156
Kazuhiko Ishida
Japan’s Foreign Direct Investment in East
Asia: Its Influence on Recipient Countries
and Japan’s Trade Structure
Kazuhiko Ishida*
1.
Increase in Japan’s Foreign Direct Investment in
East Asia
Following the sharp appreciation of the yen after the Plaza Agreement of September
1985, Japan’s foreign direct investment (FDI) in East Asian countries increased rapidly:
from around $US1 billion during the first half of the 1980s, it started to increase sharply
in 1986 and hit a peak of around $US8 billion in 1989. This rapid increase then stopped
as the appreciation of the yen slowed during 1990-92, although the level has stayed
around $US6-7 billion (Figure 1). However, it should also be noted that Japan’s total FDI
has increased significantly since 1986, and that East Asia has not necessarily been the
major investment destination for Japan (Figure 2).
The main factors that have driven this rapid increase in Japan’s FDI in East Asia can
be summarised as follows:
• the appreciation of the yen;
• the aggravation of trade friction;
• lower wages in East Asian countries; and
• imports from East Asian countries.
The appreciation of the yen after the Plaza Agreement was regarded as irreversible by
most Japanese firms and, since corporate ability to maintain export volumes by
squeezing profits was thought to be very limited, firms tended to respond by effecting
structural changes to improve their competitiveness in international markets, including
shifting production overseas.
In spite of the sharp appreciation of the yen, Japan’s trade surplus did not decrease
significantly until 1988, which further aggravated trade friction. Voluntary export
restrictions vis-à-vis the United States and EC countries were introduced or strengthened
in certain areas (automobiles, machinery etc.). In some cases, anti-dumping duties were
imposed on Japanese exports. These restrictions on exports also prompted Japanese
firms to shift production out of Japan. While some (mainly automakers) shifted
production directly to North America and Europe, others chose to set up production sites
in East Asian countries from which to export to the United States and Europe.
For most Japanese firms that have chosen to invest in East Asia, the main reason to
shift their production was, at least initially, to take advantage of lower wages in these
countries so as to improve their competitiveness in international markets. For example,
*
The views expressed are those of the author and do not necessarily reflect those of the Bank of Japan.
Japan’s Foreign Direct Investment in East Asia
157
Figure 1: Yen/US Dollar Exchange Rate and Japanese FDI in Asia
Yen appreciation
Yen depreciation
¥/$US
$USb
8
200
150
6
Yen/$US exchange rates
(LHS)
100
4
50
2
Japanese FDI in Asia
(RHS)
0
1980
Note:
Source:
0
1983
1986
1989
1992 J F M A M J J A S O N D
1993
The yen/$US rate is a central rate average.
Ministry of Finance, Annual Report of International Finance Bureau; Bank of Japan,
Economic Statistics Monthly.
Figure 2: Japan’s Foreign Direct Investment
(manufactures, by area; fiscal years)
$US100m
160
160
North America
140
140
Asia
Europe
120
120
Others
100
100
80
80
60
60
40
40
20
20
0
1970 1975
0
1981
1983
1985
1987
1989
1991
158
Kazuhiko Ishida
in 1986, average real wage costs in newly industrialising economies (NIEs) were only
slightly more than 20 per cent (and in ASEAN countries less than 10 per cent) of the
figure for Japan.
While most of the components were, at least initially, exported from Japan, the
assembly process, which is relatively labour intensive, was shifted to low-wage countries
in East Asia. This kind of production shift to East Asian countries can be thought of as
a typical example of the most important structural response to the appreciation of the yen
– that is, restructuring domestic production to specialise in high-value-added products.
Similar to high-value-added final goods, certain components which require a high level
of technology and a well-trained workforce remained competitive in spite of the sharp
appreciation of the yen, as there were few competing producers. These components,
therefore, could be, and in fact had to be, produced domestically. On the other hand, the
assembly process, which does not necessarily need such high technology, nor such
skilled workers, could be shifted to countries where wages were lower so as to improve
the price competitiveness of the final product.
Whilst initially the main purpose for Japanese firms to invest in East Asian countries
was to improve their competitiveness in international markets, as this shift proceeded,
Japanese firms started to import certain products from their production sites in East Asia
(Figure 3). This was especially the case for low-value-added or ‘lower-end’ goods. For
these goods, competition in the domestic market is also high, and firms have tried to
become more competitive by importing from their affiliates in East Asian countries
where production costs are lower. In fact, in recent years, importing from overseas
Figure 3: Imports from Overseas Affiliates
(manufacturing)
$USb
$USb
90
90
Europe
80
80
North America
Asia
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1980
Source:
1983
1986
1987
1988
1989
1990
MITI, Basic Survey on Japanese Business Activities Abroad.
1991
Japan’s Foreign Direct Investment in East Asia
159
affiliates has been cited by a number of firms as one of the main reasons for undertaking
FDI, especially in East Asia. For example, according to the survey published by the
Export-Import Bank of Japan, more than 20 per cent of firms which invested in ASEAN
countries in 1993 raised this reason; the corresponding figure being around 20 per cent
in the case of China, and 12 per cent for NIEs.
2.
The Influence of Foreign Direct Investment in East
Asian Countries
As suggested by Figure 4, from the viewpoint of recipient East Asian countries,
movements in the inflow of foreign direct investment can be classified into the following
three stages:
• Investment in NIEs first increased during 1986-89. This was mainly because these
economies provided a reasonably good environment for foreign investment in
terms of infrastructure, level of education, institutional framework and political
stability.
• Second, investment in ASEAN countries increased during 1988-90. This was
because, by then, the wage level in NIEs had increased significantly, reflecting their
own rapid growth (that is, the benefit of lower wage costs had largely been lost in
NIEs). Even NIE firms started to invest in ASEAN countries as they gradually lost
their competitiveness due to higher domestic labour costs as well as exchange rate
changes vis-à-vis the US dollar.
• Since 1990, investment in China has grown dramatically in line with the opening
up of its economy.
The share of Japan’s investment in total FDI received by these economies has been
around 30 per cent in NIEs and around 20 per cent in ASEAN countries. In the case of
China, Hong Kong occupies by far the largest share, but this is because foreign
investments, including those from Japan and the United States, made through affiliates
in Hong Kong are included.
This rapid increase in FDI has had a significant impact on East Asian countries, not
only economically but also socially. The scope of this paper, however, is limited to
economic effects, which can be classified into three areas, namely: supply capacity,
foreign trade and domestic demand.
2.1
Influence of FDI on Supply Capacity
The increase in FDI has influenced the supply capacity of recipient countries by
effecting shifts in industrial structure, increasing labour productivity and contributing to
production technology.
During the 1980s, in most East Asian countries, the primary sector decreased as a
share of GDP while the secondary and tertiary sectors grew (Figure 5). This kind of
change in industrial structure is, of course, seen in many industrialising countries, and
it is not clear to what extent it can be attributed to the increase in FDI. Figure 6 indicates
the relationship between shifts in industrial structure and the increase in FDI for Malaysia
and Indonesia, where relevant annual data are available. It can be seen from this figure
160
Kazuhiko Ishida
Figure 4: FDI in NIEs, ASEAN and China (a)(b)
$USb
8
NIEs(c)
6
Others (41.6%)
4
US (29.8%)
2
Japan (28.6%)
$USb
20
(c)
ASEAN
15
Others (41.9%)
10
US (10.4%)
5
NIEs (27.7%)
Japan (20.0%)
$USb
50
40
China(d)
Others (19.4%)
US (5.4%)
Japan (3.7%)
30
20
Hong Kong (71.5%)
10
0
1986 1987 1988 1989 1990 1991 1992
Notes:
Source:
(a) Amounts are those approved by the governments.
(b) Based on the most recent available data.
(c) For Hong Kong, Singapore and Malaysia manufacturing sector only. Indonesia
excludes financial and oil and gas sectors.
(d) Investment in China from Hong Kong includes indirect investment by United
States, Japanese and NIE firms via Hong Kong.
JETRO, Cross-Border Direct Investment of Japan and World: Investment.
that the shift in industrial structure has taken place broadly in accordance with the
increase in FDI, which suggests that FDI has played a significant role in changing
industrial structure in these countries. It seems likely that this has also been the case in
most other counties, although data availability is too limited to present clear evidence.
In the case of NIEs, the increase in the share of the secondary sector had halted by the
mid 1980s and, in fact, the share has slightly fallen since 1985. This might be because
the tertiary sector has been growing more rapidly in line with the growth of consumption
in these economies, as argued later.
Labour productivity, measured in terms of real GDP per worker, has been on a steady
increase in most East Asian countries since the 1980s (Figure 7). Although, again, it is
Japan’s Foreign Direct Investment in East Asia
161
Figure 5: Sectoral Composition of GDP
(per cent)
%
100
80
NIEs
49.1
52.0
54.8
55.2
Teritary sector (a)
42.2
41.0
39.9
40.1
Secondary sector(b)
8.6
7.0
5.3
4.7
60
40
20
%
100
80
Primary sector(c)
ASEAN
38.9
44.1
43.8
Teritary sector (a)
36.7
34.1
37.6
Secondary sector(b)
24.4
21.8
18.6
Primary sector(c)
60
40
20
%
100
80
China(d)
20.6
25.1
28.0
27.3
Teritary sector(a)
49.0
45.2
43.6
46.1
Secondary sector(b)
30.4
29.7
28.4
26.6
Primary sector(c)
1980
1985
1990
1991
60
40
20
0
Notes:
Sources:
(a) Services, etc.
(b) Manufacturing, mining and construction.
(c) Agriculture, forestry and fisheries.
(d) GNP basis.
Asian Development Bank (ADB), Key Indicators of Developing Asian and Pacific
Countries; and local statistics.
not clear to what extent FDI has contributed to this improvement, in most ASEAN
countries (except the Philippines) it seems to have played a major role. This is suggested
by the fact that the acceleration of labour productivity has coincided with the rapid
increase in FDI, and that the share of FDI in aggregate domestic investment remains at
an extremely high level. Comparing the development of the capital equipment ratio with
FDI in Thailand and the Republic of Korea (for which statistics are available), there is
a clear sign of labour productivity improvement in Thailand in the second half of the
1980s, with FDI serving as a locomotive enhancing the ratio. In the Republic of Korea
also, developments in the capital equipment ratio generally coincide with those of FDI
received (Figure 8).
162
Kazuhiko Ishida
Figure 6: FDI in Relation to Industrial Structure
$USb
6
%
41
Malaysia
40
5
4
39
Share of secondary sector in GDP
(RHS)
3
2
38
37
FDI in manufacturing
(LHS)
1
$USb
6
36
%
21
Indonesia
5
20
4
19
3
18
Share of secondary sector in GDP
(RHS)
2
17
FDI in manufacturing
(LHS)
1
16
0
15
1985
Sources:
1986
1987
1988
1989
1990
JETRO, Cross-Border Direct Investment of Japan and World: Investment; ADB, Key
Indicators of Developing Asian and Pacific Countries.
The increase in FDI is expected to contribute to the progress of production technology
in recipient countries (technology transfer). This effect is very difficult to quantify. It
could, for example, be guessed from the increase in the share of industrial products in
total exports and the increase in exports to industrial countries (Figures 9 and 10), which
will be mentioned later. It is, however, often argued that those exports are still produced
by the affiliates of firms from Japan and other industrial countries. Thus the extent to
which the technology has been well transplanted in recipient countries might be
questionable.
2.2
Influence of FDI on Foreign Trade
In accordance with the shifts in the industrial structure induced by the increase in FDI
in East Asian countries, the structure of their exports has changed gradually. The share
of industrial products in total exports has grown significantly since the mid 1980s and
the share of primary products has decreased (Figure 9). This change is supposed to have
contributed to making their export earnings less sensitive to movements in commodity
prices, which has laid a solid basis for their stable growth.
The contribution of net exports to their growth, however, has remained fairly limited,
because their imports have also increased broadly in line with exports (Figure 10). This
increase in imports can be mostly attributed to the import of capital goods and
intermediate goods (various components) associated with FDI. It should, however, be
Japan’s Foreign Direct Investment in East Asia
163
Figure 7: Real GDP per Worker
(1980 = 100)
Index
Index
NIEs
180
Taiwan
160
180
160
Republic of Korea
140
140
Singapore
120
120
Hong Kong
Index
Index
ASEAN
150
150
Thailand
Malaysia
130
130
Indonesia
110
90
110
90
Philippines
70
1981
Sources:
1983
1985
1987
1989
1991
70
Bank of Japan, Foreign Economic Statistics Annual; ADB, Key Indicators of Developing
Asian and Pacific Countries.
noted that, without the expansion of their export market induced by the shift in their
export structure, the increase in their imports of capital goods would not have been
possible, which would have significantly limited their economic growth.
In addition, because of the change in the export and import structure in each country
induced by the increase in FDI, regional trade flows have changed significantly
(Figure 11). For example, the value of trade (exports plus imports) between the United
States and NIEs doubled between 1985 and 1992, and that between Japan and NIEs
tripled, at least partly reflecting ‘indirect’ exports from Japan to the United States
through NIEs. A similar pattern is also observed for ASEAN countries. Furthermore, the
expansion of inter-regional trade flows among NIEs, ASEAN countries and China, is
also significant. This expansion of inter-regional trade seems to reflect strengthening of
mutual economic ties, especially the establishment of the horizontal division of production
among those countries, which has gradually grown as a result of the increase in FDI.
2.3
Influence on Domestic Demand
The increase in FDI, combined with domestic investments induced by FDI, seems to
have resulted in an expansion of job opportunities in East Asian countries, which has
contributed to a rise in personal income, and hence personal consumption. The increase
in domestic demand induced by FDI through this channel is likely to have also supported
164
Kazuhiko Ishida
Figure 8: Capital Equipment Ratio in Thailand and Korea(a)
$USb
Thailand
2
$USb $USb
0.9
2
Value of FDI received
1
1
Index(b)
300
10
0.6
0.3
0.3
Capital equipment ratio
(RHS)
300
5
200
Capital equipment index
(LHS)
100
0
-10
0
1981 1984 1987 1990
Notes:
Sources:
10
5
200
-5
0.9
Value of FDI received
0.6
(b)
%(c) Index
Capital equipment ratio
(RHS)
Republic of Korea
100
0
Capital equipment index
(LHS)
0
-5
-10
1982 1985 1988 1991
(a) Capital equipment to labour ratio (K/L) and accumulated investment (K) from
1965, on the assumption that annual capital depreciation is 6 per cent.
(b) Index, 1980=100.
(c) Annual percentage change.
IMF, International Financial Statistics; and local statistics.
the high growth enjoyed by East Asian countries in recent years. In fact, parallel increases
in FDI, labour income and personal consumption can be observed in NIEs, ASEAN
countries, and China (Figure 12).
3.
Influence of the Increase in Foreign Direct Investment
on Japan’s Trade Structure
The rapid increase in Japan’s FDI has also affected Japan’s own trade structure.
Noteworthy is that while the share of Japan’s FDI in East Asia is not so large compared
with Japan’s total FDI, its influence has played a significant role in changing Japan’s
trade structure.
First, the rise in FDI has resulted in an increase in so-called ‘induced’ exports. At the
initial stage of overseas production, capital goods (mainly production equipment) are
usually exported from Japan. Then, once production has started, many components for
production are exported. In fact, a significant increase in exports to overseas subsidiaries
has been observed in line with the increase in FDI (Figure 13). This increase in induced
exports has been particularly significant in the case of FDI in East Asian countries
because the supply of capital and intermediate goods has been very limited in these
countries. An increase in induced exports is expected to lower the price elasticity of
Japan’s exports, because induced exports tend to respond less to exchange rate fluctuations.
Japan’s Foreign Direct Investment in East Asia
165
Figure 9: Share of Export Items
%
100
NIEs
7.7
9.4
8.5
6.6
73.0
76.7
81.7
83.7
12.5
6.8
9.1
4.8
6.0
3.8
5.9
3.8
80
60
40
20
%
100
ASEAN
2.8
3.6
16.7
80
3.7
25.7
50.9
60
40
63.2
51.0
28.8
20
17.3
%
100
19.7
16.6
China
1.1
12.4
18.7
19.0
55.7
58.5
80
48.6
37.1
33.0
35.6
17.3
14.9
60
40
20
0
1980
Primary
Sources:
1985
Mining
14.2
11.5
11.5
11.0
1990
Industrial
1991
Others
ADB, Key Indicators of Developing Asian and Pacific Countries; Bank of Japan,
Foreign Economic Statistics Annual; and IMF, International Financial Statistics.
Second, as stated before, restructuring of domestic production has taken place in
accordance with the increase in FDI, so that domestic production has come to be more
specialised in high-value-added goods. These high-value-added goods are often
technology intensive, and hence exhibit strong non-price competitiveness. Export of
these goods, therefore, tends to be less sensitive to changes in the exchange rate, resulting
in the lower price elasticity of Japan’s exports.
As a result of the two above-mentioned factors, Japan’s export volume is expected
to have become less elastic to changes in the exchange rate. In fact, the elasticity of
Japan’s export volume to the relative price factor is found to have decreased significantly
for the estimation period after the Plaza Agreement (see Table 1 results for 1986-92).1
1.
It should be noted that structural changes took place continuously during the estimation period, and hence
the estimated parameters could be different from those to be obtained after all the changes have been
completed. This is also the case for Table 2, where the results seem more puzzling.
166
Kazuhiko Ishida
Figure 10: Share of Imports and Exports in GDP
(per cent)
%
65
%
65
NIEs(a)
60
60
Exports (b)
55
55
50
50
45
Imports
(b)
45
40
40
%
%
ASEAN
40
40
35
35
Exports
Imports
30
30
25
25
20
20
1975
Notes:
Sources:
1977
1979
1981
1983
1985
1987
1989
1991
(a) Excludes Singapore.
(b) Calculated using the figures of exports and imports from the national accounts.
IMF, International Financial Statistics; and local statistics.
Table 1: Parameters of Export Volume Equations
Estimation period
1975:1 – 1985:4
1986:1 – 1992:3
Income factor
1.75
0.50
Relative price factor
-1.53
-0.62
Third, on the import side, the shift of production of low-value-added or ‘lower-end’
products overseas, associated with the increase in FDI, has resulted in an increase in
imports from Japanese firms’ overseas affiliates. This, again, has been particularly the
case for FDI in East Asian countries because the shift of production of this category of
goods has been mainly directed to these countries where the advantage of lower wages
is larger.
For individual firms, this shift has meant the establishment of the horizontal division
of production between domestic factories and those overseas. Once this division has been
established as a result of FDI and importing from overseas affiliates has commenced, the
existence of ‘sunk costs’ tends to prevent frequent adjustment in such imports. For
example, import volumes are less likely to decrease immediately even when the yen
Japan’s Foreign Direct Investment in East Asia
167
Figure 11: Changing Trade Patterns (a)
1985
Japan(b)
95
22
(39)
(9)
24
9
(10)
(0)
US(c)
(f)
China
31
16
14
(7)
(2)
(11)
2
(0)
56
(21)
15
NIEs
(3)
(d)
ASEAN(e)
1992
Japan(b)
152
(47)
US(c)
30
(2)
37
55
(18)
(1)
China(f)
92
40
57
(39)
(9)
(12)
6
(0)
112
(9)
52
NIEs(d)
Notes:
(1)
ASEAN(e)
(a) $US billion. Trade values of exports and imports. Figures in parentheses represent
trade balances. Intermediary trade via Hong Kong partially adjusted.
(b) Trade values between Japan and other partners excluding China based on Japan
statistics.
(c) Trade values between US and China/ASEAN based on US statistics.
(d) Trade values between NIEs and China/US based on NIEs statistics.
(e) Trade values between ASEAN and NIEs/China based on ASEAN statistics.
(f) Trade values between Japan and China based on China statistics.
168
Kazuhiko Ishida
Figure 12: Personal Income, Consumption and FDI
($US billion; annual percentage change)
$USb
%
NIEs
9
(83.5)
(84.5)
(85.3)
(86.2)
12
(82.1)
8
6
3
4
(80.6)
0
ASEAN
0
(45.3)
10
25
8
20
(47.4)
(44.3)
15
6
(44.3)
4
10
5
2
(45.1)
(44.2)
0
0
China
(40.0)
12
9
24
18
(38.7)
(39.6)
6
12
(40.3)
(39.7)
3
(38.7)
6
0
0
1986 1987 1988 1989 1990 1991
(a)
Value of FDI received (LHS)
Real personal consumption (RHS)
(b)
Real labour income (RHS)
Notes:
Sources:
(a) Values of FDI are those approved by the governments. For Singapore and
Malaysia, manufacturing sector only; for Indonesia, excluding finance and oil and
gas. Figures in parentheses represent share of workers engaged in secondary and
tertiary sectors on a GDP basis.
(b) Figures represent labour income of workers in secondary and tertiary sectors on
a GDP basis.
IMF, International Financial Statistics; JETRO, Cross-Border Direct Investment of
Japan and World: Investment; ADB, Key Indicators of Developing Asian and Pacific
Countries, and local statistics.
Japan’s Foreign Direct Investment in East Asia
169
depreciates. In other words, at least some of the influence of exchange rate changes can
be absorbed by each individual firm in terms of the reallocation of profit between head
office and overseas subsidiaries. This could be a possible factor reducing the elasticity
of Japan’s imports to exchange rate changes.
In fact, the price elasticity of Japan’s import volume seems to have fallen slightly
(from -0.33 to -0.26) since the Plaza Agreement (Table 2), although it is questionable
whether or not this fall is statistically significant. Taking account of the fact that this
observed fall during 1986-92 took place against the background of various structural
measures to promote imports, it seems that the influence of the increase in FDI on
Japan’s imports has, in fact, been significant.
Table 2: Parameters of Import Volume Equations
Estimation period
1975:1 – 1985:4
1986:1 – 1992:3
Income factor
0.88
1.04
Relative price factor
-0.33
-0.26
In conclusion, it is likely that these changes in Japan’s trade structure induced by the
increase in FDI have made Japan’s trade balance less sensitive to exchange rate changes.
It is, therefore, possible that changes in the exchange rate have become less effective in
adjusting the trade imbalance as a result of the increase in FDI.
Figure 13: Exports to Japanese Overseas Subsidiaries
$US100m
Per cent of total exports
(RHS)
500
375
16
12
Export value to
subsidiaries
(LHS)
250
8
125
4
0
0
1980
Note:
1983
1986
1987
1988
1989
1990
Export value equals total purchases of Japanese overseas subsidiaries multiplied by
the per cent of purchases from Japan, in each fiscal year.