Japan Inc.’s acquisition spree is likely to continue as Japanese businesses sit on huge cash reserves and are incentivized to look for productive ways to spend. The European Union—with its large and relatively affordable industrial, consumer and technology base—is one of Japan’s primary targets, also bolstered by this year’s EU-Japan free trade agreement. But Europe is a very different place since the previous Japanese acquisition waves, and Japanese business leaders need to adapt their approach and be aware of the changes Europe is undergoing.
These are a few key trends impacting investments in the EU:
- New nationalism and populism are on the rise, driving public debate and conditioning policies; even when new nationalist forces are not in the driver’s seat of the government, they often strongly influence the political agenda;
- The EU is simultaneously more fragmented and more interconnected than ever. The latest EU elections were a snapshot of the structurally-changing political scenario. EU leadership is lacking and there’s no unity, but the integration (institutional, economic, cultural) is so advanced that what happens in any member state can have direct consequences elsewhere in the bloc. Brexit is a testimony to this interconnectedness.
- New investment flows determined by geopolitical movements are becoming a top, and divisive economic issue in Europe. This mainly concerns China, which continues its strategic acquisitions in technology, manufacturing and infrastructure. Middle East investments, mainly in real estate, also make headlines and raise scrutiny. Even U.S. investments, to which Europe has been accustomed to for decades, are now received with more suspicion. Europe is still open for business, but the narrative that accompanies these investments is key to defining its success.
- The EU is building up more attentive foreign investment screening tools, as a result of the previous point. At the EU level, a new regulation will come into force next year which will subject foreign investments to more scrutiny across the continent, and this effort may push member states to enhance their own tools.
These new challenges require Japanese business leaders to have informed strategies to maximize their investment’s success. The price for missteps can range from getting entangled in the regulatory and bureaucratic issues stemming from the new EU Regulation, to becoming the target of new nationalists protecting local workers and brands, or being unexpectedly caught by protectionist policies.
Japanese businesses can better navigate this new scenario by doing the following:
- Closely monitor policy and political developments, both at the EU and country level. The accelerated pace of the political cycle is disrupting the policy framework, which used to be slow-paced and easily predictable. When public outcry happens, political players are required to address the issue much faster than in the past—this often leads to harsher, less thought-through policy solutions that sometimes skip the traditional, consultative policy development process and catch companies off guard.
- Be proactive in telling a positive story—both to institutional counterparts and broader impacted audiences. Japanese businesses are often reluctant to push out a narrative but a communication void around an investment—especially one that comes under political or public scrutiny—will soon be filled by adversarial voices or misunderstandings. Japanese leaders need to be in control of the story; they have all the elements to build a positive narrative, backed by a successful track record and a soft power associated with Japan that they need to take advantage of more often.
- Connect with local communities, especially when they are peripheric. The investment story needs to be tied to the local community it impacts; otherwise, this is where issues arise. The EU is a grouping of local communities tied to their territory, anchored in their history and traditions. Plus, populism is fuelled by local communities, rural areas or deindustrialized regions. Emotional connection can be drawn with a tailored local message, relationship building with local institutions and ad hoc CSR programs.
- Build alliances and win third party supporters. The EU is fragmented—between nations, within societies, among political groups, across institutions. There’s a myriad of voices—often conflicting and diverse—every day in this complex and multinational public ecosystem. In this context, one voice is not enough to push out a story: Japanese businesses need to have third party supporters ready to back them during the tough times and advocate for their positions—including their commercial partners, industry thought leaders, or local and national institutions.
In a Europe—and a world—defined by global trade tension and renewed geo-commercial movements, the challenges for foreign investments are more complex than ever. But Japan has a unique opportunity: it’s one of the few global players that today, thanks to its reputation and branding, can easily narrate a credible positive story around their investments to the EU—but they need to be smart, informed and forward-looking about it.