Closing the Gap: How India Can Revive Japanese Investment

In 2024, ASEAN captured $28.7 billion in Japanese investment compared to India’s $5.3 billion. The fivefold disparity reflects a profound shift from 2008, when Japanese capital flowed in nearly equal measure to India and ASEAN (Japan External Trade Organization, 2025). The barriers that drove this shift, including regulatory uncertainty, supply chain disruptions, and compliance challenges, transformed India from a competitive destination for investment into a complicated one, but the trends are reversible.

The barriers to investment and business operations that led Japanese investors to shift from India to ASEAN after 2008 and created the fivefold investment gap seen today are reversible. To win back Japanese capital, India must pursue a policy agenda focused on streamlining regulation, supporting business growth, and developing deeper institutional partnerships.

To win back Japanese capital, India must pursue a policy agenda that addresses the specific regulatory friction and supply chain challenges that drove Japanese manufacturers to ASEAN, while leveraging Japan’s unique strengths in technology and infrastructure development.

Streamlining Regulation

India can start to address its business environment’s regulatory challenges by developing industry-integrated roadmaps that outline industrial policy targets and timelines at five- to ten-year intervals. Singapore’s Industry Transformation Maps are a proven model that offers investors a clearly defined regulatory direction through specific targets and timelines (Singapore EDB, 2022). Future-facing policy frameworks with explicit commitments and progress reviews would provide Japanese stakeholders with the predictability needed to sustain investments.

Regulatory harmony between governments will also prevent overlapping red tape from increasing compliance costs for Japanese firms. Mutual Recognition Agreements (MRAs) similar to those established between Japan and the European Union have prevented duplicate testing of Japanese equipment sold in Europe and simplified market access for Japanese firms (European Commission & Government of Japan, 2001). A similar understanding between Indian and Japanese standards authorities focusing on high-value sectors of the future could align certification processes for the semiconductors, advanced batteries, and green technologies, where India-Japan collaboration has enormous potential.

India must combine regulatory clarity and harmony with speed. India has proven solutions in place, but they need to scale. The National Single Window System, launched in 2021, enables foreign investors to monitor their approval processes through a single, consolidated interface (Press Information Bureau, 2021). At the state level, Maharashtra’s Maha Parwana scheme offers companies investing over $5.8 million blanket approval within 48 hours, with the remaining clearances guaranteed to be completed within 30 days or automatically approved if delayed (Economic Times, 2020). Scaling these digital reforms nationwide would prove to Japanese investors that India can match ASEAN’s operational efficiency.

Building Integrated Supply Networks

India must create an environment that attracts Japanese capital while facilitating the growth of Japanese firms.

India must create an environment that attracts Japanese capital while facilitating the growth of Japanese firms. A critical untapped opportunity lies in Japanese small and medium-sized enterprises (SMEs) that have largely avoided the Indian market to date. Unlike in Southeast Asia, where Japanese firms typically bring networks of smaller firms, large Japanese companies in India have primarily worked with local suppliers and subcontractors. While this approach has reduced costs for major firms, it also means that Japanese SMEs lack the necessary support infrastructure to enter India’s market (Pajon & Saint-Mézard, 2018). The absence of integrated Japanese supply networks perpetuates the sourcing challenges that initially drove Japanese investment toward ASEAN.

India could build supplier parks that co-locate Japanese companies with their supply chains. Vietnam’s Thang Long Industrial Park exemplifies the potential of this model. It houses 106 Japanese companies that manufacture at both small and large scales while employing over 60,000 people (Japan Bank for International Cooperation, 2023). India can replicate this success by establishing Japanese-designed supplier parks near existing manufacturing clusters in Gujarat, Tamil Nadu, or Maharashtra, states that are already home to Japanese operations, including Toyota Tsusho’s facilities in Gujarat (Toyota Tsusho, n.d.). Suppliers positioned near existing clusters would provide Japanese SMEs with viable entry points into India.

To complement these industrial clusters, India should partner with Japan to expand logistics networks by inviting Japanese development agencies to co-finance rail links and logistics hubs in the Chennai–Bengaluru corridor. Japan has already demonstrated its commitment: Japan holds a 26% stake in the Delhi–Mumbai Industrial Corridor and pledged $12 billion for the Ahmedabad–Mumbai high-speed rail line (Pajon & Saint-Mézard, 2018). The initiatives are delivering results for India beyond infrastructure, as high-speed rail construction alone provided over 90,000 jobs in India in 2024 (JETRO, 2024). Expanding this model would strengthen India’s supply chains and deepen Japan’s manufacturing footprint, thereby creating the jobs and logistics infrastructure India needs to support its growth. 

Fostering Innovative Partnerships

India and Japan should co-launch joint R&D centers that combine India’s engineering talent with Japan’s technical expertise. To staff R&D facilities effectively, expanding bilateral fellowship programs focused on technology development and exchange would facilitate the cross-trained talent pipeline these innovation hubs require.

A revitalized bilateral innovation fund and startup exchange could deepen commercial ties between India’s tech ecosystem and Japanese investors. The original Japan-India Startup Hub initiative, launched in 2018, stalled during the COVID-19 pandemic and has potential for expansion. Targeted seed capital, accelerator programs, and regulatory fast-tracks could catalyze cooperation in future technologies and increase Japanese SME participation in India (Pajon & Saint-Mézard, 2018). India’s vibrant startup scene, combined with Japan’s capital-rich enterprises, could accelerate innovation and attract billions of dollars in Japanese venture capital to India’s tech sector.

Sustained bilateral partnerships require a pipeline of cross-trained professionals who understand both markets’ technical requirements and business practices. India should proactively invite Japanese universities and research institutes to create satellite campuses or co-branded innovation centers in its technology hubs. The University of Tokyo, Waseda University, and Kyoto University offer proven partnership models that Indian research organizations can replicate to cultivate bilingual talent, foster joint patents, and align Japanese capital with India’s research ambitions. Japanese universities would gain access to India’s engineering talent pipeline for joint research projects, while Indian partnerships would help them compete with Chinese universities for Southeast Asian students and research funding.

The Path Forward

India has a narrow window to implement these reforms and transform from a challenging to a reliable destination for Japanese capital.

India has a narrow window to implement these reforms and transform from a challenging to a reliable destination for Japanese capital. The barriers to investment and business operations that pushed Japanese toward ASEAN after 2008 are reversible, but only through decisive action across all three pillars: streamlining regulation to provide predictability, supporting business growth through integrated supplier parks and infrastructure partnerships, and developing the long-term partnerships that will sustain cooperation.

Success would close the $23 billion investment gap while establishing India as Japan’s strategic anchor in Indo-Pacific economic integration. India’s path will decide whether it reclaims its position in Asia’s high-value manufacturing networks, or watches ASEAN’s investment lead become insurmountable. India’s economic future depends on seizing the moment.