Japan’s Foreign Direct Investment into Africa’s Digital Economy is Rising

Author: 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 Japanese firms in the African market.  African entrepreneurs and businesses naturally have a closer understanding of domestic conditions, and are thus critical partners in market success particularly through localisation and innovation. BCG suggests that the relative success of tech entrepreneurs in Africa is due to its fertile environment of a growing, youthful population and the aforementioned growth in digital access, and the application of emerging technologies across both private(i.e. financial services and energy), and public sectors, in particular, health and education. There was a significant degree of optimism demonstrated by Japanese investors about the pace of growth of both investment and the target market. All respondents strongly believed Japanese investment and interest in African economies would increase. They were also confident about the growth of the African market, especially certain countries like Kenya, Nigeria and Rwanda. Japanese companies also expected a boom from the African Continental Free Trade Area (AfCFTA). In anticipation of this, Mitsubishi Motors began production of commercial vehicles in 2022 in Kenya, hoping to benefit from the reduced tariffs into the rest of the continent.^[14]

My research also showed  evidence of a clear shift in the terms of engagement over the past five years or so. Initially Japanese firms had engaged in African markets primarily in trading activities, but had struggled to make a significant impact or remain competitive especially in sectors where other players remained dominant. To get ahead, Japanese companies were partnering with a local African firm. There was evidence of technology transfer and capacity building to improve standards and competitiveness of African partner firms. Sectors of interest ranged from healthtech, to infrastructure, which reflected historical trends, but there was an increasing focus on startups, acquisition and partnership whereas before there hadn’t been. This was attributed to greater success in outcomes, despite challenges in different business cultures between Japanese investors and African firms.  

Beyond the government and enterprise rhetoric, it does seem that Japanese companies themselves see their own futures and self-preservation as closely entwined with the degree to which they can enter the African market in the long term and this includes investing in technology and innovation. To do this, companies need to establish their footprint in the present which may translate, in the future, to longevity. While many respondents suggested that it was already too late for Japan given the prevalence and engagement of other competitors, it was acknowledged that if Japan focused on areas of comparative advantage, it could retain a specialist foothold that offset its latecomer status.

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About the author

Emma Ruiters is a digital economist and currently works as a policy analyst in the United Kingdom. She has several years of management consulting experience working in the digital economy and public sector space in South Africa. She holds an MSc in Development Economics from SOAS, University of London, where she focused on industrial policy, and an MSc in Japanese Studies from Oxford University, where she focused on foreign investment into the African digital economy. 

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