The Analysis Of The Impact Of Institutional Distance On FDI Inflows To Japan

The Japanese market has long been considered to be one of the least accessible areas for foreign investors and as a result Japan attracts a disproportionately low level of inward FDI relative to other developed economies. Although the government has discovered the problem and has taken measures to attract more FDI, the overall effect is not obvious. Since 2008, especially after the the Great East earthquake in 2011, the Japanese government introduced a wider range, more powerful support measures, such as improve the profitability of company, improve the business environment, provide "one-stop" service, National Strategic Zone, promote structural reforms in many fields, enrich the spread of investment information and so on, to attract FDI inflows to Japan, stimulate the vitality of the economy and help Japan get rid of the shackles of the rigid system. It has been widely recognised that Japan’s institutional change in attracting inward FDI is relatively slow when compared with other developed economies, both formal institution in macro level formulated by the authorities and informal institution in micro level provided by the public.This paper studies the influence of institutional distance, include difference in rule of law, economic and cultural institutions, on FDI inflows to Japan. We break through the traditional research perspective which is mostly based on traditional market, technological development, and add the institutional factors into our analysis of Japan’s attraction of foreign direct investment. Our study shows that the institutional distance of source country of investment and Japan, both on the rule of law, economic system and cultural differences, has a negative effect on FDI inflows to Japan. The greater the distance between source country and Japan, the smaller the country’s direct investment in Japan. For the rule of law, foreign investors may pay more attention to the quality of the Japanese market itself rather than the differences between the two countries. Besides, relative to the rule of law and cultural distance, economic institutional distance has a more obvious negative effect on FDI inflows to Japan. From different levels of development, institutional distance on the rule of law and economic system have a significant impeditive function on Japan’s FDI inflows from developing countries and economic institutional distance is the influencing factors on the size of Japan’s FDI inflows from developed countries. The cultural difference has a negative effect on FDI inflows to Japan, but it doesn’t work obviously, or not the main factor.In order to promote China’s FDI in Japan, we should further improve the legal system and economic system and narrow the difference between the two countries; comprehensive assessment on Japanese institutional environment, to know each other and to defuse the risk of investment; in addition, an accurate grasp of the differences between the two countries in view of business practices, social value, cultural customs and the informal system, reduce the additional cost of FDI in Japan.