Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Japanese and Chinese FDI in South Asia: An Investigation
Munim Kumar Barai and Badar Alam Iqbal
Japan and China are now major investing countries in the world. In 2013, they accounted for about 16.8
percent of world’s outward FDI and 6.1 percent of outstanding investment stocks. While investing abroad,
they seem to have a different focus in selecting economies. In essence, the Japanese investors invest
distinctively more in the developed economies while the Chinese investors invest mainly in the developing
countries. This paper, however, compares the Chinese and Japanese investment in the SAARC regions and
finds that the investors from these two countries are yet to channel any significant FDI in South Asian
economies, quite contrary to the investment positions they have taken in the economies of East and
Southeast Asia. Again, between the two, Japan has much higher investment stocks than China’s in South
Asia though the Chinese investment in the region is growing fast. They, however, slightly differ in their
investment projects and forms of businesses. Thus, the challenges to their investments also differ.
Nevertheless, the paper argues that both Japan and China should increase their FDI presence in South Asia
as most of the countries follow a different growth model and the region has potentials to grow more quickly
than many other regions in the world.
Keywords: Japan, China, South Asia, FDI, Investment Destination
Introduction
South Asia1 as a geographical entity is much easier to define than drawing a common
understanding on the economies as a whole. That is because of the fact that they still
encompass mixed economic system that comprises economic sectors from their
rudimentary to most modern levels. The primary sector of these economies is still mostly
in the traditional form. Their manufacturing and service sectors are mainly based on factordriven competitiveness, which is the primary stage of industrial competitiveness (WEF,
2013). In spite of that, a small number of their industries has graduated to efficiency-driven
level of competitiveness as well. However, the maturity of a particular economy is reflected
by the level of innovation-driven competitiveness the industrial base has achieved.
Arguably, there are some pockets of industrial development in the region
_____________________________________________________________
Munim K Barai, PhD, Professor, Ritsumeikan Asia Pacific University, 1-1 Jumajibaru, BeppuOita 874-8577,
Japan, Email: baraimk@apu.ac.jp, Phone: +81-80-42860267
Badar Alam Iqbal, PhD, Senior Professor, Aligarh Muslim University, India.
In our discussion, we accept the SAARC eight members as the constituents of South Asia. They are
Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka. For relatively
insignificant flows of FDI, some of the economies may get relatively fewer references in the discussion.
1
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
that promise a climb on the ladder of competitiveness of that level. There is, however, one
commonality among these economies; they all are striving for foreign direct investments
(FDI) to grow and develop. Not only that, most of the countries in South Asia adopted the
market led growth approach in the 1980s and 1990s by liberalizing and globalizing (L&G)
their economies. In the L&G process, they dedicated FDI a major role to play.
Paradoxically, despite dysfunctional political management of some of the countries in
South Asia, the efforts to open up their markets seem to have paid dividends. During the
last decade, the South Asian economies have attained an impressive, though varied and
sometimes less consistent, growth. In fact, this uneven growth in these economies may be
because of their differences in political, institutional, and regulatory environment that
affect the business climate and scope of opportunities differently (Hallward-Driemeier,
2007). But we should not miss the point that, presently, South Asia has become an
economy of more than US$ 2.5 trillion as India forming the gravity center and the region
now houses some of the fastest growing economies in the world. As we know, in the
aftermath of the 2008 financial crisis, Indian growth dampened a bit but, since this time,
it seems to have bounced back. In addition, Bangladesh, Sri Lanka, Bhutan have been
growing at 6 percent or more annually for quite some time.
Perhaps, this may bring into fore the question whether foreign investment has affected the
growth of respective economies in South Asia or not. But this paper has a different
objective to examine the flow of FDI to South Asia mainly from two economic giants, viz.
China and Japan. Incidentally, they are number one and two economies in Asia. However,
following their investment history, we find that Japan has become a big investor from the
1980s in Asia, North America, and Europe while China is a recent addition to the league of
major investors and now occupies the third position in the world after the United States
and Japan.
Awkwardly, the records of their investments in South Asia is not impressive and yet to
reach the level of high expectations. Without doubt, there are internal weaknesses of these
economies. But if we look at the history of Japanese investment abroad, the total Japanese
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
FDI stocks South Asia look to be dismal and could have been higher. On the other hand,
the Chinese trade and investment links with South Asia was relatively low in the 1990s but
have been growing since the mid-2000s. This has led to a growing Chinese financial flows
to the region in tandem, and the Chinese portfolio of investment in South Asia is increasing
at a relatively quicker pace in the recent years.
To make the point, this is a descriptive study using the secondary sources of information
to analyze and compare the Japanese and Chinese investments in the eight SAARC
economies. Though their levels of investment beg further pace, Japan and subsequently
China have emerged as important sources of foreign investment in the region. The paper
has used various descriptive tools used to analyze and explain investment data for a period
of 1990 to 2012 when the South Asian economies have gathered a relatively higher pace in
economic growth.
The paper has four more parts. Part two reviews some of the existing literature that has
tried to explain various determinants of FDI in different regions and economies in the
world including South Asia. Part three describes the state of Japanese and Chinese
investments particularly in South Asia. Part four makes the effort to analyze critically and
compare their investments in the region. Part five concludes the paper.
Literature Review
Flow of investments across borders is explained by two streams of literature. One of the
streams identifies two sets of motives for investing enterprises or multinational
corporations (MNCs): they are cost-related and revenue-related motives (Madura, 2010).
This literature argues that either the reduction of costs or an increase of revenue or
achieving both of them simultaneously becomes the real motive for MNCs moves to locate
the production bases and FDI. On the other hand, a majority of the second stream of
literature tries to find the attractiveness of destinations, may be a particular country or
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
region, for FDI flows. The attractiveness depends on a variety of factors including size and
prospects of the economy under-investment consideration, condition of its physical
infrastructure, socio-political environment, technological readiness, quality of governance,
functioning of FDI policies and so on. But in the ultimate analysis, both the streams seem
to converge with each other to complete the same mission: finding the suitability of the
investment in the host nations.
In the brief review of the literature, this paper is more focused to the second stream that
identifies different variables or determinants that help attract FDI in an economy. A
United Nations Committee on Trade and Development (UNCTAD, 2006) study identifies
five sets of variables or determinants of FDI: policy variables (trade policy, tax policy,
macroeconomic policy and privatization policy), business variables (business conditions
and investment benefits), market-related economic determinants (market structure,
market size and market growth), resource-related economic determinants (technological
base, labor cost and raw materials) and efficiency related economic determinants
(productivity of labor, transport and communication costs) and so on. Unsurprisingly,
empirical studies devoted to finding the association between FDI flows and their
determinants do not form uniformity in findings all the time. The same variables may have
worked differently in different economies.
In the regional context, we find studies of Amal et al. (2010) for eight Latin American
countries, Ho and Rashid (2011) for Association of Southeast Asian Nations (ASEAN) and
Bhavan et al. (2011) for selected South Asian economies that try to find the determinants
of FDI. Of them, Bhavan et al. (2011) apply the Arellano-Bond dynamic panel estimation
method to study the determinants and growth effect of FDI on selected South Asian
economies. The study finds that while population, trade openness, and infrastructure are
the significant positive factors in attracting FDI in South Asia, the geographical distance
affects FDI inflows negatively, and human capital bears no significance in FDI flows. An
earlier study of Sahoo (2006) identified that market size, infrastructure, and the
availability of cheap labor were the significant positive determinants of FDI inflows in
South Asia.
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Unfortunately, no study seems available that looks into the Japanese and Chinese FDI in
South Asia on a comparative basis. Iqbal (1997) made an effort to find out why Japanese
FDI was shy to go to South Asian economies. He identified that a significant chunk of the
Japanese FDI went to resource development projects in various parts of the world, but
South Asia had little to offer in this regard. Further, Jain (2000) assessed that Japanese
influence in the South Asian investment markets was limited. In his words, “Japan and
South Asian nations remained distant to each other. The distance is not just borne of
geographic location but of different history, economic, political and social experience. For
Japan, South Asia is ‘other Asia’, not the intimate Asia that it associates with East and
Southeast Asia” (Jain 2000: 208). In another study, Brunjes et al. (2013) report that
China’s economic engagement in South Asia has grown quickly in the recent years and
identify economic profit as the primary motive for that. Looking at the Chinese domestic
conditions, they predict its trade and investment relations with South Asian countries to
go further up.
Thus, the non-availability of a similar sort of study gives the justification to this paper
which compares Japanese and Chinese investments in South Asia.
Japanese and Chinese Investments in South Asia
To begin with, let us have an idea on how the two economies, viz. Japan and China have
emerged as significant global sources of FDI over time. While Japanese investment abroad
is indebted to the rapid economic growth in the 1960s, Chinese push for overseas
investment is rooted in its economic progress made in the 1990s. Interestingly, both of
them followed the export-led growth model for their economic development that
ultimately has turned them into major sources of FDI.
For Japan, both outflows and inflows of FDI in the 1960s were not that significant, and the
investment gap was modest. However, the gap widened in the 1970s as outflows of FDI
increased at a much faster pace. But between 1980 and 1990, Japanese outward
investment increased exponentially. As a result, in 1990 the outward stocks of Japanese
investment stood at $201.4 billion against the inflow stocks of $9.85 billion, a ratio of 20.5
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
(UNCTAD 2014). To put the Japanese imbalance between inward and outward
investments in perspective, “it is useful to remember that, during the same decade, the
OFDI/IFDI ratio was only 5.2 for Germany, 1.4 for the UK and 0.5 for the United States.
In other words, in the United States inflows surpassed outflows of direct investment” (Solis
2005: 110). This trend in Japanese outflow has been continuing since then and by the end
of 2013 the inward and outward stock figures stood at $170.9 billion and $992.9 billion
respectively.
A number of factors are considered to be responsible for a bigger Japanese outward
investment. The rapid appreciation of the yen since 1985 has remained a significant
influencer, in this case. And, in that instance, ASEAN countries were the main initial
beneficiaries of Japanese FDI. Later, the price bubble burst in 1991 dealt a blow to the
prospect of the domestic economy of Japan as it ensured a long-term economic slump in
Japan and, unfortunately, that has been continuing since then. Additionally, the rise in
manufacturing costs due to increase in wage and transport costs, competition in the
external markets, etc. forced many Japanese investors to find lower-cost production bases
in newly industrialized countries (NICs) and China. The Japanese investors also used their
outward investments to foster trade. Observing the pattern of outward investments during
that period, Urata (1993: 285) argues, “The main motive behind Japanese FDI in Asia is to
set up an export base, while the main motive of Japanese FDI in the United States and the
EC is to maintain or capture the local market.”
A look at China, however, reveals that it incentivized domestic over international
investment until the late 1980s, though it started setting up international firms since it
began the open door policy in 1978 (Sauvant 2005). The Chinese initial disinclination to
allow outward investment may be due to the apprehension of capital flight and loss of
control of state assets (Buckley et al. 2008). Following the implementation of “Go Global”
program in 2001, the Chinese government relaxed its foreign exchange controls, approval
procedures, and investment restrictions and from 2003 onward, it allowed privately
owned enterprises to apply for permission to invest internationally (Buckley et al. 2008).
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Since this time, Chinese outward investment has rapidly expanded, from $2.85 billion in
2003 to more than $101 billion in 2013 (UNCTAD 2014). In that outflows state-owned
enterprises (SOEs) continue to be the largest investors—mainly in petroleum, construction,
telecommunications, and shipping. But more recently, private companies such as Lenovo
have started to invest abroad (Morck et al. 2008).
Figure 1 gives us a comparative view on the outbound investments from Japan and China
from 1990 to 2013. By 1990, Japan became a significant investor while China was yet to
join the investor club in any meaningful way. But the price bubble burst in 1991 seems to
have an adverse impact on the Japanese outflows. However, Japanese FDI again attained
pace from 2004 to reach a pre-recession high of $128.1 billion or 6.4 percent of the world
total in 2008. However, the Financial Crisis in 2008-09 put a spanner on the flow. But FDI
from Japan gained momentum from 2010 and touched an all-time high in 2013 to reach
$135.7 billion or 9.6 percent of the world total (UNCTAD, 2014). Overall, the investment
flows from Japan seem to have maintained a kind of synchronization with the outflowtrend of the world.
Figure 1: Chinese and Japanese Outward FDI Flows
(1990-2013)
160
2 500.0
140
135.7
128.1
122.5
120
107.6
100
87.8
73.5
80
60
50.8
40
20
2 000.0
101.0
45.8 50.3
22.6
0.8
2.0
31.5 28.8 30.9
0.9
2.9
5.5
12.3
21.2
74.7
68.8
55.9 56.5 56.3
1 500.0
74.7
1 000.0
26.5
500.0
0
1990 1995 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Japan
China
World
Source: Constructed. Data from UNCTAD (WIR), 2014.
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
In comparison, the Chinese outward investment in the 1990s begs little reference due to
an insignificant amount. But the scenario started changing in the next decade, particularly
from 2003 since when outward flows of FDI from China went on increasing to reach $101
billion (7.2 percent of the world) in 2013 (UNCTAD 2014). This shows 34.8 times jump
within a decade. Importantly, the financial crisis of 2008-09 seems to have affected
Chinese FDI only momentarily in 2009 and then bounced back in 2010. It may be
important to note that in 2013, Japan and China together contributed about 16.8 percent
of world’s outward FDI and 6.1 percent of outstanding investment stocks.
How do the economies of South Asia figure in the investment chart of Japan and China?
Tables 1 and 2 have been prepared to show the Japanese and Chinese FDI inflow positions
in the South Asian economies for a period of 2003 to 2012. Moreover, Appendix Tables A1
and A2 shows the stocks of Japanese and Chinese FDI in South Asia for the same period.
Table 1: Japan – FDI Flows to South Asian Economies
(Millions of US dollars)
Region/Economies
World
Developed
Economies
Developing
Economies
South Asia
Bangladesh
India
Maldives
Nepal
Pakistan
Sri Lanka
2003
28 773
2004
30 951
2005
45 781
2006
50 266
2007
73 549
2008
128 020
2009
74 699
2010
56 263
2011
114 353
2012
122 548
20 198
16 592
22 282
28 701
42 034
72 966
35 468
29 693
62 763
77 176
8 326
125
125
-
14 055
139
139
-
23 438
268
-7
270
31
- 26
21 372
512
- 26
513
24
-
31 386
1 558
1 513
- 12
51
6
54 737
5 485
398
5 253
0
116
- 282
38 782
3 718
-5
3 679
31
12
26 189
2 771
6
2 747
17
-1
5
-3
51 257
2 328
44
2 274
1
8
2
44 616
2 831
29
2 792
1
13
-4
Source: Compiled. UNCTAD FDI/TNC database, based on data from the Bank of Japan.
A closer look on Table 1 also reveals that the Japanese investors are more comfortable to
invest in the developed countries, may be for historical and cultural reasons. In 2012, for
example, 63 percent of its total outward investment headed towards developed economies.
In a decade from 2003 to 2012, it was only in 2009 when Japan invested more in the
developing countries. Evidently, the bulk of its FDI in the developing economies goes to
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
the economies of East and Southeast Asian regions. Physical nearness, relatively low cost
of labor and cultural closeness may explain the heavy Japanese investment in these regions.
From the table, it also appears that South Asia is yet to attract the Japanese investors, even
though the 3rd largest Asian economy is located in the region. To substantiate, in 2012,
only $2.8 billion (6.34 percent) of the total of $44.6 billion Japanese investment in
developing economies headed towards South Asia. That too was India-centric, as it
received 98.6 percent of that Japanese FDI. Bangladesh, Pakistan, and Sri Lanka are the
other economies that received a little of Japanese investment during the period of our
consideration.
On the other hand, the Chinese investment abroad has a significant difference in this that
the investors much more by directing the lion share of their investment towards the
developing economies. Table 2 clearly shows that from 2003 to 2012, the share of Chinese
investment in developed countries was never that high, the highest being about 18 percent
in 2011. In 2012, the share of developing countries in Chinese investment increased to 84.6
percent of the total. However, the South Asian economies are yet to make noticeable places
in the list of Chinese FDI destinations though China’s economic reach in the South Asian
economies has grown considerably since the late 1990s. In this regard, Kelegama (2014)
observes, “For now, China’s foreign direct investment (FDI) in the South Asian region has
not kept pace with growing trade. However, during the last three years, Chinese
investment has grown rapidly in some South Asian countries such as Pakistan, Sri Lanka,
and Bangladesh.” Chinese investment figures in Table 2 supplement his observation.
Table 2: China – Flow of Investment in South Asian Economies
(Millions of US dollars)
Region / economy
World
Developed economies
Developing economies
South Asia
Afghanistan
Bangladesh
India
Nepal
2003
2 855
211
2 605
20
1
-
2004
5 498
336
5 065
22
1
2
2005
12 261
731
11 216
29
11
1
2006
17 634
520
16 565
15
5
6
-
9
2007
26 506
2 747
22 891
947
4
22
1
2008
55 907
2 787
52 055
460
114
5
102
-
2009
56 529
7 043
48 780
204
16
11
- 25
1
2010
68 811
10 864
56 736
928
2
7
48
1
2011
74 654
13 423
60 034
1 525
296
10
180
9
2012
87 804
13 508
70 017
1 143
18
33
277
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Proceedings of 13th Asian Business Research Conference
26 - 27 December, 2015, BIAM Foundation, Dhaka, Bangladesh,
ISBN: 978-1-922069-93-1
Pakistan
Sri Lanka
10
-
1
-
4
-
- 62
-
911
-2
265
9
77
-1
331
28
333
81
89
17
Source: Compiled. UNCTAD FDI/TNC database, based on data from the Ministry of Commerce (MOFCOM).
In addition, Table 3 summarizes total inflows of foreign investment in eight economies in
South Asia and shares of Japan and China of that FDI for a period of ten years – from 2003
to 2012. Among the economies, Japan has been investing in Bangladesh, India, Pakistan
and Sri Lanka more. Among them, India, for obvious reason, seems to have remained at
the center of Japanese investment attention where its investment has crossed the critical
level of 5 percent of Indian total FDI for both 2011 and 2012. In Bangladesh, however,
Japan had the highest share of investment of 8.3 percent of the total in 2003. Pakistan is
also receiving some investment from Japan. But the history Japanese investment in Sri
Lanka seems to have been affected by the civil war and in 2008 Japanese investment
experienced a net withdraw of $282 million We see a repeat of Japanese investment
withdrawals from SL again in 2010 and 2012. Among the SARRAC countries, Afghanistan
and Bhutan are yet to record any FDI from the Japan.
Table 3: South Asia - Total and Share of Japanese and Chinese FDI
Economy
Afghanistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri
Lanka
Total ($m)
Japan
China1 ($m)
Total ($m)
Japan (%)
China (%)
Total ($m)
Japan (%)
China (%)
Total ($m)
Japan (%)
China (%)
Total ($m)
Japan (%)
China (%)
Total ($m)
Japan (%)
China (%)
Total ($m)
Japan (%)
China (%)
Total ($m)
Japan (%)
China (%)
2003
57.8
2004
186.9
2005
271.0
2006
238.0
2007
188.7
2008
94.4
2009
75.7
2010
211.3
2011
83.4
2012
93.8
350
8.3
1.1
3.4
460
6.5
792
2.9
0.1
72.2
666
5.6
8.9
845
5.4
0.2
6.2
3.0
114
1 086
5.2
0.5
19.9
16
700
2.4
0.4
71.7
2
913
2.4
1.0
30.8
296
1 136
4.1
1.7
25.9
18
1 293
2.3
1.4
21.8
4 321
1.6
31.8
-
5 778
2.1
52.9
-
7 622
1.1
73.2
-
20 328
0.4
95.2
-
25 350
1.8
132.4
-9.1
47 139
0.6
181.3
-
35 657
2.7
158.0
-
27 431
4.6
0.01
216.5
7.9
36 190
5.8
0.2
256.5
-
24 194
5.5
0.6
284.0
-
14.8
532
2.3
1.7
229
-
- 0.4
1 117
2.9
0.7
233
-
2.5
40.0
2 200
2.0
0.1
272
-9.6
-
- 6.6
-
5.9
16.9
5 590
1.9
12.9
603
1.0
-0.3
1.0
-
38.6
2.6
2 338
1.6
-4.7
404
3.0
-0.2
86.7
-1.2
1.2
2 022
0.99
0.45
478
-0.6
5.9
95.5
1.0
9.4
1 326
1.2
7.6
981
0.2
8.3
92.0
1.1
8.7
858
3.4
8.7
941
-0.4
1.8
4 272
1.5
0.1
480
-
10
5 437
2.0
0.1
752
-37.5
1.2
Proceedings of 13th Asian Business Research Conference
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ISBN: 978-1-922069-93-1
Note: 1 China’s investment figures in Afghanistan look inconsistent with the total figure and hence share not
calculated.
Source: Constructed. UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) for total figures, and UNCTAD,
FDI/TNC database (http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx) for country
specific FDI figures.
Noticeably, FDI from China in South Asia seems to be a recent phenomenon. With the
exception of Bhutan and the Maldives, all other economies have registered Chinese
investment during the period of our discussion. For historical reason, Pakistan has
remained the largest recipient of Chinese investment in South Asia. Afghanistan,
Bangladesh, Nepal and Sri Lanka have been seeing fast growth of Chinese FDI. Though
India is by far the largest economy in South Asia; it is yet to receive any noteworthy Chinese
investment. That again may be explained by the acrimonious past they live with.
However, both Japanese and Chinese investment in South Asia may see an acceleration
for a number of reasons in the near future. They include the growing economic and
strategic importance of India as a partner to Japan, election of more representative
government in Sri Lanka, increase in geo-strategic weight of Pakistan to China, better
economic prospect of the region as a whole and so on. In essence, presence of India at the
geographic center also enhances the overall expectation and importance of the regional as
a whole because of the size of the market and its growth potentials.
Japanese and Chinese FDI in South Asia Compared
Disappointingly, the prospect for foreign investments in South Asia seems to have not been
capitalized so far for a number of economic and non-economic factors. Insufficiency of
infrastructure, overpopulation, corruption, disruptive political discourse, workforce that
lacks required education and discipline, etc. are to name a few. But if we assess South Asia
as a whole on the basis of economic growth prospects, then a higher level of inward of
investment could have been expected in the region. Not only that, most of the economies
in the region have a domestic consumption based growth approach, instead of exportoriented growth model, supported by a larger population. That might have played an
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Proceedings of 13th Asian Business Research Conference
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ISBN: 978-1-922069-93-1
important role in achieving six-percent-plus growth rate by most of them despite having a
plethora of problems in their way to economic progress.
In this regard, between the two countries, Japan seems to have missed more this
fundamental difference in the development approach of the South Asian economies.
Keeping this point in mind, let us try to compare the Japanese and Chinese investment in
South Asia.
1. As stated earlier, Japanese external investment is principally directed to the
developed economies. As a result, the gap in Japanese investment between
developed and developing economies was always there and has been widening since
2010. Figure 2 also shows that the Japanese FDI in developing Asia is highly focused
on the East Asian countries, in particular. However, we follow an exception in 2011
when South East Asia revived more Japanese investment than any other developing
regions. In South Asia, Japan has remained an important investor but that does not
stand well when compared to its investment in East and South East Asia. West Asia
too is largely ignored by the Japanese investors.
Figure 2: Japan- FDI Flows to Selected Regions 2001-12
(Millions of USD)
90 000
25 000
80 000
20 000
70 000
60 000
15 000
50 000
10 000
40 000
30 000
5 000
20 000
-
10 000
-
-5 000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
East Asia
SE-Asia
South Asia
West Asia
Developed
Developing
Source: Constructed. Data from UNCTAD, 2014.
12
2011
2012
Proceedings of 13th Asian Business Research Conference
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ISBN: 978-1-922069-93-1
In contrast, China maintains a diametrically opposite approach to investment
internationally as the developing economies are the central to that strategy. This
reflects the Chinese desire for diversification and consists with normal economic
interests (Brunjis, et al. 2013: ix). Figure 3 shows that since 2003, Chinese aggregate
investment in the developing economies is growing at a faster pace. Interestingly,
the gap is widening since the 2009 financial crisis.
Figure 3: China - FDI Flows to Selected Regions 2003-12
(Millions of USD)
60 000
80 000
70 000
50 000
60 000
40 000
50 000
30 000
40 000
30 000
20 000
20 000
10 000
10 000
-
2003
2004
2005
2006
2007
2008
2009
2010
2011
East Asia
SE-Asia
South Asia
West Asia
Developed
Developing
2012
Source: Constructed. Data from UNCTAD, 2014.
From Figure 1 and 2, we find at least two similarities when outward investments in
different regions in Asia from Japan and China are compared. First, like the
Japanese FDI flows, East Asia constitutes the single largest zone for the Chinese
investors followed by South East Asia, South Asia, and West Asia. Secondly, South
Asia still figures insignificantly in the flows of Chinese FDI.
2. China’s initial FDI has the distinction or orientation to secure natural resources
abroad to fuel the economic growth back home, quite similar to that of Japanese
approach in the 1970s and 1980s. Kelegama (2014) notes, “Chinese trade and
investment links have led to growing Chinese financial flows in the form of loans
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Proceedings of 13th Asian Business Research Conference
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ISBN: 978-1-922069-93-1
and aid to the region since the mid-2000s. Most of these loans are associated with
large infrastructure projects such as ports, highways, bridges and power plants.”
Along with this sectoral focus, Chinese investments are also looking for resource
extraction (for example in Afghanistan), market opportunities and manufacturing
bases for regional labor division in South Asia. Having a government-led
development approach and presence of state-owned-enterprises (SOEs) in
fostering role of the government at home and abroad, the SOEs also become
participants in the Chinese outward investment side by side the private enterprises.
Japan has a slightly different strategy whereby the government Official
Development Assistance (ODA) is used to help the development of infrastructural
projects for assisting the Japanese businesses and their investment abroad. For
example, the Delhi-Mumbai industrial corridor in India, a project estimated to be
of $100 billion, is to be constructed jointly by the Indian government and the
Japanese ODA Fund. Investment of this scale from Japan is designed to help the
MNCs from Japan as well. But in the most the cases, Japanese businesses in South
Asia invest to set up export base, as well as the business opportunities. This is
contrary to the resource development focus of Chinese investment that forms a
significant portion of Chinese investment in South Asia.
3. Looking at the future of FDI from these two sources, it may be assumed that China’s
increasing focus on the domestic economy should create some pressure on the yuan
to appreciate unless otherwise the international currency-politics and other
strategic moves force the yuan to be devalued significantly. However, any
appreciation of the yuan should trigger an outflow of Chinese investment, as was
the case with Japan after the appreciation of yen in the 1980s. In that instance,
ASEAN countries were the main beneficiaries of Japanese FDI flows. Thus, given
China’s strong trading and investment foothold, and the relatively low labour costs
compared to East Asia, the SAARC region is in a position to attract more Chinese
FDI in the coming years (Kelegama 2014). Japan, on the other hand, is playing a
different ball game at the moment. The monetary policy of quantitative easing
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Proceedings of 13th Asian Business Research Conference
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implemented since April 2013 has pushed the value of yen down by more than 30
percent till then. This was done to make Japanese exports competitive
internationally was well as to slow down the
hollowing out of Japanese
manufacturing base. If successful, this can stifle the flow of Japanese investment in
the medium to long term. But given the labor situation in Japan, the second purpose
of the policy move may fail. In the ultimate analysis, this should not deter the
Japanese FDI flows to South Asia as India in particular play a counter-weight role
in Asia for Japan and even for the USA.
4. Given the Indo-centric geography, the South Asian economies may be much more
welcoming to Japanese investment than that from China, largely because of
concerns in India. In this analysis, the SAARC region is considered to be part of
India’s geopolitical backyard. The recent trouble with the Chinese “Colombo Port
City Project”2 in Sri Lanka may be good example of this apprehension. But Japanese
or Chinese investment project in South Asia could face problems on purely business
ground as well. As an example, we can take the case of Daiichi-Sankyo’s fiasco with
its Indian investment in Ranbaxy.3
This may happen to them in other countries of the region as well. That is, the
investment from Japan and China may face significant economic, business or
political risk in South Asia. Additionally, India’s “overall policy stance toward China
may impact the flow of Chinese investment in the region as well. According to
Professor S.D. Muni, India’s policy towards China revolves around the 4 ‘C’s,
containment, conflict, competition, and cooperation. Various groups in India
2
This is $1.4 billion infrastructural project under which China is to build a skyline on land reclaimed from
the Indian Ocean. Under the port plan arrangement, China Communications Construction Co Ltd would take
over 108 hectares of land next to the main commercial port of Colombo. This includs 20 hectares on an
outright basis and the rest on a 99-year lease.
In 2008, Daiichi-Sankyo of Japan had acquired a 63.9 per cent stake in Ranbaxy Laboratories, an Indian
pharmaceutical, for $4.2 billion. But the value of its investments halved over the years, as Daiichi was
not been able to restore compliance at Ranbaxy factories supplying to the US. Daiichi had to sell the
venture at $4.00 billion in 2014.
3
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Proceedings of 13th Asian Business Research Conference
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support different ‘C’s: the Indian business community supports competition, while
part of the military supports containment, the bureaucracy calls for cooperation,
and so on” (Kelegama 2014).
5. Finally, Appendix Table A3 has been constructed to give a comparative view on the
ranks Japan and China have had with their FDI in the individual South Asian
economies from 2010 to 2012. In Afghanistan, according to the available data,
China seems to have remained the only major investor. During the same period, the
significant players in Bangladesh are Singapore, Egypt, and China. For Bhutan and
Sri Lanka, India has remained the top investor while for Sri Lanka China is an
important player too. Interestingly, India, the single largest destination for FDI in
South Asia, has Mauritius as the top investing country for all those years. Singapore,
Japan, and the Netherlands are important investors too. For the same period, Japan
is a tiny but number one investor in the Maldives. Meanwhile, Nepal is the only
country where the names of both the countries have propped up as top investors.
But Pakistan is mostly a beneficiary of investments from USA, UK, some Middle
Eastern countries and China.
Conclusion
There is an apprehension that China may end up in the peculiar Japanese no man’s land
between growth and non-growth in the not too distant future. But we have the following
possibilities for China at the moment: unless forced otherwise, the yuan will appreciate
and an extra-rich class of entrepreneur will look for overseas bases for their business and
production. So the Chinese economic presence in the South Asian region may be inevitably
growing as most of the economies require China’s financial assistance and benefit from
deepening trading and investment links. Moreover, India is developing into an openmarket economy. A number of factors are playing in India’s favor –a young population and
corresponding low dependency ratio, remittance from a burgeoning Indian diaspora,
healthy savings and investment rates, increasing integration into the global economy and
so on. The assumption of power by the Modi government in May 2014 has accelerated the
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Proceedings of 13th Asian Business Research Conference
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ISBN: 978-1-922069-93-1
process of economic integration and has raised the growth expectation for the economy.
That is why the outlook for India's medium-term growth is looking very positive at the
moment. The surrounding economies of Bangladesh, Bhutan, Maldives, Nepal and Sri
Lanka have the promise to grow as well. In fact, the Indo-centric South Asia is showing a
much better economic prospect than the past, making the whole region an attractive
destination for future investment. This makes further ground for Japanese and Chinese
investment in the region and the investors from both the countries may not miss the signal.
References
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Appendix
Table A1: Japan – FDI Stocks in South Asia
(Millions of US dollars)
Region/Economies
World
Developed
Economies
Developing
Economies
South Asia
India
2003
2004
2005
335 504
370 541
386 585
242 987
262 255
259 634
90 391
1 510
1 505
106 701
1 755
1 750
125 188
1 799
1 795
2006
449
567
296
166
152
264
2 319
2 315
2007
542
618
346
371
193
914
4 190
4 185
2008
680
330
416
451
261
568
9 398
9 391
2009
740
927
451
621
286
684
8 995
8 989
2010
831
076
488
882
332
740
13 575
13 568
2011
962
790
556
944
394
821
15 394
15 387
2012
1 037
698
606
418
421 480
15 073
15 067
Source: UNCTAD FDI/TNC database, based on data from the Bank of Japan.
Table A2: China – FDI Stocks in South Asia
(Millions of US dollars)
Region / economy
World
Developed economies
Developing economies
South Asia
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
33 222
44 777
57 206
75 026
117 911
183 971
245 755
317 211
424 781
531 941
1 523
2 116
2 815
3 948
8 268
10 799
18 175
29 701
46 651
73 148
31 592
42 454
53 563
69 643
107 264
169 289
222 975
281 597
370 117
445 739
68
107
311
337
1 371
1 833
2 169
3 348
4 901
6 285
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Afghanistan
Bangladesh
India
Nepal
Pakistan
Sri Lanka
-
-
-
1
1
115
181
169
465
483
8
9
33
40
43
48
60
68
77
117
1
5
15
26
120
222
221
480
657
1 169
2
3
3
4
9
9
14
16
25
34
27
36
189
148
1 068
1 328
1 458
1 828
2 163
2 234
73
163
179
7
7
15
8
8
17
16
Source: UNCTAD FDI/TNC database, based on data from the Ministry of Commerce (MOFCOM).
Year
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
2012
2010
2011
Table A3: Dominant Investors in South Asian Economies
(FDI Inflows in millions of US Dollars)
Country
FDI
Country
FDI
Country
Afghanistan
China
2
China
296
China
18
Bangladesh
Singapore
317
UK
106
China
Egypt
152
China
132
Korean R.
Egypt
127
Korean R.
98
China
Bhutan
India
16
EU
7
Germany
Singapore
21
India
20
Germany
India
14
EU
3
France
India
Mauritius
5616
Singapore
1540
Netherlands
Mauritius
8142
Singapore
3306
Japan
Mauritius
8059
Netherlands
1713
Singapore
Maldives
Japan
17
Italy
7
Mauritius
Japan
1
NA
NA
NA
NA
NA
Nepal
China
1
NA
NA
China
9
Japan
1
NA
China
8
Japan
1
NA
Pakistan
US
386
UK
310
UAE
UK
283
US
245
UAE
19
FDI
81
113
86
6
7
2
1418
2089
1605
1
297
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ISBN: 978-1-922069-93-1
2012
China
258
US
218
Italy
218
Sri Lanka
2010
India
1262
China
28
Switzerland
24
2011
India
260
China
81
Italy
37
2012
India
157
China
17
Switzerland
15
Source: Compiled. UNCTAD FDI/TNC database, http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-StatisticsBilateral.aspx
20