Locational Determinants of Japanese Foreign Direct Investment in China

Abstract

This study examines 2,933 cases of Japanese investment in 27 provinces and regions in China to identify the role that policy determinants had in influencing the sub-national location decision of Japanese firms in China. The empirical results show that the Special Economic Zones (SEZs) and Opening Coastal Cities (OCCs) were a successful policy instrument initially, as SEZs and OCCs had a strong influence on Japanese foreign investment during the early years of China's liberalized foreign investment environment. Since the mid-1990s SEZs and OCCs have attracted proportionally less foreign investment as competition from other special investment zones has intensified in China. From these observations, we discuss the periodic influence of SEZs and OCCs and introduce and review the influence of newly emerging investment zones. We also draw inferences to the location choice literature in terms of understanding the variable influence of policy factors and traditional locational indicators as driven by temporal changes in investor motivations and preferences in a country.

Keywords: FDI, location choice, Policy, China, Japan, foreign investment