Appendix E—Response to Questions taken on Notice: DFAT and Austrade
Japan
Japan’s inward stock of FDI was only 3 per cent of GDP, the
lowest in the OECD according to the OECD’s 2011 Economic Survey of Japan.[1]
Foreign-controlled affiliates accounted for only 3.1 per cent of Japan’s total
turnover in manufacturing, and 1.4 per cent in services, both the lowest in the
OECD. According to the OECD’s FDI restrictiveness index, Japan is the
fourth-most restrictive country in the OECD (behind Iceland, Russia and New
Zealand).[2] Japan also has the strongest
restrictions on foreign-equity investments, though other types of restrictions are
less onerous, such as on the appointment of foreign managers.
The Japanese government acknowledges many of the
restrictions facing foreign investors in Japan. The Expert Committee on FDI
Promotion, established in 2008 under the Minister of Economic and Fiscal Policy
in the Cabinet Office, identified in its final report issued in May 2008[3]
a wide range of barriers and disincentives to FDI in Japan:
- regulatory and
administrative procedures;
- strong resistance to
FDI from the corporate sector;
- high corporate tax
rates;
- lack of transparency
on tax treatment for complex transactions;
- limited information
on regional markets;
- insufficient capacity
in the regions to deal with FDI; and
- language barriers.
Regarding the regulatory and administrative barriers facing
potential foreign investors in Japan, the Expert Committee concluded that:
- deregulation has not
progressed as completely or as fast as necessary to promote significant growth
in foreign investment;
- administrative
guidance remains difficult to understand;
- the time required for
administrative procedures is lengthy and unpredictable;
- the forms to be
completed are numerous and complicated;
- implementation of
regulation lacks transparency, consistency and predictability;
- verbal guidance
during informal discussions with government officials is more prevalent than public
comments and written responses such as no-action letters;
- complex regulatory
and administrative procedures result in high regulatory compliance costs, which
add to business costs;
- mergers and
acquisition (M&A) takeover rules remain unclear, largely owing to the lack
of accumulation of precedents and judicial reviews;
- despite new rules
allowing triangular mergers, actual transactions are difficult to conclude
owing to complex procedures.
Many of these restrictions apply equally to domestic
companies, according to the Expert Committee. But corporate management in
Japan displays an adversarial attitude to foreign investors. Japanese firms
actively discourage foreign investment through cross-shareholdings and the use
of defensive measures such as poison-pill takeover measures.
To address some of these issues, the Japanese government
implemented the Inward Investment Promotion Program in 2010, cutting the
corporate tax rate, deregulating investment procedures, and offering incentives
such as preferential tax treatment and subsidies. But many of these measures
are yet to come into effect.
There are very few cases of the Japanese government failing
to approve foreign investment applications; only one foreign-investment request
has been declined in the last thirty years.[4]
Japan’s legal framework for foreign investment
Japan does not have a screening process for inward FDI per
se, requiring in most cases only notification after the fact. But in
certain industries, advance notice is still required. The laws governing such
cases, as well as the foreign ownership thresholds that apply in each case, are
discussed below.
Foreign investment in Japan is regulated primarily by the Foreign
Exchange and Foreign Trade Act (FEFTA)[5], supplemented by the
Cabinet Order on Inward Direct Investment (IDI)[6] and the Ministerial
Ordinance on IDI[7]. In 1979, when the FEFTA
replaced the previous law governing FDI (the Act on Foreign Capital),
the system’s operating principle switched from one requiring advance permission
to one requiring advance notification.
In addition to the FEFTA, foreign investment is also
subject to the Prohibition of Private Monopolisation and Maintenance of Fair
Trade Act (hereafter, the Anti-Monopoly Act).[8]
Section 9 of the Anti-Monopoly Act prohibits the establishment or
transformation of a company which constitutes an “excessive concentration of
economic power” by the acquisition or possession of shares (including those of
employees) of a Japanese company.[9] But this law applies
equally to domestic and foreign companies.
Following the 1991 revision of the Foreign Exchange and
Foreign Trade Act (FEFTA), most foreign investment transactions
became subject to post-transaction reporting only. But prior notification is
still required for certain inward direct investment in sensitive industries,
defence and utilities. The Cabinet Order on IDI[10]
also requires prior notification of inward direct investment in companies that
have technologies which could be converted to military use. Notification must
be made to both the minister with jurisdiction over the business in question
and the Minister of Finance. In practice, documents are delivered to the Bank
of Japan for formal acceptance, as affairs concerning the FEFTA are
delegated to the Bank of Japan.
Under Article 27 of the FEFTA, certain foreign
investments are subject to pre-transaction notification and require government
approval. Under this category, the government may exercise the power to
recommend or order a change or discontinuation of the proposed investment.
Two factors determine the need for pre-transaction
notification filing. The first is the nationality of the foreign investor.
Pre-transaction notification filing is required for inward direct investment
from countries with which Japan does not have a reciprocal investment
agreement. The second is the sensitivity of the business/industry in which the
investment is proposed. The investor must notify the government if the
proposed investment has a risk of causing one of the following conditions:
(i)
impairing of national security;
(ii)
disturbing public order;
(iii) hindering
public safety; or
(iv) significant
harm to the smooth management of the Japanese economy.
Examples of businesses/industries that fall under each of
these categories include:
(i)
aircraft, weapons, nuclear power, space development, gunpowder;
(ii)
electricity, gas, heat supply, communications, broadcasting, water
services, railways, passenger transportation;
(iii) biological
chemicals, guard services; or
(iv) primary
industries relating to agriculture, forestry and fisheries, oil, leather and
leather product manufacturing, air transport and maritime transport.
In principle, the foreign investor has to make a judgment on
whether the target company is subject to pre-transaction filing or not, based
on public information and direct inquiries to the target company. But in cases
where it remains unclear whether the target company is engaged in a business
that requires pre-transaction filing, the investor may make an inquiry to the
ministry having jurisdiction. This requirement could act as a potential
disincentive to foreign investment in these sectors.
Foreign investment in a number of industries is also
regulated by various sectoral laws. These laws generally limit the voting
rights held by foreign investors or deny business licences to foreign
investors. As such, the purchase of shares does not necessarily guarantee
voting rights because the transfer of shareholder registration may be refused.
These sectoral laws are as follows:
Nippon Telegraph and Telecommunications Company Law[11]
Under the Nippon Telegraph and Telecommunications Company
Law (the NTT Law), the transfer of shareholder registration is
prohibited if such a transfer results in holdings by “foreigners, etc” of
one-third or more of voting rights. “Foreigners, etc” refers to:
(i)
an individual who is not a Japanese national[12];
(ii)
a foreign government or its representative;
(iii) a
foreign firm or organisation; or
(iv) a
firm or organisation in which 10 per cent or more of voting rights are held by
(i), (ii) or (iii) above.
Radio Law[13]
The Radio Law prohibits the issuance of the wireless
radio licences to the following (Article 5-4):
(i)
an individual who is not a Japanese national;
(ii)
a foreign government or its representative;
(iii) a
foreign firm or organisation;
(iv) a
firm or organisation in which 20 per cent or more of voting rights are held
directly or indirectly by (i), (ii) or (iii) above[14];
or
(v)
a firm or organisation which has a director whose radio license was
cancelled within the last two years.
But category (iv) does not prevent foreign investors
purchasing shares to acquire 20 per cent or more of voting rights in a
company which already owns a wireless radio license.
Japan Broadcasting Law[15]
Under the Japan Broadcasting Law, the transfer of
shareholder registration may be denied if such a transfer results in holdings
by “foreigners, etc” of 20 per cent or more of voting rights, provided that the
shares are listed on an exchange (Article 52-8). “Foreigners, etc” refers to:
(i)
an individual who is not a Japanese national;
(ii)
a foreign government or its representative;
(iii) a
foreign firm or organisation; or
(iv) a
firm or organisation in which 20 per cent or more of voting rights are held
directly or indirectly by (i), (ii) or (iii) above.[16]
Aviation Law[17]
The Aviation Law prohibits the following from
entering the air transport business (Article 101-9):
(i) an
individual who is not a Japanese national;
(ii) a foreign country or a
foreign public entity and similar institution;
(iii)
a firm established under a foreign law; or
(iv)a firm or
other organisation in which one-third or more of voting rights are held by (i),
(ii) or (iii) above.
But clause (iv) does not prevent the purchase of shares by
foreigners to acquire one-third or more of voting rights in a company that has
already been approved to conduct air transport business. To respond to such
cases, Article 120-2 of the Aviation Law states that an air transport
company or its holding company may deny transfer of shareholder registration if
such a transfer results in holdings by “foreigners, etc” of one-third or more
of voting rights, provided that the shares are listed on an exchange.
Other
The Freight Transport Law[18]
limits holding of voting rights by foreigners to less than one-third in
freight transport companies.
The Mining Law[19] prohibits
foreigners from acquiring mining rights. Although investments in certain
sectors of the mining industry are permitted, these are not equivalent to
mining rights. Article 17 of the Mining Law permits only Japanese
nationals and Japanese firms to hold mining rights. Prior notification
regarding investment is required only for the sub-sectors listed in Annex 5 and
7, as well as the sub-sectors that do not appear in Annex 8.
The Financial Instruments and Exchange Act[20]
limits holding of voting rights by any person, whether foreign or Japanese,
to less than 20 per cent in any securities exchange in Japan (for example, the
Tokyo Securities Exchange or the Osaka Securities
Exchange).
Republic of Korea
ROK policy is to welcome foreign direct investment. In
particular, the ROK implemented a number of FDI-friendly policies after the Asian
Financial Crisis in 1998. There are now few formal restrictions on foreign
investment, most investment notifications are automatically approved and the
process is transparent with a negative list of proscribed areas.
But challenges remain for investors in the ROK which explain
its low levels of inbound foreign investment. The cost of doing business can
be high. Some sectors are highly-regulated, and some labour unions have a
reputation for militancy. Some Korean business practices can also be difficult
to internationalise. For example, Standard Chartered bank’s attempts to
introduce performance-related promotions resulted in a long-standing union-led
strike to retain the Korean practice of promotion based on length of service.
To encourage foreign investment, the ROK has appointed an
ombudsman for foreign-investment concerns and a formal regulation-review
process to determine if new regulations are required or could be improved. It
also provides some incentives to attract foreign investment, such as tax
concessions and cash grants.
The ROK’s legal framework for foreign investment
Regulation of foreign investment in the ROK falls under the
Foreign Investment Promotion Act (FIPA). Foreign investors may establish a
wholly-owned company or joint venture company. Both the minimum amount of the
foreign investment and the stock ratio are prescribed in the FIPA:
- Minimum Foreign
Investment Amount (the threshold): KRW100 million (A$85,000)
- Foreign Investment
Ratio: 10 per cent or more of the voting stocks or total invested capital
Foreign Investment needs to be notified the Korean Trade-Investment
Promotion Authority (KOTRA) or to a commercial bank. If it does not fall into a
restricted category, it is automatically approved.
According to Invest Korea, out of a total of 1,145
categories of business under the Korean Standard Industrial Classification
(KSIC), foreign investment is not permitted in 60 categories of business, as
set out under the Regulations on Foreign Investment and Technology Introduction
and the Consolidated Public Notice for Foreign Investment.
Business categories in which foreign investment is not
permitted include:
- Public
administration, diplomacy, and national defence
- Postal services, central
banking, individual mutual-aid organizations, pension funding, administration
of financial markets, activities auxiliary to financial service activities.
- Legislative,
judiciary, administrative bodies, foreign embassies, extra-territorial
organizations and bodies.
- Education
(pre-primary, primary, secondary, higher education, universities, graduate
schools, schools for the handicapped, etc.)
- Artists, religious,
business, professional, environmental advocacy, political, and labour organizations.
In addition, foreign investment is restricted in a further
29 categories of business. In principle, foreign investment is not permitted
in these restricted categories, except in certain circumstances, known as
“standards for permission”. These categories are set out in the table below:
ROK:
Business categories in which foreign investment is restricted
Category of
Business (KSIC) |
Standards for Permission |
Growing of cereal
crops and other crops for food (01110) |
- Growing of rice and barley is prohibited |
Farming of beef
cattle (01212) |
- Permitted where the foreign investment ratio is less
than 50 per cent |
Inshore and coastal
fishing (03112) |
Manufacture of
other basic inorganic chemicals (20129) |
- Permitted with the exception of manufacture and
distribution of nuclear fuel |
Manufacture of
other smelting, refining and alloys of non-ferrous metals (24219) |
Nuclear power
generation (35111) |
- Prohibited |
Hydroelectric power
generation (35112)
Fire power generation (35113)
Other power generation (35119) |
- The sum of power-plant facilities purchased by
foreigners from Korea Electric Power Corporation (KEPCO) must not surpass 30
per cent of the total domestic power plant facilities |
Transmission and
distribution of electric power (35120) |
- The foreign investment ratio must be less than 50 per
cent
- Voting stocks owned by foreign investors must be less than dominant stocks
held by Korean nationals |
Disposal of
radioactive waste (38240) |
- Radioactive waste management business is prohibited
under Article 82 of the Electric Utility Act |
Wholesale of meat
(46312) |
- Permitted where the foreign investment ratio is less
than 50 per cent |
Coastal water
passenger transport (50121)
Coastal water freight transport (50122) |
- Permitted: Transport of passengers or freight between
South and North Korea;
- Joint venture with a shipping company of the Republic of Korea;
- The foreign investment ratio is less than 50 per cent |
Scheduled air
transport (51100)
Non-scheduled air transport (51200) |
- Permitted where the foreign investment ratio is less
than
50 per cent |
Publishing of
newspapers (58121) |
- Permitted where the foreign investment ratio is less
than
30 per cent |
Publishing of
magazines and periodicals (58122) |
- Permitted where the foreign investment ratio is less
than
50 per cent |
Radio broadcasting
(60100) |
Prohibited |
Over-the-air
broadcasting (60210) |
Prohibited |
Program
distribution (60221) |
- Permitted where the foreign investment ratio is 49 per
cent or less
(* General programming channel and specialized news channel businesses are
prohibited.)
* Program distribution refers to program providing business under the
Broadcasting Act |
Cable networks
(60222) |
- CATV broadcasting business is permitted where foreign
investment ratio is 49 per cent or less (* CATV relay broadcasting business
is prohibited) |
Broadcasting via
satellite and other broadcasting (60229) |
- Permitted where foreign investment ratio is 33 per cent
or less
(* Internet multimedia broadcasting business is permitted where the foreign
investment ratio is 49 per cent or less) |
Wired
telecommunications (61210) |
- Permitted where the sum of shares (limited to voting
shares, including depositary receipt (DR) and other share equivalents and
equity interests) held by a foreign government or a foreigner (including
fictitious corporation of foreigners) is 49 per cent or less of the total
issued shares of the company (Foreigners are not allowed to become a majority
shareholder of KT. But, they may invest in KT where they own less than 5 per
cent of the total shares.)
* Fictitious corporation of foreigners: a corporation whose largest
shareholder is a foreign government or a foreigner (including a
specially-related person as referred to in Article 9 (1) 1 of the Financial
Investment Services and Capital Markets Act), and not less than 15/100 of the
gross number of whose issued stocks are owned by the said foreign government
or foreigner.
- Telecommunications resellers business (61282) is permitted
- Supplementary communications business is not restricted |
Mobile
communications (61220) |
Satellite
communications (61230) |
Other electronic
communications (61299) |
News agency
activities (63910) |
- Permitted where the foreign investment ratio is less
than 25 per cent |
Domestic commercial
bank (64121) |
- Permission is limited to commercial banks and local
banks
(*Foreign investment in specialised banks, and
agricultural/fisheries/livestock cooperative banking activities are
prohibited.) |
Data on foreign investment
from Japan and the ROK by industry
The Foreign Investment Review Board (FIRB) publishes data on
FIRB-approved foreign investment by industry sector. The most recent data for
Japan and the ROK are attached on page 13. This data only captures those
proposed investments that fall within the scope of the Foreign Acquisitions and
Takeovers Act 1975 and Australia's Foreign Investment Policy, and therefore is
not a measure of actual or total foreign investment. For example, FIRB statistics
measure only direct investment, not portfolio or other investment. Nor do they
measure when (or if) an approved investment is realised, or any subsequent withdrawal
of direct investment from Australia.
The Australian Bureau of Statistics’ (ABS) publishes data on
foreign investment into Australia by country (see table below), but it does not
routinely release data disaggregated by industry for individual countries. In
part, this is because such disaggregated data may not accurately reflect the
end use of the funds. For example, Australian banks and financial intermediaries
may on-lend investment funds sourced from overseas to clients in a range of other
industries. Another problem is that significant parts of the data cannot be
published because of confidentiality requirements under the Census and
Statistics Act of 1905. In response to a DFAT request, the ABS provided a
customised product, attached on page 14, containing some limited data on
foreign investment from Japan and the ROK in 2008 (the latest the ABS was able
to provide).
*Total foreign investment in Australia
– top 10 sources
(A$
billion, 2010 – most recent currently available)
![graph showing the top 10 sources of total foreign investment in Australia](https://aphref.aph.gov.au/House/committee/jfadt/japanandkoreatrade/report/appendixe_files/image001.gif)
*The ROK’s total
stock of investment in Australia as at the end of 2010 was $9.4 billion, making
it Australia’s then sixteenth-largest source of foreign investment.
Foreign Investment
Review Board foreign investment approvals by country of investor in 2010-11 —
industry sector