Japanese Investment in the World Economy
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Japanese Investment in the World Economy

A Study of Strategic Themes in the Internationalisation of Japanese Industry

Roger Farrell

This book examines Japanese Foreign Direct Investment (FDI) in the world economy over more than five decades. It provides a unique focus on the internationalisation experience of selected industries, such as forestry, textiles, electronics, motor vehicles, steel and services as well as case studies of individual firms. Japanese Investment in the World Economy is distinctive in that it examines overseas investment by firms in the primary, manufacturing and services sectors over the period in which the Japanese economy became the second largest in the world.
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Chapter 6: Financing Investment

Roger Farrell


INTRODUCTION The financial organisation and funding of Japanese direct investment has evolved from the 1950s when foreign exchange restrictions effectively limited overseas investment, to more sophisticated investment structures in later years. The financing of Japanese foreign direct investment has been through a varying blend of equity capital from the parent company; reinvestment from earnings of the subsidiary; borrowings by either the parent or subsidiary in Japan or the host economy; or other financial instruments such as corporate bond issues on international markets. Since the 1970s, equity capital has been the predominant form of funding for overseas subsidiaries, while reinvestment has been comparatively unimportant – possibly due to the comparatively low profitability of Japanese FDI for much of the post-war period. Loans to parents or subsidiary companies were a significant source of finance for FDI until the end of the 1990s but have been negligible since then. Equity contributions from parents to subsidiaries could also be funded by borrowing in Japan, but this is not evident in the available statistics. In the early phase of Japanese modernisation, overseas investment occurred typically as an adjunct to international trade and trading companies were major investors (Wilkins, 1990). As Japan became the world’s second largest economy by the 1970s, Japanese banks and other financial institutions established overseas representative offices and branches to facilitate the global operations of their domestic clients (Tamaki, 1990). This international financial network was able to lend directly to overseas Japanese affiliates. A wide range of factors,...

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