The past few decades have seen rapid advances toward a truly global economy, driven, to a large extent, by the growing role of multinational corporations (MNCs) and their activities around the world. Japanese companies have vigorously participated in this trend, both through exports and foreign direct investment. However, when it comes to Japan as a marketplace for foreign companies, the country has lagged far behind. Generating roughly 10 percent of global GDP, Japan accounts for less than 5 percent of worldwide merchandise imports and, even after the boom in recent years, for just 2 percent of the global inward FDI stock. In most other developed countries, foreign firms have come to play an important part in overall economic activity, making sizeable contributions to capital formation and employment. This is not the case in Japan: as new calculations in this chapter show, using employment as an indicator, foreign firms' role in the Japanese economy may be substantially larger than the most frequently cited published statistics suggest. Nevertheless, compared with countries such as the United States, Germany, or the United Kingdom, Japan's inward FDI penetration remains conspicuously low.

One important reason, of course, is geography. An island nation situated on the edge of a continent of which it is by far the most economically advanced, Japan has enjoyed none of the natural advantages that have facilitated cross-border trade and investment in other parts of the world such as Europe, where countries share land borders as well as cultural and linguistic roots.