By Wang Hong and Gao Kai

Ever greater numbers of Chinese enterprises are currently seeking to enter the vast global market. For those looking for an idea of how to find international success, both history and geography provide valuable lessons. China’s neighbour, Japan, has followed a similar economic growth pattern, and over the past fifty years has accumulated a wealth of experience in terms of its enterprises “going global”. The trails they have blazed serve as a valuable guide for those who now seek to follow in their footsteps.

Japanese companies first began large-scale global expansion in the 1980s, amid developments in information and transportation technology, rapid globalisation, and slow yet persistent economic growth.

As of 2022, Japan’s total overseas investment stock accounts for 40% of its overall capital stock; foreign direct investment accounts for about 8% of Japan’s capital stock and about 20% of total overseas investment stock. By 2023, the stock of Japan’s outward investment accounted for nearly 50% of the country’s GDP and its net overseas assets amounted to about $3 trillion, marking 33 consecutive years of Japan ranking as the world’s largest creditor nation.

In other words, Japan has managed to create the equivalent of almost half of its economy outside its own borders, a scale of overseas investment that means it naturally provides a vital reference for Chinese enterprises aiming to expand globally.

Trends in Japanese Enterprises “Going Global”

Looking at Japan’s experience of corporate global expansion, we see several key trends relevant to China today.

Firstly, Japan has integrated its production layout with the global production network, and its outward investment continues to expand. Japan has increased its share of the global market by leveraging a “global production-global sales” model. The overseas production ratio of Japan's manufacturing industry has climbed from a mere 6% in 1992 to a substantial 25.8% in 2021, and this upward trend can be seen across various industries. Some sectors, like transport equipment, have an overseas production ratio of nearly 50%. In 2023, Japanese car brands led the world with a sales volume of 23.59 million units sold globally and only 4.77 million units sold domestically. The rest are either produced in overseas factories or exported to the world.

There has also been a surge in Japan’s small and medium-sized enterprises (SMEs) expanding overseas. According to data from Japan’s Basic Survey on Overseas Business Activities, in 2000, firms with revenues totalling less than 1 billion yen made up 43.4% of Japanese companies expanding globally. By 2020, this figure had risen to 76.5%. After 2006, there was a rapid increase in SMEs with capital between 50 million and 100 million yen extending their operations overseas, becoming key players in foreign investment. As of 2021, these SMEs accounted for 37% of Japanese companies expanding globally, making them the driving force of Japan’s international business endeavours.

Japan also continues to increase its investments in Europe and the United States, while its investment in Asia remains steady. The primary goal behind Japan’s investment growth in Europe and the U.S. is to sidestep trade barriers and broaden its overseas markets. Meanwhile, Japan’s investment in Asia has been to leverage cost advantages. However, as labour costs in China rise, Japanese firms have gradually redirected their direct investments in Asia from China to the four ASEAN nations. Between 2016 and 2022, Japan’s investments were split at 31.8% in Europe, 29.1% in the United States, and just 23.7% in Asia, marking a downward trend from previous years.

Secondly, the main force of Japan’s industrial outward investment has gradually shifted from manufacturing to services.

In 2008, Japan’s outbound investment in non-manufacturing sectors surpassed that of manufacturing sectors and has maintained its lead ever since. As of 2022, the proportion of Japan’s overseas investment in manufacturing stood at 31.9%, while the non-manufacturing sectors made up the remaining 68.1%.

Among them, manufacturing outbound investments primarily focus on capital and technology-intensive sectors, such as transportation equipment, food, chemicals and pharmaceuticals, ferrous and non-ferrous metals, general machinery and equipment, and electrical machinery and equipment. As of 2022, Japan’s top five sectors in terms of overseas revenue were semiconductors, automotive vehicles, technical hardware and storage, aerospace, and electronic equipment. By the first half of 2023, chemicals/pharmaceuticals, electrical equipment, and transportation equipment made up 20%, 18%, and 9% of outward investment in manufacturing, respectively.

At the same time, the financial and insurance sector leads the pack in Japan’s non-manufacturing overseas investment, while industries like food and beverage, pharmaceuticals and biotech, and other consumer goods are ramping up their own global expansion. The financial and insurance sector holds a prime spot amongst Japanese outbound investment companies, accounting for over 10%.

From 2008 to 2022, the top five industries that saw the fastest growth in overseas revenue were household goods, food and beverages, air freight and logistics, pharmaceuticals, and semiconductors. These are mainly concentrated in the consumer and technology sectors. The global expansion of wholesale and retail is also gaining speed: from 2012 to 2019, the share of overseas investment in this sector jumped from 25% to 45% of overseas service sector revenues.

Demand and technology drivers are leading the global expansion of Japanese industries. As outlined in a foreign direct investment questionnaire from the Japan Central Research Agency, Japanese businesses see China and the ASEAN countries as the most promising investment destinations, mainly due to the future growth potential of the market. Investment in Europe and America by Japanese firms continues to rebound, and the number of Japanese enterprises' M&As (mergers and acquisitions) is also on the rise, primarily driven by efforts to further leverage globalisation and compete more effectively in technology.

Thirdly, several supportive government policies are in place to companies in their overseas expansion.

The first is the gradual liberalisation of foreign investment. With the growing international competitiveness of Japan’s industries, the government has eased its regulations on direct foreign investments for enterprises. This shift from a strict to a looser attitude to investment has happened alongside Japan’s own economic development level. By 1978, Japan had essentially achieved full capital liberalisation, removing all policy barriers hindering multinational corporations from making international direct investments.

The government also offers tax and financial policy support, which includes tax incentives and exemptions for companies expanding overseas. Japanese companies that invest in developing countries and secure tax reduction benefits are considered to have paid their taxes; this allows these companies to offset these amounts against their domestic corporate taxes, avoiding double taxation. The government has also set up a loss reserve system, sharing the risk of overseas operations with the companies. The Export-Import Bank of Japan (now the Japan Bank for International Cooperation) specialises in providing loans to overseas companies. Japanese small and medium-sized enterprises are also provided with financial support; they are able to receive low-interest financing for the capital needed for direct foreign investment.

Finally, information convenience and economic cooperation also help. Dedicated agencies have been set up to enhance the transparency and exchange of information. Research agencies can, for example, guide domestic petrochemical, steel, aluminium, light machinery, pulp and other light and heavy industrial enterprises to find suitable locations abroad, paving the way for the transition of other related domestic sectors. The government also often actively helps Japanese companies build solid relationships with destination countries and invests to improve local economic infrastructure and cultivate skilled local talent, easing enterprises’ market entry.

Lessons for Chinese enterprises

What lessons can Chinese companies learn from the global expansion of Japanese enterprises?

Firstly, China must focus on nurturing “new quality productive forces”, fast-track an integrated “produce-where-you-sell” model, and push Chinese businesses to take their high-quality offerings global.

To make the most of the opportunities offered by global expansion, China must focus on building global supply and industry chains centred on new productivity as well as breakthroughs in key technologies. This will involve teamwork; different fields, disciplines, departments, and institutions must come together to overcome the bottlenecks in technology. With the help of targeted policies and financial backing, China will be able to ramp up R&D investment in cutting-edge areas like chip manufacturing, artificial intelligence, quantum information, and biotechnology. This will drive scientific and technological innovation, enable greater connections between innovation, industry, and supply chains, and ensure that new innovations and technological achievements are both effectively and widely applied.

China must also commit to an ecological approach to overseas expansion, stepping up global deployment of an integrated “produce-where-you-sell” model; in other words, businesses should boost their footprints in foreign markets and prioritise product localisation. It is important to respect local markets, encourage companies to assemble local decision-making teams and establish localised marketing and service networks.

Companies should conduct solid field research to understand local market needs and shape their brand in a way that resonates with local culture. It is also important for businesses to build localised teams that can make independent decisions. Ideally, this would involve setting up standalone subsidiaries and offering sufficient equity and option incentives to key personnel. Such an approach not only generates localised value, but also fuels the high-quality development of businesses expanding overseas.

Companies expanding overseas should hasten the development of their own value ecosystems, including building relationships with upstream and downstream partners and considering the broader business landscape. This should be part of a holistic strategy that emphasises creating value for the local community and establishing a product system that is not only trustworthy, but also mutually beneficial. By laying this groundwork, businesses can pave the way for sustained cooperation in the long run.

Furthermore, China should also prioritise the high-quality global expansion of new energy vehicles. This involves promoting international mutual recognition of automotive carbon footprint calculation standards, methods, and data. In particular, China should strengthen low-carbon development cooperation with the European Union to clear carbon emission-related barriers for Chinese new energy vehicles exported to Europe. At the same time, China can learn from the EU’s experience in advanced carbon footprint calculation to guide domestic carbon footprint calculations. China should swiftly identify promising component manufacturers that are eager to expand overseas, especially by providing fiscal and financial support to private component companies, thereby encouraging high-quality supply chains to go global. Exploring the establishment of a national green electricity trading mechanism can help promote green transformation led by key businesses in the supply chain. Businesses should also receive support in their overseas intellectual property layout, establishing comprehensive measures and service mechanisms for dealing with overseas intellectual property disputes, with particular attention paid to helping enterprises in sectors like batteries, materials, overseas marketing, and after-sales operation to “go global” alongside producers of whole vehicles, thereby deeply integrating into the global supply chain system.

Secondly, China must hasten the development of a cross-border e-commerce ecosystem, carving out fresh pathways for businesses to expand globally.

To more greatly enable the global expansion of Chinese businesses, China must open a comprehensive chain of cross-border e-commerce. This means deepening reforms to make customs clearance more efficient, implementing online and one-stop solutions for various tasks like cross-border e-commerce export list evaluations. China should also promote the development of integrated cross-border logistics providers, encouraging and supporting capable businesses to evolve into one-stop, door-to-door service providers with comprehensive abilities and full-chain resource integration. In addition, China can make efforts to spur the growth of overseas warehouses, encouraging domestic businesses to build, lease, and operate these warehouses, as well as support the development of overseas warehouse operators.

It is also crucial to address gaps in financial support. China should facilitate cross-border capital settlements by encouraging eligible banks and payment institutions to provide such services for cross-border e-commerce entities based on electronic transaction data, while also strengthening credit financing support, support banks and other financial institutions to diversify their cross-border e-commerce trade financing methods and generating innovative financing mortgage approaches and trade financing products.

Cross-border e-commerce companies also need to develop innovative development models. They should leverage multiple platforms and develop strategies that combine these platforms with independent sites; this approach will reduce over-reliance on third-party platforms while promoting innovative models such as cross-border live streaming and direct-to-consumer (DTC) models, where brand products reach consumers directly. It is equally important to enhance the adoption and application of emerging technologies, including blockchain, Artificial Intelligence Generated Content (AIGC), virtual reality (VR), and big data.

Thirdly, China must develop greater institutional openness and continue to promote comprehensive openness to the outside world.

The country’s first step should be to fully leverage the pioneering and experimental roles of free trade pilot zones and ports, strengthening its commitment to innovative policies and aiming to create more open, business-friendly environments with a broader influence. China should also put strategies in place to upgrade these zones and expand the scope of openness, and move quickly to set open standards in crucial trade and investment sectors, all with the aim of making trade and investment more liberal and straightforward. Additionally, attention should be paid to how policy innovations can lead to breakthroughs in key technologies. Finally, further opening-up in service sectors such as telecommunications, healthcare, education, and tourism to meet the market’s demand for high-quality services should also be encouraged.

Next, China should take an active role in international rulemaking in order to boost its influence in these discussions. Through active involvement in the setting of rules in international economics and trade, China can help build a fair, rational, and transparent international rule system, strengthening the country’s voice and influence as the world’s governance systems evolve. China must keep a close eye on trends in international investment and trade rules, aiming to shift the country’s role away from simply following the rules to helping lead the way in setting them. The “Belt and Road” Initiative can serve as a perfect platform for international cooperation as an example to draw on, innovate, and promote China's approach to global governance, setting an example for how to align high-standard economic and trade rules across different countries and regions.

The country must also align with top-tier digital trade regulations and set up a system for cross-border data flow transactions. This means launching pilot projects for secure cross-border data flow at a national level, and exploring the establishment of a whitelist system for non-critical data. Guidelines for important data certification, as well as a “negative list” for data exempt from cross-border transfer, should be published; it is also important to set up a cross-departmental coordination system for cross-border data flow. China should also expedite pilot programs for cross-border data flow collaboration and explore the development of a “Guangdong, Hong Kong, and Macao Greater Bay Area Data Special Zone”. As China expands digital trade and its international data industry, the country should also explore building offshore data centres and trading platforms, as well as a national cross-border data security fast-track channel.

Lastly, China should explore moving from a tax offset system to a tax exemption system, to lighten the tax burden for companies expanding overseas; the examples by the Hainan Free Trade Zone offer an illustrative example. By making this change and gradually easing restrictions on shareholding ratios and tax exemption limits, companies expanding overseas can fully benefit from tax incentives in their destination markets, thereby reducing their overall tax burden.

Fourth, China needs to enhance support services for businesses expanding overseas to boost the confidence of private enterprises making their global leap.

First, China must build a service platform for companies going global. This involves setting up overseas hubs dedicated to private enterprises, backing these enterprises in creating international R&D centres, and guiding them towards the high-value ends of the “smile curve.” Moreover, a comprehensive network of legal services adept at handling foreign affairs is also necessary, as is the establishment of a series of “one-stop” service centres to providing streamlined, efficient legal services for businesses. It is important to improve the efficiency of law enforcement and judicial work related to foreign affairs, and to invest in developing a talent pool in this regard. This will require enhanced coordination across different regions and departments, and collaboration in addressing pressing issues when necessary.

Next, businesses expanding globally should be offered increased financial service support. China should encourage financial institutions to produce financial products and services that cater to the unique needs of companies venturing overseas. This could include setting up overseas investment funds, streamlining the approval procedures for foreign investment loans, and cutting the costs of overseas investment and financing. Additionally, policies should be optimised to facilitate cross-border investment and financing and multi-currency fund pools for multinational corporations introduced, so as to make it easier for private enterprises to manage and use their funds across borders.

China should also boost the international capabilities of national industry associations to better guide and assist companies in their global expansion. The country should actively champion domestic industries and enterprises to step out onto the global stage. For instance, dedicated industry associations could engage in international tech exchanges, connect with foreign chambers of commerce, and lead group overseas expansions. National departments and overseas institutions should foster better communication and coordination with local governments, put more effort into compiling and introducing authoritative information about the local business environment and industry policies, and enhance their guidance on compliance for companies going abroad.

Finally, it is crucial for China to maintain high-quality international relations and broaden the country’s foreign trade network.

China should venture into international markets and construct a robust global industrial chain. By capitalising on the groundwork laid by the Belt and Road Initiative, the Asia-Pacific Economic Cooperation (APEC), the Regional Comprehensive Economic Partnership (RCEP), and other mechanisms and regional cooperation organisations, we can expand our foreign trade network and nurture strong cooperative relationships with overseas destination countries. Maintaining healthy economic and trade relations with the European Union is particularly vital, as part of a wider strategy of developing an integrated and unified global economic and trade environment. A key part of this strategy involves focusing on the stabilisation and enhancement of current trade networks, specifically within supply chains and industrial chains with ASEAN countries. Lastly, China should proactively tap into emerging markets and expand trade in Central Asia, the Middle East, Latin America, and Africa.

Furthermore, China should actively engage in multi-faceted, multi-tiered international economic cooperation. For instance, the country must reinforce collaboration with trade partners in key areas like green development, facilitating people-to-people exchanges, and driving technological innovation.

By further developing this kind of open economic cooperation, and enacting targeted policies, China can help domestic businesses expand globally more effectively, while also alleviating overcapacity and promoting the more effective upgrading and development of domestic industries.

This article was co-authored with CEIBS Researcher Gao Kai. Wang Hong is President, Professor of Management and Hengdian Group Chair in Management at CEIBS and a Recipient of the Special Government Allowance of the State Council.