By Hosokawa Masahiko, professor at Meisei University
Discussions surrounding economic security are gaining momentum as the government moves to establish relevant systems and its panel discusses corresponding policies. I give the administration of Prime Minister Kishida Fumio a high mark for designating economic security as a core policy.
We must not forget, however, that in economic security, private-sector corporations must play the central role. This is a fundamental difference between economic security and more narrowly defined [military] security. And the government’s efforts in economic security must focus on activities of business corporations, by either supporting or regulating them.
To enhance Japan’s economic security, therefore, corporate awareness is of paramount importance, and without it, building a solid regulatory system would have no consequence. But while enthusiasm is unmistakable at the government level, it is far from clear if Japanese corporations see economic security as their own issue.
China prepares to boost made-in-China production
In an effort to accommodate the government policy, an increasing number of Japanese businesses are attending seminars and listening to consulting firms that urge them to adopt new strategies designed to enhance economic security at the corporate level. Many corporations have established new executive positions to oversee economic security, along with sections in charge of related issues. What matters is content, however, rather than framework.
Here are a few examples of management issues that businesses may encounter in accommodating economic security.
China is currently engaging in a nationwide effort to establish domestic production bases for strategic products. To this end, the Chinese government has formulated a detailed industry-by-industry development plan. In January, for example, the Chinese government announced a domestic production plan targeting areas of electronic components currently led by Japanese companies. In an effort to enhance Chinese firms’ international competitiveness, the Chinese government has been inviting foreign companies to invest in China so as to access their technology–technology that prevents China from gaining the upper hand in the market. A case in point was a joint venture between Japan and China that involved the production of a high-end magnet.
Another effective method to obtain advanced technology has been through acquisition of foreign businesses, such as manufacturers of semiconductor equipment/materials and advanced medical equipment, fields in which Japan has expertise. A unit dedicated to business acquisition has been established inside the Chinese government, and officials have been busying themselves with selecting candidates for purchase. We should pay extra attention to the fact that in choosing potential targets for acquisition, China considers mid- and small- size firms that supply core components in addition to large corporations. Japanese managers must keep an eye out for the overall supply chain beyond their own companies.
China views Japanese investment regulations as more lenient than those of the Committee on Foreign Investment in the United States (CFIUS). Although Japanese authorities are reluctant to admit it, this is a fact, as I pointed out in an Apr. 6 article in this column titled “Rakuten scandal sends ripples through Japan-U.S. economic security ties.” Under Japan’s current Foreign Exchange Law, China’s private companies could be exempted from the government obligation to obtain pre-approval based on corporate evaluation. This is a loophole. China has been studying the Japanese regulatory system in detail. Even if the government regulation doesn’t require it, Japanese managers should make a solid security-minded judgement.
Sort technology and manage data
To lay the groundwork for economic security, Japanese businesses should classify their own technologies and identify and focus efforts on the most crucial technologies that are potential choke points in supply chains and defend these at all costs. Japanese corporations must establish themselves as key players in industries so that cannot be replaced by their Chinese rivals.
Technologies should be sorted by level of sensitivity as well. It goes without saying that companies must ascertain if a certain technology is subject to restrictions imposed by the Foreign Exchange Law, but that’s not enough. Even if it doesn’t meet the criteria for restrictions, the technology could still be strategically sensitive. In formulating measures to protect certain technologies, companies must reflect the level of sensitivity associated with the technologies. Designing protective measures against a recent wave of cyberattacks, which were presumably for the purpose of stealing technological information, should be reviewed in this context.
In this regard, friendship exchanges hosted by Japanese mega-banks and trading companies to enhance ties between Japanese small and medium-size businesses and Chinese companies raise concerns. It is commendable that banks and trading companies support smaller firms that lack the resources to enter the Chinese market. However, there is cause for concern because some of these smaller firms hold sensitive technologies that could affect Japan’s economic security. As business ties developed in this context rely on trust for mega-banks and trading firms, the responsibility of these large corporations should come under rigorous scrutiny in case of a serious incident of technology outflow.
Japanese corporations must tighten data management as well. The Rakuten scandal, in which customers’ private information was found to be exposed to Chinese contractors, revealed the lack of security awareness in Japan’s business sector. The enactment of China’s Data Security Law in September further deepened the seriousness of the threat to data security. The Data Security Law restricts the transfer of data overseas, while allowing access to company data by the Chinese Communist Party government. Japanese corporations operating in China should urgently review their data security practices in light of the new law, including outsourcing of research/development data, as well as personnel and accounting data, to Chinese firms.
Universities should protect themselves
Japanese universities need to review their practices from the perspective of economic security. The Japanese government plans to make it mandatory for schools to report foreign funds they receive when accepting government subsidies for research and development. In the United States, academic institutions are leading the way to avoid conflicts of interest arising from foreign influence, which they claim undermines “fairness in research.”
No voluntary steps have been taken by Japanese universities, however. The government plans to ask them to formulate rules to enhance economic security on campus, but so far, universities’ security awareness has remained low, and rules could end up being just a façade. If there are no effective rules governing foreign funding at Japanese universities, they could be excluded from joint research opportunities with U.S. and European institutions. Japanese universities must realize that it is in their own institutional defense to strive to achieve economic security.
Meanwhile, we should carefully avoid enforcing unnecessary regulations under the all-encompassing banner of economic security. For corporations and universities to remain active, government regulations must be kept to a minimum. This is another reason for the schools to improve their own security management. If they fail to do this, more governmental regulations may follow.