Japan is the largest provider of development aid to India. However, scholars following Japan?s engagement with India often lament why Japanese investments in India have not been as large as the aid flows. The commonly held view in this regard is that the Japanese government?s engagement with India, reflected in greater development aid, has been conspicuously different from the engagement of Japanese firms, who have been hesitant to set foot in India. The hesitation on the part of the latter is explained by referring to various business survey reports prepared by different agencies that find Japanese investors heavily wary of the difficulties of doing business in India.

In the first place, it is erroneous to trace causality between aid and capital flows. The motivations behind the two are entirely different. Aid is often guided by non-economic considerations. Capital flows, on the other hand, are influenced primarily by the prospects of expected returns. In this regard, Japanese investments in India have not behaved much differently vis-?-vis other important source countries for India such as the US or the UK.

Japan?s Suzuki Motors was the first foreign firm to enter India?s automobile industry by collaborating with Maruti Udyog. The initiative was remarkable as it occurred at a time when India was yet to embrace economic liberalisation and had significant controls on foreign participation in domestic industries. The Maruti-Suzuki partnership has proven to be one of the most durable associations in the Indian industry. Over the last decade, Japanese investments in India have increased and become more diversified. Japan is now the seventh largest source-country for FDI into India, from a cumulative perspective. However, Japan?s relative share in India?s inward FDI has reduced, which is basically indicative of India attracting larger FDI inflows from several other source-countries.

The year 2007-08 saw a spurt in inward Japanese FDI to India that conveyed, to many, the impression that the Japanese investment perception of India is becoming more positive. Market surveys also began to indicate the eagerness of Japanese manufacturers to exploit the lucrative prospects of the vast Indian market. This is not surprising since the size of the domestic market and level of returns obtainable on fixed investments are factors that have made India an attractive investment location. India?s gradual return to the high-growth trajectory, combined with prospects of rising disposable consumer incomes, is expected to preserve it as a favourite with Japanese firms, notwithstanding the short-lived blip inflicted by the global recession.

At present, there are more than 300 Japanese firms in India, with maximum presence in the automobile and electrical equipment industries. India?s automobile industry has strongly benefited from the presence of Suzuki, Toyota, Mitsubishi and Honda. The latter have been instrumental in shaping the growth of a globally competitive automobile sector in India. The cutting edge of the industry is expected to become sharper with the entry of Nissan. What is often overlooked in this regard is the role that these ?mother? firms have played in building a competent group of Indian vendors that supply parts and components to the parent outfits. The process has resulted in significant technology diffusion and upgrade of capacities on part of the local suppliers.

The interest of Japanese firms in making strategic inroads in to the Indian market is evident from their acquisition initiatives. Daiichi Sankyo?s acquisition of Ranbaxy is a key example. The acquisition can prove to be a landmark initiative signalling the entry of Japanese efforts in building durable capacities in corporate-funded research in India?s pharmaceutical industry. The DoCoMo?s acquisition of a substantive stake in Tata Telecom can also unleash strong co-operative synergies in the long term. Both these acquisitions also reflect the growing tendency on the part of the Japanese investors to enter the Indian market through the acquisitions route rather than the ?greenfield? route. For many investors, entering the Indian market through acquisitions and collaborations makes more sense. These entry strategies offer greater opportunities of dipping into captive markets built by the local brands. Furthermore, they also help in avoiding several initial costs of setting up businesses in a difficult place like India, where unfamiliarity with local conditions entails major transaction costs.

Other than acquisition, Japanese investors are also responding in a varied fashion to the imperatives of upgrading capacities and corporate social responsibility standards in India. Toyota?s decision to open a technical training school is a good example. The school is expected to equip graduates with diverse technical skills. A similar effort, though not exactly corporate-driven, is the Japanese role in establishing a new Indian Institute of Technology and developing an Indian Institute of Information Technology, Design and Manufacturing. The fact that India has decided to establish an exclusive industrial park for Japanese firms in Rajasthan is a testimony to both countries working together for reaping advantages from investment opportunities. Daikin Industries, along with a few other Japanese firms, is involved in developing the project. The project underscores India?s faith and confidence in Japanese enterprise and capabilities and the virtuous role that the latter can play in India?s industrial growth.

Japanese commercial interests will always encourage its firms to look closely at India. This is notwithstanding the difficulties in doing business. However, investments are also dictated by factors that are intrinsic to source countries. Japan, for example, has not had a great unbroken economic run during the last decade. Contractionary conditions at home often affect the ability of multinationals to deploy resources abroad. This might have affected the larger trend of Japanese FDI in India. However, more investments are likely to materialise in the future. They are more likely to be through the acquisition route, though, as opposed to fresh ?greenfield? ventures.

?Amitendu Palit is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. Parama Sinha Palit is a specialist on international relations based in Singapore. Views are personal