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Finance for International Business

Introduction to FDI in Japan Pharmaceuticals

The Japanese government has incorporated rules for corporate governance and the establishment of national tax and governance for FDI inflow in the country. Financial risk is important due to the involvement of positive efficiencies and risk components such as stability yardstick of currency risk and interest rate that impacts the contraction and growth of the host country and potential FDI. Foreign direct investment in Pharmaceuticals Company in Japan has been assessed by using political and financial risk to identify investment decisions. Japan has been ranked 29th in ease of doing business with a friendly regulation outlook (World Bank, 2019). Country risk harms MNC profitability and operations in the host country. 

Political Risk

  1. Blocked funds

Blocked funds occur in the case when the host country has restricted the movement of earning from a foreign source. Easy access to funds generated by the FDI will be considered for a Pharmaceutical Company in Japan. The Japan External Trade Organization has provided a resource for promoting FDI in Japan (JETRO, 2018). The government has reviewed regulation for promoting foreign investment

  1. Changing tax law

Tax laws impact the viability of FDI and have an impact on project return. Tax policy has an impact on direct investment and outbound investment that leads to domestic income increase with supportive tax laws. FDI is attracted to countries with market access and a structured tax law system with macroeconomic stability and responsive actions by the government. The income of corporations established in Japan is subjected to taxation in Japan regardless of the source in section 3.2.1 (Baker Mckenzie, 2019). However, the convention between the countries creates benefits for the firm concerning the double tax treaty. Foreign Exchange Act changes by Japan in the view of restricting FDI in medical and healthcare as acquisition prevention and growth percentage has a significant impact on FDI. The agreement between Australia and Japan has been cordial and Austrade supporting direct investment in Japan. The convention between Japan and Australia promotes FDI inflow in Japan. Australia has the benefit of withholding tax which will allow the firm to bring back profits (MOFO, 2018). The country analysis has been identified as low risk due to the convention between the countries.

  1. Public revolt against the firm

Japan is the world's third-largest pharma company. The industry has a high barrier. Japan's domestic market is looking for international companies as the well-funded health care system and R&D provides a boost to the investment. The government identifies the sector as imperative for long term growth. The industry will be representing 17% of the growth (Bloomberg, 2018). The pharma FDI is in Japan, it will be critical that the project does not have a negative impact on the local. Revolt occurs due to the parent company's negligence in current practice. The public revolt is low for Japan.

  1. War

 It has been 75 years since Japan has been to war situations previously to World War II. Japan ranks among the top 5 countries in the safety and security domain in the Global Peace Index 2020 (Global Peace Index, 2020). The current position of the country is a stable political outlook and peace matrix with a focus on development and national growth. Japan has a strong military establishment and its disagreement with China is not fueled in war or unrest with trade between the parties. The strategic relationship, trade, and settlement have been cordial with Asian and western counterparts. If Japan will be involved in a conflict it will have a significant impact on the Australian company that will economically impact the country. The country had a rising conflict with China but no political revolt has been seen. The war risk component is low in Japan.

  1. Changing attitude of Host government towards Multinational corporation-

The structure investment agreement between Australia and Japan is not concrete which has the scope of parent company being susceptible to change of attitude. The FDI remains low as compared to western counterparts, the country ranks 29th in doing business report (World Bank, 2019). Japan's incentive program and host country guide promotes foreign inflow but are limited with business investment in R&D being slow in the past quarters. The change in a bill to tighten the regulation with foreign investment into Japan and cabinet order shows uncertainty concerning pharmaceutical investment. The lowering of the threshold to 1% for the equity stake is not promising for FDI inflow (Baker Mckenzie, 2018). The restriction in life science and matrix for important items can place FDI restriction and loss for the Australian MNC. Japan's system is face hurdles with domestic company strengthening stance of the government and cultural barrier. However, the country has committed towards foreign investment with relaxation in ease of business with a stable government and no bureaucratic system. The current outlook is the reason for the high risk for change in attitude in-country analysis and marked the same in country risk.

Financial Risk

  1. Inflation Risk

Inflation risk has a significant impact on business growth and investment. High inflation risk indicates consumer price increase and a decrease in consumer purchasing power that will lead to a rise in cost and an expensive impact on FDI (Arzi, 2018). Whereas deflation indicates lower production level and can contribute to lower economic growth. The current market outlook shows Japan sliding into deflation as more companies face the risk of solvency. Prolonged deflation can lead to a deep recessionary environment with weakness in wages and growth. The impact of oil price factory shutdowns and below capacity foreign operations have a cascading impact on the Japanese economy. Japan's Manufacturing Index shows a further sign of deflation (Arzi, 2018). Input price contraction in material cost offered to the client. 

  1. Interest rate

FDI inflow in-country is impacted by the interest rate, low interest is desirable due to the borrowing power being increased. The Australian company will be able to increase its spending and establish infrastructure development. Japan has a low-interest rate that encourages investment, spending by consumers. The bank of japan has maintained a low-interest rate. This has been adopted to push inflation. The low-interest rate is in contrast with Australia that has maintained interest rates with quarterly reviews with the average interest rate at 4% (Bloomberg, 2018). The low-interest rate is a low concern are

  1. GDP Growth

GDP helps in measuring economic growth in the country. GDP is the sum value all resident producers in the economy subtracting the subsidies not included in the value of the product. It is calculated without any deductions for depreciation. Japan's preliminary adjusted gross domestic product and service showed a decline in this quarter by 7.5 % (JETRO, 2018). The economy contractual of past quester and flat growth is estimated with Japan observed a fall in export and import in the quarter. FDI is attracted by economic growth as the nation, the market size and scale are important on FDI and profitability for Australian MNC investing in Japan. The GDP value of Japan has been 5000 million dollars. Japan has a solid foothold, its GDP has increased by 0.655 % in comparison to the previous year in 2019(JETRO, 2018). The year on year comparison of GDP growth shows growth range of 0.5% to 1.85% (World Bank, 2020). The economy is currently recovering from COVID 19 impact with unfavorable and negative returns expected in the current quarter in 2020. Japan is expected to revive from the current setback with economic stimulus and Olympic Games scheduled for next year. GDP is ranked moderately high in the country risk assessment.

  1. Exchange rate

Cash flow monetizes the investment with overall profit for the parent company due to the influence of the exchange rate (Hodrick, 2019). The plaza accord has strengthened yen and has given swing to the currency. A project is likely to provide NPV positive if currency deprecates. The rise in the exchange rate during the period will benefit the project with a higher return converting profit in Australian currency. The setup of operations for the pharmaceutical company will take more than 2 years to generate profit after infrastructural investment and set up. Exchange rate fluctuation contributes towards moderately high risk in FDI inflow in Japan. The direct link between exchange rate and export price is related to production n Japan that will lead to an increase in cost subject to rate and yen appreciation. 

  1. Labor cost

A skilled workforce is required for Pharmaceuticals Company. The labor cost in Japan is considerably high and companies are facing a shortage of skilled labor in the country. This is a downside for business operations in Japan. For FDI low labor costs are desired for operations. The hourly wage rate for full time and the part-time worker has increased. Labor cost for small and mid-size business has significant growth with reaching 2.4 % growth (Reuters, 2017). The increase in the cost of labor can be mounted to the labor shortage pushing the price. In the long run, the shortage of labor can push cost impacting the inflationary or deflationary environment of the business. Language and cultural barriers hold foreign workers in being employed in the workforce. The average pay for temporary workers in Japan from 1100 years to 2.1 percent (Reuters, 2017). High labor cost has an impact on operating profit that will directly impact the pharmaceutical company investment in Japan

Capital Budgeting

Capital budgeting is a planning process that assesses the viability of the investment and determines whether long term investment should be pursued (Hodrick, 2017). The determination of country risk is not only the single factor for project success. The initial investment of the project is compared with future cash flow. The estimation of country risk can be adjusted into a discount rate in which the country is planning to operate its venture. Discount rate and country risk are correlated (positively). On observation, it is determined that Japan risk s risk is to be accounted for in project capital budgeting. The result is favorable for operations with positive NPV. It would be recommended that Australian firms analyze diversification for accommodating and investment in Japanese pharmaceuticals. 

The following table provides the risk analysis with political and financial risk accommodated onto the same. Here higher weight signifies greater risk. Political risk is assigned 45% weightage and financial risk are assigned 55% weightage. This weight is used for the final calculation for the sum value at the end of total country risk accounting for all factors. On analysis, if the risk combined is less than 4 than MNC should not invest in Japan.

Below is the table for country risk assessment

Political Risk Factor

Assigned rating (Range 1-5) 5 being the least

Assigned weight (Weight scale 0-100%)

The weight value of the factor

Blocked funds




Changing tax laws




Public revolt against the firm








Change in attitude of Host towards MNC





Total political risk rating


Financial Risk Factor

Assigned rating (Range 1-5) 5 being the least

Assigned weight (Weight scale 0-100%)

The weight value of the factor





Interest rate




GDP Growth




Exchange rate




Labor cost





Total financial risk


Political risk rating= Political risk weightage* Total political risk

=45% *2.35=1.057

Financial risk rating= Financial risk weightage*Total financial risk


Country risk= 2.37

Based on the chart analysis the risk analysis hence the Australian FDI inflow in Japan should reconsider the investment. Australian MNC should account for uncertainty on the risk factors. Purchase insurance will reduce host country risk takeover.

Reference for FDI in Japan Pharmaceuticals

Arzi, K. (2018). Impact of labor cost on Inflation. International Journal of Academic Research in Business and Social Sciences.7(6).

Baker Mckenzie. (2019). Japan Government revised rules on Foreign Investment. Retrieved from

Bloomberg. (2020). Deflation a real risk for Japan. Retrieved from

Global Peace Index. (2020). Safety and security domain. Retrieved from

Hodrick, R., Bekaert, G. (2017). International financial management. Cambridge University Press

JETRO. (2018). Laws and regulation- Setting up a business in Japan. Retrieved from

MOFO. (2008). Australia- Japan Convention. Retrieved from

Reuters. (2017). Fewer workers, higher wages Japan Inc. feels the demographic pinch. Retrieved from

World Bank. (2019). Ease of business indicator. Retrieved from

World Bank. (2020). GDP Growth rate. Retrieved from

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