FDI between Japan and China: A dynamic multi-regional general equilibrium analysis
In the World Investment Prospect Survey by UNCTAD, China has always appeared as the world’s most attractive destination of foreign direct investment (FDI) in 2008-2012. In turn, Japan has recently recovered its position as the world wide second largest investor after the US (UNCTAD, 2012). However, this contrasts with the initial collapse of Japanese’s FDI in China at the beginning of the crisis, which constitutes the center of the analysis of this paper.
Data/methods
We use a world trade (Japan-China-the Rest of the world) recursive dynamic CGE model, calibrated to the GTAP database version 8 for the year 2007. The presence and uniqueness of Japanese MNEs’ affiliates in China, in terms of sourcing of input and sales of output, is estimated with a rich survey dataset on the operations of Japanese MNEs by METI. Thus, we model Japanese MNEs taking into account their export and import propensity, the value added and production they generate, as well as, their capital intensity patterns. These features stand out among the few CGEs that consider the presence of MNEs. To investigate the role of FDI between Japan and China, the putty-clay type investment is endogenously determined by local firms according to their sectoral size and rate of returns, while the sectoral investment by the Japanese MNEs’ affiliates (i.e., FDI) is exogenously assumed to contrast the impact of the fall in FDI growth.
Results
The following results are expressed with respect to the evolution under the BAU scenario. The contraction of Japanese FDI in China would lead to rather small adjustments in aggregate variables of opposite sign in China and Japan, and negligible variations for the rest of the world. Wages and capital remuneration would decrease slightly in China. This would result in lower factor costs, which would increase Chinese competitiveness, production and exports and bring about a small reduction in Japanese aggregate exports. The operations of Japanese MNEs in China would have an important impact in the sectoral bilateral trade between Japan and China, but not generally for the rest of the world. Only in the case of the sector of transport equipment, where Japanese affiliates in China are so important, would Chinese exports to the rest of the world be mildly reduced.
JEL Codes: C68, F23, F17, F21