Acceleration in Foreign Direct Investment

Until recently Japan was considered a minor player in the arena of foreign direct investment (FDI). Before the Second World War its FDI was negligible while after the war stringent restraints had to be imposed on capital outflows because of an overwhelming domestic need and a weak balance of payments situation. The rapid economic growth of the 1960s eased the balance of payments situation but the FDI flows remained small. They ranged between $200 million and $300 million a year during this decade, with the largest share (25 per cent) going to North America and 20 per cent to Europe. Less developed countries (LDCs) attracted above half of the FDI with Asia alone accounting for 20 per cent of the total FDI. In the early 1970s, the volume recorded a substantial rise. In 1972 it crossed the $2 billion mark and the Japanese economists call it the gan-nen or the very first year, of the FDI. Apart from the economic growth and export successes of the 1960s, there were three more reasons behind this ripple of FDI in early 1970s. First, between end-1970 and end-1972 the yen had appreciated from 358 to the dollar to 302 to the dollar — a 14 per cent appreciation in nominal terms. This appreciation was brought about by the collapse of the Bretton Woods system and affected the yen’s value not only vis-à-vis the dollar but also the East and South East Asian currencies which were pegged to the dollar. Second, in the early 1970s wages in Japan were rising with an annual average rate of 15 per cent.