World Economy

FDI Changing Corporate Japan

FDI Changing Corporate JapanFDI Changing Corporate Japan

Japan is one of the most uncertainty-avoiding countries. Indeed, Japanese firms exhibit the lowest level of risk taking, Geert Hofstede, a social psychologist, said.

“In corporate Japan, a lot of time and effort is put into feasibility studies and all the risk factors must be worked out before any project can start. Managers ask for all the detailed facts and figures before taking any decision”, the World Economic Forum quoted him as saying in a press release.

Increasing globalization recently has been changing corporate Japan. For example, there are hundreds of foreign-owned corporations located in Japan. Foreign investors (companies) bring different technologies and management skills into the foreign-owned firms.

Also, studies on the roles of international institutional investment show that foreign institutional investors export good corporate governance practices around the world and that monitoring and activism by foreign institutions lead to better firm performance. Thus, financial globalization and liberalization strengthen market forces to promote good corporate governance practices and change corporate cultures regarding risk taking.

 Risk Taking

Entrepreneurs are thought to be capable of innovation and risk taking. Innovation and risk taking are widely viewed as critical components to the success of any economy. Also, most private companies are run by entrepreneurs, but few studies focus on risk taking in private firms.

Unlike publicly traded firms with dispersed ownership, entrepreneurs are less likely to avoid value-enhancing risky projects in the context of preserving private benefits. On the other hand, entrepreneurs are likely to invest more conservatively unless they hold a diversified portfolio of firms. Also, bankruptcy laws protect the assets of debtors from creditors, thus risk taking in private entrepreneurial firms strongly depends on the harshness of the consequences of personal bankruptcy laws.

In Japan, entrepreneurs usually pledge their residential properties as collateral, and their spouse and relatives provide unlimited liability guarantees as co-signers for entrepreneurial small businesses.

Meanwhile, foreign-owned corporations may have a different corporate culture regarding risk taking.

“The ambiguities regarding risk taking of private firms motivate our empirical investigation. We use the micro databases of the Basic Survey of Japanese Business Structure and Activities conducted by the Ministry of Economy, Trade and Industry and the Basic Survey on Small and Medium Enterprises conducted by the Small and Medium Enterprise Agency.

“The main purpose of the surveys is to acquire collective and quantitative information on diversification, globalization, internationalization, and the soft economy of Japanese enterprises. We provide empirical evidence of the relation between instrumented risk taking and both company assets and sales growth, as well as the relationship between ownership and risk taking”, the report said.

 Corporate Earnings

According to WEF regression results, whole foreign ownership is associated with a 69.5% (40.8%) rise in risk taking above its mean.

A one standard deviation increase in risk taking raises the annual ‘earnings before interest, tax, depreciation and amortization’/assets ratio of small and medium-sized business by 4.8%, and of large private firms by 3.5%. It is notable that over the sample period 2003-2012, the same average annual ratio is only 6.9% for small and medium-sized firms and 9.1% for large private firms. Additionally, higher risk-taking firms had smaller cash flow shortfalls during the credit crisis of 2008-2009.

Foreign-owned private firms are much more inclined to risk-taking than domestically owned private firms. Risk taking has statistically and economically significant effects on corporate earnings.