese and Japanese businesses are very nervous about the escalating costs of legal expenses in the U.S.  Excessive legal costs and awards deter foreign businesses.  The question of excessive damage awards in the U.S. remains a concern to both U.S. and Chinese and Japanese businesses.  The government and the courts have recognized these concerns and have made proposals to reduce inordinate court awards.
The Chinese and Japanese governments and their respective businesses have recognized the inherent value to their countries of encouraging both inbound and outbound foreign investment.  The process of recognition needs to continue to trickle down to the lower levels of government, business and citizenry.

It is apparent that Chinese and Japanese have accepted this business reality and are adopting essential measures to ensure increased foreign investment at all levels.  Chinese and Japanese consumers have also accepted the intrinsic value of American and other foreign goods.

As the Chinese and Japanese economies continues their growth and Chinese and Japanese investors and businesses increase capital investment outside their countries, the movement toward globalization will accelerate. 

China and Japan need to address basic structural issues and implement reforms to encourage foreign investment opportunities.    The Chinese and Japanese governments are relentlessly receptive to the needs of international businesses in order to ensure that international trade and investment is enhanced.  A solid foundation has been laid for foreign investment to continue to accelerate for the benefit of China, Japan and the U.S.



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