Category: Foreign Direct Investment

Japanese companies in the UK are shrinking – is Brexit to blame?

The number of Japanese companies and their employees in the UK is starting to decline. Given that this is against the trend elsewhere in Europe, it is hard to avoid the conclusion that this is a reaction to Brexit.

Brexit has put up barriers to the UK trading within the Single Market, damaging sectors it used to have a comparative advantage in such as automotive manufacturing and financial services. The UK is now left with its global strength in services such as professional services, IT, design, marketing and education. It remains to be seen how much of this strength was also reliant on being part of the Single Market, in terms of being able to sell those services to the EU and benefit from the freedom of movement of the people providing or benefiting from those services. So far, Japanese companies seem to be happy to continue to access these services by basing their regional head offices in the UK, regardless of Brexit, or through acquiring British companies in the services sector.

The decline is from a high base. The UK has the highest stock of Japanese foreign direct investment, the highest number of employees of Japanese companies, and the most resident Japanese nationals in Europe.

The decline in numbers of Japanese companies in the UK is mainly due to a reduction in Japanese companies in the manufacturing and financial sectors. There has also been a drop in the number employed in automotive manufacturing. On top of this, the main driver of the past few years behind the rising employee and company numbers – big-ticket M&As followed by expansion in employee numbers – has been less of a force more recently.

To understand more about the trends in Japanese companies in the UK in terms of investment and employee numbers, how this compares with Germany, France, the Netherlands and Italy and what this might mean for the UK in future years, please download our report below:

Japanese companies in the UK

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The advantages of investing in smaller countries

I was asked to speak at a Portugal-Japan Investment event at the end of 2019. Initially I was worried about what I could say as I was not sure there would be much that would interest Japanese companies in Portugal. The population is only around 10 million and multinationals mostly either have a small sales office there, or cover it from Spain.

For British people Portugal is mainly seen as a nice place to go on holiday – for golf or the beaches or to enjoy the rich history, culture and port wine.  There are also some similarities in temperament between Portugal, the UK and even Japan – a gentility, understatement and a slight melancholy which contrasts with bigger European nations like Spain or France or Germany.

Portugal is the UK’s longest standing ally – for more than 650 years –  and the Portuguese Prime Minister and officials who spoke at the event emphasised that they saw Portugal as an additional base for Japanese companies, rather than an alternative to the UK.

Portugal has strengths in traditional sectors such as food, apparel and automotive manufacturing. For example, Toyota has a joint venture with Caetano, who also have a joint venture with Mitsui, manufacturing electric buses.  There are also some emerging strengths, such as energy and IT services, particularly business process outsourcing.

The two Japanese companies that spoke on the panel with me were Fujitsu, who employ nearly 2000 people in Portugal now, providing business process outsourcing and IT services and Marubeni, who have invested in various energy projects.

All the presentations emphasised the obvious advantages of Portugal. Firstly, that the economic and political risks are low. Portugal has recovered well from the Lehman Shock recession, does not have much populism, and the coalition government has been in power for over 5 years.

Secondly, Portugal has a well-educated (particularly in science, technology and maths), multilingual workforce. And thirdly, as well as being in the EU, it also provides a bridge to Portuguese speaking markets, most notably Brazil.

But there was an additional reason, given by the Marubeni representative which caught my interest. He said that starting a new business in a smaller economy meant it was more “manageable”.  A foreign direct investment expert at the event confirmed what I had found out through my own researches on Japanese companies in Europe – smaller European countries are becoming popular foreign direct investment destinations.

Japanese companies in Portugal have quadrupled (from a small base) over the past 6 years, but other European countries of 6-11 million population size have also seen an increase in Japanese acquisitions or greenfield manufacturing investment, such as Finland, Sweden, Hungary and Czech Republic.

The number of Japanese expatriates in Portugal has not risen quite so rapidly.  Growth in the Japanese communities in the Netherlands, Poland and Ireland has been greater. From a business, as well as a weather, food, golfing and cultural perspective, I wonder whether this might be about to change.

This article by Pernille Rudlin was originally published in Japanese in the Teikoku Databank News on 15 January 2020

For more content like this, subscribe to the free Rudlin Consulting Newsletter. 最新の在欧日系企業の状況については無料の月刊Rudlin Consulting ニューズレターにご登録ください。

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