Author name: Emma Ruiters

In recent years, Japanese Foreign Direct Investment (FDI) has been rising in African countries. A new development has been that Japanese FDI has been flowing to information and communications technology (ICT) & Digital Technologies. African countries are growing rapidly which is likely underpinning rising investment, but African economic development is already demonstrating some points of departure from the industrialisation or development experiences of the late industrializers in Europe and Asia. Indeed, digital technologies have fuelled the rise of new business models across the continent where e-commerce, e-hailing and mobile money are increasingly ubiquitous even in underdeveloped settings. Indicators show consistent levels of digital & ICT technology adoption across African countries, suggesting strong signs of emergence in this space. However, digital ecosystems require high levels of capital investment and institutional development, which are increasingly becoming minimum standards of competitive industry. Japan’s modern relations with African countries are marked by a growing trend of investment and commitment to economic development through foreign aid. However, there is evidence that, since 2016, there has increasingly been a shift towards public-private partnerships as well as increased interest from the Japanese private sector. This has been driven by public institutions such as the Japan International Cooperation Agency (JICA) as much as the private sector, and it has also seemingly been an organic transition, driven by domestic factors in the Japanese economy as well as the high growth of African economies. Overall, as Japanese global FDI, outflows have been rising steadily since the early 2000s. Thus, with a global uptick in outflows, it is unsurprising that African countries are also experiencing increased FDI flows. In 2021, Japanese FDI net flows to Africa sat at US$3.5 billion.[1] For comparison, in 2018, Chinese FDI flows to Africa sat at US$5.5 billion.[2] Headwinds in the Japanese economy may be part of the reason for rising FDI. Manufacturing is slowing, Japan’s expansionary monetary policy regime continues and the yen is at its weakest in 2022 since the 1990s.[3] Amidst Prime Minister Kishida’s push for a New Capitalism, domestically, Japan is facing its own push towards digital transformation, which the government hopes to guide through the conceptualisation of Society 5.0 which envisions the resolution of social problems and economic advancement through the application of new technologies. Masayoshi Son is (in)famous for his Softbank Vision fund, at US$100 billion it is the largest tech-focused investment fund in the world.[4] Rising global Japanese FDI may reflect the significant cash reserves of Japanese corporations held on their balance sheets. 53% of Japanese companies on the Topix index are net cash, compared to only 14% of US companies in the S&P 500.[5] Non-financial companies on the Topix 500 maintain US$2.6 trillion of tangible assets.[6] Japanese firms are notable in that financing is still often derived from relational banking rather than international capital markets or the stock market thus resulting in Japan’s remarkably low levels of FDI. This has enabled Japanese companies to limit cash dividends and retain earnings. Further evidence of a government push to unlock corporate savings is, in 2022, Japan’s government and business sector pushed for increased planned capital investment, which includes encouragement of global expansion for Japanese startups. Japanese companies are aiming to invest 25% more into equipment, real estate and other physical assets from 2022 to advance in decarbonisation.[7] The Government Pension Investment Fund (GPIF) of Japan, one of the world’s largest institutional investors, will begin investing in Japanese startups.[8] Thus, it’s likely these reforms including Shinzo Abe’s corporate governance reforms will have had some acceleratory effects on FDI as the reforms are supportive of outward-bound M&A (mergers and acquisitions) through tax reforms and deregulation as reflected in increasing outflows in FDI.[9] Simultaneously, the Japanese economy has also encountered difficulties in the face of digitalisation. Deindustrialisation, increased financialisation, inequality and rising job insecurity have also become more pronounced in Japan. Japan has also lost competitiveness in its historical areas of ‘comparative advantage’ such as electronics and telecommunications.[10] Japanese businesses have begun using M&A as a means to build out new technology niches and expand their market presence to seek new customers.[11] Thus, they are becoming increasingly global. Japanese banks are also acquiring foreign banks and developing M&A advisory businesses for foreign markets. There is also the phenomenon of ‘Japan Inside’ where Japanese high-value manufactures are critical inputs to the production processes of even highly industrialised South Korea and Taiwan.[12] Japanese companies are exiting non-core businesses and redefining business focusses. An example may be Sony’s recent diversification into a non-traditional industry, namely, into the automobile sector through imaging sensors. In 2022, Sony launched an Electric Vehicle (EV) division, as well as a joint venture with Honda to make cars.[13] Correspondingly, Japanese private sector actors, namely trading companies and Venture Capital (VC) funds, have utilised M&A, private equity and venture capital as tools to enter the African market, namely in sectors ranging from healthcare, logistics and mobility, and energy. Largely, however, China has not penetrated the market in the same way. In the VC space in particular, the USA, EU countries and the UK are seen as competitors by Japanese firms. It can be argued that part of the reason for Japan’s struggles to make itself prominent in the African market is precisely because of the fierce competition in both the public and private sector from other global powers. But it is undeniable that Japan’s own, unique economic imperatives are increasingly shaping its interest in Africa, rather than external influences, and its business practices remain unique. Several Africa-focused VC firms have emerged such as Samurai Incubate, Leapfrog Ventures, and Kepple Africa, amongst others. Regardless of their intentions, unlike their success in Asia, Japanese investors have long struggled to penetrate the African market. Interviews that I conducted with firms, as well as other reports, suggest that initial forays into the African market, with the business practices of South Asia in mind, were fruitless and fraught with miscommunication. There was some degree of information asymmetry on both sides, which led to frustrations. Nonetheless, new ways of partnering and doing business are at present being sought by

African countries and Japan have a natural synergy, and South Africa is no exception.   The African continent boasts the youngest population in the world with an average age of 17. The world’s fastest growing economies and fastest urbanising cities are all in Africa. But there is still a significant lack of investment, poverty and underdevelopment that plagues many African nations. But the lion is stirring. Japan, the world’s third biggest economy, is the world’s fastest aging society with more than 20% of its population over the age of 65. Nonetheless, Japan remains a capital rich, innovative country with a large population of about 110 million people, larger than the UK, France or Germany. Japan also boasts high rates of saving and its investors are seeking bankable business opportunities outside of an economy wracked by deflation. With these complementary challenges and opportunities, the future of Africa and Japan should certainly be closely linked. Already, Japan’s former prime minister Shinzo Abe, along with South Africa’s president and the head of Africa Union, Cyril Ramaphosa emphasised the need for closer connections between Japan and Africa through the Japan-Africa Business Forum in 2019. JICA, Japan’s foreign aid agency, a long term supporter of infrastructure projects in Africa, is investing more and more into digital economy, business, innovation and entrepreneurship opportunities across the continent through its Ninja business programme and other initiatives.  With South Africa’s critical economic and social challenges, Japan’s development initiatives could be impactful in the creation of new opportunities, youth employment and fulfilling livelihoods. South Africa and Japan already have a long, albeit little known history, as Dutch East Indian Company traders who had stopped in the Cape conveyed South African goods like animal skins and other items to the trading island of Dejima – the only open port in Japan during the 1600s that allowed trade with foreigners. That, arguably, makes South African one of Japan’s oldest trading partners. Today, Japan is South Africa’s sixth largest export market and 8th largest import market (2019). Bilateral trade between the two countries stands at $7.1 bn. In particular, Japanese companies like Toyota, Nissan, Isuzu and Mazda are key players in South Africa’s automotive industry which is a sector that is a significant contributor to GDP at 6.4%, comprises 27.6% of South Africa’s total manufacturing output and directly employs 110 000 people.  In 2020, more South Africans than ever are interested in Japanese culture, learning Japanese and buying Japanese products. This is in no small part due to the soft power of Japan magnified globally through entertainment, media and gaming. Since the 1990s, many South African children can remember growing up watching Japanese shows like Pokemon, Digimon, DragonballZ, Yu-Gi-Oh and others which played on SABC2 in the afternoon after school. Japanese foods like sushi and ramen, and increasingly, drinks like gin and whiskey are extremely popular in South Africa as well. However, chances to foster closer relationships with Japan are scarce. There are few opportunities to formally learn Japanese in South Africa. The University of Pretoria partnered with the Centre for Japanese Studies, established in 2011, the Centre is an organisation which promotes cooperation between South and Japan, and provides some introductory courses in Japanese, however, no universities in South Africa offer a major or beginner to advanced language courses in Japanese. Two programmes are available for South Africans who wish to work or study in Japan: the JET programme offered to those wishing to teach English in Japan; and, the ABE programme for Africans wishing to study in Japan at a Masters or PhD level. Companies like Samurai Incubate, And Africa and JETRO do provide opportunities for South African businesses to connect with Japanese investors and markets. There is, of course, still more to be done. More opportunities are required for South Africa and Japan to truly take advantage of the latent synergies that exist. The Japanese are notoriously risk-averse investors and may require some coaxing, reassurance and trust-building from African partners of the opportunities that are abound in Africa. At present, market intelligence and insight is limited. Thus, both South Africa and Japan may benefit from a closer understanding of each other’s cultures and values. As South Africans know well, knowing someone else’s language is an important way to show respect and gain trust. South Africans deeply resonate with the spirit of ubuntu which embodies compassion and humanity which is echoed in the Japanese concept of Wa which translates to harmony and underpins much of the empathy and unity of Japanese society. There is a critical need to foment further mutual cultural and linguistic understanding for further cooperation between Japanese and South African businesses, startups, investors, consumers, governments and civil society. Moreover, as Japan seeks opportunities for investment and collaboration across the African continent, South Africa must find ways to stand out from its peers. While the internet has provided many with opportunities to access language teachers and materials, this is largely still restricted to those who can afford it leaving many South Africans out of the loop. An impactful and equitable enabler may be to create channels of access to accredited Japanese language learning resources, funded exchange programmes for students to Japanese institutions, and wide-scale low cost platforms for business and entrepreneurs to access Japanese markets.  The first step to a fruitful collaboration is always understanding and friendship. While living in Japan, I met a Japanese man who gave an unusual answer to the question, posed in Japanese, ‘What do you know about South Africa?’ Until present, many answers had been around gold, diamonds, safari and Mandela. Unexpectedly, the man said that he loved South Africa because of the luxury Blue Train which many Japanese densha otaku – people who are obsessed with trains – were fascinated by. There is a sense that there is more to share beyond the conventional wisdom, and unique impact for South Africa to make in a still mysterious market. South Africa and Japan should look to strengthen a remarkable relationship in as many ways as possible.