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Japan has been a tough market for foreign firms to enter

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Japan has been a tough market for foreign firms to enter. The level of foreign direct investment (FDI) in Japan is a fraction of that found in many other developed nations. In 2008, for example, the stock of foreign direct investment as a percentage of GDP was 4.1 percent in Japan. In the United States, the comparable figure was 16 percent, in Germany 19.2 percent, in France 34. 7 percent, and in the United Kingdom 36.9 percent. Various reasons account for the lack of FDI into Japan. Until the 1990s, government regulations made it difficult for companies to establish a direct presence in the nation. In the retail sector, for example, the Large-Scale Retail Store Law, which was designed to protect politically powerful small retailers, made it all but impossible for foreign retailers to open large-volume stores in the country (the law was repealed in 1994). Despite deregulation during the 1990s, FDI into Japan remained at low levels. Some cite cultural factors in explaining this. Many Japanese companies have resisted acquisitions by foreign enterprises (acquisitions are a major vehicle for FDI). They did so because of fears that new owners would restructure too harshly, cutting jobs and breaking long-standing commitments with suppliers. Foreign investors also state that it is difficult to find managerial talent in Japan. Most managers tend to stay with a single employer for their entire career, leaving very few managers in the labor market for foreign firms to hire. Furthermore, a combination of slow economic growth, sluggish consumer spending, and an aging population makes the Japanese economy less attractive than it once was, particularly when compared to the dynamic and rapidly growing economies of India and China, or even the United States and the United Kingdom.

The Japanese government, however, has come around to the view that the country needs more foreign investment. Foreign firms can bring competition to Japan where local ones may not because the foreign firms do not feel bound by existing business practices or relationships. They can be a source of new management ideas, business policies, and technology, all of which boost productivity. Indeed, a study by the Organization for Economic Cooperation and Development (OECD) suggests that labor productivity at the Japanese affiliates of foreign firms is as much as 60 percent higher than at domestic firms, and in services firms it is as much as 80 percent higher. It was the opportunity to help restructure Japan's retail sector, boosting productivity, gaining market share, and profiting in the process, that attracted Walmart to Japan. The world's largest retailer, Walmart entered Japan in 2002 by acquiring a stake in Seiyu, which was then the fifth-largest retailer in Japan. Under the terms of the deal, Walmart increased its ownership stake over the next five years, becoming a majority owner by 2006. Seiyu was by all accounts an inefficient retailer. According to one top officer, "Seiyu is bogged down in old customs that are wasteful. Walmart brings proven skills in managing big supermarkets, which is what we would like to learn to do."

Walmart's goal was to transfer best practices from its U.S. stores and use them to improve the performance of Seiyu. This meant implementing Walmart's cutting-edge information systems, adopting tight inventory control, leveraging its global supply chain to bring low-cost goods into Japan, introducing everyday low prices, retraining employees to improve customer service, extending opening hours, renovating stores, and investing in new ones. It proved to be more difficult than Walmart had hoped. Walmart's entry prompted local rivals to change their strategies. They began to make acquisitions and started to cut their prices to match Walmart's discounting strategy. Walmart also found that it had to alter its merchandising approach, offering more high-value items to match Japanese shopping habits, which were proving to be difficult to change. Also, many Japanese suppliers were reluctant to work closely with Wal mart. Despite this, after years of losses it looked as if Seiyu would become profitable in 2010, indicating that Walmart might be able to ultimately reap a return on its investment.

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