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Assessing foreign direct investment relationships between China, Japan, and the United States


Journal of Asian Economics 20 (2009) 611–625

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Journal of Asian Economics

Assessing foreign direct investment relationships between China, Japan, and the United States§
Theresa M. Greaney a,*, Yao Li b
a b

Department of Economics, University of Hawaii, 2424 Maile Way, Saunders Hall 542, Honolulu 96822, USA School of Management and Economics, University of Electronic Science and Technology of China, Number 4, Section 2, North Jian She Road Chengdu, Sichuan 610054, China

A R T I C L E I N F O

A B S T R A C T

Article history: Received 25 June 2009 Received in revised form 12 August 2009 Accepted 19 August 2009 JEL classi?cation: F21 F23 Keywords: FDI Asia Regional integration

China has received enormous in?ows of foreign direct investment (FDI) in recent years, including signi?cant ?ows from Japan and the US. We examine these investment ?ows in detail to gain perspectives on their relative importance for the three countries involved. We also analyze the industrial composition of FDI ?ows over time. American FDI ?ows to China have been less concentrated in manufacturing than average for investors in China while Japan’s FDI ?ows have been much more concentrated in manufacturing, particularly in transport, electrical and machinery industries in recent years. Using survey data from American and Japanese af?liates, we compare the employment patterns and sales destinations of American and Japanese af?liates in China. We ?nd a much higher degree of export-orientation for Japanese af?liates than American af?liates, with the latter tending to make the vast majority of their sales in the Chinese market. Over time, however, we ?nd a tendency towards convergence in the sales destinations of Japanese and American af?liates. ? 2009 Elsevier Inc. All rights reserved.

1. Introduction China’s economic reforms, begun in the late 1970s and progressing through its entry into the WTO in 2001, have allowed it to participate more fully in international commerce and to bene?t from economic growth. China’s rapid economic growth has been outpaced only by its even more rapid increases in international trade participation and receipt of foreign direct investment (FDI). As Fig. 1 shows, China’s FDI in?ows relative to GDP have grown from 0.2% in 1982 to a high of 6.3% in 1993, then back down to 4.3% in 2007. The accumulated stock of FDI from 1982 rises particularly rapidly relative to GDP from the early 1990s to early 2000s, rising from only 8% in 1992 to hit a peak of almost 30% in 2002 before dropping modestly to 25.8% in 2007. Similarly dramatic growth has occurred in exports and imports relative to GDP, with the export share rising from 12.3% to 41.9% and the import share from 10.1% to 32.3% between 1982 and 2007. The rapid growth in China’s GDP, trade and FDI made it the fourth largest economy, the third largest trading country, and the largest FDI recipient in the world in 2007.1

§ This paper was prepared for the conference China, Japan, and the United States: Deeper Integration, organized by Theresa Greaney and Mary Lovely and hosted by the Asian Development Bank Institute in Tokyo in May 2009. The authors gratefully acknowledge ?nancial support from ADBI, and from cosponsors the East-West Center, the University of Hawaii’s Center for Japanese Studies, Nihon University’s Department of Economics, and Brandeis University’s Asia-Paci?c Center. We also thank discussants Alyson Ma and Yuqing Xing, other conference participants and an anonymous referee for their helpful comments on our paper. * Corresponding author. E-mail address: greaney@hawaii.edu (T.M. Greaney). 1 GDP rankings from IMF and World Bank data, trade rankings combine export and import totals based on World Trade Organization data, and FDI rankings based on OCO Global data.

1049-0078/$ – see front matter ? 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.asieco.2009.08.001

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T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625

Fig. 1. China’s FDI and trade relative to GDP, 1982–2007. Source: Data from The World Bank Group, Global Development Finance, GDP online.

China’s rapid economic growth and international integration have captured a lot of media attention and cocktail-party theorizing as to the causal relationships within China, as well as the possible impacts on China’s major trade and investment partners, such as Japan and the United States. In this paper, we jump on this bandwagon, but with a sobering examination of the available data from all three countries. We assess the FDI relationships between China, Japan, and the US by analyzing data on FDI stocks and ?ows across the three countries along with data on the operations of American and Japanese af?liates in China. We attempt to weigh the importance of these bilateral FDI relationships relative to other bilateral relationships for each country, and we analyze the industrial composition of the investment relationships. Although this analysis serves to remind observers that the direct investment relationship between Japan and the US is still much larger than that between either country and China, the growth in the China investments and popular interest therein prompts our further investigation into the China-hosted investments. We look for similarities and differences between Japanese and American multinationals in their approaches to investment in China by examining operating data from their af?liates. We ?nd evidence that Japanese af?liates in China are more concentrated in manufacturing industries and are more export-oriented than their American counterparts, but the latter difference is shrinking over time. 2. Related literature One branch of related literature has sought to explain possible relationships between international trade and FDI. The traditional Heckscher–Ohlin (H–O) theorem of trade helps in explaining China’s trade pattern. With the largest population in the world and relatively low wages, China has comparative and even absolute advantage in manufacturing labor-intensive products relative to most of its trading partners. As China has increasingly integrated into the world economy over the past three decades, it has evolved into a major exporter in most categories of labor-intensive manufacturers, as predicted by the H–O theorem. Based on the same H–O framework, early theoretical analyses also predict that product trade and international capital movements act as substitutes (Mundell, 1957). This framework indicates that an increase in a country’s inward FDI ?ows will dampen its trade growth. More recent theories that incorporate multinational enterprise production into models of international trade develop two different hypotheses to explain the relationship between FDI and trade ?ows. In vertical integration models such as Helpman (1984), the primary incentive for FDI is to seek lower production costs in the host country and then to export goods produced or processed by the ?rm’s foreign af?liates. This type of FDI in?ow will increase a host country’s trade, primarily through increased exports.2 On the other hand, a host country’s trade is predicted to decrease in horizontal integration models (such as Horstmann & Markusen, 1992) where FDI in?ows substitute for imports. In this case, ?rms move the production of their exportable products to the host country to economize on ?rm-level economies of scale, avoid trade barriers and reduce transportation costs. Gu et al. (2008) and Xing (2007) examine the recent relationship between trade and FDI for China. Gu et al. use disaggregated manufacturing sector data for 1995–2005 to conclude that China’s FDI in?ows have statistically signi?cant and positive effects on China’s total exports, but these effects differ across industries. With trade data from 1980 to 2004, Xing (2007) investigates to what extent FDI promoted intra-industry trade between China and its major trading partners,

2

Imports of intermediate inputs also may increase in vertical integration models.

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Japan, and the US. The analysis indicates that Japanese direct investment in China performed a signi?cant role in enhancing intra-industry trade between Japan and China. However, there is no such evidence found for the US direct investment in China. Therefore, the effect of inward FDI on China’s economy can be different for different industries and source countries. Another branch of the literature has produced descriptive analyses focused typically on a particular bilateral relationship or on a particular country’s international linkages. Branstetter and Foley (2007) provide an example of the former, with a focus on US–China FDI linkages.3 They attempt to debunk several misconceptions regarding US investment in China by pointing out that US FDI in China is not large, is not very export-oriented, does not replace investment elsewhere, and does not exploit increased technology levels in China. The Japan–China relationship is examined in research such as Cassidy and Andreosso-O’Callaghan (2006), which identi?es spatial determinants of Japan’s FDI in China. Lipsey (2000) differs from the previously mentioned literature by focusing on the activities of US and Japanese manufacturing af?liates in East Asia rather than on FDI ?ows. He ?nds that US af?liates in East Asia were more exportoriented than were Japanese af?liates in East Asia in 1977, but that the US af?liates became less export-oriented over time while the Japanese af?liates became more export-oriented by 1995. Since Lipsey’s study used data from 1977 as a starting point, the focus of his study was on the four so-called newly industrializing economies (NIEs)—Hong Kong, South Korea, Singapore, and Taiwan— and four members of the Association of South East Asian Nations (ASEAN)—Indonesia, Malaysia, the Philippines, and Thailand. His results for American and Japanese af?liates located in these other East Asian economics will be compared with our results for af?liates in China later in the paper. 3. Descriptive analysis of FDI We have collected available data from the US, Japan, and China to assess the current state of FDI linkages across the three countries. The FDI data is organized ?rst at the country level and then at the industry level. After examining the FDI data, we analyze data collected by the American and Japanese governments on the overseas activities of foreign-invested ?rms. This data includes industry-level employment and sales data for the multinational ?rms. 3.1. Country analysis We start the country-level FDI analysis with bilateral FDI data that allows us to examine the relative importance and trends of the three target countries in each other’s FDI portfolios. Table 1 shows US FDI stocks abroad from 1982 to 2007 in the top row, followed by FDI shares by region or country destination in subsequent rows. The last three columns in the table show the average annual growth rates in FDI stocks by destination. By region, Canada has seen a major decline in its role as a destination for US FDI, with 20.9% in 1982 but only 9.2% in 2007. Europe experienced the largest percentage gains in US FDI stock shares, from 44.5% in 1982 to 55.6% in 2007, while the regions of Latin America and other Western Hemisphere and Asia and the Paci?c had almost identical, modest increases from 13.6% to 16.9% and 16.3%, respectively. China’s share of US FDI stocks has grown from below 0.1% to 1.0%, while Hong Kong’s share has increased from 1.4% to 1.7%. Combining China’s share of US FDI stocks with Hong Kong’s share produces a 2.7% share total in 2007, which puts China above four of the European countries listed but below six European countries, Canada, and Japan as a host of US FDI. The leading hosts of US FDI stocks were the United Kingdom with 14.3% and the Netherlands with 13.3% in 2007. As shown in the last three columns of Table 1, China had the fastest growth for US FDI stocks in the 1980s and 1990s, with average annual growth rates of 28% and 41%, respectively. In part, this re?ects the very low initial FDI stocks in 1982 ($49 million) and in 1990 ($354 million), the smallest of any of the individual countries listed. From 2000 to 2007, however, three other countries and one region recorded faster average annual growth in US FDI stocks than China’s growth of 14%. These countries and region are Austria at 32%, Luxembourg at 22%, the Netherlands at 18% and the Middle East at 15%. Data from the Bank of Japan provides Japan’s FDI stocks abroad from 1996 to 2007, as shown in the top row of Table 2. Subsequent rows show the shares of Japan’s FDI stocks by region or country destination. By region, Asia’s share of Japan’s FDI stocks has declined from 30.6% in 1996 to 24.3% in 2007, while North America’s share has declined from 37.8% to 33.6%. Western Europe has recorded the strongest share gains, from 18.4% to 26.7%, followed by Central and South America with a share increase from 4.6% to 10.0%. The Asia regional losses are concentrated mainly in the ASEAN countries, particularly Indonesia, Thailand, and Singapore, and in Hong Kong. In contrast, China’s share of Japan’s FDI stocks has more than doubled over the 11-year period from 3.1% to 6.9%. The only other country with a larger percentage increase in Japan’s FDI stock shares is the Netherlands, with a jump from 3.3% to 11.7%. By 2007, China and Hong Kong combined hosted 9.1% of Japan’s total FDI stock abroad. Only the US (31.9%) and the Netherlands (11.7%) hosted larger shares of Japan’s FDI. The last two columns of Table 2 show the average annual growth rates of Japan’s FDI stocks abroad in the late 1990s and 2000s. China received most of its increase in FDI stocks from Japan during the 2000s, with average annual growth of 23%, just above Thailand’s growth rate of Japanese FDI stock of 22%. The growth rate for Thailand comes after a period from 1996 to 2000 of FDI losses of 26% on average annually, probably due to the Asian ?nancial crisis. Japan’s FDI stocks in Hong Kong experienced a less severe decline of 8.9% on average annually during the late 1990s, then a similar average annual increase during the most recent 7-year period.

3

Fung et al. (2004) provide an earlier extensive examination of US investment in China.

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Table 1 US FDI stocks abroad by destination, 1982–2007. Destination All countries total Canada Europe Austria Belgium France Germany Ireland Italy Luxembourg Netherlands Switzerland United Kingdom Latin Am. and Other W. Hem. Africa Middle East Asia and Paci?c China Hong Kong Japan 1982a 207,752 20.9 44.5 0.3 2.7 3.6 7.4 1.0 2.1 0.5 3.3 6.2 13.3 13.6 3.1 1.7 13.6 0.0 1.4 3.1 1985a 238,369 20.1 45.6 0.2 2.4 3.3 7.2 1.6 2.6 0.3 3.2 6.7 14.3 12.8 2.6 1.9 14.8 0.1 1.5 4.0 1990a 430,521 16.1 49.9 0.3 2.2 4.5 6.4 1.4 3.3 0.4 4.4 5.8 16.9 16.6 0.8 0.9 15.0 0.1 1.4 5.2 1995a 699,015 11.9 49.3 0.4 2.7 4.8 6.3 1.1 2.4 0.8 6.0 4.5 15.2 18.8 0.9 1.0 17.6 0.4 1.7 5.3 2000a 1,316,247 10.1 52.2 0.2 1.4 3.2 4.2 2.7 1.8 2.1 8.8 4.2 17.5 20.3 0.9 0.8 15.7 0.8 2.1 4.3 2005a 2,241,656 10.3 54.0 0.5 2.2 2.7 4.5 2.5 1.1 3.6 10.7 4.5 15.7 16.9 1.0 0.9 16.8 0.8 1.6 3.6 2006a 2,454,674 9.4 54.6 0.7 2.1 2.5 3.9 2.9 1.1 3.9 11.4 4.7 15.3 17.4 1.0 1.0 16.5 1.0 1.7 3.8 2007a 2,791,269 9.2 55.6 0.7 2.0 2.5 3.8 3.1 1.0 4.1 13.3 4.6 14.3 16.9 1.0 1.1 16.3 1.0 1.7 3.6 Growthb 82–90 9.54 6.03 11.11 8.92 6.90 12.65 7.52 14.25 15.91 5.59 13.88 8.71 12.90 12.34 ?6.94 1.37 10.90 28.04 9.86 17.07 Growthb 90–00 11.82 6.66 12.34 9.94 6.62 8.32 7.23 19.80 5.26 32.29 19.70 8.23 12.24 14.08 12.54 10.62 12.34 41.18 16.32 9.71 Growthb 00–07 11.34 9.93 12.33 32.41 17.16 7.00 9.88 13.48 2.76 22.24 18.11 12.68 8.13 8.50 12.88 15.27 11.86 14.25 8.13 8.58

Notes: Balance of payments transactions (and associated positions) between parents and af?liates are recorded against the country of the foreign af?liate with which the US parent had a direct transaction even if the transaction may re?ect indirect claims on or liabilities to or income from indirectly held af?liates in third countries. Source: Authors’ analysis of data from the U.S. Bureau of Economic Analysis. a All countries total is denominated in US $ millions, historical-cost basis. All values shown for individual countries and regions are shares by destination (%). b Growth indicates average annual growth rate of investment (not shares).

Having examined the FDI data from the perspective of the investing countries, we now turn to the host country perspective. The data for Table 3 is published by the Chinese government, and the available data is for FDI in?ows by investment source for a few major investors.4 As seen in Table 3, the growth in FDI in?ows into China was particularly rapid during the 1990s, with average annual growth rates of almost 28%. Branstetter and Foley (2007) note that these statistics are heavily in?uenced by of?cial restrictions on direct investments from Taiwan that prompt investment routing through Hong Kong or tax havens such as the Cayman Islands, by the preference among some advanced country investors to invest in China through Hong Kong-based af?liates, and by the likelihood that many other investments purportedly from Hong Kong are actually Chinese investors seeking to qualify for preferential treatment offered to multinational enterprises. For these reasons, interpreting the statistics at the individual investor country level is somewhat suspect. The investment shares by country shown in Table 3 indicate that both Japan and the US have decreased in relative importance as investors in China, with Japan’s share falling from 11.7% to 6.6% between 1986 and 2006 and the US share falling from 14.5% to 9.4% during the same time period. However, for the reasons mentioned above, these shares may exclude other investment that occurred through Hong Kong or tax havens. From China’s perspective, the US and Japan are behind only Hong Kong and the EU as reported sources of FDI in?ows into China. In sum, China has seen very strong growth in its FDI stocks from the US and Japan in recent years, but the growth has been from low initial values so China still hosts only small portions of their worldwide investments. Both investing countries have larger stocks of FDI in each other than they have in China as of 2007. Of the US FDI stocks in that year, 2.8% was invested in China including Hong Kong while 3.6% was invested in Japan. For Japan’s FDI stocks, an enormous 31.9% was invested in the US and only 9.1% was invested in China, including Hong Kong. China plays a larger role in Japan’s FDI abroad than in the US FDI abroad, probably due in part to its closer proximity to Japan. The industry breakdown of FDI may help in explaining these different patterns of investment, which is the topic of the following section. 3.2. Industry analysis Tables 4.1 and 4.2 show shares of US FDI ?ows by industry of af?liates for Japan and for China for 1999–2007. The US FDI ?ows to Japan were dominated by the ?nance and insurance and the information industries in 1999, with 44.0% and 22.6%

4 To parallel the American and Japanese data in Tables 1 and 2, we would like to have Chinese data for FDI stocks, but we were not able to ?nd the stock data by source countries across time, so we use the available data on FDI ?ows.

T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625 Table 2 Japan FDI stocks abroad by destination, 1996–2007. Region and Country All countries total Asia P.R. China Taiwan R. Korea Hong Kong Singapore Thailand Indonesia Malaysia North America USA Canada Central and South America Oceania Western Europe Germany U.K. France Netherlands Belgium/Luxembourg Eastern Europe, Russia, etc. Middle East Africa 1996a 299,986 30.6 3.1 1.6 1.3 3.6 4.4 6.1 6.6 2.2 37.8 36.5 1.4 4.6 4.1 18.4 1.6 7.9 0.6 3.3 2.3 0.1 0.4 0.2 2000a 319,933 17.7 3.1 1.3 1.5 2.3 3.2 1.7 1.7 1.4 49.7 47.5 2.2 7.5 3.6 20.3 1.5 7.8 1.1 6.0 1.4 0.1 0.3 0.3 2002a 364,776 19.1 4.1 1.2 1.7 1.8 3.4 2.1 1.8 1.3 46.1 44.6 1.6 5.9 3.9 23.7 1.5 8.6 1.8 7.5 2.1 0.2 0.3 0.4 2004a 385,808 20.6 5.4 1.7 1.5 1.8 3.0 2.7 1.8 1.1 39.5 38.3 1.3 7.2 4.1 27.4 1.9 7.2 3.5 9.8 2.7 0.4 0.3 0.4 2005a 456,054 22.7 6.4 1.7 1.5 2.1 3.0 3.0 2.0 1.2 40.2 38.7 1.6 8.5 3.3 23.8 1.6 6.3 2.9 8.9 2.2 0.5 0.4 0.3 2006a 534,760 23.9 6.7 1.7 1.4 2.4 3.2 3.3 1.7 1.7 36.3 34.8 1.5 8.7 3.1 26.4 1.6 7.0 2.9 10.1 2.4 0.5 0.5 0.6 2007a 618,584 24.3 6.9 1.7 1.4 2.2 3.2 3.6 1.5 1.5 33.6 31.9 1.8 10.0 3.6 26.7 1.7 5.9 2.3 11.7 2.9 0.5 0.6 0.7 Growthb 96–00 1.62 ?11.37 1.57 ?3.36 4.64 ?8.89 ?6.37 ?26.00 ?27.61 ?8.87 8.80 8.55 14.88 14.82 ?1.08 4.15 ?0.76 1.49 19.04 18.27 ?10.36 14.53 ?5.04 14.24

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Growthb 00–07 9.88 14.97 23.08 14.12 8.92 8.94 10.06 22.27 8.04 10.51 3.90 3.79 6.09 14.40 9.62 14.27 12.43 5.43 21.81 20.91 21.50 35.21 21.04 26.06

Notes: From 2005 onwards, ‘‘Direct Investment/Liabilities/Equitiy Capital’’ includes capital reserves. From the end of 2006, the method for compiling the direct investment position has been changed. Refer to ‘‘Change in the Method for Compiling Direct Investment Position’’ (25 May 2007), which is available on the website of the Bank of Japan. Source: Authors’ analysis of data from the Bank of Japan. a All countries total is denominated in 100 million yen. All values shown for individual countries and regions are shares by destination (%). b Growth indicates average annual growth rate of investment (not shares). Table 3 China’s FDI in?ows by investment source, 1986–2006. Source Total Hong Kong Taiwan Japan US EU Others 1986a 2244 59.2 NA 11.7 14.5 8.0 6.6 1990a 3487 53.9 6.4 14.4 13.1 4.2 8.0 1995a 37,521 53.5 8.4 8.3 8.2 5.7 15.9 2000a 40,715 38.1 5.6 7.2 10.8 11.0 27.4 2002a 52,743 33.9 7.5 7.9 10.3 7.0 33.3 2004a 60,630 31.3 5.1 9.0 6.5 7.0 41.0 2005a 72,406 24.8 3.0 9.0 4.2 7.2 51.8 2006a 69,468 29.1 3.1 6.6 9.4 9.8 42.0 Growthb 86–90 11.65 9.06 NA 17.58 8.74 ?4.69 17.27 Growthb 90–00 27.86 23.49 26.30 19.20 25.40 40.70 44.64 Growthb 00–06 9.31 4.54 ?1.20 7.89 6.93 7.15 17.40

Source: Author’s analysis of MOFCOM FDI statistics, http://www.fdi.gov.cn/pub/FDI_EN/default.htm. a ‘‘Total’’ is denominated in US $ millions, in realized FDI value. Values shown for individual countries and ‘‘others’’ are shares by investment source (%). b Growth indicates average annual growth rate of investment (not shares).

shares, as shown in Table 4.1. By 2007, these industries contributed smaller shares of 21.0% and 7.7%, respectively, while holding companies contributed 59.1%.5 The contributions of manufacturing industry af?liates to US FDI ?ows to Japan has ?uctuated widely over the 9 years, with a high of 36.6% in 2000 and a low of ?385.6% (i.e., capital in?ows from af?liates) in 2003. The large capital in?ows recorded from af?liates in other manufacturing, chemicals, and primary and fabricated metals, along with depository institutions, may have been caused in part by the yen’s appreciation in 2003. Overall, nonmanufacturing af?liates received the vast majority of US FDI ?ows to Japan over the 1999–2007 period. In contrast, US FDI ?ows to China have tended to favor manufacturing industries, as shown in Table 4.2. The contribution has varied over the years with a high of 83.6% in 2001 and a low of 28.9% in 2005, but it rebounded to a 56.8% contribution in 2007. Among manufacturing industries, computers and electronic products and chemicals contributed the largest shares in 2007 with 25.9% and 12.9%, respectively. Among non-manufacturing industries, other industries (14.4%) and wholesale trade (13.2%) were the only industries with contributions above 6% in 2007.

5 The category ‘‘holding company (non-bank)’’ is included in the BEA industry breakdown only from 2003 onward. Borga and Mataloni (2001) describe the increased popularity of US FDI in holding companies and the impact of this trend on the BEA survey data in a technical note on pp. 23–25.

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Table 4.1 US FDI ?ows to Japan, shares by industry, 1999–2007. 1999 Food Chemicals Primary and fabricated metals Machinery Computers and electronic products Electrical equipment, appliances, and components Transportation equipment Other manufacturing Manufacturing total Mining Wholesale trade Information Depository institutions Finance (exc. depository institutions) & insurance Professional, scienti?c, and technical services Holding companies (non-bank) Utilities Other industries Non-manufacturing total Total 0.4 2.3 0.1 2.1 3.4 0.4 2.2 (D) 10.3 0.0 6.5 22.6 1.4 44.0 (D) NA 0.0 (D) 89.7 100.0 2000 ?3.6 ?6.8 ?0.3 5.4 13.5 0.9 19.0 (D) 36.6 (D) 41.3 0.5 0.9 9.8 (D) NA 0.0 (D) 63.4 100.0 2001a ?0.6 ?12.5 ?0.5 ?0.2 17.0 0.1 8.7 (D) 10.4 (D) 2.6 ?10.8 3.1 140.4 ?23.7 NA 0.0 (D) 89.6 100.0 2002 0.2 5.9 ?0.1 ?1.5 4.6 0.1 1.7 (D) 50.2 (D) 0.4 1.0 ?2.9 41.0 6.7 NA 0.0 (D) 49.8 100.0 2003 1.2 ?102.7 ?28.3 19.7 39.9 9.0 7.6 ?332.2 ?385.6 (D) 34.3 99.3 ?49.3 338.4 96.2 6.0 NA (D) 485.6 100.0 2004 0.5 ?3.8 2.0 ?0.1 0.8 0.8 1.7 13.6 15.4 (D) 13.0 7.0 ?4.6 43.8 9.0 0.9 NA (D) 84.6 100.0 2005 ?0.6 16.3 0.7 4.1 6.3 ?2.0 4.6 6.1 35.6 (D) 10.9 (D) ?5.4 46.3 ?8.2 (D) NA (D) 64.4 100.0 2006 ?0.3 3.2 0.0 0.2 8.6 0.6 0.7 6.7 19.7 0.0 0.8 (D) ?1.0 53.4 11.3 (D) NA 13.4 80.3 100.0 2007 0.2 ?0.7 ?0.1 0.7 2.0 0.4 0.2 4.2 6.9 (D) 1.1 7.7 ?0.7 21.0 1.7 59.1 NA 3.2 93.1 100.0

Source: Authors’ analysis of BEA data. Notes: (D) indicates suppressed to avoid disclosure of data of individual companies; NA indicates data not available in this year; shares are based on capital out?ow data reported without a current-cost adjustment; negatives represent capital in?ows except for 2001 shares. a The all industries total for 2001 is ?$4.7 billion so positive (negative) shares represent capital in?ows (out?ows).

Table 4.2 US FDI ?ows to China, shares by industry, 1999–2007. 1999 Food Chemicals Primary and fabricated metals Machinery Computers and electronic products Electrical equipment, appliances, and components Transportation equipment Other manufacturing Manufacturing total Mining Wholesale trade Information Depository institutions Finance (exc. depository institutions) and insurance Professional, scienti?c, and technical services Holding companies (non-bank) Utilities Other industries Non-manufacturing total Total 2.9 1.9 2.4 ?4.1 33.2 0.1 20.3 NA 64.8 ?2.6 6.8 ?0.2 ?2.7 ?0.1 10.4 NA 5.9 17.7 35.2 100.0 2000 0.4 ?2.6 ?2.2 1.7 65.8 4.2 0.9 NA 73.3 23.9 5.6 1.7 ?0.1 0.9 ?3.2 NA ?1.3 ?0.7 26.7 100.0 2001 2.3 ?3.0 ?1.0 0.4 40.8 40.5 ?0.2 NA 83.6 28.5 8.7 ?1.2 4.8 ?2.8 ?6.4 NA ?5.8 ?9.5 16.4 100.0 2002 10.1 17.0 ?1.6 7.1 ?21.7 2.9 11.3 NA 51.3 ?37.4 25.9 0.5 18.7 (D) 23.0 NA 5.9 (D) 48.7 100.0 2003 7.9 19.7 ?1.2 0.5 ?37.2 7.6 34.1 6.0 37.4 24.3 29.5 4.3 6.8 (D) 2.4 ?4.2 NA (D) 62.6 100.0 2004 2.2 10.5 1.4 2.9 25.2 1.9 8.2 20.4 72.8 13.1 0.9 1.0 2.9 1.0 2.9 3.6 NA 1.6 27.2 100.0 2005 1.1 17.7 6.8 ?2.4 0.5 12.8 ?19.3 11.6 28.9 4.1 23.1 8.5 8.2 8.8 1.4 ?2.0 NA 19.0 71.1 100.0 2006 2.4 12.0 8.2 5.1 13.8 ?0.9 9.7 10.6 61.0 ?17.7 4.9 4.5 22.6 ?0.8 3.2 8.5 NA 13.9 39.0 100.0 2007 1.2 12.9 3.4 8.3 25.9 0.9 0.8 3.3 56.8 0.1 13.2 2.4 1.6 4.2 2.1 5.3 NA 14.4 43.2 100.0

Source: Authors’ analysis of BEA data. Notes: (D) indicates suppressed to avoid disclosure of data of individual companies; NA indicates data not available in this year; shares are based on capital out?ow data reported without a current-cost adjustment; negatives represent capital in?ows.

Tables 5.1 and 5.2 are comparable to Tables 4.1 and 4.2, but the focus shifts to Japan’s FDI ?ows by industry for the US and for China for 1989–2004. As shown in Table 5.1, the manufacturing af?liates’ share of Japan’s FDI ?ows to the US varied over a relatively narrow range between 24% and 38%, except for a large jump to 60% in 2002 and 2003. This volatility re?ects the in?uence of large investments made in particular years, speci?cally in electrical industries in 2002 and in chemical industries in 2003. Japanese investments in af?liates in the service, transportation, and real estate industries also appear to be particularly volatile from year to year. Table 5.2 shows Japan’s FDI ?ows to China with shares by af?liate industry. Unsurprisingly, the recent shares for manufactured industries are particularly high, with 82.8% of investments in total in 2004. This share has grown steadily over time, from only 47.0% in 1989. Among manufacturing industries, the transport sector had the largest FDI share in 2004 with

T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625 Table 5.1 Japan’s FDI ?ows to the US, shares by industry, 1989–2004. FY Food Textile Lumber and pulp Chemical Metal Machinery Electrical Transport Others Manufacturing total Farming and forestry Fishery Mining Construction Trade Finance and insurance Service Transportation Real estate Others Non-manufacturing total Branches Total 1989 1.7 0.4 0.4 3.8 3.3 1.7 8.3 4.1 3.5 27.1 0.2 0.0 0.5 0.9 7.2 13.9 22.0 0.5 26.4 0.2 71.9 1.1 100.0 1990 1.3 0.2 0.3 4.6 1.9 2.6 9.0 2.0 2.5 24.3 0.1 0.1 0.7 0.6 10.5 8.6 32.8 0.4 21.8 NA 75.5 0.2 100.0 1992 2.8 0.4 0.2 2.9 2.5 2.2 5.1 4.1 7.1 27.4 0.3 0.0 0.5 1.3 11.5 11.3 31.4 0.6 15.7 NA 72.5 0.1 100.0 1994 1.7 0.3 0.0 7.6 1.4 4.9 4.9 2.0 3.8 26.6 0.0 0.0 0.2 0.7 7.6 11.9 27.2 1.3 24.3 NA 73.3 0.1 100.0 1996 0.7 0.1 0.9 2.9 2.8 2.0 14.7 8.9 4.2 37.0 0.3 0.0 1.4 0.7 9.5 18.5 10.8 0.5 21.2 NA 62.9 0.1 100.0 1998 2.5 0.4 0.3 5.9 4.5 2.9 15.0 3.3 2.3 37.2 0.1 NA 0.7 1.5 17.6 18.8 8.6 1.8 13.7 NA 62.8 NA 100.0 2000 1.1 0.3 0.1 8.6 1.5 6.1 9.3 3.8 1.3 32.1 0.0 0.3 0.6 0.5 10.8 7.5 6.3 40.7 1.1 NA 67.8 0.1 100.0 2002 1.1 0.2 0.1 13.6 1.6 4.6 30.0 8.0 0.9 60.0 NA 0.2 1.8 0.0 12.3 14.5 4.0 4.6 2.4 0.3 40.0 0.0 100.0 2003 0.6 0.0 NA 30.6 5.1 2.5 14.8 4.3 2.2 60.2 NA NA 0.2 0.4 6.7 8.8 8.5 1.9 13.1 NA 39.7 0.0 100.0

617

2004 6.2 0.7 NA 4.7 11.0 2.1 3.9 7.3 2.0 37.9 NA NA 0.8 NA 11.9 12.3 18.1 15.5 3.4 NA 62.1 NA 100.0

Source: Authors’ analysis of data from Japan’s Ministry of Finance, http://www.mof.go.jp/english/?les.htm. Notes: NA indicates data not available.

36.6%, up from less than 1% in 1989. The non-manufacturing industries have declined in importance as targets of FDI in China, from 52.8% in 1989 to only 12.9% in 2004. The services sector saw the largest individual share decline, from 40.1% to 3.0% over the same time period. The data in Tables 4.1–5.2 show more similarities than differences in American and Japanese investment ?ows. Both investing countries tend to make most of their investments in China in manufacturing af?liates, while making most of their bilateral investments in each other in non-manufacturing af?liates. One difference is that US investment in Japan is more concentrated in non-manufacturing than is Japanese investment in the US, while Japanese investment in China is more concentrated in manufacturing than is US investment in China. The industries that have consistently played a major role in US-Japan investment ?ows are ?nance and insurance for US investments, and ?nance and insurance, service, and real estate for Japan’s investments. For investments in China, US ?ows to computers and electronic products af?liates and chemical af?liates have been consistently high, while Japan’s ?ows in electrical, machinery, and transport sectors have been noteworthy. China’s total FDI stocks and shares by industry for 1996–2007 are shown in Table 6.6 The National Bureau of Statistics of China changed the industrial classi?cation in its Statistical Yearbook from 2004, so we have divided the data into 1996–2003 and 2004–2007 periods. This division also roughly matches with China’s pre-WTO and post-WTO entrance since China of?cially joined the WTO on December 11, 2001 and there were some lags in policy implementations.7 Manufacturing’s share of FDI was 57.9% in 1996, increased fairly consistently to a high of 63.2% in 2006, then fell back to 58.3% in 2007. Unfortunately, China’s statistics do not allow us to break down the manufacturing sector into individual industries to see where changes may be occurring. Real estate had 19.4% of China’s FDI stocks in 1996, but its share fell to 13.4% by 2007. Social services had 6.6% of FDI in 1996, but this industry category was discontinued from 2004. In 2007, the only sector besides manufacturing and real estate with more than a 5% share of FDI was leasing and business services with 5.2%. Of the 16 industry categories shown for China’s FDI stocks in Table 6, nine had faster average annual growth in the 2004– 07 period than in the 1996–2003 period, while only three industries had slower growth (four industries had missing data that precludes a comparison across the two time periods). Of these three, two fell from rapid positive growth to negative growth, while one merely dropped from 36.5% to 28.3% average annual growth (scienti?c research, polytechnic services, water management, environmental and public facilities). Transport, storage, post, and telecommunications service had 18.7% annual growth in the early period but ?3.8% growth in the later period, while the catchall category of ‘‘other’’ had 29.1% annual growth, followed by ?37.2% growth. The industries with the fastest average annual growth rates in either time

6 Again, to maintain consistency in this section, we would prefer to show FDI ?ows for China, but we have not been able to ?nd this data. The US data from the BEA is available for FDI ?ows and stocks by industry, but for Japan we have located only FDI ?ow data by industry. 7 Rose (2004) and Baier and Bergstrand (2007) ?nd evidence that the effects of WTO accession and PTA formation are best measured with lagged indicators.

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Table 5.2 Japan’s FDI ?ows to China, shares by industry, 1989–2004. FY Food Textile Lumber and pulp Chemical Metal Machinery Electrical Transport Others Manufacturing total Farming and forestry Fishery Mining Construction Trade Finance and insurance Service Transportation Real estate Others Non-manufacturing total Branches Total 1989 3.1 2.5 0.3 2.6 1.4 9.8 18.2 0.3 8.9 47.0 0.1 1.3 1.1 0.9 2.0 2.3 40.1 3.3 1.9 NA 52.8 0.2 100.0 1990 2.6 6.0 0.4 3.3 4.0 14.5 6.4 0.4 8.8 46.4 0.4 1.3 5.6 2.1 0.9 0.7 38.9 0.2 2.8 NA 52.8 0.8 100.0 1992 2.7 11.2 0.3 1.8 2.7 4.7 17.8 3.0 16.4 60.7 0.5 1.2 0.2 0.7 2.2 0.0 20.5 2.5 6.1 NA 33.8 5.5 100.0 1994 5.1 13.0 0.4 4.0 6.1 5.1 19.2 8.7 10.8 72.4 0.1 0.3 NA 3.0 5.8 0.0 8.0 0.9 5.4 NA 23.6 4.1 100.0 1996 7.3 7.5 1.6 3.5 7.2 11.3 15.7 9.9 7.9 71.9 NA 0.2 0.2 2.4 5.2 0.8 10.1 0.8 6.9 NA 26.5 1.6 100.0 1998 7.6 3.7 0.7 11.1 6.8 8.3 11.8 13.0 12.3 75.3 NA NA NA 5.9 3.2 2.8 7.0 0.8 3.3 NA 23.0 1.6 100.0 2000 2.2 2.7 0.5 6.5 4.4 8.5 32.1 9.1 10.7 76.8 NA NA NA 0.3 5.6 0.4 15.0 0.5 1.3 NA 23.0 0.2 100.0 2002 4.2 4.2 1.2 8.1 6.4 8.9 17.7 11.0 17.8 79.5 NA NA 0.3 0.5 3.9 6.8 1.8 0.3 0.2 NA 13.7 6.8 100.0 2003 3.9 3.2 0.2 7.9 5.0 11.2 14.0 27.0 5.7 78.1 NA NA NA 4.6 7.0 4.9 2.3 0.6 0.4 NA 19.9 2.1 100.0 2004 2.3 2.4 1.2 6.2 8.7 9.4 10.3 36.6 5.7 82.8 NA 0.1 0.0 NA 5.6 3.6 3.0 0.4 0.3 NA 12.9 4.2 100.0

Source: Authors’ analysis of data from Japan’s Ministry of Finance, http://www.mof.go.jp/english/?les.htm. Notes: NA indicates data not available.

Table 6 FDI stocks in China by industry, 1996–2007. Sector National total Manufacturing total Agriculture, forestry, livestock and ?shing Mining Production and distribution of electricity, gas, and water Construction Transport, storage, post and telecomm. services Information, computer services and software Wholesale and retail trade and catering services Financial intermediation Real estate Health care, sports, social welfare, educ., culture and entertainment Sci. res., polytechnic services, water management, environ. and public facilities Social services Services to households and other services Leasing and business services Others Non-manufacturing total Total 1996a 2,898.0 57.90 1.48 0.55 2.82 2.43 2.40 NA 4.13 0.43 19.45 0.81 0.30 1998a 3,137.1 57.21 1.48 0.53 3.61 2.79 3.00 NA 3.91 0.38 18.40 0.66 0.35 2000a 3,372.0 58.91 1.40 0.42 3.39 2.38 3.50 NA 3.48 0.39 16.63 0.54 0.79 2002a 4,020.0 61.77 1.30 0.42 2.99 1.96 4.22 NA 2.91 0.40 12.90 0.49 1.31 2003a 4,657.8 62.14 1.32 0.40 2.76 1.97 4.96 NA 2.82 0.46 12.45 0.47 1.64 2004a 5,579.9 63.14 1.45 0.43 2.74 1.67 4.52 1.96 3.66 0.52 11.25 1.12 2.33 2006a 7,406.0 63.21 1.43 0.47 2.63 1.59 2.48 2.58 3.96 0.41 12.42 0.99 2.69 2007a 9,211.5 58.28 1.28 0.45 2.56 1.48 2.43 4.33 4.37 1.55 13.41 0.83 2.99 Growthb 96–03 7.01 8.10 5.28 2.08 6.70 3.86 18.70 NA 1.37 8.06 0.40 ?0.90 36.55 Growthb 04–07 18.19 15.07 13.48 20.16 15.42 13.42 ?3.85 53.89 25.34 69.94 25.32 6.77 28.32

6.60 NA NA 0.70 42.10 100.00

6.48 NA NA 1.20 42.79 100.00

6.69 NA NA 1.46 41.09 100.00

6.22 NA NA 3.12 38.23 100.00

5.99 NA NA 2.61 37.86 100.00

NA 1.51 1.46 2.23 36.86 100.00

NA 0.66 3.04 1.42 36.79 100.00

NA 0.46 5.25 0.33 41.72 100.00

5.55 NA NA 29.14 91.90 100.00

NA ?20.30 81.07 ?37.16 84.93 100.00

Notes: Odd numbered years, except end years, dropped from table due to space constraints. Source: Authors’ analysis of data from Chinese National Bureau of Statistics, China Statistical Yearbook, 1997–2008 editions. a National total denominated in $100 million; all other values indicate shares by industry. b Growth indicates average annual growth rate of investment (not shares); NA indicates data not available.

Table 7 Employment by US majority-owned non-bank af?liates (USMONA) in China, 1990–2005. Sectors All industries total Food Chemicals Primary and fabricated metals Machinery Computers and electronic products Electrical equip., appliances and components Transportation equip. Other manufacturing Manufacturing total Mining Utilities Wholesale trade Information Finance (exc. depository inst.) and insurance Professional; scienti?c and technical svc. Other non-manufacturing Non-manufacturing total 1990a 13.6 2.9 8.1 2.2 (D) NA (D) 0.0 2.2 75.0 NA NA (D) NA 0.0 NA NA 25.0 1995a 80.9 2.8 11.6 2.2 8.3 NA 52.3 0.1 12.7 90.0 NA NA 3.5 NA 0.6 NA NA 10.0 1998a 175.5 2.8 9.0 2.2 10.3 NA 41.9 3.2 10.1 79.6 NA NA 3.1 NA 0.5 NA 14.6 20.4 1999a 252.4 2.8 8.5 3.5 6.5 26.3 20.2 4.2 6.8 78.8 0.4 0.1 3.5 0.4 0.3 1.9 14.5 21.2 2000a 252.0 3.0 9.6 3.2 7.0 27.8 15.4 3.9 6.9 76.8 0.4 0.2 3.6 0.8 G 1.7 K 23.2 2001a 273.0 3.3 9.6 2.9 7.6 26.8 15.4 3.6 6.4 75.5 0.6 G 4.2 1.1 0.4 1.4 K 24.5 2002a 316.7 3.1 8.6 3.3 6.7 22.2 13.1 3.6 5.7 66.3 0.4 H 7.4 1.2 G 1.5 21.8 33.7 2003a 338.9 3.1 7.4 3.5 6.5 20.6 12.1 4.2 6.9 64.3 0.5 0.8 7.5 1.2 G 1.3 L 35.7 2004a 459.9 3.0 6.7 2.8 5.8 21.4 8.3 3.6 8.5 60.0 0.2 0.4 5.1 1.7 H 1.3 M 40.0 2005a 521.8 3.3 7.5 2.9 6.4 21.5 7.9 3.5 8.2 61.2 0.2 G 4.9 1.7 H 1.5 29.5 38.8 Growthb 90–95 42.9 41.9 53.6 43.1 NA NA NA NA 102.8 48.2 NA NA NA NA NA NA NA 19.0 Growthb 95–00 25.5 27.0 20.7 34.8 21.4 NA ?1.7 150.2 11.2 21.6 NA NA 26.3 NA NA NA NA 48.5 Growthb 00–05 15.7 17.6 10.3 13.7 13.7 9.9 1.3 13.1 19.5 10.5 3.7 NA 23.2 34.5 NA 11.8 NA 28.2 T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625 619

Source: Authors analysis of data from the U.S. Bureau of Economic Analysis. a All industries total denotes employment in thousands, all other values indicate shares by industry. (D) indicates that the data in the cell have been suppressed to avoid disclosure of data of individual companies. Size ranges are given in some employment cells that are suppressed. The employment (not share) size ranges are: G—1000–2499; H—2500–4999; K—25,000–49,999; L—50,000–99,999; M—100,000 or more. The composition of the ‘‘Other’’ categories shown in this table may change from 1 year to another; industry breakdowns for 1990–98 data were based on SIC industry coding and were matched when possible to NAICS industry groupings for 1999 data on. Note that the ‘‘Computers and electronic products’’ industry was separated from the ‘‘Electrical equipment, appliances and components’’ industry only from 1999 onwards. b Growth indicates average annual growth rate of employment (not shares). Note that the ‘‘computers and electronic products’’ industry was separated from the ‘‘Electrical equipment, applicances and components’’ industry only from 1999 onwards.

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period were leasing and business services (81.1%), ?nancial intermediation (69.9%), and information, computer services, and software (53.9%), all between 2004 and 2007. The ?rst and last of these three industry categories were added from 2004. Two other industries with noteworthy increases in annual growth are wholesale and retail trade and catering services, and real estate. Both jumped from 1% or less annual growth in the early period to 25% annual growth in the later period. FDI in mining also jumped from 2.1% to 20.2% average annual growth between the two time periods. In sum, from the late 1990s up to the present, the majority of FDI stocks (57–63%) in China have been in manufacturing industries, followed distantly by real estate with 11–19%. American FDI ?ows to China have been less concentrated in manufacturing while Japan’s FDI ?ows have been much more concentrated in manufacturing, particularly in transport, electrical and machinery industries in the most recent years. American investments in China have included signi?cant ?ows to wholesale trade industries and other service industries recently. To compare American and Japanese investments in China in greater detail, we turn now to operating data collected directly from these countries’ foreign af?liates. 3.3. MNE activities analysis Both the US Bureau of Economic Analysis (BEA) and Japan’s Ministry of Economy, Trade and Industry (METI) conduct detailed surveys of their ?rms’ international activities. One noteworthy difference across these two surveys is that the BEA survey is more comprehensive in its coverage since reporting is mandatory for ?rms receiving a survey while the METI survey is not mandatory and generally posts response rates of 60–80% of recipients. To improve the METI data, Matsuura (2004) uses the METI ?rm-level responses to create a panel data set and he estimates missing values in each year based on each ?rm’s responses in other years. He then aggregates the responses to industry and country levels and posts the data on a website maintained by the Research Institute of Economy, Trade and Industry (RIETI).8 The most recent updates to the RIETI website (for June 2009) provide data on the employment and sales activities of Japan’s majority-owned non-bank af?liates (JMONA). This data can be directly compared with BEA data on US majority-owned non-bank af?liates (USMONA). Tables 7 and 8 present employment statistics of USMONA and JMONA in China for selected years between 1990 and 2005. USMONA employed only 13,600 workers in China in 1990 but this number grew to 521,800 by 2005, as shown in Table 7. The growth in employment was particularly rapid in the 1990–95 period, with 43% average annual growth, followed by average annual growth rates of 25% in 1995–2000 and 16% in 2000–05. The industry breakdown indicates an early concentration in manufacturing—with 75% of employment in 1990—that became stronger in the mid-1990s—with 90% in 1995—but then has weakened in recent years to only 60%, as the shares of employment in non-manufacturing sectors have grown. At the individual industry level, USMONA in electrical equipment, appliances and components employed 52% of the USMONA total workforce in China in 1995. This industry grouping later broke out a separate ‘‘computers and electronic products’’ grouping which had 28% of the USMONA workforce in China in 2000, while electrical equipment, etc. employed 15%. The top individual industry employer in 2005 was ‘‘other non-manufacturing’’ with 29%, followed by computers and electronic products with 21%. The data for USMONA presented in Table 7 can be compared with data from JMONA shown in Table 8. In 1990, JMONA in China employed more than three times as many workers as USMONA in China, with 44,500 workers. By 2005, JMONA had less than twice as many employees as USMONA (967,100 versus 521,800). The growth rates for JMONA employment in China were particularly strong in the early 1990s, with 46% average annual growth. Interestingly, JMONA also increased their concentration in manufacturing between 1990 and 1995—from 80% to 92%—but unlike their American counterparts, the concentration in manufacturing employment remained very stable in the 92–94% range through 2005. Among the individual industries, JMONA employed the most workers in other manufacturing (26%), computers and electronic products (19%) and electronic and other electric equipment (16%) in 1990. Only one of these three industries, computers, etc., saw its share of JMONA employment in China grow through 2005, to 30%, making it the largest employer in that year. The second largest employer in 2005 was transportation equipment with a 19% share, followed by other manufacturing with 12%. JMONA in the transportation equipment sector recorded an amazingly rapid average annual growth rate of 82% between 1990 and 1995, while the average annual growth rate for all manufacturing industries combined was 50% during that period. JMONA in manufacturing continued their rapid employment growth in China with average annual growth rates of 46% from 1995 to 2000 and 40% from 2000 to 2005. The sales activities of USMONA and JMONA in China can be compared using Tables 9 and 10. Table 9 shows the destination shares of USMONA in China, with sales grouped by local sales, exports to the US, and exports to other countries for selected years from 1989 to 2005.9 At the all industries level, USMONA in China made 94% of their sales locally in 1989, but the local sales share fell to 78% in 1994 and then to 73% in 2005. Much of the shift in sales favored exports to other countries, with a rise in sales share from 5% to 19%, but exports to the US also had a rising share from less than 1% up to 8% of total sales. Manufacturing industries in aggregate show a similar decline in local sales share, from 88% in 1989 to 67% in 2005, and a corresponding rise in exports. At the individual manufacturing industry level, however, there is signi?cant variation in the pattern of sales over time. USMONA in primary and fabricated metals reported local sales of 100% in 1989, 75% in 1994,

See Tanaka (2009) for a description of the RIETI data. The years 1989, 1994 and 1999 were chosen because the BEA conducts benchmark surveys in these years, and ?nal results from these surveys are available.
9

8

Table 8 Employment by Japan’s majority-owned non-bank af?liates (JMONA) in China, 1990–2005. T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625 Sectors All industries total Food and kindred products Chemicals and allied products Primary and fabricated metals Industrial machinery and equip. Electronic and other electric equip. Computers and electronic prod. Transportation equipment Other manufacturing Manufacturing total Non-manufacturing total 1990a 44.5 2.6 3.9 3.8 5.6 16.3 18.6 2.6 26.4 79.7 20.3 1995a 292.0 4.4 5.0 4.1 6.4 9.2 25.6 8.0 29.5 92.2 7.8 1998a 464.7 5.8 4.0 4.5 8.2 11.1 27.0 8.2 24.4 93.2 6.8 2000a 543.6 7.0 4.0 4.8 9.1 11.3 28.7 8.1 21.2 94.2 5.8 2001a 581.5 7.6 3.9 4.5 9.1 11.8 27.4 9.3 19.0 92.6 7.4 2002a 680.2 3.9 3.8 4.0 10.3 11.0 33.2 9.9 16.8 92.9 7.1 2003a 829.1 3.2 3.4 3.8 9.9 11.2 30.3 16.5 15.1 93.3 6.7 2004a 913.1 2.8 3.5 4.2 10.1 11.0 29.9 17.5 13.9 92.9 7.1 2005a 967.1 3.4 3.3 3.6 10.2 10.8 29.9 18.7 12.4 92.3 7.7 Growthb 90–95 45.7 61.3 53.5 48.1 49.8 29.9 55.3 82.4 48.9 50.0 20.3 Growthb 95–00 13.2 24.6 8.0 16.8 21.5 18.1 15.8 13.3 6.0 46.2 6.7 Growthb 00–05 12.2 ?3.2 8.0 5.9 14.8 11.3 13.1 32.8 0.9 39.7 18.8

Source: Authors analysis of data from the Research Institute of Economy Trade and Industry, http://www.rieti.go.jp/en/database/FDI2009/index.html. a All industries total denotes employment in thousands, all other values indicate shares by industry. b Growth indicates average annual growth rate of employment (not shares).

621

622

Table 9 Sales of US majority-owned non-bank af?liates (USMONA) in China for selected years, 1989–2005 (% of sales). T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625 Sectors Local sales 1989 Food Chemicals Primary and fabricated metals Machinery Computers and electronic products Electrical equipment, appliances, and components Transportation equipment Manufacturing total Mining Wholesale trade Information Finance (exc. depository institutions) and insurance Professional, scienti?c, and technical services Utilities Non-manufacturing total All industries NA 93.6 100.0 82.4 NA NA
a

Exports to US 1999 97.8 89.2 96.9 87.2 44.5 36.3 74.3 63.1 NA 94.8 100.0 NA NA 100.0 91.6 70.2 2002 83.7 90.3 88.2 56.5 59.1 35.4 NA 66.1 NA 89.9 NA NA NA 100.0 88.6 73.0 2005 90.8 88.0 72.6 64.2 58.8 39.4 84.1 67.4 NA 88.9 91.5 NA 67.1 100.0 87.1 73.2 1989 NA 2.1 0.0 0.0 NA NA
a

Exports to other countries 1999 NA 0.6 1.0 4.1 22.8 43.4 24.1 16.3 NA 5.0 0.0 NA NA 0.0 4.2 13.3 2002 1.6 0.5 NA 5.9 9.4 41.2 NA 9.2 NA 3.3 NA NA 26.1 0.0 4.5 7.7 2005 0.7 2.5 12.6 8.1 8.7 25.3 4.0 8.2 NA 4.9 6.2 NA 24.6 0.0 8.0 8.1 1989 NA 4.3 0.0 17.6 NA NA
a

1994 NA 92.7 75.0 NA NA 55.9
a

1994 0.0 0.4 NA NA NA 21.5
a

1994 NA 6.9 NA 2.9 NA 22.5
a

1999 2.2 10.1 2.1 8.9 32.7 20.2 1.6 20.6 42.0 0.3 0.0 NA 0.2 0.0 4.2 16.5

2002 14.7 9.3 NA 37.7 31.4 23.3 8.2 24.7 39.6 6.8 0.0 NA NA 0.0 7.0 19.3

2005 8.5 9.5 14.8 27.7 32.5 35.4 11.8 24.4 8.7 6.1 2.3 NA 8.2 0.0 4.9 18.6

87.6 NA 100.0 NA
a

75.4 NA 75.6 NA 89.9 93.7 NA 82.1 78.1

0.8 NA 0.0 NA
a

10.6 NA 0.3 NA 4.5 0.8 NA 1.2 6.8

10.7 NA NA NA
a

13.9 NA 24.1 NA 5.6 5.6 NA 16.8 15.1

NA NA 100.0 94.2

NA NA 0.0 0.4

NA NA 0.0 5.1

Notes: NA indicates not available due to disclosure concerns based on very small numbers of af?liates reporting or due to changes in industry classi?cations; years 1989, 1994 and 1999 are BEA benchmark years with ?nal results available. Source: Authors’ analysis of data from the Bureau of Economic Analysis. U.S. direct investment abroad: balance of payments and direct investment position data. Available online at http://www.bea.gov/ international/di1usdbal.htm. a Zero total sales for this industry.

T.M. Greaney, Y. Li / Journal of Asian Economics 20 (2009) 611–625 Table 10 Sales of Japan’s majority-owned non-bank af?liates (JMONA) in China for selected years, 1989–2005 (% of sales). Sectors Local sales 1989 Food and kindred products Chemicals and allied products Primary and fabricated metals Industrial machinery and equip. Electronic and other elect. equip. Computers and electronic prod. Transportation equip. Other manufacturing Manufacturing total Non-manufacturing total Total 99.1 87.2 91.9 96.4 20.6 11.1 NA 37.3 46.8 56.0 50.2 1994 60.8 17.8 21.8 10.7 59.5 18.2 82.3 26.0 37.4 31.9 36.5 1999 76.4 63.3 73.4 43.9 55.5 31.3 80.5 41.4 50.0 45.1 48.6 2002 73.7 58.9 78.4 43.6 49.8 30.9 84.7 50.1 51.3 61.1 53.5 2005 73.3 78.6 72.3 47.0 47.9 33.0 69.5 52.1 53.6 63.3 56.2 Exports to Japan 1989 0.0 12.6 8.1 3.1 39.7 3.4 NA 52.1 14.3 1.5 9.6 1994 38.3 81.6 34.8 30.1 10.3 24.1 3.7 59.6 30.3 12.7 27.3 1999 22.2 27.9 18.5 25.4 25.0 26.0 10.9 46.8 26.1 23.0 25.2 2002 24.9 34.8 14.7 34.6 32.5 31.6 9.6 42.0 28.9 17.8 26.5 2005 20.4 14.8 11.8 32.2 35.7 33.2 26.0 38.1 29.6 10.4 24.5 Exports to other countries 1989 0.9 0.2 0.0 0.5 39.6 85.4 NA 10.7 38.9 42.5 40.2 1994 1.0 0.5 43.4 59.2 30.2 57.7 14.0 14.3 32.3 55.4 36.3 1999 1.4 8.8 8.1 30.7 19.5 42.7 8.6 11.8 23.9 31.9 26.2 2002 1.4 6.3 6.9 21.8 17.7 37.6 5.7 7.9 19.7 21.0 20.0

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2005 6.2 6.6 15.8 20.7 16.4 33.8 4.6 9.7 16.8 26.3 19.3

Notes: NA indicates not available due to disclosure concerns based on very small numbers of af?liates reporting. The manufacturing total for 1989 is calculated by treating the NA’s for sales in transportation equipment as zeroes. Source: Author’s analysis of data from the Research Institute of Economy, Trade and Industry (RIETI), http://www.rieti.go.jp/en/database/FDI2009/ index.html.

back up to 97% in 1999, and then down to 88% in 2002 and 73% in 2005. This industry showed the largest percentage point decline in local sales between 1989 and 2005, followed by the machinery sector with a local sales share decline from 82% to 64% over this period. Electrical equipment, appliances and components also show a declining pattern of local sales, from 56% in 1994 to 39% in 2005, with sales shifting to favor exports to the US in 1999 and 2002, but shifting to favor exports to other countries in 2005. Only two industries, computers and electronic products and transportation equipment showed increases in their local sales share, from 44% in 1999 to 59% in 2005 in the former case and from 74% to 84% in the latter case for the same years. Unsurprisingly, among the non-manufacturing industries shown in Table 9, we see quite high local sales ratios over the entire time period since most of these industries are services. Unfortunately, many of the observations for individual industries are either not available, due to changes in industry classi?cation, or suppressed due to disclosure concerns with small numbers of af?liates reporting. One interesting change is the decline in local sales for professional, scienti?c and technical services from 94% in 1994 to 67% in 2005. For this industry, sales shifted to strongly favor exports to the US, which increased from less than 1% of sales in 1990 up to 25% in 2005. However, USMONA in these services industries contribute only a small share of the total sales by USMONA in China. The total sales for USMONA in China in these services industries were $914 million in 2005, approximately 1% of total sales for all USMONA in China. Table 10 shows the distribution of sales by JMONA in China for selected years between 1989 and 2005. The sales shares suggest that JMONA in China were much more export-oriented than USMONA in China in 1989. Half of JMONA sales went to export markets while only 6% of USMONA sales were exported. By 2005, 44% of JMONA sales were exported versus 27% for USMONA. For JMONA, the destination of their exports changed to favor Japan, which increased its share from almost 10% in 1989 to 24% in 2005. The share of sales exported to other countries fell from 40% to 19% over the same time period. The share of JMONA sales going to the local Chinese market increased slightly—from 50% to 56%—over this period. Comparing the manufacturing industry totals across JMONA and USMONA shows a similar pattern of very divergent strategies in 1989 but some convergence over time. JMONA in manufacturing were export-oriented in 1989 with 53% of their sales exported while USMONA were strongly oriented towards the local market with only 12% of their sales exported in that year. Over time, manufacturing JMONA become somewhat less export-oriented (46% of sales exported in 2005) while USMONA become more export-oriented (33% of sales exported). Looking at the individual industries in Table 10 shows signi?cant variations over time. Among the manufacturing industries, ‘‘electronic and other electrical equipment’’ and ‘‘computers and electronic equipment’’ are the most important industries in terms of sales and their sales pattern is extremely export-oriented initially but becomes less export-oriented over time. These industries exported 79% and 89% of their sales in 1989, respectively, but only 52% and 67% in 2005, as local sales grew. Among the exports, the electronics, etc. industry maintained a fairly stable share of sales exported to Japan—40% in 1989 to 36% in 2005—while the share exported to other countries dropped from 40% of sales to 16%. In the computers, etc. industry, exports to Japan grew in importance—from 3% of sales to 33%—while exports to other countries declined tremendously from 85% to 34% of sales between 1989 and 2005. Some of the other manufacturing industries showed the opposite time trend, moving from selling the vast majority of their products in the local market to exporting signi?cant shares.

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The sales shares in Tables 9 and 10 indicate a much stronger export-orientation for JMONA in China relative to USMONA in China in 1989, but a trend towards convergence in more recent years. Interestingly, Lipsey (2000) found a similar trend towards convergence but from opposite starting points when he examined US and Japanese manufacturing af?liates in other East Asian economies using data from 1977 to 1995. He found that US af?liates in East Asia tended to be more exportoriented than their Japanese counterparts in 1977. The US af?liates on average became slightly less exported-oriented between 1977 and 1995—with export shares of total sales falling from 57% to 54%—while Japanese af?liates became more export-oriented—with export shares that grew from 33% to 44%. The differences between our results and Lipsey’s results suggest that US and Japanese multinationals have approached their investments in China somewhat differently than they approached investments in other East Asian countries a decade earlier. At the individual industry and country level, Lipsey (2000) noted a lot of variance in export shares between 1977 and 1995, and more recent data on JMONA and USMONA activities in other East Asian economies con?rms signi?cant variance in export share levels and time trends.10 Further comparisons of JMONA and USMONA activities in other East Asian economies versus their activities in China will be deferred to future research since it is tangential to our research objectives. 4. Conclusions We have analyzed the FDI relationships between China, Japan, and the United States with available statistics from all three countries. At the country-level, Japanese and American investments in China have grown very rapidly in recent years, but from low initial levels, so these investments in China still represent less than 10% of outstanding FDI stocks for Japan and less than 3% for the US, even with Hong Kong investments included. Bilateral investment linkages between the Japan and the US are stronger, with the US holding about 32% of Japan’s FDI stocks and Japan holding almost 4% of US FDI stocks. From China’s perspective, the US and Japan fall behind only Hong Kong as single-country sources of FDI in?ows, with Hong Kong contributing almost 30%, while the US and Japan contribute about 9% and 7%, respectively, but these statistics are suspect due to ‘‘creative accounting’’ practices mentioned previously. At the industry level, American FDI ?ows to China have been less concentrated in manufacturing than average for investors in China while Japan’s FDI ?ows have been much more concentrated in manufacturing, particularly in transport, electrical, and machinery industries in the most recent years. American investments have included signi?cant contributions from wholesale trade industries and other service industries in recent years, along with large FDI ?ows in both the computers and electronic products and chemicals industries. This difference in the industry distribution of FDI ?ows matches fairly well with the industry distribution of af?liate employment. American af?liates in other non-manufacturing industries and in computers and electronic products industries together employed half of the total workforce of American af?liates in China in 2005, while Japanese af?liates in the computers and electronic products and transportation equipment industries together employed almost half of their workforce total in China. The differences in industry distribution of af?liates help to explain the observed differences in sales destinations of American and Japanese af?liates in China at the aggregate level. American af?liates made the vast majority of their sales (73%) in the Chinese market while Japanese af?liates made just over half of their sales (56%) locally in 2005. The gap narrows if we focus on only manufacturing industries: 67% local sales for US af?liates versus 54% local sales for Japanese af?liates in 2005. We also observe a trend towards convergence as US manufacturing af?liates have moved from a local sales share of 88% in 1989 towards more export sales, and their Japanese counterparts have moved from a local sales share of only 47% towards more local sales. Some of the recent trends in the fragmentation of production and the possible differences between American and Japanese af?liates in their participation therein, as described in Dean et al. (in press), may help in interpreting these sales trends. Lower trade costs associated with closer proximity may prompt Japan’s multinationals to locate processing plants in China. These plants use imported intermediate inputs from Japan to produce ?nal manufactures primarily for export. Higher trade costs may lead American multinationals to invest in China as a substitute for exporting to China, with af?liates’ sales primarily targeted at the local market. These different strategies for FDI in China based on proximity differences may become less important over time as China’s economic growth, market development, and continuing trade liberalization become more important factors driving the behavior of all foreign af?liates located in China. Testing this hypothesis more fully would require foreign af?liates’ data from more than just Japan and the US, which we leave for future research. References
Baier, S. L., & Bergstrand, J. H. (2007). Do free trade agreements actually increase members’ international trade? Journal of International Economics, 71, 72–95. Borga, M., & Mataloni, R. J., Jr. (2001). Direct investment positions for 2000: country and industry detail. Survey of Current Business, 81, 16–25. Branstetter, L. & Foley, C. F. (2007). Facts and fallacies about U.S. FDI in China. NBER Working Paper 13470. Cambridge, MA: National Bureau of Economic Research. Cassidy, J. F., & Andreosso-O’Callaghan, B. (2006). Spatial determinants of Japanese FDI in China. Japan and the World Economy, 18, 512–527. Dean, J. M., Lovely, M. E. & Mora, J. (in press). Decomposing China–Japan–U.S. trade: Vertical specialization, ownership, and organizational form. Journal of Asian Economics. Fung, K. C., Lau, L. J., & Lee, J. S. (2004). U.S. direct investment in China. Washington: AEI Press.

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Updated tables to match those in Lipsey (2000) are available by contacting the authors.

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