Trends in global business strategy at Japanese companies

The majority of respondents expect increased revenue from their overseas business operations this fiscal year

The first question in the survey asked about the respondents’ revenue forecast for their overseas businesses. Over half of the respondents replied that they predict a growth in revenue, with 20% predicting an increase and 33% a slight increase (Figure 1). While the economic impact of COVID-19 and the state of vaccination vary from country to country, this overall positive outlook in comparison to 2020, when many countries were on lockdown, can be partially attributed to the general economic recovery brought about by vaccination progress.

Figure 1
Question: How does your overseas business forecast for the current fiscal year compare to the previous fiscal year? 

The US was ranked as the most promising country/region based on market growth potential

Next, the survey asked respondents to list the countries or regions that they see as promising potential markets for their companies. The US was ranked the highest, followed by China and then India (Figure 4).

We then asked the respondents to select the reasons for their choices. The most common response was, ‘Future growth potential of the local market’, followed by ‘Current scale of the local market’ (Figure 5). The US and China have large-scale markets, as well as large GDPs, and these results can be interpreted to show that many respondents expect these two countries to continue to lead the growth of the global economy. Finally, it is also worth noting that seven of the top ten countries and regions selected as promising markets are located in Asia, suggesting that a large number of companies are focused on Asia as a region to invest in going forward.

Many Japanese companies named market intelligence, fraud and embezzlement risks, and the hiring and training of digital talent as important immediate agendas for their overseas businesses

The survey results thus far suggest that overseas markets are very important for many Japanese companies from the perspective of medium-term growth. In the second part of our survey, we focused on the issues Japanese companies are currently facing in their overseas business operations as the result of factors such as COVID-19 and US-China decoupling, as well as the factors behind these issues.

First, we asked respondents about the management issues they considered important for their overseas businesses (Figure 8).

The top answer was understanding of the market and competitive environment—in other words, market intelligence. This is likely because overseas markets differ from Japanese markets both in terms of the customers and of the competitive environment, making it necessary for Japanese companies to enhance their intelligence functions to enable them to detect market changes at an earlier stage. Although many companies have become more aware of geopolitical risks, compliance with existing laws and regulations is not enough. To adequately monitor and investigate such risks, companies need to be equipped with savvy intelligence functions that enable them to predict political and economic changes by understanding the underlying inter-governmental relationships.

To achieve this, many companies seem to be working to strengthen their intelligence functions, which contribute to improving the quality of information they collect and to the enhancement of strategic decision-making and risk analysis.

The second most common answer was the early detection and visualisation of fraud and embezzlement risks at overseas affiliates and subsidiaries. This response was particularly prevalent among companies that conduct business in emerging countries in Asia and other regions. This is likely due to the frequent occurrence of fraud and illegal activities, including embezzlement, at local businesses in emerging countries and the resulting need for Japanese companies to establish mechanisms to prevent and detect such activity.

The third most common answer was the hiring and training of local digital talent to propel overseas operations. This answer was especially prevalent among companies operating in the Americas and Europe. In Japan, as well, we have seen a steep increase in references to digital transformation (DX) in the media over the past few years, and more and more companies are working to advance their own DX initiatives within Japan. However, rolling out DX on a global scale seems to be a challenge on a completely different level. Companies’ infrastructure for training digital talent is hugely impacted by local political and economic policies, which makes it practically impossible to promote DX in a universal manner across countries or regions.

The fourth most common answer, establishment of production and supply frameworks to handle supply chain disruptions caused by changes in US-China relations, will be discussed in detail later in this report in reference to US-China decoupling and related issues.

The survey results illustrate a distinct variation in the management issues that are considered important for each region. While the top three issues (market intelligence, hiring and training of local digital talent, and early detection and visualisation of fraud and embezzlement risks) were generally ranked as important in all regions, the survey also identified some issues that are characteristic of each region. For instance, the execution of strategic cross-border M&A ranked highly for the Americas, and post-merger integration (PMI) ranked highly for Europe, which indicates that companies operating in those regions are more focused on management issues related to M&A. In East Asia, including China, on the other hand, the management of cost increases and compliance requirements due to changes in local laws and regulations stands out as a region-specific issue.

Figure 9
Q: What management issues do you consider to be particularly important in the regions where you conduct overseas business? Choose the issue you consider most important for each region. 

* The numbers of responses for each region varied due to differences in the countries/regions where survey respondents are currently operating. Therefore, multiple regions and countries have been grouped together to provide numbers of responses amenable to analysis.

In this report thus far, we have analysed the survey results, specifically focusing on the management agendas that Japanese companies recognise in their global business operations and how they are responding to them. In our analysis, we were first able to confirm that many Japanese companies are focused on overseas markets and value their growth potential in the medium term. We also learned that companies are highly aware of the need to bolster their market intelligence functions, hire and train digital talent, drive digital transformation, and prevent fraud and embezzlement, particularly in emerging countries, and reconfirmed the unique characteristics of each region. The survey results also indicated that a considerable number of Japanese companies still have not been able to take effective measures to address the issues caused by trade conflict between the US and China.

Now, let us take a step back and examine the outlook for the world economy from a macro perspective. The table below shows the real GDP forecast for five major countries, and suggests that we will see a change in the real GDP rankings between now and 2023. Namely, China is expected to surpass the US in terms of real GDP and to become the world’s largest economy. We should not exclude the possibility that this changeover might be accelerated by the ongoing COVID-19 pandemic. India is also projected to surpass Japan and to become the world’s third largest real GDP. This forecast indicates that the ten years leading up to 2032 are likely to be a period of great change from the global economic perspective (Figure 18).

This forecast, alongside the survey results, indicates that Japanese companies will need to transform their business models to achieve medium-term growth through their overseas businesses during this period of great change. So, what do Japanese companies need to do in order to transform their overseas businesses and achieve sustainable growth? Our survey results indicate the necessity of the following three initiatives, in particular.