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May 16, 2005

Japan and India Need Each Other

Anthony P D'Costa (Professor, University of Washington)

The recent visit to India by Japanese Prime Minister Junichiro Koizumi has profound implications for Japan and Asian stability as China and South Korea make noises over Japan's war time atrocities, while North Korea rattles its nuclear arsenal. India, too, has had to realign itself in the post-nuclear and 9/11 environment. India's increasing visibility in the information technology (IT) industry, especially in the software industry and high economic growth rate has placed it favorably among governments and the business community.

India's bilateral relationship with Japan has always been cordial, although in the last half of the 20th century has remained lukewarm at best, overshadowed by Japan's bilateral security relationship with the U.S. and its own quest for economic development to catch up to the West. The invitation by Koizumi to business communities in both countries to tap the opportunities that exist is right on the mark and the establishment of a joint Indo-Japan Study Group is laudatory. The question is: Are these steps adequate to raise the bilateral relationship to new heights or will they remain publicity stunts?

I was in Japan in 1991 as a Fulbright scholar. At that time, well-meaning Japanese academics and other individuals had various Japan-India study groups. Japanese corporations, as well as businessmen who had some historic ties to India, also joined the study groups. They saw the huge market potential in India after the 1991 economic reforms. Nearly 14 years later, there is little evidence of a dynamic bilateral relationship between Japan and India. Japanese foreign direct investment in India remains paltry (less than $2 billion), though its official development assistance to India has exceeded that of China's.

In the meantime, China has forged ahead in basic manufacturing, sucking up global resources and capturing foreign markets (much like the Japanese of the 1970s and 1980s); the U.S. has aggressively pursued reorganization of its businesses in the IT industry through global outsourcing; and India has cashed in on this growing market for software services, including business process organizations and call centers. Japan, unfortunately, is still struggling with its post-bubble recession, an aging society, and in its inability to come to grips with a very different 21st-century global economy. A more active attention to these issues is likely to take Japan's bilateral relationship with India to new heights.

Consider the following facts: Japan is the second largest market in IT spending after the U.S., with a whopping total of 2.32 trillion yen (about $203 billion) in equipment spending in fiscal year 2004-05 and 3 trillion yen in R&D investment. India's software exports have been growing rapidly since 1990. In 1999-2000, India exported $3.4 billion worth of software services, which increased to $12.2 billion in the current fiscal year. The U.S. absorbed roughly 65% of Indian exports of software, while Japan received barely 3% of India's exports.

Furthermore, as global population increases, Japan's population is anticipated to decline absolutely. According to World Bank estimates, Japan's population is expected to decline from 127 million to about 124 million by 2015, with a -0.2 average growth rate. During the same period India's population is expected to increase from 1.03 billion to 1.3 billion. These two asymmetries, a demographic dilemma for Japan and its associated aging population and India's growing population and thus a much younger work force with a propensity to pursue technical education for the growing IT industry, speaks volumes about the imbalances in the global economy and an undeveloped bilateral relationship between Japan and India.

Japan needs workers

As the population ages, so does the need for services, such as health care, grows. Lots of nurses and other healthcare workers will be needed and yet Japanese immigration policy toward Philippines nurses is woefully inadequate. As the fertility rate drops below the replacement rate, Japan will also need other workers. There are already immigrant workers in Japanese manufacturing, construction, and the infamous "entertainment" industry. If Japan is to maintain its competitiveness, it has to either increase its productivity even more and/or get more people.

Increasing productivity is a real dilemma for mature economies such as Japan. Besides, it is already highly automated, there are no rural workforces to tap, and labor markets for women are not particularly flexible in Japan's highly male-dominated society. When one looks at Japan's R&D spending, it is clear it is aimed at the high end chip manufacturing, plasma screens, and the like - the backbone so to speak of the new economy. Japan does not have other lead industries to drive its economy in the future. It is evident that Japan has to tap foreign workforces and India can be an important source. On this score Koizumi is right. But at the ground level, there is a host of barriers that make such partnerships trying at best and impossible at worst.

Based on my interviews earlier this year of 30 Indian and Japanese IT companies in India, several broad trends emerged. First, Japanese business are not willing to relinquish control to Indian managers. There is a problem of trust. True, partners thousands of kilometers away make it awkward for every day interaction and sustain long-term relationships. But it's time to wake up to the fact that the world has changed. Various transactions can be done at a distance. And Indians are bloody good engineers. Haven't they proved themselves in the U.S. and elsewhere?

Second, there is always that problem of language and culture. Few Japanese engineers speak good English, which is essential to interface with foreign engineers. Again, the world looks quite different today from that of the 1960s. English is the de facto global language, whether you like it or not. In the course of my work, I came across many Indian IT companies who are investing good money to train their engineers in Japanese. They are in for the long haul. This is a good sign and Koizumi's appreciation of Indian school children learning Japanese is no small step.

But it takes two to tango - the Indians will learn Japanese and the Japanese must learn English. For India, English has been the principal medium for penetrating the U.S. IT market and the economic rationale for learning Japanese is not very strong when U.S. businesses come to India in any case. But from India's strategic point of view, it needs to diversify its export markets, reduce its dependence on the U.S., and create alternative learning opportunities from the Japanese market. After all, the Japanese produce excellent engineers too.

Third, the demand for technical talent will grow in the foreseeable future. There will be competition for such workers. Japan cannot afford to be indifferent; it has to compete head on with the U.S., Germany, Canada and Australia. Even South Korea and Taiwan are beginning to outsource software services from India. No doubt the fear of job losses is real, but Japan must devise a social security system that takes care of its elderly population and eliminate the stresses that working Japanese encounter in their everyday working life.

More importantly, it is high time Japan shared its affluence with others. For much too long Japan's aid policy has been commercially motivated and we know that aid is not the solution to global inequalities. Creating global employment is. Since IT services are a high-end and labor-intensive activity, fostering such a sector would produce immense economic and social benefits.

After many decades India has finally found a niche to specialize in. The challenge is to sustain it. Japan can play an important role in India's IT future if it is receptive to Indian business and so can India in Japan's competitiveness. What Japan needs to do is internationalize its operations in an integrated way and appreciate other countries' technical capabilities. Japan needs to establish new IT business partnerships with India, promote effective English and learn to cope with globalization. Otherwise, it will have missed a historic opportunity and Koizumi's visit may not even be a blip in the 21st century radar screen.

(This article was published in Japan Today on May 7, 2005, and reproduced here with the author's permission.)

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