FDI in China vs Japan - Determinants and Comparison

This report analyzes the determinants of FDI in China and compares it with FDI in Japan. It discusses factors such as FDI growth, source country, types of FDI, sector distribution, and regional distribution. The report concludes that China has undertaken FDI in a larger share.

FDI IN CHINA VS JAPAN
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9/20/2018

EXECUTIVE SUMMARY
As the title suggests, the Foreign Direct Investment has gathered the significance in the last two
decades. Through this report importance and growth has been highlighted. The report has been framed
with the two major objectives. One of the objectives is to analyze the growth of the foreign direct
investment in the World. The second objective has been to analyze the development in China with
regard to the development in Japan and how one of the aforesaid countries has the increased inflows or
outflows of the foreign direct investment. The report has been divided into appropriate headings as per
the objectives.
Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................2
DETERMINANTS OF FDI IN CHINA................................................................................................................3
COMPARSION WITH FDI IN JAPAN...............................................................................................................4
CONCLUSION...............................................................................................................................................5
REFERENCES................................................................................................................................................5
INTRODUCTION
Foreign Direct Investment is the process where the company or the individual in one country invest
amount in the other country so as to have the smooth business operations and the expansion. Through
this report the foreign direct investment made by two countries have been analysed in detail with the
determinants of making the investment. These two countries are China and Japan. Over the past decade
the importance and the quantum of the foreign direct investment has been increase manifold and the
reason for undertaking the foreign direct investment are different for different persons. Through this
report the major factors which has promoted foreign direct investment in China has been discussed with
regard to the comparison with the foreign direct investment undertaken in Japan. The former has been
found has stronger than the Japan. The report has then ended up with the appropriate concluding
paragraph stating the findings of the study. The source of the report has been secondary though the
articles and books.

DETERMINANTS OF FDI IN CHINA
China has been the largest recipient of FDI from the year of 2004 and has left behind the United States
of America which is regarded as the host destination. It has been attracting the attention in an increased
manner from the companies located across the globe known as the multinational companies. China has
been growing since 1970 when it has opened its hands towards the economic growth and as per the
World Investment Report issued in the year of 2004 by the United Nations conference amount of 54
billion dollars has been undertaken by China in the way of the foreign direct investment in the year of
2003. The figure of FDI has been further increased by approximately 14 percent in the year of 2004. It
thereby explicit that the development of China is purely dependent upon the receipt of the Foreign
Direct Investment and with the entry of china into the World Trade Organizations there has been the
sudden change in the economic development of the trade (Broadman, 2017).
Following determinants have been identified which have promoted the FDI in China and that too
basically with the characteristics prevalent in the country of China.
1. FDI Growth – One of the major determinants of the FDI in china has been the growth that has
been encountered by China in various phases. The major increase has been received during the
decade of 1990’s where the growth has been at the peak in comparison to the growth of the FDI
in the decade of 1980’s. After the year of 1979 only the investors from foreign countries have
emerged but that does not have posed any significant impact on the development of the FDI
because of the major reason of the poor infrastructure of the company which has been
observed and informed by the OECD in the year of 2000. The period of eight years staring from
the year of 1983 to 1991 has received the boom in the inflows of FDI because of the expansion
of the special economic zones from the total of four cities to approximately fourteen cities. In
the year of 1993, the FDI amounting to approximately 110 billion dollar has been received. In
that year itself China has been regarded as the largest host country out of all the developing
countries which are encountering the FDI and the second largest host country across the World
for the FDI. This growth does not simply attributable to the global expansion of the multinational
enterprises in China but also the share that it has in the developing countries. This continuous
growth has lead to factor of the location (Andresosso, 2015). China has the unique advantage of
the location in comparison to other developing countries.
2. Source Country – From the point of view of the source of the FDI in china, it has been seen that
the major share of the investment has come from the Asian countries. The share that has been
contributed by these countries has been known in the history of FDI as the Lions share. The
major inflows have been through the round flows from the country of Hong Kong, Macao and
Taiwan. In the history of FDI, these sourcing countries have been mentioned as the dominant
source which had given approximately 90% of the FDI in China. Although the China had been
regarded as the largest host country in developing countries but it has basically failed to extract
the maximum amount of the investment from the industries who are the major in the market.
There are two basic reasons for lesser amounts received from the major players of the
industries. One of the reasons is that to invest in China, one has to follow the export oriented
route through the Hong Kong and Macau. Second major reason is that the political condition of

the country of China is not much strong which might have led the countries to back off from
investing in China. Because of these two reasons share of European Union share has been
increased in the FDI and Asian countries have been decreased (Zhang, 2016).
3. Types of FDI- There are three types of the investment ways which are prevalent in the country.
It includes Equity Joint ventures, Contractual joint ventures and wholly foreign owned
enterprises. During the beginning years of FDI, contractual joint ventures have been more
prevalent but as the time passes the equity joint ventures and the wholly foreign owned
enterprises have been accepted. It is because of the reason that with the later two ways there
will be the advancement of the capital of the country, the technology which the company uses
and the experience that the country will gain in terms of the management. With the presence of
the corporate culture and the framework overall costs of the operations will reduce.
4. Sector Distribution – With the fulfillment of the commitments that the country has made with
the World Trade Organization, the country has opened the door not only for the secondary
industries but also the other sectors including the telecommunications, financial, solar power,
accounting so as to grab more and more opportunities for undertaking the FDI.
5. Regional Distribution – It has played the major role in attracting the FDI. As already discussed, at
first there are only four cities in which FDI was received but it has been increased to fourteen.
Due to this major FDI has been received in Eastern and the southern region provinces. Another
FDI determinant has been the metropolitan cities in China which has attracted the western
investors as they found it very comfortable to induce FDI from there. These cities include
Beijing, Shanghai and Shenzhen.
Thus, the above are the determinants of the FDI in China.
COMPARSION WITH FDI IN JAPAN
After identifying and discussing the determinants of FDI in China, it is necessary to discuss as in what
manner the FDI in china has been larger than the FDI in Japan. Following are the factors in which the
differences have been described:
- Corruption Rate – As per the corruption index of 2018, China has scored 41 points and Japan has
scored 73 points. Scale of corruption index states zero as the more corrupted country and the
hundred shows the best country. But it does not mean that the FDI in Japan has been higher
than that of China rather it has been identified as opposite. It is because corruption is not the
correct decisive factor for the FDI’s.
- Labor Rate – Over the last five years the labor rate in China has been increased due to which
Japan has been found as more favorable for investing. But it has not crossed the required limits
so as to become the largest host country for undertaking FDI’s (Andréosso, 2014).
- Availability of Foreign Banks – In China, almost one fourth of the total banks are the foreign
banks due to which the investors find it as comfortable to transact with their own banks rather
than transacting with the other banks as mentioned in Japan. This is another favorable reason
for increase in FDI in China.

CONCLUSION
Foreign Direct Investment has been the important factor affecting the development of China and other
developing countries. The factors affecting the FDI in China has been described and discussed in detail
and the reasons for having low GFDI in Japan has also been discussed. To conclude the report, China has
undertaken the FDI in the larger share.
REFERENCES
Andréosso-O’Callaghan, (2014). Spatial Determinants of Japanese FDI in China. Working Paper,
University of Limerick.
Andresosso W, (2015), EU FDI in China: Locational Determinants and its Role in China’s Hinterland.
Proceedings of the 15th Annual Conference of the Association for Chinese Economics Studies, Austra
(ACESA).
Broadman, H.G. (2017). The distribution of foreign direct investment in China. The World Economy,
41(2), pp 120-142.
Zhang, K. H., (2016). "Promoting exports: The role of inward FDI in China", China Economic Review,
15(120-156).