Since the initiation of the open door and reform policy, China has experienced the rapid economic growth.

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Introduction

Since the initiation of the open door and reform policy, China has experienced the rapid economic growth. During the period, China has drawn numerous worldwide foreign direct investments. For instance, since 1994, China has become the second largest foreign direct investment (FDI) absorber, only after the United State. In 1996 attracted more than 40 percent of the total FDI to the developing countries.1 According to the study of Alvin Y.So, the rapid economic growth of China in the past two decades has strong tie with the inflow of FDI, and the splendid achievement of China's economy has been contributed by FDI in the aspect of capital, technology and management, etc.2 Among those foreign countries which have invested in China, Japan, as the largest trade partner and the neighbour of China, covered a high ratio of direct investment in China. With the increasing investment, Japanese has become one of the most important investment partner of China, according to the statistics, in the years of 1993-5, and 1999, China was the largest direct investment absorber of Japan.3 Because of the economic giant position in the world and the remarkable reputation as advanced technology in the manufacturing sectors, Japanese direct investment is most attractive to China. Therefore, since the late 1970s, China has provided specific incentives for the Japanese investors. The Chinese leaders' tactic in seeking Japanese investment input reflects the two countries' industrial plan and their strategy in the economic development in East Asia. China's abundant natural resources and labour, combined with the capital and technology of Japan, have achieved strong cooperation.4

Taking into account of the significance of the investment from Japan in China, both in capital and in technology, a detailed study on the DIF from Japan will be made in the dissertation, with an aim to propose some suggestions in terms of attracting more investment, thus promote the economic growth in China. In Chapter One, I will do a general literature review on the Japanese Investment in China, covering the relative FDI theory in the aspect of translational motivation, entry mode and location. In Chapter Two, I will introduce the four stages of development of Japanese DFI in China, which have corresponded with the social and economic changes in China. The four stages are: Starting stage of Japanese investment in China (1979-1983); Period of small-scale investment of Japanese investment in China(1984-1990); Period of Large scale Japanese investment in China(1991-1995) and Adjusting stage of the Japanese investment in China (1996-2000). In Chapter Three, I will present a case study of the Japanese DFI in China - Dong-An Automotive Engine Manufacturing Co., Ltd I will introduce the objective and the subject of the study. Then I will discuss the case through the following five aspects: motivation, entry mode, investment obstacle, location and technology transfer. To conclude, during the past two decades, China has played a positive role in attracting Japanese investment, but there still exist obstacles and restrictions on the FDI inflow, which needs further development of open door policy and related legislations. In the long term view, with China's WTO entry, the investment environment of China will become more rational and perfect, which will attract more FDI inflow from Japan, thus promote the prosperity of Chinese economy.

Chapter One: Literature Review on FDI

There exist a series of theoretical perspectives on the utilization and pattern of FDI or the multinational enterprise activities (MNE). However, the following part will mainly concern the relatively important theories on the FDI motivations, entry mode and location choice.

1.1 Motivation

According to the theory of Behrman, he found the perfect competition theory, the motivations of MNE's activity can be divided in to four groups, which are: the resource seeking, the market seeking, efficiency seeking and strategic asset or capability seeking. The resource seeking is motivated by their need for cheaper resources including physical, human, technological or organisational resources. The market seeking motivated by prospects for growth and large market share, its aim is to establish presence in a new market before competitors or to provide the similar production and service as the competitors, such motivation belongs to those companies that seek to protect or exploit new markets. On the other hand, the efficiency seeking motivated by taking advantage of different factor endowments, economic systems, policies and market structures to concentrate production in a limited number of locations thus serve the service and production to other regions or countries. The strategic asset seeking is motivated by the long term strategy and tactic of MNE which aims to sustain and enhance their international competitiveness through the FDI.5 Different with the view of Behrman, Kindleberger built up his own theory about the "market imperfection model", the core idea of this model was transaction cost economics. As FDI, foreign investments of MNEs have to face some comparative disadvantages such as the language and cultural barriers, and local tasteless. The MNEs must guarantee their investment succeeding in the foreign country, therefore, in order to achieve the benefits, the foreign investment must have the comparative advantages in the host country and the benefits only can been gained when the advantages' benefits are bigger that the disadvantages' cost in the host country. Such kind of relation between the MNEs advantage and disadvantage is the true motivation of FDI.6

Furthermore, Buckley also explained the motivation of FDI in the view of economics, the reason for MNEs engaging in FDI arises from market failures stemming from the existence of transaction costs that make direct investment in subsidiaries more feasible than market contracting.7 Jaideep and Andrew highlighted the government policies as the important motivation for the FDI, they believe the government investment incentives provided favourable investment environment to the MNEs which meant the lower risk8. Also Robert emphasised on the importance of government leaders' support in the attraction of FDI, he used the open door policy of China to support his idea. 9

1.2 Entry mode

Four entry modes can be identified using the information reported in Kaigai Shinshutsu Kigyou Souran. These are wholly owned subsidiary, joint venture, acquisition and capital participation. A wholly owned subsidiary is a Greenfield operation in which the Japanese parent holds a 95 percent or greater ownership position in the subsidiary. A joint venture is also a Greenfield operation; however two partners each hold at least 5 percent of the subsidiary's equity. In joint venture, there may be multiple partners, from different country origins such as the host country, Japan or a third country. An acquisition is the purchase of an ownership position in an existing entity in the host country. It can be a complete or partial purchase. Capital participation can also be referred to as a plant expansion. It is a foreign entry mode by the expansion of an existing domestic operation as funded by the foreign investor.10 There exist various factors which may affect the mode for entering a foreign market, Gatignon and Anderson emphasised on certain product characteristics such as degree of differentiation, importance, age, and technological content;11 Root focused on the main characteristics which included size and resources, degree of diversification and corporate policies of certain enterprises;12 Baek and Kwok also highlighted the external environmental factors such as host country trade and investment restrictions, host country market size, host country geographic and cultural distance, and exchange rate fluctuations would also effect the entry mode choice of MNEs.13

1.3 Location

There are five determinants influencing FDI's choice of location.14 The most decisive determinant is the market-related factor. In theory, large landscape, which implies the huge market size behind it, of a targeted nation usually attracts more FDIs. The reason behind that is the scale economy and high revenue generation can be achieved in a relatively shorter term. Also, as Nachum put it, "(A) foreign investment history in a region is typically captured by the term agglomeration economies...Agglomeration economies refer to positive externalities that result from locating in close proximity to geographical clusters of industry".15 Interestingly, Japanese FDI seems to be particularly sensitive to agglomeration. Because of the lion's share of FDI is in the low-value-added manufacturing sector which means the cost of labour is a concern.16 In the light of this, "high wage rates and high unionization rates were often found to act as deterrents to FDI flows".17

Another factor affecting the choice of location is the transportation infrastructure of the local area. Studies have confirmed that "FDI was attracted to regions that had better transportation infrastructure".18 For the purpose of efficient operation, as members of manufacturing sector, those sales' channels, that is, via adequate roads, railways, ports and other facilities are decisive It should not be surprising the government policy such as taxes and promotional activities is another determinant, which support the idea that policy promotions will have a positive impact on the FDI flows. 19

All the factors mentioned above are operating relating issues, the newly conducted research based on the theory of firm heterogeneity has shown that there is another determinant of FDI in the choice of location, that is, the firms are prone to place differential valuations on a regional locational characteristics. Shaver and Flyer propose the idea that heterogeneity tends to be most prevalent among firms with weaker advantages.20 In a similar research context, Chung and Alcacer observed firms that had relatively low R&D intensities more likely to choose where there are more technical capabilities resided.21

Having known the theories on foreign investment, in the following chapter, I will describe the practical situation of the Japanese DFI in China, which has experienced four stages. More importantly, based on my study and research, I will give the reasons that have caused the characteristics of the stages, which is of practical significance for the later research on the Japanese FDI in China.

Chapter Two: Description of Japanese direct investment in China: four stages of development

Since the implementation of reform and opening-up policy in China in 1979, with further reform and the high-speed, though stable development of China's economy, the Japanese investment in China has kept increasing and has reached some scale. According to the statistics of China,22 the Japanese investment in China has experienced four periods during the two-decade development. Generally speaking, in the early 1980s China started its endeavour for promoting direct investment from Japan, however, in particular its investment in China's manufacturing sector did not pick up until early 1990s. The rapid growth of inflows actually began in 1991, and then peaked in 1995. Inflows from Japan during the period of 1996 to 2000 show a few prominent characteristics. The four periods will be talked about in detail in the following.

2.1. Starting stage of Japanese investment in China (1979-1983)

From 1979 to 1983, China's reform and opening-up policy just began, there were not enough ideological preparations for attracting foreign FDI, and there was not the mature social and economic environment. Therefore, during this time, most Japanese enterprises chose the wait-and-see attitude, which resulted in the small number of projects and capital attracted from Japan. During the period, according to China's statistics, the Japanese FDI in China was US$ 955 million, which covered 12.8 percent of the total foreign FDI in China, and it was much lower than the US$4320 million investment from Hong Kong and Macao.23 According to the statistics of Japan, the total Japanese FDI in China were involved with 25 projects of US$730 million, which just covered 0.16 percent of the total foreign FDI from Japan during the corresponding period24. At that time, Japanese FDI mainly focused on the non- manufacturing sectors, with 13 projects of US$ 530 million, which covered 52 percent of the total project sand 72.6 percent of the total capital investment. In the contrast, the manufacturing sector just covered 48 percent and 15.1 percent of the total respectively. Among the investment in the non-manufacturing sectors, the investment in the service industry occupied the highest ratio, which reached the US$ 320 million. Among the investment in the manufacturing sectors, the investment in the chemical industry occupied the highest ratio, which reached the US$ 7 million.25

Obviously, during the first stage of Japanese FDI inflow into China, the Japanese investment was both of small size and of small scope, which did not suit with the corresponding trade relation between China and Japan, since during the time business with Japan covered 25 percent of China's foreign trade. According to Liu Changli26, during the period, most of the Japanese enterprises still had strong misgiving about China's economical and political situation - as the result of the media control policy of Chinese government, it was extremely difficult for the Japanese companies to get the first-hand or even second-hand information about China and its development. All the information they could reach was from Chinese government or the communication through visiting, therefore, under the situation of lack of relative local information and knowledge, the investment process was full of risks and obstacles. 27

Furthermore, there was no clear guarantee in China about stability of the policy 'opening its door to the outside world', hence, even some enterprises decided to invest in China, they always preferred the non-manufacturing sectors, because compared with the manufacturing sector, the non-manufacturing sectors had lower risks and the invested capital could be reclaimed relatively easily.

2.2 Period of small-scale investment of Japanese investment in China(1984-1990)

After 1984, in order to attract more overseas companies to come to invest in China, the Chinese government deepened its reform and opening-up policy, with the establishment of the Special Economic Zone and fourteen Open Coastal Cities (OCCs), which were opened to FDI.28 Therefore, with the increasingly favorable investment environment, the Japanese FDI in China developed gradually. Only in 1984, the Japanese investment increased to 66 projects and US$114 million29, which were 12.2 and 37 times those of the previously year respectively. In 1987, the Japanese investment climbed to US$ 1226 million, which was 9.8 times than that in 1984. However, in 1990, the total Japanese investment in China was just US$349 million, which dropped 71.5 percent in contrast with 198730. The reasons for such a drastic decline of Japanese investment are closely related with the following two elements. First, there was the change of policy of Chinese government at the end of 1980s, with the aim to avoid the excessive economic development. Chinese government rearranged a series of economic policies to slow down the speed of economic development; therefore, some restrains were added to the entry of foreign capital31. Secondly, in 1989 was the Tian An Men Square Incident, which directly caused the social and political instabilities in China. To some extent, the economic environment was damaged; as the result of this political incident, not only Japanese investment was slowed down, but also all the foreign investments in China were prudential during the period32.
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From 1984 to 1990, the total Japanese FDI in China were 832 projects of US$ 2748 million, and compared with the first stage mentioned above, both the capital and project quantity increased rapidly33. However, if we compare the average capital value per project in the two periods, there was no great change in the investment scale of Japanese FDI in China from 1979 to 1990. From 1979 to 1983, the average capital value per project of Japanese FDI in China mounted 2.7 million; from 1984 to 1990 the average capital value per project of Japanese FDI in China ...

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