Japanese direct investment in China

Abstract

This paper uses survey data to study the characteristics of Japanese direct investment in China as compared to those in the newly industrializing economies (NIEs) and in the member countries of ASEAN. Japanese firms invest in China for cost reasons as well as to expand their market shares. This paper also examines the determinants of Japanese direct investment in China using a regional data set from 1990 to 2000. To form a basis of comparison we run similar regressions for the largest foreign direct investor in China: Hong Kong. Local demands affect significantly the inflow of investment from both sources. Wage costs exert a larger influence on Hong Kong investment than on Japanese investment, which can be explained by the difference in the characteristics of investment projects from Hong Kong and those from Japan. Japanese firms appear to be attracted to Economic and Technology Development Zones, whereas Hong Kong firms are more attracted to Special Economic Zones and Open Coastal Cities. The quality of infrastructure matters more for firms from Hong Kong than from Japan. Distance does not affect Japanese direct investment significantly. This may reflect Japan's extensive experience in managing its operations in the global marketplace.