Understanding Japanese direct investment in China : an intercultural analysis - 1985-1993

American Journal of Economics and Sociology, The, Jan, 1997 by Liping Deng

I

Introduction

Japanese direct investment (JDI) in China has a long and hectic history which could be dated back to the last decade of the 19th century. Its fortune and extent has been fluctuating violently ever since, and disappeared altogether after China was taken over by the Communist in 1949.(1) However, JDI has reemerged since the early 1980s when China adopted an open-door policy to attract foreign capital and new technology. in order to capitalize on the potential Chinese market and investment opportunities, Japanese investors have been in keen competition with those from Hong Kong, USA and European countries.

Starting in 1985, JDI experienced a steady growth. It ranked the third among all sources of foreign direct investment in that year (16.1%), behind those of Hong Kong (48.9%) and the USA (18.3%). This ranking remained the same in 1987, with a Japanese share of 9.4%. From 1988 on, JDI surpassed that of the USA becoming the second largest source of foreign direct investment. China's political instability in 1989 forced the Japanese to slow down its capital inflow to China. But the trend resumed and since then has been accelerated in the 1990s when China re-launched its reform program. By the end of 1993, the share of JDI was 9.2%, behind that of Hong Kong (56.2%) but ahead of those of USA (5.1%) and all European developed countries. Table 1 gives a description of JDI, by a comparison to direct investment from Hong Kong and USA.

There has been increasing interest in the issue of JDI in contemporary China, primarily from managerial, economic, social and political perspectives (Chou, 1994; Deng, 1994a,b). However, as demonstrated in many other areas of Japanese studies, it will be interesting and necessary to see how, and to what extent, some Japanese cultural elements may help to explain this phenomenon. This is the objective of this article. Within an intercultural comparative analytical framework, the contribution of Japanese cultural factors to the determination of the performance of JDI (relating to level, pattern, and managerial behavior) will be examined. The level of JDI refers to absolute volume and relative share by comparison to other foreign investment. The pattern of JDI refers to ownership structure, sectoral distribution and geographical disposition. The managerial behavior of JDI refers to corporative policy and organization structure, as well as functional areas such as production, marketing and human resource management. By combining cultural factors with economic, social and political explanations, a comprehensive understanding of JDI in China will emerge and some policy implications drawn.

Table 1

FOREIGN DIRECT INVESTMENTS IN CHINA: Percentage Shares, 1985-1993,
(US $10,000)

Year        Japan            Hong Kong            USA
        Amount    %        Amount    %      Amount    %
1985    31,507   16.1      95,568   48.9    35,719   18.3
1986    26,335   11.7     132,871   59.2    32,617   14.5
1987    21,970    9.4     159,821   69.1    26,280   11.4
1988    51,453   16.1     209,520   65.6    23,596    7.4
1989    35,634   10.5     207,759   61.2    28,427    8.4
1990    50,338   14.4     191,342   54.9    45,599   13.1
1991    60,592   13.1     257,911   55.3    33,066    7.1
1992    74,827    6.6     770,612   68.2    51,944    4.6
1993   239,412    9.2   1,462,492   56.2   132,717    5.1

Source: China's Statistical Yearbook, various issues, China's State
Statistical Bureau.

This article is based primarily on the author's field trips to China both in the winter of 1991 and the summer of 1994, during which aggregate data of JDI were collected and numbers of case analyses in four JDI-intensive areas (Dalian, Qindao, Shanghai and Fujian) were implemented. Section II suggests an intercultural analytical framework to understand JDI in China. Section III links Japanese cultural factors to the level of JDI. Section IV deals with the relationship between Japanese cultural factors and the pattern of JDI. Section V provides a cultural explanation to the managerial behavior of JDI. Section VI gives the conclusions.

II

Understanding JDI - An Intercultural Analytical Framework

To understand the degree by which Japanese cultural factors may contribute to the performance of JDI on a comparative basis, it is useful to review the existing literature on JDI overseas and to develop an intercultural comparative analytical framework.

Two hypotheses exist in the literature. The first views JDI overseas mainly from the common features of a typical multinational enterprise (MNE), (Kojima, 1985; Ueno, 1988). This approach bases its argument primarily on some behavioral pattern of Japanese MNEs new since the early 1980s. For example, Japanese investors now stress investments in production facilities in developed countries. Their MNEs enter a host country through merger, acquisition and by establishing of wholly owned subsidiaries. They are also aware of the integration of their overseas subsidiaries for their global strategy. These new features are cited to show that Japanese MNEs are similar to their American and European counterparts and a common overseas direct investment pattern exists. In general, while there are different explanations with respect to the causes of these features, either business-oriented, politics-dominated, or externality-led, the common characteristic of this school (mainly of economists) is to downplay the role of cultural factors in explaining JDI overseas.