The Evolution of Japanese Investment in China: From Toys to Textiles to BPO

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The Evolution of Japanese Investment in
ChinaFrom Toys to Textiles to BPO
Andrew Delios Zhao Xuejuan NUS Business
School 26 January 2007
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Synopsis

• Research Question
• How have the investment strategies of Japanese
  firms in China evolved in the past 25 years?
• Dimensions of Analysis
• Geography
• Industry
• Geography industry time
• Setting
• FDIs of Japanese firms in China 1979-2006
• 5,000 entries by Japanese firms
• wide sectoral distribution
• wide geographic distribution
• Finding
• Significant evolution in investment strategies
• Creates substantial opportunities for future
  research

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Japanese firms in China

• Well-recognized as one of the leading investors
  in China
• First three investments made in late 1970s
• Become a major focus of Japanese firms FDIs
• Now second largest stock of Japanese firms FDIs
• FDIs in China
• Strongest growth in the 1990s
• Increasing, than decreasing geographical
  concentration
• Wide range of industries,
• But strong industry preferences by region

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JFDI in China 1979-2005
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FDI by province in China (2006)
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China Regions

• North
• Beijing, Tianjin, Hebei, Shanxi, Neimenggu
• Northeast
• Liaoning, Jilin, Heilongjiang
• East
• Shanghai, Jiangsu, Zhejiang, Anhui, Fujian,
  Jiangxi, Shandong
• Mid-South
• Henan, Hubei, Hunan, Guangdong, Guangxi, Hainan
• Southwest
• Chongqing, Sichuan, Guizhou, Yunnan, Xizang
• Northwest
• Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang

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JFDI in China By Region
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Distribution of JFDI in China (1990)
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Distribution of JFDI in China (1998)
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Regions and Industry by year
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Centre for International Business Leeds
University Business School

• Japanese multinationals in worlds top 100
  non-financial TNCs 2004

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Provinces and Industries by Year
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Labor Costs in China
TABLE 4 Consumer Price Index by City/Province in
China 1992-2001
Source China Statistics Bureau. Various years.
China Statistical Yearbook (ZhongGuo TongJi
NianJian). Note CPI in 1992 for each
city/province set to 100, except for Tibet where
earliest observation was in 2000, which was set
to 100.
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Consumer Prices in China
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Exchange Rates (RMB to Currency)
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Implications of Trends

• Subsidiary development
• and multinational firm strategy
• Institutions
• and international business
• Offshoring, outsourcing
• and international business theory

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Subsidiary development

• Shifts in external environment creates new
  incentives for subsidiary establishment
• alters cost structure
• alters feasibility of various types of
  subsidiaries
• In China
• Higher cost structure in east, north and
  mid-south
• Greater availability of skilled labor and greater
  levels of domestic competition
• Emerging viability of inland locations
• How can subsidiary strategy evolve to meet
  challenges and opportunities of new external
  environment?
• Upgrading, skills development, and expansion of
  subsidiary charter
• Subsidiary relocation inside of China
• Subsidiary relocation outside of China
• Subsidiary exit

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Institutions

• The easy part has been done
• Opened sectors to competition
• Corrected infrastructure deficiencies
• Offered fiscal incentives
• But these just bring the country up to speed
• Now facing increased cost pressures and fewer
  cost advantages in the East, mid-South and North
• FDI will exit established areas
• FDI might migrate inland
• FDI might migrate elsewhere in Asia
• More difficult changes need to be made
• Institutions, transparency and rules of
  competition and open inland areas to FDI.
• Institutional development the next big issues in
  Chinas development
• Otherwise lowered chance of receiving high
  value-added FDI
• Otherwise future FDI in general is at
  considerable risk.

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Centre for International Business Leeds
University Business School
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Offshoring and outsourcing

• Substantial growth in offshoring and outsourcing
  in Northeast of China
• Lead by Japanese firms
• Some FDI in offshoring by leading Indian vendors
• Are offshoring and outsourcing analytically
  comparable to WOS, alliances, licensing, tech
  transfer?
• WOS offshored but not outsourced
• Alliance/Licensing outsourced and/and not
  offshored?
• Can extend internalization theory to analysis of
  outsourcing and offshoring
• Focus on intermediate product issues
• Focus on knowledge-related issues

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Outsourcing and offshoring
Geographic Location of Activity
International
Domestic
Inside
Location of Activity in Firm
Outside
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Conclusion

• Key Empirical Trends
• Rebound in levels of Japanese FDI, post-2001
• Increased (slightly) focus on inland areas
• Shift to high value-added activities, in
  traditional locations for FDI in China
• Shift in profile of region-industry clusters in
  China
• Shift of FDI out of China?
• Growth of outsourcing and offshoring activities
  in China.
• Research areas
• Subsidiary development and multinational firm
  strategy
• Institutions and international business
• Offshoring, outsourcing and international
  business theory

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• Thank You!
• .suggestions