Conclusions

We have analyzed the foreign direct investment (FDI) relationships between Japan, the People's Republic of China (PRC), and the United States (US) with available statistics from all three countries. At the country-level, Japanese and American investments in the PRC have grown very rapidly in recent years, but from low initial levels, so these investments in the PRC still represent less than 10% of outstanding FDI stocks for Japan and less than 3% for the US, even with Hong Kong, China investments included. Bilateral investment linkages between 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 the PRC's perspective, Japan and the US fall behind only Hong Kong, China as sources of FDI inflows, with Hong Kong, China contributing almost 30%, while Japan and the US contribute about 7% and 9%, respectively, but these statistics are suspect due to “creative accounting” practices mentioned previously (Branstetter and Foley 2007).

At the industry level, US FDI flows to the PRC have been less concentrated in manufacturing than average for investors in the PRC while Japan's FDI flows have been much more concentrated in manufacturing, particularly in transport, electrical, and machinery industries in the most recent years. US investments have included significant contributions from wholesale trade industries and other service industries in recent years, along with large FDI flows in both the computers and electronic products and chemicals industries. This difference in the industry distribution of FDI flows matches fairly well with the industry distribution of affiliate employment. US affiliates in other non-manufacturing industries and in computers and electronic products industries together employed half of the total workforce of US affiliates in the PRC in 2005, while Japanese affiliates in the computers and electronic products and transportation equipment industries together employed almost half of their workforce total in the PRC.

The differences in industry distribution of affiliates help to explain the observed differences in sales destinations of American and Japanese affiliates in the PRC at the aggregate level. American affiliates made the vast majority of their sales (73%) in the PRC's market while Japanese affiliates 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 affiliates versus 54% local sales for Japanese affiliates in 2005. We also observe a trend towards convergence as US manufacturing affiliates 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 affiliates in their participation therein, as described in Dean, Lovely, and Mora (2009), may help in interpreting these sales trends. Lower trade costs associated with closer proximity to the PRC may prompt Japan's multinationals to locate processing plants in the PRC. These plants use imported intermediate inputs from Japan to produce final manufactures primarily for export. Higher trade costs may lead US multinationals to invest in the PRC as a substitute for exporting to the PRC, with affiliate sales primarily targeted at the local market. These different strategies for FDI in the PRC based on proximity differences may become less important over time as the PRC's economic growth, market development, and continuing trade liberalization become more important factors driving the behavior of foreign affiliates located in the PRC. Testing this hypothesis more fully would require foreign affiliate data from more than just Japan and the US, which we leave for future research.

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