Title: Japan Direct Investment in China and Other Asian Countries
Reference Number: 1052
Publication Date: December 2002

K.C. Fung
University of California, Santa Cruz

Hitomi Iizaka
University of California, Santa Cruz

Alan Siu
Hong Kong Institute of Economics and Business Strategy

This paper examines the recent trends, characteristics and determinants of Japanese direct investment in China. To study these issues, we first use qualitative and survey data to compare Japanese direct investment in China with similar investment in other Asian countries. We found that within Asia, China is the largest recipient of Japanese direct investment, with Hong Kong and Thailand coming in second and third. 76.5% of Japanese direct investment in China is in manufacturing. Such concentration in manufacturing is typical for Japanese investment in developing Asia, but rather unusual compared with Japanese investment in other developed countries. Almost one-third of Japanese investment in China is in electrical machinery. 40% of Japanese firms invest in China for cost reasons, while 21% say that they invest in China to expand market shares in China. In 1999, Japanese affiliates in China procure 47% of their inputs from China and sold 47% of the goods locally in China. We also examine econometrically the determinant of Japanese direct investment in various regions of China and compare these locational factors for direct investment from Hong Kong, the largest foreign investor in China. We found that Hong Kong companies place a stronger emphasis on labor costs and a smaller emphasis on labor quality compared to Japanese multinationals. In addition, Japanese firms prefer Economic and Technology Development Zones (ETDZs) while Hong Kong firms are attracted to Special Economic Zones (SEZs).

Last modified: 12/23/2002