Integrating the two Asian economic giants: Japanese multinational corporations in China

Abstract

In this paper we investigate various trends, behavioral patterns and geographic determinants of direct investment from Japanese multinational corporations in China. The investment and trade behavior of Japanese firms in China constitute an important channel through which economic integration takes place between the two Asian economic giants. According to recent Japanese government surveys, Japanese firms locate in China to take advantage of its low costs and its large and growing market. Japanese firms sold a large fraction of goods produced in China in the Chinese market. They also procured a significant share of its intermediate goods from suppliers in China. Based on our panel econometric analysis, Japanese multinationals are attracted to regions in China where there is an abundance of human capital, good tax and investment incentives and where economic reforms have progressed in a significant way. © 2004 Elsevier Inc. All rights reserved.