...position Japan investor in this country, and proceeds with an examination of the major theories of FDI. It then examines the underlying causes of Japanese FDI to China in view of those theories. The paper concludes that, in addition to many investment-alluring incentives, most prominently China over time has infused, fostered, created, and nurtured numerous competitive advantages (pull-factors) within its investment proliferating environment, which ultimately ushered FD! from Japan to it. Domestic factors as well as global investment competitors drive (push-factors) toward China further induced Japanese multinational corporations (MNCs to boost investment into China.

Introduction

From its centrally planned economic system (1949-1978), transition to market economic mechanisms in China started since 1978 with the introduction of major economic policy-reforms and open-market strategies under the leadership of Deng Xiaoping. Establishment of the special economic zones (SEZs) in the coastal region of Guangdong province was the milestone in its economic relations policy, which heralded the advent of a new era of embracing foreign capital, technology, and business management. In the initial stage of reform and transition (1979 to 1985), it received foreign funds mostly in development projects, and investments in business ventures were mostly with the state owned enterprises (SOEs) and to some extent in Greenfield sectors. Outside Chinese populated regions/territories, the sources of such investments and development funds were the World Bank, the International Monetary Fund (IMF), governments of Japan, the United States of America (USA), the United Kingdom (UK), Italy, Germany, Singapore, and Australia, and private business companies mostly from these countries. This amounted to $1.2 billion, $0.9 billion, $1.4 billion, and $2.0 billion respectively, in 1979-82, 1983, 1984, and 1985. The actual take-off of foreign direct investment (FDI) took place since 1985, when all the SEZs developed in the coastal region went into full operation and exhibited lofty business success without impediment, and with rather dynamic tutelage of the central government and regional governments. As of 2005, China holds the second position in the list of the FDI countries and receives a big share in Japan's FDI. Using archival data, this paper examines the nature and causes of Japanese FDI to China and theorizes it with inductive arguments.

China's Performance in Attracting FDI

FDI from All Sources: The amount of FDI in China from all sources reached from US$1.9 billion in 1986 to US$3.5 billion in 1990, registering an increase of about 86 percent in five years. Other than Hong Kong and Macao, Japan and the USA were the biggest investor countries. Taiwan Province emerged into the spotlight since 1986 and soon assumed the position the fourth biggest investor, although its political relation with the mainland was not all through lukewarm. The Chinese investors from other Southeast Asian countries assumed leading positions. From Asia, Singapore and South Korea and from Europe, UK, Germany, France, and Italy continued to invest at a constant pace, but investment from these four European countries remained within the range of 5 to 8 percent of the total inflow. Virgin Islands came to the limelight since 1993, progressively increased investment throughout the second-half of the 1990s, and led even the USA and Japan in the 21C with a share of 11 to 12 percent (Nakajima, 2005, pp. 180-1). Lax tax regimes of this region might have enticed the US/UK investments to make a detour to China through Virgin Islands.

Transfer of Hong Kong in 1997 and of Macao in 1999, and liberal politics in Taiwan together with an absence of its virtual embargo on investment to China added further to the plight of Taiwanese capital to the mainland. Japanese FDI remained more or less flattened from 1988 to 1992 and increased almost constantly from 1993 until 2004. The fluctuations in 1999 and 2000 cannot be traced to any specific changes in its domestic and global investment environments.

World Investment Reports (WIRs) compiled by the UN/UNCTAD show that year-to year cross-border investments in the world have increased with negligible fluctuation in the second-half of the 1980s; unabatedly throughout the 1990s to a record high level of 1.492 trillion in 2000, but fell within the range of $735 to $632 billion in the first four years of the millennium decade. China's average share ranged at 2.8 billion (1.9 percent) in the second half of the 1980s, 22.9 billion (9.9 percent) and 41.9 billion (6.8 percent) respectively in the first and second halves of the 1990s, and 53.4 billion (7.9 percent) in the first four years of the 21C. This amounted from 20 to 50 percent of gross FDI flows to all developing countries (except China), and it demonstrates robustness of the Chinese market as investment destination. The USA throughout the 1990s, the UK in 1998, 1999, and 2000 received more FDI than China (UNCTAD, 2002, p. 283). In this decade of 21 C, as investment host, China turned out as the champion over all developing countries/ economies, ASEAN countries, but was bitten by only the USA, Luxembourg (2003 and 2004), UK (2001, 2002, and 2004) (UNCTAD, 2005, p. 303), and France and the Netherlands in 2001 (UNCTAD, 2002, p. 303). FDI to Hong Kong and Macao, which are shown separately in the WIRs, if included as FDI host China will rank next to only the...

NOTE: All illustrations and photos have been removed from this article.



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