Nissan has announced that it will build its new car in Sunderland from 2003. This is a major boost for the north-east of England and the British economy as a whole, because since the 1997 Asian economic crisis, inward investment projects have suffered, not just in Britain, but in other European countries as well. And Nissan’s decision is all the more important because it follows the company’s alliance with Renault in March. On the face of it, the decision to continue investing in the North East is a further indication that the UK remains an attractive location for inward investment, and that this may in part be because the UK is able to avoid the increased regulation and taxation associated with the economies inside Euroland. Japanese global foreign direct investment (FDI) rose steadily throughout the 1980s, increasing from $4.69bn in 1980 to $12.22bn by 1985, and a massive $68.16bn by 1989. The number of projects also rose steadily, form 2,442 worldwide in 1980 to 6,603 by 1989, which was the peak year for Japanese FDI. After that, the Japanese economy ran into trouble, and Japanese FDI has been much lower through the 1990s than it was in 1989. Nonetheless, it has still been at a high level. For instance, in 1994, FDI was two-thirds the level of 1989, but still four times as high as a decade earlier, in 1984. Although much of the focus is on inward investment in the manufacturing sector this does not give the full picture. Over the past 40 years only one-third of Japanese FDI around the world has been in manufacturing; two-thirds has been in other areas, including services, real estate and finance. The question now is how events in Japan will affect FDI. 1998 was the first year in which the Japanese economy contracted in every quarter, and immediate economic prospects in Japan are still poor. But despite the need for caution about the short-term outlook, there is reason for optimism about Japan’s medium-term prospects. This is mainly because restructuring and deregulation are now taking place in Japan, fuelling the Japanese stockmarket rally of earlier this year. The problem for the Japanese is that restructuring also makes the immediate situation worse, as it leads to cost cutting by firms, forcing up unemployment and putting pressure on investment. And these difficult economic conditions may discourage Japanese firms from making new investment overseas. Yet the restructuring and deregulation are making Japan an attractive location for international firms to invest in. Thus the ratio of outward FDI from Japan in relation to foreign direct investment into Japan has changed dramatically. In 1993 this ratio was 11.7. That is, Japanese outward investment was almost twelve times as large as investment into Japan. By 1997 the ratio was 9.8, but the latest available data, for the first half of fiscal 1998, shows a slump to 3.9. This will obviously affect the UK, which, until now, has been very successful in attracting inward investment. The UK’s share of foreign direct investment is second in the world and first in Europe, a lead which looks set to continue. Many overseas production bases are located in the UK. Yet it is not just in manufacturing that the UK fares well. Investment into the UK has been spread across a whole host of sectors. The City of London remains one of the world’s three most important financial centres, and it will remain one even if the UK does not join the euro. Elsewhere, FDI has become vital to the revitalisation of various regions in the UK. The downside of this investment is that it leaves some areas exposed to changing global economic conditions. Japanese FDI is also driving clustering in the UK. That is, a whole host of local suppliers often establish themselves next to the main producer. In turn, this attracts other firms. This clustering effect is then reinforced by foreign firms undertaking greater research, design and development and creating joint projects with local universities. Yet the nature of inward investment is changing. Because of the problems in Japan, new projects are not the main area of inward investment. Instead, the most important area is reinvestment by companies that are already based here. Second most important is merger and acquisition activity. New projects are down to third place. This is borne out by the results of a JETRO (Japanese External Trade Organisation) summary last December. The 14th survey of the European operations of Japanese companies in the manufacturing sector showed that 77% of firms expected to strengthen their research and development (R&D) structure within the EU. And 25% were considering joint R&D with local universities. All this shows how important it is for the UK to continue to maintain the factors that have made it an attractive location for inward investment. This means remaining competitive. Also, as the Asian currency crisis of 1997 highlighted, it is more important than ever to have sensible macroeconomic policies. This means not just sensible monetary and fiscal policy, but also further development of the UK’s education and science base. It is also vital that the UK does not join the euro, as this would not only prevent policies from being set in the UK’s best interests, but would result in big regional disparities. Joining EMU would deter inward investment into some of the UK regions that have been among the most successful recipients of it. Dr Gerard Lyons is Chief Economist at DKB International, the London based subsidiary of Japan’s Dai-Ichi Kangyo Bank.
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