How India has become preferred destination for Japanese investments

February 20, 2025
Posted by: Ambassador Gurjit Singh
Categories: India, Japan

The renewed interest in India can be attributed to the developing international situations, including economic distress in China, supply chain disruptions, rising strategic risks, and increasing protectionism in traditionally preferred markets

Japanese companies have significantly revised their outlook on India as a market and are displaying greater enthusiasm for conducting business here. A recent survey conducted by the Japan External Trade Organisation (JETRO) revealed that 80 per cent of respondents expressed interest in expanding their business operations in India over the next two years. This marks an increase of 4.7 per cent in enthusiasm compared to the previous year.

The shift in interest is partially due to diminishing confidence in China, where business sentiment among Japanese firms dropped by 21.7 per cent, the lowest level since 2007. Similarly, Thailand—a traditionally favoured destination for Japanese businesses—experienced an 8.1 per cent decline in enthusiasm, dropping to 34.1 per cent from the previous year due to political instability.

India has now emerged as the most attractive destination for Japanese businesses, followed by Brazil, the UAE, Vietnam, South Korea, and South Africa. The survey, conducted between August and September 2024, polled Japanese companies operating across 83 countries. This renewed interest in India can be attributed to the evolving international landscape, including economic distress in China, supply chain disruptions, rising strategic risks, and increasing protectionism in traditionally preferred markets. India and Japan have set an investment target of 5 trillion yen ($42 billion) by 2027 and now seem to be on the way to fulfilling it.

Notably, 66 per cent of the companies polled anticipate profitability in 2024, driven by growing domestic demand in the Global South, particularly in India, Brazil, Mexico, and Vietnam. In contrast, Japanese firms operating in China, Thailand, Germany, and the Netherlands foresee lower returns, especially in the automotive sector. Despite this, only about 1 per cent of respondents indicated plans to relocate from these markets, signalling patience and a focus on diversifying services and seeking new opportunities.

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In addition to India, Japanese businesses are expanding their interests in the UAE, Latin America, and Africa. This shift reflects a strategic move towards the Global South, where larger market sizes, growth potential, and strong entry points offer attractive opportunities. Over the past five years, Japanese companies have increased their market penetration in India and Mexico. However, they face growing competition from European and US companies. In Thailand and Vietnam, Chinese firms challenge them, and Chinese domestic companies dominate the current Chinese market.

Despite economic challenges in China, local companies there are outperforming their Japanese counterparts. In India, however, nearly 55 per cent of Japanese firms surveyed expect profits to rise, representing the highest level of confidence among all countries polled by JETRO. This marks the highest confidence level in India since 2008.

The Japan Bank for International Cooperation (JBIC) published a report in December outlining the outlook for Japanese foreign direct investment (FDI). The report showed that 58 per cent of Japanese entrepreneurs view India as a promising market over the next three years, reflecting a 10 per cent increase from the previous survey. Conversely, confidence in investing in China has dropped to 17 per cent .

India’s robust economic growth, expanding population, and the rise of the middle class have made it an attractive destination for Japanese investment. These factors, coupled with sustained economic progress, have led to higher profits and greater satisfaction among Japanese businesses operating in India.

Nonetheless, the survey highlighted concerns regarding potential political instability, particularly the coalition at the central government level. Additionally, international scrutiny of certain Indian companies for questionable business practices remains a point of concern for Japanese investors. Political instability and lack of transparency are significant deterrents for Japanese businesses.

Despite these concerns, Japanese investment in India in 2024 surpassed previous years, even as global FDI flows into India slowed. Japanese companies are increasingly looking to diversify regional supply chains between India and ASEAN countries. While component exchanges are already occurring, there is potential for developing larger supply chains for complete products. For this the review of the AITIGA is imperative and could be concluded this year.

Japanese firms have long expressed concerns over rising labour costs, high employee turnover, and frequent changes in tax regulations, which often necessitate adjustments to business plans. While new Japanese entrants into the Indian market remain limited, established players continue to expand their investments, reaping the benefits of long-term commitment and patience.

Although larger firms are increasing their investments, small and medium-sized enterprises (SMEs) from Japan remain hesitant. SMEs, which constitute only about 15 per cent of Japanese companies in India, are reluctant to commit due to the long-term nature of the Indian market and the associated risks. This hesitancy is further compounded by the weakening of Japan’s keiretsu (company network) system, which traditionally facilitated SME expansion abroad. As a result, many new Japanese firms must now enter foreign markets independently, rather than as part of a broader network or as ancillary businesses.

Overall, Japanese companies are adapting to shifting global dynamics by exploring new markets and expanding their presence in India and other emerging economies. This strategic realignment underscores the importance of India as a key partner for Japanese businesses seeking growth and stability in an evolving international environment.

This growth of Japanese businesses in India is a good tribute to the legacy of Osamu Suzuki, who passed away at 94 on December 25, 2024.

His visionary leadership and strategic decisions as Chairman of Suzuki Motor Corporation were instrumental in transforming India’s automotive landscape, particularly through the introduction of the Maruti 800, which became a symbol of affordable mobility for millions. Now it is time for another set of such champions from Japan’s medium-sized companies to rise in India the successful way Suzuki has and diversify from the automobile to other sunrise sectors.

The author is a former ambassador to Germany, Indonesia, Ethiopia, ASEAN and the African Union. He tweets @AmbGurjitSingh. Views expressed in the above piece are personal and solely those of the author.

How India has become preferred destination for Japanese investments

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