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

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)

*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

Source: Foreign Investment Review Board Annual Report 2010-11

Japanese and South Korean Investment by industry division (2008 - latest available)

Source:  Australian Bureau of Statistics.  Please see explanatory note on page 12.