Is the U.S. Ready for FDI from China? Lessons from Japan in the 1980s

Abstract

The U.S. environment for inbound FDI from China today exhibits striking parallels with the environment for Japanese FDI in the 1980s. The motivations for Chinese FDI, such as building on extensive export activity by reaping advantages from location and ownership in the U.S., and internalizing processes that are currently external to Chinese firms targeting U.S. markets, are also likely to parallel those of Japanese firms during the boom in FDI from Japan in the 1980s. While the Japanese experience in the U.S. was initially rocky, many Japanese firms learned to adapt and thrive, particularly at the local level. Much can be learned from these parallels, particularly the sources of friction that Chinese firms are likely to encounter in Washington, and the means of dealing with these frictions both nationally and regionally.

Foremost among these lessons is the need to distinguish between the FDI environment at the federal and state levels. While the federal political and regulatory climate may be problematic for Chinese firms, state and local governments and communities are likely to be much more receptive to Chinese investment, particularly of the greenfield variety. Chinese firms will need to integrate fully into the community by forming dense networks of interaction with local suppliers, businesspeople and politicians, and by being good citizens in the realms of employment practices, philanthropy and community involvement. At the national level, Chinese firms probably can anticipate substantial wariness toward Chinese FDI by Congress and federal agencies. There is no magic formula for escaping political skepticism and even hostility at the national level. The Japanese case suggests that avoiding high profile acquisitions and overt lobbying efforts by individual Chinese firms (as opposed to working with organizations representing foreign investors generally) is a sound strategy for mitigating friction.

Keywords: Foreign Direct Investment, China, Japan, International Trade