INTRODUCTION

International business consists of business transactions between parties from

more than one country. Example included buying materials in one country and
shipping them to another for processing or assembly, shipping finished product
from one country to capitalize on lower labor costs, or borrowing money from a
bank in one country to finance operations in another.

The parties involved in such transactions may include private individuals,

individual companies, group of companies, and government agencies.
International business can differ from domestic business for a number of other
reasons, including the following the countries involved may use different
currencies, forcing at least one party to convert its currency into another.
Besides that, the legal systems of the countries may differ, forcing one or more
parties to adjust their practice to comply with local law. Occasionally, the
mandates of the legal systems may be incompatible, creating major headaches
for international manager. The cultures of the countries may differ, forcing each
party to adjust its behavior to meet the expectations of the other. And the lastly
the availability of recourses differs by country. One country may be rich in
natural resources but poor in skilled labor, white another may enjoy a
productive, well trained workforce but lack natural resources. Thus, the way
products are produced and the type of products that are produced vary among
countries.

International businesspeople must be knowledgeable about cultural, legal,

political, and social differences among countries. International business also
must coordinate the activities of their foreign subsidiaries, while dealing with the
taxing and regulatory authorities of their home country and all the other
countries in which they do business.

An almost any large organization you work for will have international operations
or be effected by the global economy. International business because you may
eventually work for a firm that is owned by a corporation headquartered in
another country. Besides that, small business also is becoming more involved in

1
international business. And the growth of e-commerce has also opened up new
opportunities for small business. Today, a well- develop Web site can draw the
business of consumers throughout the world without the need to establish a
physical presence in each country, making it easier for small businesses to
participate in the international market-place and than, international business can
to obtain cultural literacy.

INTERNATIONAL TRADE

International business originally consisted of international trade. Trade between

nations can be traced back as far. Success international trade often led to
political and military power. First Greece and then the Roman Empire prospered
in part because of exploitation of international trade. Ancient wars were fought
to maintain trade dominance. Another phenomenon of great importance to
international business developed during the colonial period and the subsequent
age of imperialism, the growth of foreign direct investment (FDI) and
multinational corporations , both and which involve foreigners supplying and
controlling investment in a host country.

During the nineteenth century the invention and perfection of the steam engine,
coupled with the spread of railroads, dramatically lowered the cost of
transporting good over land and thereby made larger factories more economical.
The forerunners of railroads dramatically lowered the cost of transporting goods
over land and thereby made larger factories more economical. The development
in turn broadened the extent of FDI. And the new invention promoting
technological change further stimulated FDI.

Besides that, Free trade occurs when a government does not attempt to
influence through quotas or duties what it citizen can buy from another country
or what thy can produce an sell to another country. Smith argued the invisible
hand of the market mechanism, rather than government policy, should
determine what a country import and what it export. His argument implied that
such a laissez-faire stance toward trade was in the best interest of a country.
Building on Smiths work are two additional theories that we shall review. One is

2
the theory of comparative advantage, advanced by the 19 th century English
economist David Ricardo. This theory is the intellectual basis of the modern
argument for unrestricted free trade. In the 20 th century, Ricardos work was
refined by two Swedish economists Eli Heckscher and Bertil Ohlin, whose theory
is known as the Heckscher Ohlin theory.
Mercantilism, the economic philosophy Smith attacked, held that it was essential
to a nations welfare to accumulate a stock of precious metals. These metals
were, in the mercantilists view the only sources of wealth. Because England had
no mines, the mercantilists looked to international trade to supply gold and
silver. The government established economics policies that promoted export and
stifled import, resulting in a trade surplus to be paid for gold and silver. Import
restrictions such as import duties reduced imports, while government subsidies
to exporters increased exports. Those acts created a trade surplus.

Globalization

International business has grown so rapidly in the past decade that many expert
argue we are living in the era of globalization. Globalization can be defined as
the inexorable integration of markets, nation-states, and technologies in a way
that is enabling individuals, corporations and nation-states to reach around the
world farther, faster, deeper and cheaper than ever before.

Many factors have contributed to the increasing integration of the world

economy and the worlds countries. The collapse of the Soviet empire in the late
1980s meant that the world was no longer divided into communist and capitalist
camps. The ensuing years have been characterized by increased reliance on
open markets, deregulation, and privatization. Changes in technology have also
contributed to integration. These have facilitated the growth of global capital
markets, e-commerce, supply chain that span the world, and an unprecedented
explosion of international.

Globalization refers to the shift toward a more integrated and interdependent

world economy. Globalization has two main components in the globalization of
markets and the globalization of production. The globalization of markets refers

3
to the merging of historically distinct and separate national markets into one
huge global marketplace. It has been argued for some time that the tastes and
preference of consumers in different nation are beginning to converge on some
global norm, thereby helping to create a global market. The most global markets
currently are not markets for consumer products where national difference in
tastes and preferences are still often important enough to act as a brake on
globalization but markets for industrial goods and materials that serves universal
need the world over.

The globalization of production refers to the tendency among firm to source

goods and service from locations around the globe to take advantage of national
differences in the cost and quality of factors of production such as labor, energy,
land and capital. By doing so, companies hope to lower their overall cost
structure and improve the quality of their product offering, thereby allowing
them to complete more effectively.

However, the most common definition and the one used in international business
is that of economic globalization in the international integration of goods,
technology, labor, and capital and capital that is firm implement global
strategies that link and coordinate their international activities on a worldwide
basis.

In globalization forces have five majors kinds of drivers, all based on change,
that are leading international firm of the globalization of their operations such as
political, technological, market, cost and competitive. In politic there is trend
toward the unification and socialization of the global community. Two aspect of
this trend are contributing to the globalization of business operations is a the
progressive reduction of barriers to trade and foreign investment by ore
government and the last is a the privatization of much of the industry in formerly
communist nations and the opening of their economies to global competition.

On technological, an advanced in computers and communications technology

are permitting an increased flow of idea and information across borders,
enabling customers to learn about foreign goods. Global communication network

4
enable manufacturing personal to coordinate production a design functions
worldwide so that plants in many parts of the world may be working on the same
product. The internet and network computing enable small companies to
complete globally because they make possible the rapid flow of information
regardless of the physical location of the buyer and seller to demonstrate their
product to prospective buyers all over the world without the need to travel. The
ease of obtaining information and making transactions on the internet has
started to have a profound effect on many firms and especially on business to
business commerce. Whereas companies formerly used faxes, telephone regular
their transactions, they now use the cheaper and faster internet.

Market as companies globalize, they also become global customers. For years,
advertising agencies established offices in foreign markets when their major
client entered those markets to avoid having a competitor steals the accounts.
Finding the home market saturated also sends companies into foreign markets,
especially when the marketer realized there is a convergence of customer tastes
and lifestyle brought about by increasing tourist travel, satellite TV, and global
branding. And than on the cost economies of scale to reduce unit costs are
always a management goals. One means achieving them is to globalize product
lines to reduce development, production, and inventory costs. The company can
also locate production in countries where the costs of the factors of production
are lower. And the lastly is a competitive. Competition continues to increase in
intensity. New firms, many from newly industrialized and developing countries,
have entered world markets in automobiles and electronics, for example another
competitive driving force for globalization is a fact that companies are defending
their home markets from competitors by entering the competitors home
markets to distract them.

Exporting and importing

Exporting is the selling of products made in ones country for use or sale or
resale in order countries. Importing is the buying of products made in other
countries for use or resale in ones own country; exporting and importing
activities often are divided into two groups. One of group of activities is trade in

5
goods in tangible products such as clothing, computers, and raw material. In
other group of activities is trade in service an intangible product such as
banking, travel, and accounting activities. In the United States his type of trade
is called service exports and imports. And also the great promise of exporting is
that huge revenue and profit opportunities are to be found in foreign markets for
most firms in most industries. Arties had very solid competitive position in the
United State. The company found that the opportunities for growth in foreign
markets can more than make up for any lack of opportunities in The United
State. In international markets is normally so much larger than the firms
domestic market, that exporting is nearly always way of increasing the revenue
and profit base of a company, despite the obvious opportunities associated with
exporting, studies have shown that while many large firms tends to be proactive
about seeking opportunities for profitable exporting, systematically scanning
foreign markets to see where the opportunities lie for leveraging their
technology, products, and marketing markets is saturated and the emergence of
excess productivities capacity at home forces them to look for growth
opportunities in foreign markets. Also, many small and medium-sized firms tends
to wait for the world to come to them, rather than going out into the world to
seek opportunities.

To make matters worse, many neophyte exporters have run into significant
probably when first trying to do business abroad and this has soured them on
future exporting venture. Common pitfalls include poor market, failure to
customize the product offering to the needs of foreign customers, lack of the
effective distribution program, and a poorly executed promotional campaign in
the foreign market. Neophyte exporters tend to underestimate the time and
expertise needed to cultivate business in foreign countries. Few realize the
amount of management resources that have to be dedicated to his activity. May
foreign customers require face-to-face negotiations on their home turf? An
exporter may have to spend months learning about country trade regulations,
business practice, and mores before a deal can be closed.

Export is often critical to firms financial health. There are a number of ways in
which inexperienced exporters can gain information about foreign market

6
opportunities and avoid some of the common pitfalls that tend to discourage and
frustrate novice exporters can utilize to increase their knowledge of foreign
markets opportunities, we consider the pros and cons of utilizing export
management companies (EMCs) to assist in the export process, and we review
various exporting strategies that can increase the probability of successful
exporting. We begin, however, with a look at how several Nations try to assist
domestic firms in the export process.

Legal Environmental

A domestic firm must follow the laws and customs of its home country. An
international business faces a more complex task. It must obey the laws not only
of its home country but also the laws of laws of all the host countries in which it
operates. Both home and host country laws can critically affect the way
international firms conduct their business. These laws determine the markets
firms may serve the prices they can charge for their goods, and the cost of
necessary inputs as labor, raw materials, and technology. The laws may also
affect the location of economic activity.

National legal systems vary dramatically for historical, cultural, political, and
religious reasons. The rule of law, the role of lawyers, the burden of proof, the
right to judicial review and of course, the laws themselves differ from country to
country. Thus, many international businesses are forced to resolve disputes
privately rather than utilize South Koreas courts. Because the Indian courts
system has a backlog of over three million cases, many attorneys advise their
business clients to settle conflict out of court rather than wait as long as 10
years to be heard in a court of law.

Common law is the foundation of the legal system in the United Kingdom and its
former colonies, including the United States, Canada, Australia, India, New
Zealand, Barbados, Saint Kitts and Nevis, and Malaysia. Common law is based on
the cumulative wisdom of judges decision on individual cases through history.

7
Statutory laws those enacted by legislative action also vary among the common
law countries. Common law has evolved differently in each common law country.
Thus laws affecting business practices vary somewhat among these countries,
creating potential problems for the uninformed international businessperson.

Civil law another common from of legal system, civil law is based on a
codification or detailed listing, of what is and is not permissible. The civil law
system originated unbiblical times with the Roman, who spread it throughout the
Western world. One important difference between common law and civil law
system apparent in the roles of judges and lawyers.
Religious law is based on the officially established rules governing the faith and
proactive of a particular religion. A country that applies religious law to civil and
criminal conduct is called a theocracy. Religious laws can create interesting
problems for firms. Countries relying on religious law often have other features,
such as an absence of due process and appeals procedures that should make
outside cautions. For example, all foreign firms must have a local representative
or sponsor, typically a government agency or a person well connected to the
royal family. The local representative can have the foreign detained by the local
police because no independent judiciary exists in the country to protect the
foreigners right; the foreigner is in a weak bargaining position.

In bureaucratic law the legal system in communist countries and in dictatorships

is often described as bureaucratic law. Bureaucratic law is whatever the
countrys bureaucrats say it is, regardless of the formal law of the land. In
countries relying on bureaucratic law, the ability of an international business to
manage its operations is often compromised by bureaucrats. International
managers are often confronted with arbitrary rules or decisions that have the
force of laws. Many international managers have learned the hard way that an
unfortunate by-product of bureaucratic law is the lack of consistency,
predictability, and appeal procedures. International businesspeople must be
aware of these procedures teams to avoid costly misunderstandings. They
should also rely on the expertise of local lawyers in each country in which they
operate to help them comply with the specific requirement of local laws and to

8
counsel them on substantive differences in due process, legal liabilities, and
procedural safeguards.

The Technological Environment

Another important dimension of a country is its technological environment. The

foundation of a countrys technological environment is its resource base. Some
countries, such as Australia, Argentina and Thailand, are blessed with much
fertile agricultural land. Countries may change or shape their technological
environments through investment. By improving the knowledge and skills of
their citizens, countries improve the productivity and efficiency of their
workforces. Investment in infrastructure and human capital has allowed
development countries to countries. Another means for altering a country
technology transfer, the transmittal of technology from one country to another.
Some countries have promoted technological transfer by encouraging foreign
direct investment (FDI).

An important determinant of a countrys technological environment and the

willingness of foreign firms to transfer technology to the country is the degree of
protection that its laws offer intellectual property right. Intellectual property
patens copyrights trademarks, brand names, and so for this an important asset
of most MNC. It often forms the basic of a firms competitive advantage core
competency in the global marketplace. The value of intellectual property can
quickly be damage unless countries enforce ownership right of firms. Countries
that provide weak protection for intellectual property are less likely to attract
technology intensive foreign investment. Weak protection for intellectual
property right can have high cost for international business as Harry Potters
publisher discovered. International conflict often develops because intellectual
property laws are not consistent. Registration of trademarks and brand names
can also cause problems for international business. Generally, most countries
follow a first to file approach, which often lends itself to abuses against
foreigners. A firm may popularize a brand name or trademark in its home
market, only to find. Financial service is an information intensive industry. It
draws on large volumes of information about markets, risks, exchange rates,

9
interest rates, creditworthiness, and so on. It uses this information to make
decisions about what to invest where, how much interest to pay to depositors,
and the value and friskiness of a range of financial assets including corporate
bonds, stocks, government securities, and currencies. Because of this
information intensity, the financial services industry has been revolutionized
more than any other industry by industry by financial assets including corporate
bonds, stocks, government securities, and currencies.

Because of this information intensity, the financial services industry has been
revolutionized more than any other industry advance in informational
technological the 1970s. The growth of international communications
technology has facilitated instantaneous communication between any two points
on the globe. At the same time, rapid advances in data processing capabilities
have allowed market makers to absorb and process large volumes of information
from around the world.

The integration facilitated by technology has a dark side shock that occur in
one financial center now spread around the globe very quickly. However, most
market participation would argue that the benefits of an integrated global capital
market far outweigh any potential costs.

Political Forces
An important part of any business decision is assessing the political environment
in which a firm operates. Laws and regulations passed by any level of
government can affect the viability of a firms operation in the host country.
Minimum wage laws affect the price a firm must pay for labor, zoning regulations
affect the way it can use its property, and environmental protection laws affect
the production technology it can use as well as the costs of disposing of waste
materials. Adverse change in tax laws can slowly destroy a firm profitability.

Political Risk

Most firms are comfortable assessing the political climates in their home
countries. However, assessing the political climates in other countries is far more

10
problematic. Experienced international business engages in political risk
countries. Political risks are any change in the political environmental that may
adversely affect the value of firms business activities. Most political risks can be
divided into three categories is a ownership risk, in which the property of a firm
is threatened through confiscation or expropriation, operating risk in which the
ongoing operations of a firm and or the safety of its employees are threatened
through change in laws, environmental standards tax, codes, terrorism, armed
insurrection, and so forth and transfer risk, in which the government interferes
with a firms ability to shift funds into and of the country.

Political risks may result from government actions, such as passage of laws that
expropriate private property, raise operating costs, and devalue the form
nongovernmental actions, such as kidnappings, extortion, and acts of terrorism.
Political risks may affect all firms equally or focus on only a handful. Micro
political risks affect only specific firm or firms within a specific industry. In
political system the economic and legal system of a country are often shaped by
its political system. By political we mean the system of government in a nation.
Political system can be assessed collectivism as opposed to individualism. It is
possible to have democratic societies that emphasize a mix of collectivism and
individualism.

In capitalism, free Enterprise ideal is that all the factors of production should be
privately owned. Under ideal capitalism, government is restricted to those
functions that the private sector can not perform, national, defense public
service and government to government international relations. Reality In so-
called capitalist countries is quite complex. The government of such countries
typically regulates privately owned businesses quite closely, and these
government own businesses.

In socialism trace their intellectual roots back to Karl Marx (1818-1883). Marx
argued that the few benefit at the expense of the many in a capitalist society
where individual freedoms are not restricted. The communists believed that
socialism could be achieved only through violent revolution and totalitarian
dictatorship, while the social democrats committed themselves to achieving

11
socialism by democratic means and turned their backs on violent revolution and
dictatorship. Socialism advocates government ownership or control of the basic
means production distribution, and exchange. Profit is no an aim.

National trade policies just discussed address the needs of individual industries.
a national government may also develop trade policies that begin by taking an
economy-wide perspective . After assessing the needs of the economy, the
government then adopts industry by-industry policies to promote the countrys
overall economic agenda. An important policy goals of many government,
particularly those of developing countries is economic development.
International commerce can play a major role in economic development
programs. Countries that depend on a single export often choose to diversify
their economies to reduce the impact depend on a single export often choose to
diversity their economies to reduce the impact of say a bad harvest or falling
prices for the dominant export.
In industrial policy many countries the government plays an active role in
managing the national economy. Often an important element of this task is
determining which industries should receive favorable government treatment.
The governments of most other Quad countries have faced the major issues of
whether to adopt industrial policy, by which the national government identifies
key domestic industrial critical to the countrys future economic growth and then
formulates programs that promote their competitiveness. Ideally, industrial
policy assists a countrys firms in capturing large shares of important, growing
global markets, as MITI has done for Japanese multinational corporations (MNCs).
According to public choice analysis a branch of economics that analyzes public
decision making, the special interest will often dominate the general interest on
any given issue for a simple reason such as special interest than the general
public is willing to work for the passage of laws favorable to their interests.
According to public choice analysis, domestic trade policies that affect
international business stem not from some grandiose vision of a countrys
international responsibilities but rather from the mundane interaction of
politicians trying to get elected. On savvy international businesspeople recognize
these political realities. Often a foreign firm needs to find domestic political allies
to run interference.

12
Individualism is the opposite of collectivism. In the political sense, individualism
refers to a philosophy that an individual should have freedom it his or her
economic and political pursuits. In contrast to collectivism, individualism stress
that the interests of the individual should take precedence over the interest of
the state. But in the central message of individualism, therefore, is that
individual economic and political freedoms are the ground rules on which a
society should be based. This puts individualism in direct conflict with
collectivism. Collectivism asserts the primacy of the collective over the
individuals asserts just the opposite.

Democracy and totalitarianism are at different ends of a political dimension.

Democracy refers to a political system in which government is by the people,
exert either directly or through elected representatives. Totalitarianism is a form
of government in which one person or political party exercise absolute control
aver all spheres of human life and opposing political prohibited. The democracy
totalities dimension is not independent of the collection. In a totalitarian country
all the constitutional guarantees on which representative democracies are built
such as an individuals right to freedom of expression and organization, a free
media, and regular elections are denied to the citizens. Four major forms of
totalitarianism exists I the world today. Until recently the most widespread was
communist totalitarianism. A second form of totalitarianism might be labeled
theocratic totalitarianism. Theocratic totalitarianism is found in states where
political power is monopolized by a party, group, or individual that governs
according to religious principles. A third form of totalitarianism might be referred
to as tribal totalitarianism. Consequently, the typical contains a number of
different tribes. Tribal totalitarianism occurs when a political that represents the
interests of a particular tribe monopolized power. And the lastly is major from of
totalitarianism might be described as right-wing totalitarianism. Right wing
totalitarianism generally permits individual economic freedom but restricts
individuals political freedom on the grounds that it would lead to the rise of
communism.

The Role Of Culture Influence

13
Culture is the collection of value, beliefs, behavior, customers, and attitudes that
distinguish one society from another. A societys culture determines the rules
that govern how firms operate in the society. Several characteristics of culture
are worth noting for their relevance to international businesses. In the culture
reflects learned behavior that is transmitted from one number of a society to
another. Some elements of culture are transmitted intergeneration ally, as when
parents teach their children table manners. Other elements are transmitted
intergenerational, as when senior educate incoming freshmen about a schools
traditions. In the elements o culture are interrelated for example, Japan group-
oriented, hierarchical society stress harmony and loyalty, which has historically
translated into lifetime employment and minimal job switching. Because culture
is learned behavior it is adaptive that is the culture change in response to
external forces that affect the society. Culture is shared by members of the
society and indeed defines the membership of the society; those who do not are
outside the boundaries of the society. A societys culture determines how its
members communicate and interact with each other. The basic elements of
culture are social structure, language, communication, religions, and value and
attitudes. The interaction of these elements affects the local environment in
which international business operate.

In social structure basic to every society is its social structure, the overall
framework that determine the roles of individuals within the society, the
stratification of the society, and individuals mobility within the society.

An individuals, families and groups all human societies involve individuals living
in family units and working with each other in group. Societies differs however,
in the way they define family an in the relative importance they place on the
individuals role within groups. In the cultures, the extended family is far more
important. These differing social attitudes are reflected in the importance of the
family to business. Similarly, family members fill critical management positions
and supply capital from personal saving to ensure the firms growth. Cultures also
differ in the importance of the individuals relative to the group, culture for

14
example, promotes individualism. In culture also have language, communication,
religion, social structure and values and attitudes.

In social stratification, societies differ in their degree of social stratification. All

societies categories people to some extent on the basis of their birth,
occupation, education achievements, or other attributes. However, the important
of these categories in defining how individuals interact with each other within
and between these groups varies by society. The British class structure and the
Indians caste system provide more recent examples with other people.
Multinational corporations (MNC) operating in highly stratified societies often
must adjust their hiring and promotion producers to take into account class or
clan differences among supervisors and workers. In highly stratified societies,
advertisers must tailor their message more carefully to ensure that they reach
only the targeted audience and do not spill over to another audience that may
be offended by receiving a message intended for the first group.

Social mobility is the ability of individuals to move from one of society to

another. Social mobility tends to be higher in less stratified societies. Social
mobility often affects individuals attitudes and behaviors toward such forces as
labor relations, human capital formation, risk taking, and entrepreneurship.
Language is a primary delineator of cultural groups because it is an important
means by which society members communicate with each other. Language
organized the way members of a society think about the world. It filters
observations and perceptions and thus affects unpredictably the message that is
sent when two individuals try to communicate. The professor in charge of the
experiment looks every precaution to ensure that the translation was perfect,
yet the language itself altered the nature of the information being conveyed.

In additional to shaping ones perceptions of the world, language provides

important clues about the cultural values of the society and aids acculturation.
For example many languages have informal and formal forms of the word you
the use of which depend on the relationship between the speaker and the person
addressed.

15
INTERNATIONAL INVESTMENT

Investment objective

Investment is important because everyone must invest to provide for vital future
needs such as cars, homes, education, and retirement income. By studding
investment theory and analysis, it becomes possible to improve investment
results. Saving money for a down payment on a home is a prefect example.
Using high-yield money market instruments, individual savers can often increase
the interest earned over certificates of deposit offered by commercial banks or
saving s and loan institutions. Effective selection of stock and bond investment is
an important consideration for all investors seeking to improve their chances for
a satisfactory retirement income.

Thirty years ago, it was common for individual companies to offer employees
defined-benefit retirement plans. Under a defined-benefit retirement plan,
employee is promised a fixed retirement income. A substantial pension would
provide a meaningful supplement to social security payments and any other
retirement income from investments. Actually when the employees have
defined-contribution retirement plans, it is necessary that they themselves
accept responsibility for the management of their retirement assets. Under a
defined-contribution retirement plan, the employee accepts no responsibility for
the amount accumulative in an individual employees retirement account. The
freedom to match individual retirement strategies with indicial risk attitudes is a
compelling advantage of defined-contribution retirement plan. At the same time,
this greater flexibility brings along with it a greater level of employee
responsibility. If the individual employee fails to understand the fundamental
relationships between risk and expected return and the pluses and minuses of
stock and bond investing in the long run, such as an individual is apt to pay a
startling cost in term of reduced retirement income.

The second objectives for the investment are to meet other financial goals. Of
course, the importance of learning about investing extends beyond the need for

16
intelligent retirement plan. Funding an adequate retirement income is a prime
concern to many investors, but it is not their sole concern. Carefully selected
stock and bond investments can make an important contribution toward paying
the cost of college education especially when an extended investments
horizontal is possible.

The third objectives for the investment are essence of time. It is important to
emphasize the role that the length of investment horizontal, or time itself, plays
in building a significant and successful investment portfolio.

Capital theory and investment behavior

There is no greater gap between theory and econometric practice than which
characterizes the literature on business investment in fixed capital. According to
the neoclassical theory of capital, as expounded for example by Irving Fisher, a
production plan for the firm is chosen so as to maximize utility over time. Under
certain well-known, condition this leads to maximization of the net worth of the
enterprise as the criterion of optimal capital accumulation. Capital is
accumulated to provide capital services, which are inputs to productive process.
For convenience the relationship between inputs, including the input of capital
services, and output is summarized in a production function. Although this
theory has been known for at least for fifty years, it is currently undergoing a
great revival in the interest. The theory appears to beginning increasing currency
and more widespread understanding.

By contrast, the econometric literature on business investment consist of ad hoc

descriptive generalization such as the capital principal, profit principal and the
like. Given sufficient imprecision, one can rationalize any generalization of this
type by an appeal to theory. However, even with the aid of much ambiguity, it is
impossible to reconcile the theory of econometric literature on investment with
the neoclassical of optimal capital accumulation. The central feature of the
neoclassical theory is the response of the demand for the capital to changes in
relative factor prices or the ratio of factor prices to the price of output. This
feature is entirely absent from the econometric literature on investment.

17
It is difficult to reconcile the steady advance in the acceptance of the
neoclassical theory of the capital with the steady march of the econometric
literature in a direction which appeals to be diametrically opposite. It is true that
there have been attempts to validate the theory. Both profit and capacity
theories have tried a rate of interest have been or a price of investment goods
there. By and large these efforts have been unsuccessful. The nave positive can
only conclude, so much the worse for the theory. That a case can be made that
previous attempts to test the neoclassical theory of capital have fallen so far
short of a correct formulation of this theory that the issue of validity of the
neoclassical theory remains undecided.

Demand for capital is not demand for the investment. The short-run
determination of investment behavior depends on the time form of legged
response to changes in the demand for the capital. For simplicity, the time form
for legged response will be assumed to be fixed. At the same time, are more
general hypothesis about the form of the lag is admitted than that customary in
the literature. Finally, it will assume that replacement investment is proportional
to capital stock. This assumption, while customary has a deep justification which
will present.

Business behavior is one of the areas of modern economic research that is being
studied most intensively. Empirical economic are accumulating rapidly and at the
same time important developments in the economic theory of investment
behavior are taking place. As yet, there is very little common ground between
the empirical and theoretical approaches to this subject. From a certain point of
view, this is a desirable state of affairs. Econometric study of behavior date back
no more than thirty years. Only recently have date on investment expenditures
suitable for analysis by econometric methods become available. If empirical
studies are forced prematurely into a theoretical straitjacket, attention may be
diverted from historical and institutional considerations that are essential to a
complete understanding of investment behavior. On the other hand, if
theoretical work is made to conform to realistic assumptions at too early a stage

18
in the development of empirical work, the door may be closed to theoretical
innovations that could lead to improvements in empirical work at a later stage.

While these are some surface plausibility in the view that empirical and
theoretical research are best carried out in isolation from each other, this view is
seriously incomplete. Econometric work is always based on highly simplified
methods. The number of possible explanations of investment behavior, which is
limited only by the imagination of the investors, is so large that, in any empirical
investigation, all but a very few must be ruled out in advance. Insofar as the
necessary simplifications restrict the possible explanation of investment
behavior, these simplifications constitute, at least implicitly, at theory of
investment behavior. Such theories can be compared with each other most
expeditiously by reducing each to its basic underlying assumptions, after which
empirical tests to discriminate among alternative theories can be designed. Far
from forcing empirical studies into a theoretical straitjacket, judicious use of a
theoretical framework is essential to the proper direction of the empirical work.

Nature of investing

a) future value
Investment is an important subject. Whether we realize it or not, we make
important investment everyday. For example, if we decide to buy rather
than lease a car, we are making a significant investment decision. We
purchase decision involves a substantial cash outlay prior to the
enjoyment of the many benefits bestowed by automobile ownership. In
return of initial cash outlay, we receive a flow of automobile services that
lasts as long as you own your car. Financially speaking, automobile owners
receive an implicit return on our investment comparing the amount of an
initial outlay to buy a car with the amount of lease payment that would be
required

b) Present value
An alternative way of looking at the process of investment is to look at
present-day dollars rather than future dollars. If instead one wishes to

19
 express the present value of a future sum, an analogous technique called
present-value analysis is used. Using present value analysis, the time
value of money concept is used to discount the value of future dollars
back to their present-day equivalent. Instead of growing current dollars
into future dollars, present value analysis is the process of shrinking future
dollars into their present-day equivalent.

Theory of finance
Today many novice investors are primarily concerned with two simple questions.
First, how do you access investment information? And the answer is often simple
and direct no the net. The internet and traditional financial publication offer
todays investors a wealth of valuable investment information and analysis, often
for free. A second common and important question is how does investor
efficiently organize financial information? Many novice investments today are
seasoned in the use of personal computers and financial software. In many
instances, even novice investors are adept at organizing a wealth of financial
information available on individual companies. To be sure, answers to the
question are important to the all investors.

However, before addressed these to important question, a third and perhaps

more basic question must be ask. How do you process, or make sense of,
investment information? This is where the theory of finance comes into play. Just
as the affective practices of successful investors give clues about how to
proceed, so to does investment theory provide a useful road map or context for
analyzing investments problems? The road nap provided by the theory of
financial explains that economic force determine the process for stocks, bonds
and other assets such as real estate, art, and collectibles. Money grows over
time according to the economic fundamental. Compound interest can create an
astounding increase in the value of company or investment over time.

Key investment concept

In addition to the compound interest concept, another key idea in investment
theory is the concept of portfolio. A portfolio is a diversified collection of stocks

20
and bonds or other assets. An investors intent in creating a portfolio of assets is
to provide the basis for a stable rate of return. Portfolio theory tell us that
diversification has the potential to reduce anticipates risk for a given expected
return. Each individual firm has various influences that affect its risk. Firm-
specific risk is tied to the chance that a key executive might leave the firm or
die, important product might lose out to the new competitors, or vital brand
names would be lose. By forming an investment portfolio, firm-specific risk tend
to cancel out.

Psychology and the stock market

According to the efficient market hypothesis, current stock price reflect all
relevant risk and return information. This implies that near-term stock price new
changes a random and independent. In a rational pricing environment, investing
in the stock price market is a fair game in which the expected excess return for
each security is zero. Taken literally, this means that every stock every point in
time is an equally good buys or sell.

At the same time, a large and growing literature on stock market anomalies
suggests that unexplained systematic abnormal return may reflect market
inefficiency and more elusive errors in expectant return calculation. Several
recent studies show that average return on common stock are reacted to firm
characteristics such as size, earning, price, high cash flow, book-to-market
equity, past sales growth, long-term past return, and short term past return.
Some academic scholars in the field of finance argue that perceived dispraising
of fundamental factors disappears in a three-factor model and argue that asset
pricing appears rational within this framework.

However, George Soros among others, suggest that subtle psychological

influence can help explain certain anomalous pricing situations. In the word of
George Soros, classical economic theory assumes that market participants act
on the basis of perfect knowledge. That assumption is false. The participations
perception influences the market in which their participant, but the market
action also influences the perceptions. They cannot perfect knowledge of the
market because their thinking always affecting the market and the market is

21
affecting their thinking. Within this context, it becomes reasonable to regard the
efficient market hypothesis as a working hypothesis regarding primarily rational
investors who typically price security in a rational fashion. However, history
seems to suggest that outbreaks of crowed behavior, typified by extraordinary
popular delusions and madness, are occasionally observed in various markets.

Investment Banking
At the other of the investment business from the stock broker and the financial
planner, who deal mainly with individual investors, is the investment banker,
who deals mainly with institutional clients. Investment bankers are primarily
involved in the distributing of securities from issuing corporation to the general
public.

The investment banker goes to company in need of debt or equity financing

arranges to see those securities to the general public, and acts as intermediary
between individual investors and the issuing corporations. Investment banker
also advises corporate clients on financial strategies and often helps arrange
mergers and acquisition. To be sure, the investment bankers job is not passive.
Investment bankers aggressively seek out corporate clients who need financial
advice. Investment bankers tend to be talented, hardworking, and extremely
aggressive. It is a pressure cooker occupation with enormous risk and staggering
potential rewards. Individual investment bankers have been known to make in
the tens of millions of dollars per year in total compensation. On the other hand,
the penalty for failure can be extreme. Widespread layoffs during industry
downturns are common. It is not rare for an individual investment banker to go
from making millions of dollars of compensation one year to getting fired the
next year.

This review of career opportunities in investment and the financial services

industry is not meant to be exhaustive. Certainly, it is not meant to be
discouraging. This is definitely a growth industry. The compensation in the field
of investments is performance based. Rewards for success are substantial.
Penalties for underperformance are swift.

22
Brokerage business

A stock broker is referred to as account executive, usually work with individual

investors and institutions in advising and executing orders for individual common
stocks or bonds. Although the broker may receive a base salary, it is common for
the main part of a brokers compensation to come in the form of commission
income. In typical arrangement, an individual broker might receive 35-50% of
the total commissions generated.

c) INVESTMENT IN JAPAN

Economic of Japan

Japan's industrialized, free-market economy is the world's third-largest

purchasing power parity (PPP) after the United States, and People's Republic of
China. It is the second-largest by market exchange rates. Its economy is highly
efficient and competitive in areas linked to international trade although
productivity is lower in areas such as agriculture, distribution, and services.
Government-industry cooperation, a strong work ethic, mastery of high
technology, and a comparatively small defense allocation have helped Japan
advance with extraordinary speed to become one of the largest economies in the
world. Its reservoir of industrial leadership and technicians, well-educated and
industrious work force, high savings and investment rates, and intensive
promotion of industrial development and foreign trade have produced a mature
industrial economy. Japan has few natural resources, and trade helps it earn the
foreign exchange needed to purchase raw materials for its economy.

Distinguishing characteristics of the Japanese economy include the cooperation

of manufacturers, suppliers, distributors, and banks in closely-knit groups called
keiretsu; the powerful enterprise unions and shunt; cozy relations with
government bureaucrats, and the guarantee of lifetime employment (shushin
koyo) in big corporations and highly unionized blue-collar factories. Recently,

23
Japanese companies have begun to gradually move away from some of these
norms in an attempt to increase their global competitiveness and profitability
(the latter due mostly to their increased reliance on equity rather than debt
financing).

For three decades, Japan's overall real economic growth had been spectacular: a
10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the
1980s.[1]

Growth slowed markedly in the 1990s largely due to the after-effects of over-
investment during the late 1980s and domestic policies intended to wring
speculative excesses from the stock and real estate markets. Government efforts
to revive economic growth have met with little success and were further
hampered in 2000 to 2001 by the slowing of the global economy. [2] However,
GDP per worker has increased steadily even through the nineties, given that
from 1993 to 2007, 10% of the population distribution moved from the "working
age" to "elderly age".

Sliding stock and real estate prices marked the end of the "bubble economy" of
the late 1980s, and ushered in a decade of stagnant economic growth. Real GDP
in Japan grew at an average of roughly 1.5% yearly between 1991-1999,
compared to growth in the 1980s of about 4% per year. Growth in Japan
throughout the 1990s was slower than growth in other major industrial nations,
and the same as France and Germany. Japan endured periods of recession
around the turn of the millennium, exacerbated by recession in the United
States, but from 2003 began to grow strongly again at 2.0% and this rate has
held steady through 2004. The economy saw signs of strong recovery in 2005.
GDP growth for the year was 2.8%, with an annualized fourth quarter expansion
of 5.5%, surpassing the growth rate of the US and European Union during the
same period.[3] Unlike previous recovery trends, domestic consumption has been
the dominant factor in leading the growth. As predicted, the economical recovery
continued in 2006 and 2007. Prime Minister Shinzo Abe, who is currently working
on Japan's economic revival, has signed a treaty with Saudi Arabia and UAE
about the rising prices of oil.

24
Development Bank of Japan
Development Bank of Japan is a policy-based financial institution wholly owned
by the Government of Japan. Reorganized to its present status in 1999, DBJ was
established in 1951 to help the country's economy recover from the devastation
of the Second World War. Since then, DBJ has shifted its focus onto areas such as
energy, urban and regional development, and environmental preservation, as
well as the revitalization of the economy. The bank's main business is to supply
long-term financial solutions, from a government perspective, to capital
investments and other projects conducted in Japan.

Bank Of Japan Raises interest rates

After 5 years of a near zero interest rate policy the Bank of Japan today, Friday
14th July 2006, decided to raise interest rates by 0.25%. The central Bank made
this announcement today stating the decision was unanimous and had
been arrived at only after two days of meetings.

When BOJ board member Hidehiko Haru said on June 1st 2006 he expected the
zero interest rate policy to stay in place for some time to come. I really felt that
meant more than 5 weeks. Still this is a well predicted interested rate hike and
has been on the cards for some time. One may say it is even a little late.

Laws & Regulations on Setting Up Business in Japan

Section1: Incorporating Your Business

Definitions and comparisons of various business operations; procedures and
guidelines for establishing/registering each of these distinct operations in Japan.

Section2: Visas and Status of Residence

Entry procedures into Japan, conditions and provisions that apply to various

25
types of visas and working/residence statuses; the alien registration process;
details concerning family members accompanying foreign nationals.

Section3: Taxes in Japan

Aspects of Japan's tax systems most relevant to a foreign corporation/individual
investing in Japan (emphasis on corporate tax structures, tax treaties as well as
personal and consumption taxes).

Section4: Human Resource Management

Japan's labor laws and regulations; topics include; recruitment; employment
contracts; wages, working ours; work rules; workplace safety and hygiene
requirements; resignation and dismissal procedures and Japan's social security,
health and pension systems.

Section5: Trademark and Design Protection Systems

Japan's trademark and design protection systems; registration validities, periods
of protection as well as trademark and design registration procedures.

Establishment of the invest Japan Office

The Japan Investment Council Expert Committee Report stated that the Invest
Japan Office will "Translate various types of information on investment
procedures, and establish a single contact point in JETRO for access to such
information. In addition, each ministry or institution related to investment will set
up a single contact point, which can indicate the division in charge of a particular
procedure."

The Office of Invest Japan provides the following services to potential investors
Request of information on investment, information on applying for investment
opportunities, Complaints about processing of the advanced notification system,
on the so-called no-action-letter system, and on investment, and matters related
to investment.

26
Japan's industrialized, free-market economy is the world's third-largest
purchasing power parity (PPP) after the United States, and People's Republic of
China. It is the second-largest by market exchange rates. Its economy is highly
efficient and competitive in areas linked to international trade although
productivity is lower in areas such as agriculture, distribution, and services.
Government-industry cooperation, a strong work ethic, mastery of high
technology, and a comparatively small defense allocation have helped Japan
advance with extraordinary speed to become one of the largest economies in the
world. Its reservoir of industrial leadership and technicians, well-educated and
industrious work force, high savings and investment rates, and intensive
promotion of industrial development and foreign trade have produced a mature
industrial economy. Japan has few natural resources, and trade helps it earn the
foreign exchange needed to purchase raw materials for its economy.

Distinguishing characteristics of the Japanese economy include the cooperation

of manufacturers, suppliers, distributors, and banks in closely-knit groups called
keiretsu; the powerful enterprise unions and shunt; cozy relations with
government bureaucrats, and the guarantee of lifetime employment (shushin
koyo) in big corporations and highly unionized blue-collar factories. Recently,
Japanese companies have begun to gradually move away from some of these
norms in an attempt to increase their global competitiveness and profitability
(the latter due mostly to their increased reliance on equity rather than debt
financing).

For three decades, Japan's overall real economic growth had been spectacular: a
10% average in the 1960s, a 5% average in the 1970s, and a 4% average in the
1980s.

Growth slowed markedly in the 1990s largely due to the after-effects of over-
investment during the late 1980s and domestic policies intended to wring
speculative excesses from the stock and real estate markets. Government efforts
to revive economic growth have met with little success and were further
hampered in 2000 to 2001 by the slowing of the global economy. ] However, GDP
per worker has increased steadily even through the nineties, given that from

27
1993 to 2007, 10% of the population distribution moved from the "working age"
to "elderly age".

Sliding stock and real estate prices marked the end of the "bubble economy" of
the late 1980s, and ushered in a decade of stagnant economic growth. Real GDP
in Japan grew at an average of roughly 1.5% yearly between 1991-1999,
compared to growth in the 1980s of about 4% per year. Growth in Japan
throughout the 1990s was slower than growth in other major industrial nations,
and the same as France and Germany. Japan endured periods of recession
around the turn of the millennium, exacerbated by recession in the United
States, but from 2003 began to grow strongly again at 2.0% and this rate has
held steady through 2004. The economy saw signs of strong recovery in 2005.
GDP growth for the year was 2.8%, with an annualized fourth quarter expansion
of 5.5%, surpassing the growth rate of the US and European Union during the
same period. Unlike previous recovery trends, domestic consumption has been
the dominant factor in leading the growth. As predicted, the economical recovery
continued in 2006 and 2007. Prime Minister Shinzo Abe, who is currently working
on Japan's economic revival, has signed a treaty with Saudi Arabia and UAE
about the rising prices of oil.

Japan Investments Finance

Private Cash Purchase

The purchase of an entire piece of real estate in Japan in one individuals name.
This finance category is open to Private individuals wishing to invest 100% cash
and purchase a property in their own name as an individual. The laws of Japan
are very friendly in this respect of foreign ownership and 100% foreign
ownership is acceptable. These parcels of real estate may be single homes, land
upon which we manage the development of a new residential building or the
purchase of an existing residential property which we take over and manage.
The investment range here is between US$150,000 and US$20,000,000.These
projects may be long term or short. The length of the project is up to the
individual investor and the market itself.

28
Partnership Cash Purchase
The investment of funds into a partnership with other investors with the aim to
purchase single homes, land upon which we mange the development of a new
residential building or the purchase if an existing property which we take over
and manage. Investors can get going from $50,000 within this group. Projects
will only commence once an adequate pool of funds has been created. This
method allows easy access to those who want to get going in the real estate
market of Japan but do not have sufficient funds to buy their own building
outright. It is not a REIT. It requires that a formal partnership be formed between
the groups of investors. Japan Investments has in the past and continues to be
willing as a group to join you in these investments and use our own cash to get a
investment going. In some cases we will later sell our portion of the partnership
on whilst in others we will stay with the project for its full life.

Private Cash/Finance Purchase

Our real estate investment group does have access to Japanese financial
intuitional loans. The loans we facilitate attract Japanese interest rates. As in any
other country each investment will be viewed on its own merits by the banks. In
our experience there is normally no problem for foreigners accessing Japanese
banks loans provided a) the deal is solid. b) the deal is being supported by a
trust worthy mentor who knows the real estate market in Japan and that the
bank is familiar with. Investing in real estate in Japan is a much easier if you are
accomplices to the bank by a well known property manager or real estate
investor who assures the bank they will be involved in the management of the
asset.

Macroeconomic trend

29
Rend of Historical value of Japanese Yen

This is a chart of trend of gross domestic product of Japan at market prices

estimated by the International Monetary Fund with figures in millions of Japanese
Yen.

Yea Gross Domestic US Dollar Inflation Index

r Product Exchange (2000=100)

195
8,369,500 360
5

196
16,009,700 360
0

30
196
32,866,000 360
5

197
73,344,900 360
0

197
148,327,100 297.26
5

198
240,707,315 225.82 75
0

198
323,541,300 236.79 86
5

199
440,124,900 144.15 92
0

199
493,271,700 93.52 98
5

200
501,068,100 107.73 100
0

200
502,905,400 110.01 97
5

For purchasing power parity comparisons, the US Dollar is exchanged at

125.16.

31
A natural resources in Japan

A mountainous, island country, Japan has inadequate natural resources to

support its growing economy and large population. Although many kinds of
minerals were extracted throughout the country, most mineral resources had to
be imported in the postwar era. Local deposits of metal-bearing ores were
difficult to process because they were low grade. The nation's large and varied
forest resources, which covered 70 percent of the country in the late 1980s,
were not utilized extensively. Because of the terrain, underdeveloped road
network, and high percentage of young trees, domestic sources were only able
to supply between 25 and 30 percent of the nation's timber needs. Agriculture
and fishing were the best developed resources, but only through years of
painstaking investment and toil. The nation therefore built up the manufacturing
and processing industries to convert raw materials imported from abroad. This
strategy of economic development necessitated the establishment of a strong
economic infrastructure to provide the needed energy, transportation,
communications, and technological know-how.

Given its heavy dependence on imported energy, Japan has aimed to diversify its
sources. Since the oil shocks of the 1970s, Japan has reduced dependence on
petroleum as a source of energy from more than 75% in 1973 to about 57% at
present. Other important energy sources are coal, liquefied natural gas, nuclear
power, and hydropower. Demand for oil is also dampened by higher government
taxes on automobile engines over 2000 cc, as well as on gasoline itself, currently
54 yen per liter sold retail. Kerosene is also used extensively for home heating in
portable heaters, especially farther north. Many taxi companies run their fleets
on liquefied gas with tanks in the car trunks. A recent success towards greater
fuel economy was the introduction of mass-produced Hybrid vehicles.

Deposits of gold, magnesium, and silver meet current industrial demands, but
Japan is dependent on foreign sources for many of the minerals essential to
modern industry. Iron ore, coke, copper, and bauxite must be imported, as must
many forest products.

32
The types of economic activity in Japan

i. Agriculture

Rice is a very important crop in Japan as shown here in a rice paddy in Autumn,
Kurihara, Miyagi prefecture.

Only 12% of Japan's land is suitable for cultivation. Due to this lack of arable
land, a system of terraces is used to farm in small areas. This results in one of
the world's highest levels of crop yields per unit area, with an overall agricultural
self-sufficiency rate of about 50% on fewer than 56,000 km (14 million acres)
cultivated.

Japan's small agricultural sector, however, is also highly subsidized and

protected, with government regulations that favor small-scale cultivation instead
of large-scale agriculture as practiced in North America.

Imported rice, the most protected crop, is subject to tariffs of 490% and was
restricted to a quota of only 7.2% of average rice consumption from 1968 to
1988. Imports beyond the quota are unrestricted in legal terms, but subject to a
341 yen per kilogram tariff. This tariff is now estimated at 490%, but the rate will
soar to a massive 778% under new calculation rules to be introduced as part of
the Doha Round.

Although Japan is usually self-sufficient in rice (except for its use in making rice
crackers and processed foods) and wheat, the country must import about 50% of
its requirements of other grain and fodder crops and relies on imports for most of
its supply of meat. Japan imports large quantities of wheat, sorghum, and
soybeans, primarily from the United States. Japan is the largest market for EU
agricultural exports. Apples are also grown, where mostly in Tohoku and
Hokkaid; Pears and Oranges are also in Shikoku and in Kyushu. Pears and
Oranges were first introduced by Dutch traders, in Nagasaki in the late 18th
century.

ii. Fishery

33
Japan ranked second in the world behind the People's Republic of China in
tonnage of fish caught11.9 million tons in 1989, down slightly from 11.1 million
tons in 1980. After the 1973 energy crisis, deep-sea fishing in Japan declined,
with the annual catch in the 1980s averaging 2 million tons. Offshore fisheries
accounted for an average of 50 % of the nation's total fish catches in the late
1980s although they experienced repeated ups and downs during that period

Coastal fishing by small boats, set nets, or breeding techniques accounts for
about one third of the industry's total production, while offshore fishing by
medium-sized boats makes up for more than half the total production. Deep-sea
fishing from larger vessels makes up the rest. Among the many fish species
caught are sardines, skipjack tuna, crab, shrimp, salmon, pollock, squid, clams,
mackerel, sea bream, saury, tuna and Japanese amberjack.

Japan maintains one of the world's largest fishing fleets and accounts for nearly
15% of the global catch, prompting some claims that Japan's fishing is leading to
depletion in fish stocks such as tuna. Japan has also sparked controversy by
supporting quasi-commercial whaling.

iii. Industry

The nation's industrial activities (including mining, manufacturing, and power,

gas, and water utilities) contributed 46.6% of total domestic industrial production
in 1989, up slightly from 45.8 percent in 1975. This steady performance of the
industrial sector in the 1970s and 1980s was a result of the growth of high-
technology industries. During this period, some of the older heavy industries,
such as steel and shipbuilding, either declined or simply held stable. Together
with the construction industry, those older heavy industries employed 34.9% of
the work force in 1989 (relatively unchanged from 34.8 percent in 1980). The
service industry sector grew the fastest in the 1980s in terms of GNP, while the
greatest losses occurred in agriculture, forestry, mining, and transportation. Most
industry catered to the domestic market, but exports were important for several
key commodities. In general, industries relatively geared toward exports over
imports in 1988 were transportation equipment (with a 24.8 percent ratio of

34
exports over imports), motor vehicles (54 percent), electrical machinery (23.4
percent), general machinery (21.2 percent), and metal products (8.2 percent).

Industry is concentrated in several regions, in the following order of importance:

the Kant region surrounding Tokyo, especially the prefectures of Chiba,
Kanagawa, Saitama and Tokyo (the Keihin industrial region); the Tkai region ,
including Aichi, Gifu, Mie, and Shizuoka prefectures (the Chukyo-Tokai industrial
region); Kinki (Kansai), including Osaka, Kyoto, Kobe, ( the Hanshin industrial
region); the southwestern part of Honsh and northern Shikoku around the
Inland Sea (the Setouchi industrial region); and the northern part of Kysh
(Kitakyushu). In addition, a long narrow belt of industrial centers is found
between Tokyo and Fukuoka, established by particular industries, that have
developed as mill towns.

The fields in which Japan enjoys relatively high technological development

include semiconductor manufacturing, optical fibers, optoelectronics, optical
media, facsimile and copy machines, and fermentation processes in food and
biochemistry. Japan lags slightly in such fields as satellites, rockets, and large
aircraft, where advanced engineering capabilities are required but they made
headway through their aerospace exploration agency, JAXA with possible
manned independent mission to moon, and in such fields as computer-aided
design and computer-aided manufacturing (CAD/CAM), and databases, where
basic software capabilities are required, and natural resources exploitation, due
to the lack of them.

iv. Services

The Tokyo Stock Exchange is the second largest in the world with market
capitalization.. of more than $4 trillion.

Japan's service sector accounts for about three-fourths of its total economic
output. banking, insurance, real estate, retailing, transportation, and
telecommunications are all major industries such as Mitsubishi UFJ, Mizuho, NTT,

35
TEPCO, Nomura, Mitsubishi Estate, Tokio Marine, Japan Railway, Seven & I, ANA
counting as one of the largest companies in the world. The Koizumi government
privatized Japan Post, one of the country's largest providers of savings and
insurance services by 2014. The six major keiretsus are the Mitsubishi,
Sumitomo, Fuyo, Mitsui, Dai-Ichi Kangyo and Sanwa Groups. Japan is home to
326 companies from the Forbes Global 2000 or 16.3% (as of 2006).

Labor force

In 2001, Japan's labor force consists of some 67 million workers, 40% of whom
are women, and is rapidly shrinking. Labor union membership is about 12
million. The unemployment rate is currently 4.1%. In 1989, the predominantly
public sector union confederation, SOHYO (General Council of Trade Unions of
Japan), merged with RENGO (Japanese Private Sector Trade Union Confederation)
to form the Japanese Trade Union Confederation.

36
One major long-term concern for the Japanese labor force is a low birthrate. In
the first half of 2005, the number of deaths in Japan exceeded the number of
births, indicating that the decline in population, initially predicted to start in
2007, had already started. While one countermeasure for a declining birthrate
would be to remove barriers to immigration, the Japanese government has been
reluctant to do so. As of July 2006, the unemployment rate in Japan is 4.1%,
according to the OCDE.

Current economic issues

The Koizumi administration, which held office until 2006, enacted or attempted
to pass (sometimes with failure) major privatization and foreign-investment laws
intended to help stimulate Japan's dormant economy. Although the effectiveness
of these laws is still ambiguous, the economy has begun to respond, but Japan's
aging population is expected to place further strain on growth in the near future.

Heterodox economists tend to claim that Japan is far stronger economically than
is usually appreciated. Some mainstream economists acknowledge that Japan,
which unlike most Western countries has maintained its industrial base, and has
vast capital reserves, currently has a strong economic outlook.

The privatization of Japan Post, the Japanese postal system which also runs
insurance and deposit-taking businesses, is a major issue. A political battle over
privatization caused a political stalemate in August, 2005, and ultimately led to
the dissolution of the Japanese House of Representatives. The Postal Savings
deposits, which have until now been used to fund public works projects, many of
which have had questionable economic value, stands in excess of 1.9 trillion U.S.
dollars, and could be a major force in energizing the private sector.

The decline in the Japanese population as a result of a low birthrate threatens

the long-term economic vitality of Japan. A higher percentage of elderly in the
population will put pressures on the pension system, and will ultimately force a
higher burden on the current generation of laborers.

37
The Japanese monetary authorities' continued desire to depress the price of yen
relative to other key specific currencies to protect domestic business from
imports may no longer be feasible. The most recent record intervention in 2003
amounted to over 17 trillion yen, more than one third of one trillion US dollars at
the time and nearly 3% of Japan's 2003 GDP, being sold in favor of other non-yen
denominated assets. However, since 2005, Japan has not directly intervened to
buy currency, as yen carry trade has effectively carried out the same task.

Interestingly, international trade has expanded by 60% from 91.4 trillion yen to
142.6 trillion yen from 2001 to 2006, but the size of GDP has barely budged.
However, taking in account the economic participation rate, Japan's GDP per
worker has increased steadily.

Japanese exports in 2005

From the 1960s to the 1980s, overall real economic growth has been called a
"miracle": a 10% average in the 1960s, a 5% average in the 1970s and a 4%
average in the 1980s. Growth slowed markedly in the 1990s, largely due to the
Bank of Japan's failure to cut interest rates quickly enough to counter after-
effects of over-investment during the late 1980s. Because the Bank of Japan
failed to cut rates quickly enough, Japan entered a liquidity trap. To keep its
economy afloat, Japan ran massive budget deficits to finance large public works
programs. By 1998, Japan's public works projects still could not stimulate
demand enough to end the economy's stagnation. In desperation, the Japanese
government undertook "structural reform" policies intended to wring speculative
excesses from the stock and real estate markets. Unfortunately, these policies
led Japan into deflation on numerous occasions between 1999 and 2004. In his
1998 paper, Japan's Trap, Princeton economics professor Paul Krugman argued
that based on a number of models, Japan had a new option. Krugman's plan
called for a rise in inflation expectations to, in effect, cut long-term interest rates
and promote spending. Japan used another technique, somewhat based on
Krugman's, called Quantitative easing. As opposed to flooding the money supply
with newly printed money, the Bank of Japan expanded the money supply
internally to raise expectations of inflation. Initially, the policy failed to induce

38
any growth, but it eventually began to affect inflationary expectations. By late
2005, the economy finally began what seems to be a sustained recovery. GDP
growth for that year was 2.8%, with an annualized fourth quarter expansion of
5.5%, surpassing the growth rates of the US and European Union during the
same period. Unlike previous recovery trends, domestic consumption has been
the dominant factor of growth.

Trend of real GDP of Japan

94/4Q 95/1Q 95/2Q 95/3Q 95/4Q 96/1Q

GDP -1.1 0.1 0.6 0.6 1.2 3.0
domestic demand -0.9 0.3 0.6 1.1 1.7 3.4
Net exports of goods and -0.2 -0.2 0.1 -0.5 -0.6 -0.3
services
Changes from previous period in percentage
(Source: Economic Planning Agency)

Foreign Relations
Japan is the world's second-largest economy and a major economic power both
in Asia and globally. Japan has diplomatic relations with nearly all independent
nations and has been an active member of the United Nations since 1956.
Japanese foreign policy has aimed to promote peace and prosperity for the

39
Japanese people by working closely with the West and supporting the United
Nations.

In recent years, the Japanese public has shown a substantially greater awareness
of security issues and increasing support for the Self Defense Forces. This is in
part due to the Self Defense Forces' success in disaster relief efforts at home,
and its participation in peacekeeping operations such as in Cambodia in the
early 1990s and Iraq in 2005-2006. However, there are still significant political
and psychological constraints on strengthening Japan's security profile. Although
a military role for Japan in international affairs is highly constrained by its
constitution and government policy, Japanese cooperation with the United States
through the 1960 U.S.-Japan Security Treaty has been important to the peace
and stability of East Asia. Currently, there are domestic discussions about
possible reinterpretation or revision of Article 9 of the Japanese constitution.
Prime Minister Abe has made revising or reinterpreting the Japanese constitution
a priority of his administration. All postwar Japanese governments have relied on
a close relationship with the United States as the foundation of their foreign
policy and have depended on the Mutual Security Treaty for strategic protection.

While maintaining its relationship with the United States, Japan has diversified
and expanded its ties with other nations. Good relations with its neighbors
continue to be of vital interest. After the signing of a peace and friendship treaty
with China in 1978, ties between the two countries developed rapidly. Japan
extended significant economic assistance to the Chinese in various
modernization projects and supported Chinese membership in the World Trade
Organization (WTO). Japan's economic assistance to China is now declining. In
recent years, however, Chinese exploitation of gas fields in the East China sea
has raised Japanese concerns given disagreement over the demarcation of their
maritime boundary. Prime Minister Abe's October 2006 visits to Beijing and Seoul
helped improve relations with China and South Korea that had been strained
following Prime Minister Koizumi's visits to Yasukuni Shrine. At the same time,
Japan maintains economic and cultural but not diplomatic relations with Taiwan,
with which a strong bilateral trade relationship thrives.

40
Territorial disputes and historical animosities continue to strain Japan's political
relations with South Korea despite growing economic and cultural ties. Japan has
limited economic and commercial ties with North Korea. A surprise visit by Prime
Minister Koizumi to Pyongyang on September 17, 2002, resulted in renewed
discussions on contentious bilateral issues--especially which of abductions to
North Korea of Japanese citizens--and Japan's agreement to resume
normalization talks in the near future. In October 2002, five abductees returned
to Japan, but soon after negotiations reached a stalemate over the fate of
abductees' families in North Korea. Japan strongly supported the United States in
its efforts to encourage Pyongyang to abide by the nuclear Non-Proliferation
Treaty and its agreements with the International Atomic Energy Agency (IAEA).
Japan responded to North Korea's missile launches and nuclear tests by imposing
sanctions and working with the United Nations Security Council. The U.S., Japan,
and South Korea closely coordinate and consult trilaterally on policy toward
North Korea, and Japan participates in the Six-Party Talks to end North Korea's
nuclear arms ambitions.

Japan's relations with Russia are hampered by the two sides' inability to resolve
their territorial dispute over the islands that make up the Northern Territories
(Southern Kuriles) seized by the U.S.S.R. at the end of World War II. In August
2006, a Russian patrol shot at a Japanese fishing vessel, claiming the vessel was
in Russian waters, killing one crewmember and taking three seamen into
custody. The stalemate over territorial issues has prevented conclusion of a
peace treaty formally ending the war between Japan and Russia. The United
States supports Japan on the Northern Territories issue and recognizes Japanese
sovereignty over the islands. Despite the lack of progress in resolving the
Northern Territories dispute, however, Japan and Russia have made progress in
developing other aspects of the relationship.

Japan has pursued a more active foreign policy in recent years, recognizing the
responsibility that accompanies its economic strength. It has expanded ties with
the Middle East, which provides most of its oil, and has been the second-largest
assistance donor (behind the U.S.) to Iraq and Afghanistan. Japan's Ground Self
Defense Force completed a successful two-year mission in Iraq in 2006 and the

41
Diet in October extended the Anti-Terrorism Special Measures Law which allowed
for Japan's Maritime Self Defense Force refueling activities in support of
Operation Enduring Freedom in the Indian Ocean. On July 10, 2007 the Japanese
Government decided to extend the Air Self-Defense Force's (ASDF) airlift support
mission in Iraq to July 31, 2008. Under the Iraq Special Measures Law a wing of
the ASDF' C-130 transport planes, based in Kuwait, will continue to carry
personnel and supplies for the U.S.-led multinational forces and the United
Nations in Iraq. The law has been extended to July 31, 2009 and will be voted on
again in 2008.

Japan increasingly is active in Africa and Latin America--recently concluding

negotiations with Mexico and Chile on an Economic Partnership Agreement (EPA)
and has extended significant support to development projects in both regions. A
Japanese-conceived peace plan became the foundation for nationwide elections
in Cambodia in 1998. Japan's economic engagement with its neighbors is
increasing, as evidenced by the conclusion of an EPA with Singapore and the
Philippines, and its ongoing negotiations for EPA with Thailand and Malaysia.

In May 2007, just prior to the G8 Summit in Heiligendamm, Prime Minister Abe
announced an initiative to address greenhouse gas emissions and seek to
mitigate the impact of energy consumption on climate. Japan will host the G8
Summit in 2008.

U.S. and Japan relations

The U.S.-Japan alliance is the cornerstone of U.S. security interests in Asia and is
fundamental to regional stability and prosperity. Despite the changes in the post-
Cold War strategic landscape, the U.S.-Japan alliance continues to be based on
shared vital interests and values. These include stability in the Asia-Pacific
region, the preservation and promotion of political and economic freedoms,
support for human rights and democratic institutions, and securing of prosperity
for the people of both countries and the international community as a whole.

42
Japan provides bases and financial and material support to U.S. forward-
deployed forces, which are essential for maintaining stability in the region. Under
the U.S.-Japan Treaty of Mutual Cooperation and Security, Japan hosts a carrier
battle group, the III Marine Expeditionary Force, the 5th Air Force, and elements
of the Army's I Corps. The United States currently maintains approximately
50,000 troops in Japan, about half of whom are stationed in Okinawa.

Over the past decade the alliance has been strengthened through revised
Defense Guidelines, which expand Japan's noncombatant role in a regional
contingency, the renewal of our agreement on Host Nation Support of U.S. forces
stationed in Japan, and an ongoing process called the Defense Policy Review
Initiative (DPRI). The DPRI redefines roles, missions, and capabilities of alliance
forces and outlines key realignment and transformation initiatives, including
reducing the number of troops stationed in Okinawa, enhancing interoperability
and communication between our respective commands, and broadening our
cooperation in the area of ballistic missile defense.

Implementation of these agreements will strengthen our capabilities and make

our alliance more sustainable. After the tragic events of September 11, 2001,
Japan has participated significantly with the global war on terrorism by providing
major logistical support for U.S. and coalition forces in the Indian Ocean.

Because of the two countries' combined economic and technological impact on

the world, the U.S.-Japan relationship has become global in scope. The United
States and Japan cooperate on a broad range of global issues, including
development assistance, combating communicable disease such as the spread
of HIV/AIDS and avian influenza, and protecting the environment and natural
resources. Both countries also collaborate in science and technology in such
areas as mapping the human genome, research on aging, and international
space exploration. As one of Asia's most successful democracies and its largest
economy, Japan contributes irreplaceable political, financial, and moral support
to U.S.-Japan diplomatic efforts. The United States consults closely with Japan
and the Republic of Korea on policy regarding North Korea. In Southeast Asia,
U.S.-Japan cooperation is vital for stability and for political and economic reform.

43
Outside Asia, Japanese political and financial support has substantially
strengthened the U.S. position on a variety of global geopolitical problems,
including the Gulf, Middle East peace efforts, and the Balkans. Japan is an
indispensable partner on UN reform and the second largest contributor to the UN
budget. Japan broadly supports the United States on nonproliferation and nuclear
issues.

Economic Relations
U.S. economic policy toward Japan is aimed at increasing access to Japan's
markets and two-way investment, stimulating domestic demand-led economic
growth, promoting economic restructuring, improving the climate for U.S.
investors, and raising the standard of living in both the United States and Japan.
The U.S.-Japan bilateral economic relationship--based on enormous flows of
trade, investment, and finance--is strong, mature, and increasingly
interdependent. Further, it is firmly rooted in the shared interest and
responsibility of the United States and Japan to promote global growth, open
markets, and a vital world trading system. In addition to bilateral economic ties,
the U.S. and Japan cooperate closely in multilateral fora such as the WTO,
Organization for Economic Cooperation and Development, the World Bank, and
the International Monetary Fund, and regionally in the Asia-Pacific Economic
Cooperation forum (APEC).

Japan is a major market for many U.S. products, including chemicals,

pharmaceuticals, films and music, commercial aircraft, nonferrous metals,
plastics, and medical and scientific supplies. Japan also is the largest foreign
market for U.S. agricultural products, with total agricultural exports valued at
$9.7 billion, excluding forestry products. Revenues from Japanese tourism to the
United States reached nearly $13 billion in 2005.

Trade between the United States and Japan remained strong in 2006. Total trade
grew about 7.3% year-on-year. U.S. exports to Japan reached $59.6 billion in
2006, up from $55.4 billion in 2005. U.S. imports from Japan totaled $148.1
billion in 2006 ($138.1 billion in 2005).

44
U.S. foreign direct investment in Japan reached $78 billion in 2004, up from $73 billion in
2003. New U.S. investment was especially significant in financial services, Internet services,
and software, generating new export opportunities for U.S. firms and employment for U.S.
workers.

Depreciation Changes may help investments in Japan soon.

Recently appointed Prime Minister of Japan Shinzo Abe is very likely to support
moves to increase corporate profits via changes in the tax law related to
depreciation. At present the maximum depreciation allowable on investment
assets is 95%. It has been argued for years that this fact reduces the
competitiveness of Japanese firms overseas. China, the U.S.A and Britain fore
example, to mention just a few countries, all accept 100% depreciation on the
book value of assets.

It would seem that the focus of this tax change at this time is to support mainly
the manufacturing industry. A solid argument exists that this change to the tax
system is needed if Japan wishes to prevent manufactures taking their factories
off shore. We can not be sure if the change will take place for certain and even if
it does whether or not the initial focus on supporting manufacturing will flow
over to other assets investments in Japan. To us the real estate investors of
Japan we can but live in hope that a) the tax change does come in allowing
manufacturers to depreciate their plant and equipment assets 100%. And that b)
this change flows over to real estate investors.

One indication that change will in fact come to pass was a comment by Mr. Takao
Kitabata, administrative vice minister several weeks ago. According to Mr.
Kitabata these changes are indeed high on the priority list of tax reforms for the
financial year 2007

45
Real estate investment in Japan

We are a Japan based Investment group providing opportunities for those

wishing to invest in real estate in Japan. We specialize in the purchase, sale and
management of small to medium residential real estate projects with a
maximum value of no more than US$20,000,000. Japan-Investments do not want
to be the largest real estate investment group in Japan. We want stay profitable
and personal. We establish one on one relationship with each of our client
investors and commence a very limited number of new projects each year. You
will find it easy to read and understand this site. Whilst we must understand all
the technical jargon and formula within investment sites, books, codes and the
laws of Japan you will find us to be a group of plain speakers. We keep it simple.
We believe simple is good.

Do you need actual real estate investors who have their own money invested in
Japan to look after your real estate investment? Do you want direct access to
that fellow investor? We have our own money in buildings here in Japan and offer
direct communications to each of our clients.

We can tell you from personal experience that these are exactly the solutions we
would have loved to have had when we began investing in Japan 1989. Now we
are offering to put our expertise to work for you. If you are looking for an
opening into Real Estate investment in Japan, tell us, we can make it happen for
you.

How much do we know about Japan and Real Estate? It was not an easy learn,
but learn we did. The Japanese Real Estate market incurred a drastic drop in
about 1992. Some called it a "bubble burst" others called it a big mistake. What
ever you'd like to call it the result was to stifle the normal market for over a

46
decade. We've been in Japan since 1989, built three successful companies and
made our own first real estate investment in 1993. It was a tough learning curve.
We prospered throughout the entire Japanese Real estate slump. We continue to
prosper today and want to invite you the foreign investor to share in this same
prosperity. Japan is poised for a solid comeback; we are here and own our piece
of it. We want you to be part of it as well. Japanese Real estate let us show you
how. Contact us for Real Estate Investments in Japan today.

Japan Investments, we have our own substantial real estate holdings in Japan
and a strong team of experienced specialists to build and run those investments.

Mission

In the short term properties, these are properties that are purchased, renovated
and then sold for profit in the short term. Capital gains on the real estate are the
prime consideration. Medium term existing properties, this real estate is
purchased and run as is. They will normally be sold within 10 years of purchase.
Income from rent and capital gains are the primary objective. They must meet
exacting criteria and will offer a long term investment with moderate returns.
Property values are priced between (USD) $150,000.00 to just over 20 million.
Professional management is the means to rental income. Long term new
construction: These are properties built to spec and pre-leased for full
occupancy. They are built to exacting criteria. Photographic evidence of all
materials and construction phases are provided to the Japanese government and
the private investor. These investments are designed to offer a long term
investment with moderate returns on rental incomes and capital gains. Property
values are priced between (USD) $150,000.00 to just over 20 million. Each of the
real estate investors in our group has a personal stake in Japanese real estate.
We are experiencing success and growth. At this time we are inviting a select
group of serious investors to join us. We will offer no more than 8 residential real
estate investment projects to private real estate investors per year. Quality is
important to us. Minimum investment begins at US$50,000 with the maximum
investment set at US$20,000,000.

47
Real positive Earning

In 1990 and 2004, the real estate market in Japan saw a deflationary cycle
lasting fourteen consecutive years then you understand that we at Japan
Investments and our clients had few chances to make income from capital gain.
We needed to make our income from actually running the investments with safe
reliable positive returns.

To those who worked through the same period in the USA, Great Britain or
Australia the thought of not making a capital gain on real estate investments
may be abstract. Perhaps it is even fair to say that in those real estate markets
outside of Japan, dramatic increases in real estate values became the norm. It
even became quite acceptable for many to live with a negative profit or loss on
rental income believing this would be offset with profits on sale. This belief to us
here in the real estate market of Japan is certainly not the norm; in fact the
thought of losing money on the regular operations of a real estate investment in
Japan is a very abstract concept indeed. We have been investing here in Japan
throughout the entire deflationary period. We continue today in this buoyant or
as some say, bullish real estate market, to maintain the very same belief. Safe,
positive returns and healthy cash flow are the way to go.

Never lose money on real estate investments today expecting to get it back
tomorrow. During our initial growth years we had to make every deal pay for
itself or the banks and investors of Japan would not even talk to us. The
deflationary nature of the market made it essential we made the investments

48
pay from day one. Today it remains our policy to find those real estate
investments here in Japan that show a safe positive return on the running of the
investment. Capital gains are expected however they are bonuses. Don't be
mistaken we like capital gains. Increases in value of the real estate investments
are fine and of course we seek them out aggressively. We have some terrific
examples of capital gains made within the deflationary period and would be
more than happy to share these with you. Capital gains by all mean however not
if means starting with anything other than safe positive return.

The time real estate market of Japan saw some of those capital gains
experienced in Britain, USA and Australia as well. All the positive words being
written about the turn around in real estate values is happen in Japan.

When somebody invest with Japan Investments real estate investment group you
may rest assured we will always keep ongoing profitable returns in mind at all
times. Capital gains are sought after and best to secure them with clever buys
however they are secondary to safety and positive earnings along the entire
investment period.

49
CONCLUSION

To predict the future we must study the past, at least the recent past and of
course the present situation. Obviously the past and present will influence the
shape of things to come, the future. The end of the Pacific War saw almost all the
countries of Asia and East Asia in particular in a moribund state. China, Japan
and Korea suffered most from the Pacific War. The countries of Southeast Asia
reverted to colonial rule, having largely changed hands from western colonial
powers to Japanese colonial rule and then back to the Western power. Under
colonial rule these countries were not free tom develop and the colonial powers
confined these countries to the production of primary commodities to be
exported to their countries, converted to manufactured products and re-exported
to them and to other countries. The war destroyed even these commodity-
producing economies. Japan was devastated. Its industrial capacity was
destroyed and its trade negligible. China had to fight a civil war while Korea was
torn into two by the Allied forces and the Communists.

Such was the confidence of the victors that the defeated eastern countries would
never recover that a condition imposed on Japan was that it must not spend
more than one percent of its G.D.P. on its military forces. The G.D.P. of Japan in
1945 was minute. But today one percent of Japan's G.D.P. is higher than the
budget for arms of most of the developed countries.

We know today of how Japan rebuilt itself in record time to become the second
most powerful economy in the world after the U.S. South Korea then followed

50
suit, appearing almost from nowhere to become a great manufacturing and
trading nation. The hermit country is hermit no more.

The Southeast Asian countries adopted their own way towards growth and
development. Bereft of capital, know-how, and management and trading
expertise, they invited foreign investors to help change their agricultural
economy into a manufacturing and trading economy. Making use of their low
labor cost and the skill of their workers they helped in making largely Western
enterprises to become competitive again, to challenge the Japanese juggernaut.
Not to be outdone, the Japanese, the Korea and even the Taiwanese invested in
the Southeast Asian countries. And so these mainly ex-colonial territories
seemed set to give the Europeans and the Americans a run for their money. Such
was the progress of the East Asian nations that many industries of Europe and
America had to close down. Steel, shipbuilding, automotive industry, etc. of the
West folded up unable to compete with the high quality low priced products of
East Asia.

An unprecedented prosperity was experienced by nearly all the East Asian

countries. Indeed it seemed a matter of time before East Asia would dominate
the economy of the world.

China remained insular at first and refused to join in the Asian industrialization
programmed. But Deng Xiaoping dragged the country into the world of
competitive trade and within a few years China became an industrial giant.

There was talk that the 21st century was going to be the century of Asia. There
seems no stopping Asia. The millions of hard working skillful and highly
intelligent work force were set to churn out all the manufactured goods of the
world at a fraction of the cost.

Japan had set the example. Whereas the West believed in low volume and high
margin of profits, Japan opted for high volume, low margins and dominant
market share. As soon as the Japanese mastered the art of making quality

51
products their market share grew until there was practically no room for the
products of the West.

When the Koreans, the Chinese and even the Southeast Asians also adopted the
Japanese strategy, the signs on the walls for Western countries became ominous.
Perhaps there was no concerted action to stop the Eastern juggernauts. But
whether there is or not, the fact remains that certain actions were taken to curb
the Eastern challenge.

When South Korea looked like becoming a second Japan, a new term was coined
to describe its economic performance. It was called a Newly Industrializing
Country. It was a flattering acknowledgement of its success but Korea soon learnt
that as a NIC, it must face restriction to its trade. It was accused of all kinds of
malpractices and it was subjected to countervailing acts.

Japan had been accused of public/private sector collaboration, termed Japan

Incorporated by its western competitors. This was regarded as unfair. But it was
too late to act against Japan. Now Korea adopted nearly the same approach.
Through strong support for certain corporations Korea was able to build up huge
conglomerates known as `cabals', the Korean equivalent of the Japanese
Zaibatsu. These corporations were hugely successful and their products were
able to compete in the international markets.

A press campaign against the cabals was mounted and certain countries openly
condemned the `charbroils' as cronyism. The nature of the Korean political
system came under attack, as were its strategies for development. Political and
labor unrest were encouraged.

Independence was once sacred. After all many countries fought to free
themselves from the colonial yoke in order to rule their own countries
themselves. For a time their independence was respected. But soon these
countries were accused of all kinds of misdemeanors and abuses. There is some
substance in this accusation but if anything is to be done it is the international
community that should do it. Instead certain countries which were in the past

52
guilty of exploitation of the former colonies had taken upon themselves to act
against the allegedly guilty countries. In particular the focus was on labor
practices and human rights.

Despite the harassments, the countries of East Asia continued to grow and to
compete successfully with the old industrial countries. Although it was said to be
unintentional, the downfall of the East-Asian countries was finally achieved by
devaluing their currencies and insisting on adoption of certain prescribed
business practices. Public/private sector cooperation was made out to be almost
criminal and government officers found helping the private sector were actually
charged with corruption for doing what they had been doing always in the past.

Between the currency devaluation and the so-called campaign for good
corporate governance, the recovery of the East Asian economy was effectively
hampered. Admittedly, corporate governance should be more transparent but
the suddenness of the imposition of stringent rules and regulations governing
business practices have made recovery of the corporations difficult. Indeed
many of East Asian corporations were unable to recover and had to be sold off to
foreigners.

Today one hardly remembers the halcyon days when the East Asian countries
looked set to conquer the world. All of them are in distress and some apparently
cannot recover, try as they might. Why is it that these countries which had so
successfully risen from the ashes of World War II, are now so incapable of
repeating their past performance, repeating the magic that propelled their
devastated economies to become economic tigers and dragons, admired for the
miracles they performed.

The answer lies in their loss of self-respect and self-confidence. Almost without
exception they believe that they were guilty of unacceptable practices when
they rebuilt their economies after the devastation of war or the dead weight of
colonial rule. They believe that to gain respect they must do everything the way
the western countries are supposed to do. Even when they discover that in fact
their detractors were actually far from practicing what they preach, they cannot

53
bring themselves to do their own thing. They struggle on to reform the way they
are told they should. They accept the remedy prescribed without questioning
whether it is suitable for them or not.

On the surface of it, the reforms prescribed are good. But as always there is no
one prescription for all illnesses. The countries of East Asia are culturally very
different from each other and so are their business practices. It is not necessary
that reforms should take only one form. There should be other ways, which can
make business and economic management acceptable and yet not be so
disruptive.

One thing is certain. Sudden changes in the way of doing anything are
disruptive. No matter how good is the reform, instant adoption will disrupt and
yet not be so disruptive.

One thing is certain. Sudden changes in the way of doing anything are
disruptive. No matter how good is the reform, instant adoption will disrupt and
damage rather than yield the expected results. We should therefore always be
circumspect when adopting new ways of doing things.

The difference between what we have been doing in the past and what we are
told to do now is centered on the concept of free market. The idea that a free
market is good has become not only an obsession but has been made sacred. No
one must question the rightness and the goodness of the free market.

The free market we are told is the ideal way to determine what is right and what
is wrong, to regulate itself accordingly and to ensure that only the best will serve
human society. The free market will determine who should drop out and who
should go on to succeed. The free market will ensure the survival of the best.
The free market will discipline itself and it will discipline the governments.

The most important factor which ensures that the free market delivers the best
is free competition. The winner will survive and the loser will be eliminated. For

54
competition to yield this result the playing field must be level, i.e. the rules of
the game must be applied to all, big and small, established or new. With the field
level the competition would yield the best result.

But is this really true? If a level playing field is all that is needed, then why is
there a rush to become the biggest and the most powerful competitor in the
field? Why do we see mergers and acquisition and more mergers and acquisition
until the players become enormous and dominating the field? Obviously it is
because in a level playing field the size of the contestants counts, counts so
much that competition will actually be prevented.

We are familiar with the Japanese and Korean conglomerates. They are big and
present a formidable force against competitors. But they are big not through
acquisition or merger. They are big because they decide to expand in related
directions through setting up their own subsidiaries. All of them expand in
practically the same direction and they and these subsidiaries compete with
each other and with the rest of the world. They are not monopolies. They are big
but not overwhelmingly dominant.

But today, mergers and acquisition are leading to a situation, if not of monopoly,
certainly oligopoly. The weak has been eliminated and no new player can come
in. It would be suicidal for any new player to enter the automotive industry for
example. In turn, the number of corporations in one industry is going to be so
reduced that a practical monopoly will emerge. Will this be good for the world,
for business, for the economy of countries, especially the weak countries?

Competition is good but in actual fact we are working towards the elimination of
competition. It is doubtful that the need to do better will influence companies
when they have become too powerful or they monopolize.

The free market demands that there be deregulation. The airline industry was
doing quite well and serving the public satisfactorily until the industry was
deregulated. Any airline can fly anywhere with any standard of service. It was
believed that service would improve because of strong competition.

55
The only thing that happens was a lowering of standard in the service provided
and even in the maintenance of aircrafts. Several crashes were attributed to low
maintenance standard. And many good airlines went bankrupt, losing huge sums
of money and creating social problems. Even before Sept. 11, practically all the
airlines were losing money due to cutthroat competition. Is it really true that
deregulation will bring about better service for more people?

There should be competition of course. But the private sector cannot be really
responsible. When failure is imminent the corners will be cut and good practices
will go out of the window. I need not mention the examples.

Today, business is not about making real profit or accumulating assets but is
about creating market perception of the value of companies. Share price is all-
important. It need not reflect the profitability or real worth of the company. If
there are buyers for the shares then the demand will push the price up and vice
versa. If the money invested will not yield any worthwhile profit it does not
matter as long as the shares can be disposed at a higher price and capital gains
made.

Thus the dot com companies had their share prices so inflated that there is no
way for the profits of the company to compensate for the investment. When
suddenly the lack of viability of some of these companies became evident, the
shares were dumped and panic followed. Billions of dollars were lost and
contributed towards recession in even the most powerful economies.

We see also how share prices can be manipulated through short selling. There is
nothing sacred about short selling that it cannot be banned or regulated.

Now we have globalization. But it is interpreted to mean only the unrestricted

flow of capital. Obviously it can only benefit those with capital most. It is fine
when the flow is inwards. But we have seen how sudden outflows can destroy
the economies of countries and even regions.

56
Of course globalization also leads to the manipulation of the currencies of
nations. Perfectly good economies went into a tailspin because their currencies
were deliberately devalued by selling non- existent currency holdings.

Prior to the ascendancy of the free market, deregulation and the retreat of
governments, the economy of the world was doing rather well. We have noted
how countries devastated by war had recovered and gone on to unprecedented
prosperity.

The world was experiencing unprecedented economic growth; world trade

increasing and many countries were prosperous. Admittedly the advances in
technology, in particular the speed of jet travel and information technology
brought with them new and widened opportunities. But opportunities for whom?
And must the opportunities be translated only in terms of capital flows? Cannot
there be other ways of exploiting the new technologies, ways that can benefit
most of the people in this world instead of just those with capital?

The EAEC was proposed not as a regional economic bloc but as a consultative
group involving the East Asian nations. The idea was to critically study common
problems and the new ideas coming out of the West. No one has a monopoly of
wisdom. The East Asian Nations have as much capacity as anyone else to
examine and formulate new ideas to modify or to reject what is presented before
it.

We could have avoided the disastrous financial crisis of 1997-8 if we had dared
to oppose currency trading and manipulation. It is one of those totally
unproductive business activities. Malaysia alone lost almost 300 billion USD for a
profit of at most 5 billion made by the currency traders. It is a case of wealth
distribution on an enormous scale merely for the currency traders to make a few
billion for themselves. The social cost is even worse.

The EAEG, if it is prepared to be critical and to initiate an East Asian solution to

57
regional and world economic problems can contribute much to the regions and
the worlds economic recovery. The East Asian countries have sufficient clout and
have shown a capacity to contribute much towards the wisdom of the human
race. It would be a pity if the voice of East Asia is stifled or so distrusted that the
countries of the region may not speak to each other without the presence of
people outside the region.

REFFERENS

Ricky W. Griffin, Micheal W. Pustay, International Business, Fourth Edition, WWW.

Prenhall. Com Griffin, US 2005.

Donald A. Ball, Wendel H. Mc Cullah, Jr Paul L. Frantz, J. Micheal Geringer, Micheal

S. Minor, International Business, The Challage Of global Competition, Ninth
Edition, North America 2004.

Charles W. Hill, competing In The Global MarketPlace, Third Edition, WWW.

Mhhe.Com Hill, United Kingdom 2000.

58
Aswath Damodran, International Valuation, Second Edition, WWW. Damodaran.
Com, New York 2002.

Mark Hirschey, International Theory and Application, Wall Street Journal Edition,
United State 1996.

Date W. Jorgenson, Capital Theory And Investment Behaviour, United State 2001.

59