WDP 146 146 131 World Bank Discussion Papers China and Mongolia Department Series Sino-Japanese Economic Relationships Trade, Direct Investment, and Future Strategy Shuichi Ono 's Recent World Bank Discussion Papers No. 90 Implementing Educational Policies in Zambia. Paul P. W. Achola No. 91 Implementing Educational Policies in Zimbabwe. 0. E. Maravanyika No. 92 Institutional Reforms in Sector Adjustment Operations: The World Bank's Experience. Samuel Paul No. 93 Assessment of the Private Secor: A Case Study and Its Methodological Implications. Samuel Paul No. 94 Reaching the Poor through Rural Public Employment: A Survey of Theory and Evidence. Martin Ravallion No. 95 Education and Development: Evidencefor New Priorities. Wadi D. Haddad and others No. 96 Household Food Security and the Role of Women. J. Price Gittinger and others No. 97 Problems of Developing Countries in the 1990s. Volume I: General Topics. F. Desmond McCarthy, editor No. 98 Problems of Developing Countries in the 1990s. Volume Il: Country Studies. F. Desmond McCarthy, editor No. 99 Public Sector Management Issues in Structural Adjustment Lending. Barbara Nunberg No. 100 The European Communities' Single Market: The Challenge of 1992for Sub-Saharan Africa. Alfted Tovias No. 101 International Migration and Development in Sub-Saharan Africa. Volume 1: Overview. Sharon Stanton Russell, Karen Jacobsen, and William Deane Stanley No. 102 International Migration and Development in Sub-Saharan Africa. Volume II: Country Analyses. Sharon Stanton Russell, Karen Jacobsen, and William Deane Stanley No. 103 Agricultural Extensionfor Women Farmers in Africa. Katrine Saito and C. Jean Weidemann No. 104 Enterprise Reform and Privitization in Socialist Economies. Barbara Lee andJohn Nellis No. 105 Redefining the Role of Govemment in Agriculturefor the 1990s. Odin Knudsen, John Nash, and others No. 106 Social Spending in Latin America: The Story of the 1980s. Margaret E. Grosh No. 107 Kenya at the Demographic Turnin,g Point? Hypotheses and a Proposed Research Agenda. Allen C. Kelley and Charles E. Nobbe No. 108 Debt Management Systems. Debt and International Finance Division No. 109 Indian Women: Their Health and Economic Productivity. Meera Chatterjee No. 110 Social Security in Latin America: Issues and Optionsfor the World Bank. William McGreevey No. 111 Household Consequences of High Fertility in Pakistan. Susan Cochrane, Valerie Kozel, and Harold Alderman No. 112 Strengthening Protection of Intellectual Property in Developing Countries: A Survey of the Literature. Wolfgang Siebeck, editor, with Robert E. Evenson, William Lesser, and Carlos A. Primo Braga No. 113 World Bank Lendingfor Small and Medium Enterprises. Leila Webster No. 114 Using Knowledgefrom Social Scienwe in Development Projects. Michael M. Cernea No. 115 Designing Major Policy Reform: jressonsfrom the Transport Sector. Ian G. Heggie No. 116 Women's Work, Education, and Family Wefare in Peru. Barbara K. Herz and Shahidur R. Khandker, editors No. 117 Developing Financial Institutionsfor the Poor and Reducing Barriers to Accessfor Women. Sharon L. Holt and Helena Ribe (Continued on the inside back cover.) Sino-Japanese Economic Relationships Trade, Direct Investment, and Future Strategy China and Mongolia Department Series Pattems of Direct Foreign Investment in China, Zaifar Shah Khan, September 1991 Coal Pricing in China: Issues and Reforn Strategies, Yves Albouy, October 1991 Reforning Prices: The Experience of China, Ilungary, and Poland, Anand Rajaram, January 1992 Developing Mongolia, Shahid Yusuf and Shahid javed Burki, January 1992 146 ~ World Bank Discussion Papers China and Mongolia Departnent Senes Sino-Japanese Economic Relationships Trade, Direct Investment, and Future Strategy Shuichi Ono The World Bank Washington, D.C. Copyright O 1992 The International Bank for Reconstructicon and Development/THE WORLD BANKI 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical tide list (wilth fiull ordering informnation) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN: 0259-210X Shuichi Ono is a consultant to the China and Mongolia Department in the World Bani's Asia Regional Office. Library of Congress Cataloging-in-Publication Data Ono, Shuichi. Sino-Japanese economic relationships: trade, direct investment, and future strategy / Shuichi Ono. p. cm. - (World Bank discussion papers; 146) Includes bibliographical references. ISBN 0-8213-1993-0 1. China-Foreign economic relations-Japan. 2. Japan-Foreign economic relations-China. 3. China-Commerce-Japan. 4. Japan- -Commerce-China. I. Title. II. Series. HF1604.Z4J3666 1992 337.51052-dc2O 91-45155 CIP -v - Foreword The World Bank's economic and sector work program on China is a very active one ranging over a wide spectrum of topics from macroeconomics to health and education. Each year we publish a handful of our formal studies, but: thus far most of the background papers and informal reports, many of them corntaining valuable analysis and information, have remained outside the public domain. Through the China and Mongolia Department Working Paper Series, we hope to make available to a broad readership among the China watchers and development communities a few of the papers which can contribute to a better understanding of China's modernization. This study by Mr. Ono examines the pattern of Sino-Japanese trade during the nineteen eighties and identifies the factors responsible for it. It provides the Japanese perspective on direct foreign investment in China with emphasis on geographical and subsectoral distribution. Finally, the paper explores the likely future trends in both trade as well as investment flows between the two countries. Shahid Javed Burki Director China and Mongolia Department Asia Region - vi - CURRENCY EQUIVALENTS (As of November 1990) Currency unit = Yuan (Y) = 100 Fen Y 1.00 = $0.19 $1.00 Y 5.22 FISCAL YEAR January 1 - December 31 'WEIGHTS AND MEASURES Metric System ABBREVIATIONS ASEAN - The Association of Southeast Asian Nations DFI - Direct Foreign Investment JETRO - Japan External Trade Organization kd - knock-down MOF - Ministry of Finance NIC - Newly Industrialized Country OECD - Organization for Economic Cooperation and Development - vii - SUMMARY Trade i. China's shift towards greater openness resulted in a rapid expansion in Japan's international trade with China with Japanese exports peaking in 1985. Thereafter, the appreciation of the yen eroded the competitiveness of Japanese goods and discouraged Japanese producers from attempting to make further inroads into Chinese markets. In addition, China's own efforts at restraining investment and curbing imports further constrained purchases from Japan. ii. Three concerns have shaped Japan's economic relations with China since the late 1970s: political stability under conditions of outward- oriented growth, the development of business opportunities for Japanese firms, and the strengthening of trends in China's energy sector that would facilitate Japan's efforts at diversifying its sources of fuels. iii. By 1990, Japan's exports had shrunk to almost half of the peak of 1985 and trade between the two countries had been altered in two respects. One was the drastic change in the composition of traded goods. Iron and steel, which accounted for more than half of Japan's exports to China in 1977, now represent only 17 percent of exports. Oil's share of Japan's imports from China dropped from 45 percent to 14 percent during the decade. Currently, nearly half of Japan's exports to China consists of machinery, and various manufactured goods such as apparel and machinery comprise over half of Japan's imports from China. iv. The second fundamental change was Japan's losing its title to Hong Kong of being China's "No. 1V trade partner. It now accounts for only one sixth of China's external trade, a little over a half of Hong Kong's share. v. However, Japanese business is cautiously optimistic regarding future trends in trade. Exporters are encouraged by the improved prospects for the Chinese economy, resumption of the disbursement of the Yen Credit and talks about the Ex-Im Bank's third natural resources loan. The importers are count- ing on such factors as: the depreciation of the Yuan last November, last year's record crop of agricultural products, stabilization in China's domestic economy and development of joint-venture manufacturing. vi. For these expectations to be realized, Chinese exporters will have to deal with a number of problems: specifically, belated delivery, poor qual- ity, cancellation of contracts and alteration of contracts. Some Japanese importers were reported to have abandoned China and shifted their supply sources to other Asian countries which they think are more reliable. Frequent change in China's economic policy have also tended to discourage some export- ers. vii. In order to expand exports to Japan, China needs to improve the quality and design of export goods. At the same time, it needs to streamline and upgrade the marketing operations of enterprises and foreign trade corpora- tions engaged in trade. - viii - Direct Investment viii. Japanese direct foreign investment (DFI) to China has been motivated by the immense potential of China. But, so far, the realized investment falls short of expectations on both s:Ldes. Japanese DFI in China accounts for only 1 percent of Japan's total DFI, or 6 percent of such investment in Asia. ix. The service industry dominated Japan's investment in China until 1987. In those years, the amount invested in the service sector alone accounted for two to five times the size of DFI in all the manufacturing sub- sectors. Leasing and the hotel industry were the areas most favored because of short payback periods, high returns and ease of repatriating profits from foreign exchange earnings. x. As for the manufacturing industry, large-scale firms were slow to invest. Unstable economic policy and the lack of legal transparency were major problems. Chinese restrictions on foreign exchange was also identified as a major obstacle. In this period, manufacturing investment in China was mostly conducted by smaller Japanese businesses, at least in terms of numbers of projects. These companies almost monopolized textile industry investment. They also enjoyed a dominant role in many of the sectors of manufacturing. xi. It was only in 1988 that Japan's big business started large-scale investment in China, when Japan committed a massive Yen Credit and an invest- ment protection treaty was concluded between the two countries. Such moves seem to have given the kind of assurance capital-intensive investment awaited. xii. Compared with other investing countries, Japan's DFI in China has a few distinct features. They are: (i) paucity of manufacturing DFI, (ii) the tendency to invest in small lots; (iii) preference of three major cities and coastal provinces; and (iv) preponderance of small or medium enterprises in terms of number of investment. xiii. In recent years, however, the share of smaller firms' investment has been declining, while such a ratio is increasing in the rest of Asia. This is because larger Japanese invesitors are not pulling in as many small firms as they do in other Asian countrLes, and because small firms which lack political clout are inhibited by bureaucratic obstacles. xiv. DFI's effects on trade are mixed. It seems to have played a deci- sive role in the recent upsurge in Japan's electronic machinery imports from China. However, the effects of DFI on apparel imports to Japan have been marginal. xv. In the future, Japanese businesses will increasingly consider Asia as an important part of their globalization strategy. Within Asia, an intra- firm division of labor is being established. As a result of automation, pro- duction of lower-end products is not always drawn to low-wage countries any- more. Cheap labor is not sufficient for manufacturers to decide locations of their offshore production. Infrastructure, skills, ease of doing business and other factors rank higher in importance. xvi. In order to successfully compete with the other Asian countries, China needs to: make full use of its advantages such as a potentially huge - ix - domestic market, abundant labor, and proximity to Japan, by pursuing a stable economic policy, improving the infrastructure and increasing the transparent legal systems. Furthermore, it needs to pay more attention to the important role of small- and medium-size firms in transfer of their unique technology and know-how, and in complementing production linkages. xvii. China may well have a chance to attract a larger portion of Japan's DFI in Asia in the near future because traditional locations of Japan's DFI are now being saturated. China's Economic Future xviii. Japan's business community tends to have a pragmatic view on China's future. They believe that China will keep its open-door policy and economic reforms, and that the Chinese economy will grow at least 6 percent a year. China is expected to play a much more important role than now as an integral part of the Asian production network. Liaoning, Shandong and the region around Shanghai are drawing special attention because of the geographical proximity to Japan. Among these three, Liaoning, in particular Dalian, is attracting increasing numbers of Japan's DFI. xix. In the coming years, China is likely to have more economic rivals in addition to already very tough competitors in Southeast Asia. They are North Korea, the Soviet Union (its far-eastern region), Vietnam and other socialist countries in Indo-China. xx. As the Chinese economy becomes more trade-oriented, changes in its production or demand of commodities will have a much larger impact on the external world. In particular, Japan, as a country that is dependent upon trade, especially the import of basic materials, such as mineral fuels and food, would benefit from the steady growth of China's economy. xxi. The possibility that China may become a net importer of oil later in this decade and possibly more dependent on foreign supplies of grain is viewed with some apprehension. These concerns explain why a large portion of Japan's financial assistance to China is allocated towards energy- and food- (or fer- tilizer)-related projects. Another worry, increasingly recognized by the Japanese, is the environmental problems China's economic expansion will cre- ate. In the near future, Japan's technical assistance as well as financial support will be directed more and more toward environmental issues. Conclusion xxii. Being one of the closest neighbors to China with strong cultural and historical ties, Japan has always been attracted by China. It is, therefore, somewhat surprising that Japan has failed to strengthen its economic relation- ship with China to the due extent it should have over the past decade or so, but future trends are increasingly positive. xxiii. Being the key economic powers in Asia where the most dynamic eco- nomic development is expected into the next century, China and Japan would be able to acquire enormous benefit through expansion of a mutual economic rela- tionship. Failure to fulfill its potential would not only deny benefits to t.he two countries, but also hamper the development of the whole region. - x - Table of Contents Page No. I. TRADE . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Japan's Strategy in the First Half of the Eighties . . . 2 B. Trade Relations, Past 1985 . . . . . . . . . . . . . . . 5 C. Decline in Japan's Share . . . . . . . . . . . . . . . . 10 D. Future Prospects .13 II. DIRECT INVESTMENT .17 A. Overview ........... 17 B. Characteristics of Japan's DFI in China . . . . . . . . 24 C. Impact on Trade ... . . . . . . . . ..... . . . . 30 D. Role Played by Smal.L Firms . . . . . . . . . . . . . . . 33 E. Globalization, the New Strategy for Japanese Firms . . . 39 F. Future Prospects ... . . . . . . . . ..... . . . . 42 III. CHINA'S ECONOMIC FUTURE . . . . . . . . . . . . . . . . . . 45 A. Japanese Perception . . . . . . . . . . .45 B. China's Economic Impact on Japan . . . . . . . . . . . . 46 C. Japan's Other Concerns . . . . . . . . . . . . . . . . . 48 REFERENCES . . .51 ANNEX - JAPANESE STATISTICS ON DFI ... . . . . . . . . . . . . . 55 A. BOJ-Based Data and MOF-]Based Data . . . . . . . . . . . . . 55 B. Small Firms' DFI Statistics . . . . . . . . . . . . . . . . 56 STATISTICAL APPENDIX ....................... 59 - xi - Page No. TABLES IN TEXT 1.1 China's Trade Partners (Exports and Imports) . . . . . . . 1 1.2 Average Annual Rates of Growth (Exports) . . . . . . . . . 6 1.3 Average Annual Rates of Growth (Imports) . . . . . . . . . 8 2.1 Joint-Ventures in China by Sector and by Investing Countries 25 2.2 Japan's DFI to China and Other Asia by Sector . . . . . . 26 2.3 Geographical Distribution of Joint-Ventures Made by US and Japan .... . . . . . . . . . . . . . . . . . . . . . . 29 2.4 Japan's Joint Ventures in China by Sector and by Location 31 2.5 Small Firms' DFI to China and Other Asia by Sector . . . . 35 2.6 Small Firms Importance Index . . . . . . . . . . . . . . . 37 2.7 Motives of DFI in China . . . . . . . . . . . . . . . . . 42 3.1 Long-Term Forecast on China by Japanese Think-Tanks After 1989. . . . . . . . . . . . . . . . . . . . . . . I . . . 45 CHARTS IN TEXT 1.1 Japan's Exports to China . . . . . . . . . . . . . . . . . 3 1.2 Japan's Imports from China ... . . . . . . . . . . . . . 4 1.3 Japan's Share in China's Exports . . . . . . . . . . . . . 11 1.4 Japan's Share in China's Energy Exports . . . . . . . . . 12 1.5 Japan's Metal Exports to China . . . . . . . . . . . . . . 14 2.1 Japan's Direct Investment in China . . . . . . . . . . . . 19 2.2 Japan's Manufacturing DFI in Asia . . . . . . . . . . . . 22 2.3 Japan's DFI in China . . . . . . . . . . . . . . . . . . . 23 2.4 DFI in China by Size of Major Investors . . . . . . . . . 27 2.5 Average Size of Manufacturing DFI in Asia . . . . . . . . 28 2.6 Major Locations of DFI Shares by Home Country . . . . . . 30 2.7 The Recent Development . . . . . . . . . . . . . . . . . . 40 TABLES IN ANNEX 1. Japan's Direct Foreign Investment . . . . . . . . . . . . 57 2. Japan's Flows of Foreign Direct Investment by SMEs, 1974-86 58 TABLES IN STATISTICAL APPENDIX A.1 China's Trade Partners . . . . . . . . . . . . . . . . . . 59 A.2 OECD Countries' Trade with China . . . . . . . . . . . . . 60 A.3 Japan's Manufactured Goods Imports from China . . . . . . 61 A.4 Japan's Crude Oil Import from China Within the Sino- Japanese Long-Term Trade Agreement . . . . . . . . . . . . 62 A.5 Japan's Trade with China . . . . . . . . . . . . . . . . . 63 A.6 Japan's DFI to Asian Countries . . . . . . . . . . . . . . 64 - xii - Page No. CHARTS IN STATISTICAL APPENDIX A.1 Composition of Japan"s Exports to China . . . . . . . . . 66 A.2 Composition of Japan"s Imports from China . . . . . . . . 67 A.3 Breakdown of Japan's Machinery Exports to China . . . . . 68 A.4 China's Plant and Technology Imports . . . . . . . . . . . 69 A.5 Japan's Import Price of Oil from China . . . . . . . . . . 70 A.6 Composition of Japan"s Iron and Steel Exports to China 71 - 1 - I. TRADE 1.1 China's spectacular development through the 1980s has transformed Sino-Japanese trade to a great extent. One of the most striking changes can be found in the composition of the traded goods. For example, iron and steel which accounted for 53 percent of Japan's total exports to China in 1977 now represents only 17 percent. And the share of oil in Japan's imports from China dropped from 45 percent to 14 percent during the decade. Nearly half of Japan's exports to China now consists of machinery. Various manufactured goods including machines, rather than raw materials or agricultural products comprise over a half of China's exports to Japan. At the same time, Japan has lost its title to Hong Kong of being China's "No. 1" trade partner (Table 1.1). It now accounts for only one-sixth of China's external trade, a little over one-half of Hong Kong's share. Table 1.1: CHINA'S TRADE WITH MAJOR PARTNERS (TOTAL OF EXPORTS AND IMPORTS) (Z) Total Hong Kong Japan United States Germany Others 1978 100.0 - 23.4 4.8 6.6 65.3 1980 100.0 - 24.3 12.7 5.4 57.5 1981 100.0 15.1 25.3 14.3 5.0 40.2 1982 100.0 15.9 21.4 14.8 4.3 43.6 1983 100.0 17.3 23.1 10.3 4.8 44.5 1984 100.0 18.4 26.0 12.1 4.0 39.5 1985 100.0 .17.2 30.4 10.7 4.5 37.2 1986 100.0 20.8 23.3 10.0 6.2 39.7 1987 100.0 26.9 19.9 9.5 5.3 38.4 1988 100.0 29.4 18.5 9.7 4.8 37.6 1989 100.0 30.9 16.9 11.0 4.5 36.8 Note: Figures for 1978-80 based on FTD, for 1981-89 on GAC. Source: Before 1983, IDE (1987); after 1984, OECF (1990). 1.2 For China, Japan has been an important source of equipment, mate- rial, technology and capital for its economic development, as well as an out- let for its manufactured products and natural resources. However, China has always wanted to alleviate its excessively large dependence on Japan, particu- larly in imports. In this sense, the recent decline in Japan's share can be viewed in a positive light. The same can be said for the diversification of composition of the trade between the two countries. But what is the reason behind this? Will this last or go further? This chapter reviews the develop- ment of the Sino-Japanese trade since the late 1980s with a special focus on the latter half of the decade, attempts to give answers to the above ques- tions, and tries to shed some light on the future prospects. - 2 - A. Japan's Strategy in the First Half of the Eighties 1.3 In February 1978, shortly before China's then-president Mr. Hua disclosed the ambitious ten-yiear economic development plan at the People's Congress, a long-term trade protocol was signed between Chinese and Japanese business representatives. This protocol, not being a governmental treaty and not binding to either side, concerned Japan's exports of technology, plants, construction materials and equipment to China in exchange for China's oil and coal exports to Japan. Both sides agreed that, during the eight years start- ing with 1978, these shipments should amount to around $10 billion each. As for crude oil, coking coal and fuel coal, a specific annual shipment schedule was targeted for the first fivre years. In March 1979, this protocol was extended to cover 13 years rather than eight years and the total amount of shipments was agreed to broaden to $20-30 billion for each side. 1.4 In the early 1980s, the Japanese government moved to offer financial assistance to China. It was agreed that Japan's Overseas Economic Cooperation Fund would extend Yen Credit to China for its infrastructure development proj- ects. It was the first government loan China accepted from a foreign country since it borrowed money from the USSR during its first Five-Year Plan. The Export-Import Bank of Japan also allocated Y 420 billion to development of natural sources in China. Later in 1980, the Chinese and Japanese agreed to jointly explore the offshore oilfield in the Bohai Sea and to develop three coal mines. 1.5 Such moves reflect the basic standpoint of the Japanese toward China. Japan's China strategy, was threefold. Firstly, it wanted China as a politically stable, more outward-oriented economy. The Japanese hoped that the extended credit would strengthen the position of newly emerged reform- oriented leadership through improvement of basic economic conditions. At the same time, it was hoped that such credit would generate opportunities to the Japanese manufacturers of plant and equipment and other basic industrial materials which were hit hard by the two oil crises. The other consideration concerned the diversification of energy sources. Japan, which is almost totally dependent on overseas supplies of oil, badly needed to lessen the importance of the Middle Eastern oil. China had oil as well as coal and was geographically much closer to Japan. 1.6 In 1978, Japanese exports to China grew by 57 percent and imports expanded by 31 percent over the previous year. Such a brisk pace of expansion was maintained for a couple of years, but in the early 1980s, both exports and imports experienced a setback. Faced with a shortfall of energy and worsened international trade deficits, the Chinese government enforced deflationary measures and controls on trade. During late 1980 and the beginning of 1981, the Chinese surprised the Japanese by informing them of massive cancellations or suspensions of awarded plant projects, which, as a total, amounted to M 300 billion. This, combined with curbs on durable consumption goods imports, resulted in a decline in Sino-Japanese trade in 1982 for the first time in six years. In this year, Japanese exports to China declined by 31 percent, while its imports registered a meager 1 percent growth. The most severely affected export category was 'machinery and equipment,' which shrank to less than half the 1981 level (Charts 1.1 and 1.2). 1.7 However, as the Chinese economy resumed its brisk expansion, Sino- Japanese trade also expanded rapidly. In the three years up to 1985, Japan's exports grew by 40, 47 and 73 percent, respectively, each year. In the mean- time, the second round of Yen Credit was agreed between the Japanese and Chinese governments in 1984. This loan, amounting to Y 470 billion, was to be supplied during the six-year period starting in 1984 and to follow up the first round of such loans agreed in 1979 which amounted to Y 330 billion in the five years to 1983. There seemed no cloud on the horizon for the Sino- Japanese trade relationship. JETRO's (Japan External Trade Organization) annual white paper on external trade described it as a "honeymoon" in its 1984 issue. 1.8 At the end of 1984 and toward the start of 1985, a "China Boom" hit the Japanese industry. China's economic reforms, particularly the decentra- lization of authority to import, combined with rise in income triggered an explosion in demand for such imports as TVs and motor vehicles. During the two years to 1985, Japan's TV exports to China jumped by 15 times, and motor vehicles expanded by 12 times. Japan's exports to China in 1985, as a whole, grew 2.5 times the size of 1983 levels. Chart 1.1: JAPAN'S EXPORTS TO CHINA (S billion) 13 - ______________________________ 12- 11 10 9- 7- 5- 4- 3- 2- 1977 1978 1979 1900 1901 1982 1983 1984 1985 1986 1987 1988 1989 1990 V /1IRON & S1ML OTHERS Source: Ministry of Finance, Japanese Government. 1.9 Japanese industries, which had been suffering from very slow growth in the domestic economy induced by the second oil crisis and worsening trade friction in the overseas market, saw an invaluable potential outlet for their excess goods in the burgeoning import market in China. For instance, the iron and steel industry, which was experiencing an unprecedented sharp drop in -4- Chart 1.2: JAPAN'S IMPORTS FROM CHINA ($ billion) 13- 12 - 10 9 7- 4- 2- 1977 1978 1979 1960 1981 1962 1963 1984 1985 1966 198? 1988 1989 1990 MINERAkL FUJELSc OTHERS Source: Ministry of Finance, Japanese Government. demand both in Japan and abroad, took to the Chinese market and shipped a quarter to one third of their total exports by cutting their prices. The 'China prices, I as traditionally cheaper prices of steel products for China were called, were set at nearLy 40 percent less than the regular export prices in this period. In 1985, at its peak, the Japanese steel mills directed more than one-tenth of their domestic production to China. Japan's TV manufactur- ers found a much greater opportunity there. In 1985, the Chinese market con- sumed 44 percent of exported Japanese TVs, or one-third of Japan's total pro- duction of TVs that year. To cope with a sudden boom in China, they even had to expand production lines. 1.10 Alarmed by swollen t:rade deficits, falling oil prices and shrinking foreign reserves, the Chinese government began curbing imports in the latter half of 1985. Fixed investment in the state industry was slated to decrease in 1986. In July, the yuan was depreciated. The Chinese were particularly concerned over the huge defic:its with Japan which amounted to 60 percent of its total trade deficits in 1985. To soothe the frustration of the Chinese and to avoid discriminatory controls on Japanese goods, the Japanese sent a trade mission to China and established the Japan China Trade Expansion Coun- cil, an organization to promote expansion of Sino-Japanese trade, in 1986. B. Trade Relations, Post-1985 1.11 The Sino-Japanese trade imbalance reached its peak in 1985, but thereafter it declined much faster than was expected. Later in 1985, there was a drastic realignment of exchange rates of the major currencies which lasted a few years. The Japanese yen, which stood at 238.54 vis-&-vis the US dollar as an average in 1985, began sharp appreciation in November that year. It reached an average level of Y 128.15 per dollar in 1988. Such an unprece- dented change in Japan's exchange rate seriously eroded the Japanese indus- try's international competitive edge, not only against American rivals, but against those counterparts whose currencies were more or less pegged to the US currencies, notably those in the Asian countries. Coupled with the develop- ment of their own industries, these Asian products, as well as American or European products, emerged as substitutes to Japanese imports. 1.12 Japanese business was now forced to change its export strategies toward China. The iron and steel industry was among the first to shift. The collective bargaining between the Japanese steel mills and Chinese customers after 1986 did not proceed smoothly. Faced with an overall drop in demand and worsening business performance since the yen's appreciation, Japanese steel- makers attempted to increase the dollar-denominated export price to China of their products. In the later years, as domestic demand increased rather unex- pectedly, the Japanese became more reluctant to sell cheap to China. After 1986, the export prices of steel to China steadily increased to catch up with world prices. 1.13 A more fundamental change in the business strategy of Japanese industries which emerged after 1986 was a new horizontal division of labor between their factories in Japan and abroad. Instead of sticking to the old principle of exporting from Japan, they shifted the export-oriented production to either consumption markets or offshore export bases in East and Southeast Asia; and the Japanese production facilities were remodeled to produce domes- tic market-oriented products.l/ For these manufacturers, China was no longer a market for excess goods which they had to secure at any cost. 1.14 Such a change in the Japanese business strategy, coupled with China's restraint on domestic investment (1986 and 1989/90), import curbs and the development of its own industry, resulted in setbacks in Japan's exports to China after 1986. By 1990, Japan's exports had shrunk to almost half the peak of 1985. But Japanese imports from China accelerated in the second half of the decade, another reflection of the changed Japanese strategy and development of the Chinese industry. 1.15 Table 1.2 compares the annual average growth rates of major trade items in the periods preceding and after 1985. As for exports, almost all the items specified in the table faced declines in export values (in current US dollars) from 1985 to 1989. There were only a few exceptions where export values rose, but none of them exerted a marked influence on overall growth. The most significant deceleration occurred in items such as motor vehicles and TV receivers. In 1988, exports of these items picked up briefly, only to drop 11 More detailed discussion on this account will be made in the next chap- ter. - 6 - Table 1.2: AVERAGE ANNUAL RATES OF GROWTH (comparison before and after 1985) Japan's Exports to China 1977/85 (Z) 1985(89 (Z) Grand Total 26.2 -9.1 Foodstuff 104.9 5.9 Crude materials & fuels 28.9 -4.0 Light-industry products 17.7 3.8 Textiles 11.4 4.1 Others 33.2 3.4 Heavy-industry products 27.1 -10.5 Chemicals 9.6 2.5 Metal products 15.6 -7.9 Iron & steel 15.2 -7.6 Nonferrous metals 19.5 -16.0 Others 20.8 -5.8 Machinery equipments 54.6 -13.6 Nonelectric machinery 51.4 -6.1 Electric machinery 81.9 -7.6 TV receivers 127.4 -28.3 Transport equipment 45.4 -36.0 Motor vehicles 53.3 -42.4 Vessels 27.9 -40.6 Others 49.6 -19.5 Source: Tsusho hakusho, (_hite Paper on International Trade), MITI (yearly issues from 1978 to 1990). again in 1989 with the introduction of additional import restraint measures such as a special consumption. tax. 1.16 Electric machinery other than TVs, however, registered a gain between 1985 and 1989. This is partly because VCRs fared well, even after the color TV boom was dampened, and also because exports of advanced communication equipment such as electronic teLephone exchanges increased due to moderniza- tion of China's communication system. Electronic components such as semicon- ductors also saw a sharp increase, reflecting development of China's electro- nics industry. As will be shown later, Japan's imports of electric machinery started to increase in this period. This simultaneous rise in electronic parts exports and electric machinery imports reflects rapid expansion of tech- nical tie-ups, consignment processing and direct investment of the Japanese electric machinery industry in China. 1.17 The nonelectric machinery or general machinery, as a whole, has suffered a setback since 1985. But the degree of decline was much smaller than that of motor vehicles or TV receivers. This category comprises a wide range of industrial machinery. Many of the machines in this group, as well as some electric machinery, are shipped as an integral part of large-scale indus- - 7 - trial plants or utilities often under a long-term credit agreement. The ship- ment of equipment follows a contract and takes a few years to complete. Therefore, although the Chinese government awarded fewer contracts after 1985, actual shipments remained brisk at least for a brief period, reflecting the earlier volume of activity.2/ 1.18 To an extent, the exports of general machinery were buoyed by the transplanting of Japanese manufacturing industry to China and the associated purchases of Japanese-made production facilities. As is discussed in Chapter II, Japanese manufacturers' direct investment in China picked up in 1987, and amounted to about $200 million in both 1988 and 1989. Much of the Japanese equity was spent on import of production equipment. This, as well as deferred shipment of earlier plant contracts, supported the relatively stable shipment of general machinery compared with other export items such as transport equip- ment, despite sharp appreciation of the yen and China's import restraints.3/ 1.19 Iron and steel exports also declined in part because of rising prices, but also because the construction boom in China was repeatedly checked in the second half of the 1980s, and also because China's domestic production picked up. Between 1985 and 1989, Japan's steel exports to China declined to one third in volume although, in dollar value, the drop is much smaller thanks to the rise in export prices. 1.20 The export items which scored small but positive growth during this period were chemicals, textiles and other light-industry products. These items, when combined, comprise about 20 percent of Japan's exports to China and include: synthetic fiber, yarns, chemical dyes, and plastics of a higher quality which are not easily available in China. Much of them seem to have been used for producing such fast-growing consignment processing products as garments and electronic equipment and also for offshore production of Japanese subsidiaries. 1.21 In sharp contrast to the performance of exports, many of Japan's imports saw an acceleration of growth after 1985, specifically, food, textiles and other manufactured goods (Table 1.3). Raw materials such as textile mate- rials experienced little change, while mineral fuels, with the exception of coal, was the only category which scored negative growth between 1985 and 1989. Crude oil was the main culprit, as well as petroleum products. 1.22 Oil and coal are two import items which are dealt with in the frame- work of the Japan-China Long-term Trade Protocol. Within the agreed-upon target range of volume, an annual import volume is decided and prices are also set for each quarter, reflecting world market prices. Since China has estab- lished a number of petrochemical plants in recent years, it is facing short- ages of oil in the domestic market and oil imports are increasing. However, China has honored its agreement and the annual import volume target, although its share of Japan's total petroleum imports is falling. The decline in 2/ Yokoi reported in his article in The China Quarterly (Dec. 1990) that such time lags were one to two years. (Yokoi, 1990). 3/ Effects of production equipment purchase of Japanese subsidiaries abroad on Japan's external trade are estimated in Sumitomo (1989). - 8 - Table 1.3: AVERAGE ANNUAL RATES OF GROWTH (comparison before and after 1985) Japan's Imports to China 1977-85 (X) 1985-89 (M) Grand total 19.6 14.5 Food & food products 17.8 20.2 Raw materials 14.4 13.1 Textile materials 13.4 8.2 Metal ores & scrap 5.2 69.1 Others 15.6 14.3 Mineral fuels 20.1 -8.3 Coal 32.1 3.4 Crude & partly refined oil 16.4 -8.6 Petroleum products 66.5 -12.8 Manufactured goods 22.3 37.2 Chemicals 25.7 23.8 Machinery & equipments n.a. n.a. Textile 22.9 35.8 Apparel 28.4 48.0 Yarns, fabrics, etc. 19.2 20.5 Metal products n.a. n.a. Others 18.5 26.8 Nontextile manufactured gocids 21.4 39.1 Source: "The White Paper on International Trade," MITI (yearly issues from 1978 to 1990). dollar-value imports of oil, therefore, simply reflected the change in world oil prices, although there were marginal imports of spot oil. 1.23 A similar system works with fuel coal and coking coal imports from China. However, unlike crude oil which comes from only one oil well, coal production relies on a number oE coal mines and is vulnerable to the disloca- tion introduced by economic reforms. This, together with rising domestic demand, has meant that China's coal exports to Japan tend to fall short of the target volume agreed upon. 1.24 Imports of manufactured goods, which includes such a wide range of industrial products as chemicals, machinery, textile products, metal products and sundry goods, was one of the fastest growing sectors in pre-1985 years. During the eight years up to 1985, these imports grew to five times the amount in 1977, averaging an annual growth rate of 22 percent. This was faster than the expansion rates of imports of crude oil, raw materials, or food. However, manufactured goods comprised rather a small share of Japan's imports from China. They accounted for only 21 percent in 1977 and even in 1985 they rep- resented only a quarter of imported goods. -9- 1.25 During the years between 1985 and 1989, manufactured goods imports further accelerated expansion to a yearly rate of 37 percent. And in 1989, the share of these products reached 51 percent of all imports. Textile prod- ucts are China's most important manufactured goods for export to Japan. How- ever, the composition within textile goods has changed tremendously over the last few years. During the period prior to 1985, apparel comprised a minor portion of these and other textile goods such as cotton and silk fabrics and yarns; in other words, less value-added items accounted for a larger part of textile exports to Japan. But between 1985 and 1989, apparel export growth accelerated to 48 percent per year, while fabrics and yarns stayed at around 20 percent growth per year. As a result, apparel now account for more than two-thirds of all textile products. 1.26 Such a spectacular success of apparel exports to Japan cannot be explained without referring to consignment processing. When Japan started importing clothing from China more than 20 years ago, the Chinese products were simply imported as produced in China. Around 1971, consignment proces- sitig was first tried but, due to a rise in synthetic fiber prices after the first oil crisis and also to complicated and time-consuming procedures to clear Chinese customs, it turned out to be not a very profitable business. However, since the Chinese government facilitated consignment processing export and compensation trade in 1979, the Japanese were increasingly engaged in this type of apparel imports; and the yen's appreciation after 1985 defi- nitely accelerated this trend. 1.27 However, because consignment processing is still a rather compli- cated and risky business compared to domestic processing, low value-added clothing is not always profitable this way. To make the products more value- added, Japanese importers often bring in advanced materials which are not available in China, either from Japan or third countries. They are also selective with the Chinese manufacturers. They often have specific producers in Beijing, Shanghai, Tianjin or Jiangsu province, where the textile industry is traditionally developed, and will sometimes provide them with technical support. With an accumulation of experience in the course of development of the Chinese industry, the quality of such products is improving. 1.28 A similar arrangement is also increasingly employed in other areas of manufacturing. With sundry goods such as shoes, bags, wooden products, or simple electronic goods, Japanese buyers provide Chinese manufacturers with materials and parts, up-to-date information on Japan's market, as well as technical advice. However, when it comes to more technically advanced prod- ucts typically in high-tech machinery, consignment processing is not suitable. As we will see in the next chapter, in imports of electric machinery, Japanese joint ventures play a much more important role than in apparel or other light- industry products. 1.29 The import of machinery and equipment still accounts for much less than one tenth of manufactured goods imports, but its recent yearly growth by far outpaces that of apparel. It expanded by almost nine times in the three years between 1986 and 1989. This means machinery imports more than doubled each year. Two thirds of machinery imports are now comprised of electric machinery. - 10 - C. Decline in Japan's Share 1.30 In the 12 years between 1977 and 1989,4/ Japan's trade with China increased 5.6 times, with exports expanding 4.4 times and imports 7.2 times. But in the same period, China's external trade as a whole registered an expan- sion of 7.5 times; exports grew by 6.9 times and imports by 8.2 times. It is obvious that Japan's share as China's trade partner fell over the period. Japan, which accounted for 22 percent of China's total exports in 1981, repre- sented only 16 percent in 1989. The similar ratios concerning Chinese imports from Japan dropped from 29 percent to 18 percent in this period. 1.31 A major reason for Japan's decline as China's trade partner is Hong Kong's emergence as the most important counterpart for China's external trade. Hong Kong now accounts for 42 percent of exports and 21 percent of imports as China's customer for trade. However, Hong Kong mainly works as an intermedi- ary and much of the merchandise Hong Kong handles are reexported to third countries.5/ But Japan's share in 1989 are smaller than in 1981 even if Hong Kong is excluded. The decline is more conspicuous in Japan's exports to China. 1.32 Japan's share in OECD's exports to China stood at 47 percent in 1977. But as the United States expanded its share in the early 1980s after its diplomatic normalization with China in 1979, Japan's share declined to 33 percent in 1982. In the subsequent years, Japan expanded its share, peak- ing out at 40 percent in 1985, and losing ground again to reach 23 percent in 1989. In imports, Japan somehow maintained its share at 45 percent or higher until 1985, despite the United States' gradual emergence as a major importer of Chinese goods. But in the following years, its share declined much fur- ther. Japan's decline took place in virtually all of the product categories. However, the decline is particularly conspicuous with respect to 1985, less so if 1978 is taken as the benchmark.6/ 1.33 From the above observation, we may be able to speculate as follows, although further detailed analysis is needed to say for sure: 4/ Although preliminary data on 1990 were recently released from Japan's Ministry of Finance, more complete information has not yet become avail- able to make a consistent commodity-by-commodity analysis. Therefore, most of the analysis in l-his chapter and the following chapter deals with data only up to 1989. The 1990 figures are discussed separately later. 5/ In 1988, Hong Kong imporl:ed HK$156 billion from China and reexported HK$132 billion, of which HK$11 billion went to Japan (OECF, 1990). 6/ China's customs clearance-based trade statistics are available from 1982 by country and by commodity. But 1982 figures by commodity do not add up to totals. Therefore, 1983 data are shown here instead. Data for 1978 are based on Institute oi- Developing Economies' (IDE) own estimates. Since this is compiled from UN and OECD data and does not include China's trade with communist countries, Japan's shares tend to be overstated. Import total is 4 percent larger than noncommodity-disaggregated data China has published. Export total by 3 percent. - II - (a) Textiles and chemicals are in a long-term down trend because Japan is losing the competitive edge in these products, particularly in the lower end of such products. (b) In most machinery products, the decline in Japan's shares is largely in reaction to the abnormally high level reached in 1985. The share of general industrial machinery dropped from 62 percent in 1978 to 31 percent in 1989. (c) The falling trend in industrial machinery coincides with a drop in Japan's share in plant and technology export to China. This reflects Japan's slide in competitiveness and/or China's preference for other countries as a source of such imports. 1.34 In the case of China's exports to Japan, most of the commodities did not experience drop in shares. This is particularly so if China's exports to Hong Kong are excluded. The exception is mineral fuels. Since energy accounted for a substantial portion of Japan's imports from China, this has pulled down Japan's overall share in China's exports. If energy exports are discounted and also Hong Kong is excluded, Japan's share in China's exports haave been increasing (Charts 1.3 and 1.4). Chart 1.3: JAPAN'S SHARE IN CHINA'S EXPORTS 31- 30- 29 28 27- EXCLUDING MINERAL FUELS 26 - 25 23- 22- 21 20 19 17- L ~~~~E PORTS 14 13 12 I 978 1983 1985 1988 1989 Source: GAC, Chinese Government. - 12 - Chart 1.4: JAPAN'S SHARE IN CHINA'S ENERGY EXPORTS 90 - so X 70- X 60- 50- 40- 30- 20- 1978 19e3 1985 1988 1989 Source: GAC, Chinese Governmient. 1.35 Political turmoil and uncertainties triggered by the incident of June 4 (1989) dampened Sino-Japanese trade, particularly until the first half of 1990. Japan's exports to China in 1990 fell by 28 percent from 1989. This was the largest drop since 1935. Almost everything decreased. But the most serious decline was in iron and steel. Because of severe financial tighten- ing, the opening of a Letter of Credit was delayed by several months, thus blocking shipment of Japanese steel in the first few months of 1990. 1.36 In contrast to Japan's exports, its overall imports from China scored a 24 percent growth last year. Crude oil and coal imports increased both in volumes and prices. Food and raw material imports declined. In the case of cotton, due to a fear of reliability of supply and quality, importers moved to other countries. Manufactured goods slowed its pace of increase. Apparel import kept on rising, but it grew much slower. However, machinery imports increased by a hefty 51 percent. It seems that the Chinese government, threatened with the prospect of a severe shortage of foreign exchange after the June 4 incident, acted forcefully to check imports and to push exports. This lasted until the first half of 1990 and a more normal pattern had reemerged by early 1991. - 13 - D. Future Prospects 1.37 The deep disappointment and pessimism which prevailed among Japanese businesses after the June 4 incident was gradually replaced with a more sober wait-and-see attitude toward China in 1990. And more recently in 1991, even a certain reserved optimism is surfacing with resumption of the third round of Yen Credit amounting to Y 810 billion and talks about the Ex-Im Bank's third natural resources loan, although it is a far cry from the euphoria which pre- vailed before June 4. There are several factors which make Japanese busi- nesses engaged in trade with China somewhat optimistic about the near future. They are as follows: (a) For Japanese exporters to China: (i) The Chinese economy has bottomed out. And although the econo- mic adjustment policy is going to be kept unchanged for some more time, economic restraint is being loosened. (ii) The Eighth Five-Year Plan is under implementation. (iii) The disbursement of the Yen Credit will soon be at full steam. (iv) Japan Ex-Im Bank's natural resource loan will shortly be final- ized. (v) The rate for Japanese government's export insurance for China was lowered to the pre-incident levels. (vi) Other international or bilateral lending will be fully resumed during 1991192. (b) For Japanese importers from China: (i) The depreciation of the Yuan last November and again in May will boost the price competitiveness of Chinese products. (ii) Agricultural production has recovered. (iii) Streamlining of trade companies and local authorities will reduce quality and delivery problems. (iv) The easing of certain resource and infrastructure bottlenecks in China's domestic economy will improve the supply of a number of products. (v) Through development of consignment processing and joint-venture manufacturing, the quality of Chinese products is continuing to improve. 1L.38 However, at the same time, it must be noted that the rapid expansion of imports over the past five years has aggravated old problems afflicting China's exports. They are: belated delivery, poor quality, cancellation of contracts and alteration of contracts. Some Japanese importers were reported to have abandoned China and shifted their supply source to other Asian coun- - 14 - tries which they think are more reliable. Success at resolving these diffi- culties will have an important bearing on the growth of China's trade. 1.39 Turning to Japan's exports, Chart 1.5 shows the composition of Japan's iron and steel exports to China. It is quite obvious that a group consisting of iron rod, shapes and heavy plates fluctuates in accordance with the cyclical expansion of the Chinese economy. The products in this group are mostly used for construction and are rather easy to manufacture. On the other hand, a group which is made oi thinner sheet, coil and tin-plated or galva- nized sheet shows a gradual but steady increase. These products kept on grow- ing, even in the last few years. Between 1985 and 1988, China's overall steel imports decreased by 11 million tons with steel imports from Japan declining by some 4 million tons; however, Japan's share has recovered from 46 percent to 54 percent. Chart 1.5: JAPAN'S METAL EXPORTS TO CHINA fail 3.2-2 3- 2.84- 2.6- 2.4- 2.2- 2 -OTHER METALS 1.8- NON-FERROUS METALS 1.6 - ATUBES & PIPES 1.4- 1.40 At the same time, China's domestic production increaseROD, SHAPES 1.2 ~~~~~~~~~~~~~~~& HEAVY PLATES million tos,amot fsetigt:e rp n mors.I Cin,SHEET COIL, 0.8ntry. They mainly depend on scrap iron and find it easiertoadjusTIN-PLATED 0.6 - ~~~~~~~~~~~~~~& GALVANIZED 0.4 - ~~~~~~~~~~~~~~~SHEETS 0.2 1977 1978 97 198018192 1983 1984 1985 1906 1907 1988 1989 Source: Ministry of Finance, Japanese Government. 1.40 At the same time, Chinat's domestic production increased by about 10 million tons, almost offsetting t-he drop in imports. In China, some 40 per- cent of steel production comes from smaller-scale mills scattered around the country. They mainly depend on scrap iron and find it easier to adjust to the sudden surge in demand. Much of construction-related steel can be supplied by them. However, very recently, several large-scale mills are scheduled to expand operation. Therefore, in the near future, the shortage of more advanced steel products will be lessened. As the Chinese economy returns to its more normal growth, some expansion of Japanese steel exports to China can - 15 - be expected, but the mainstay will increasingly be made up of technically advanced products. 1.41 Japan's share in China's plant and technology imports dropped to its lowest level in the past couple of years. However, of late, Japanese export- ers are more optimistic because they are regaining price competitiveness, and partly because the third round of Yen Credit is going to take its full effect in the coming years. In the case of the second round of Yen Credit, some 60 percent of the related equipment was estimated to have been shipped from Japan at the beginning, but in the later years, that ratio dropped to less than 30 percent as the local procurement expanded and Japan lost competitive- ness. Moreover, the hopes are that the reduced burden on China's foreign reserves will stimulate the import of industrial plants. 1.42 Industrial equipment exports are also expected to grow because, after a brief pause following the Tiananmen incident, some Japanese manufac- turers are considering building factories in China.7/ The scale of facto- ries to be transplanted will probably become larger and more technologically advanced, thus making their dependence on Japanese machinery larger. While production equipment exports grow in relation to new investments or expansion of existing facilities, the supply of parts and materials for production increases are related to the accumulated amount of investment, hence such exports will grow much faster than the outflow of direct foreign investments. Of course, more and more low-tech parts and materials will be supplied locally. But as the more advanced products are increasingly made in China, dependence on Japanese parts and materials will grow. In short, the most promising items in Japanese exports to China are more advanced industrial equipment and materials. 1.43 Natural resources such as raw materials, food and mineral fuels still account for half of Japan's imports from China. Their prospects are largely decided by the speed of China's industrial development. With 1.1 billion people, China cannot ultimately be an exporter of natural resources. Its comparative advantage lies, after all, in processing products using human resources.8/ 1.44 As indicated, crude oil availability has fallen behind expectations. The current focus is on the prospects of Tarim Basin development. A big chunk of Japan Ex-Im Bank's third resource-oriented bank loan is likely to be directed to the development of the oilfield in this region. However, a lot of difficulty is anticipated. For example, the oil layer will be very deep and much will be taken out in gas. Since the Tarim Basin is located in the far west, transportation will be difficult and costly. It is considered unlikely that Japan can import oil or gas from there by the end of this century.9/ '/ See the next chapter on direct investment. 8/ China is likely to become a net importer of oil later in this decade. (see Chapter III). But in the recently renewed Sino-Japanese Long-term Trade Protocol it was agreed that the target volume range for China's oil export to Japan was to be maintained without change. 9/ The Japan Bond Research Institute, 1991. - 16 - In the meantime, this project will rather contribute to increasing Japanese exports of steel pipe and excavation equipments. 1.45 In terms of energy resources, coal can be a more promising export product to Japan.10/ But the quality of Chinese coal is often a source of complaint to Japanese customers. Much more attention will have to be paid to quality control by Chinese suppliers in order to make Japan more willing to import. 1.46 Japan's imports of manufactured goods will, no doubt, grow rapidly over the foreseeable future. Thie most promising items are apparel and machin- ery. Some processed foods such Ras pickled vegetables also have a chance to grow. But the Japanese, as culstomers, are very strict about the quality of the product they purchase. Often the quality level required for the JaparLese market is higher than for other markets. Although it is recognized that the quality of Chinese products has much improved lately, it is generally far from being satisfactory. This results not only from inadequate production technol- ogy, but often from poor packaging or handling during transport. Some of the Japanese buyers established service firms in Hong Kong, which are solely engaged in checking and examining the products they purchase from China and selecting only those which can. be shipped onward to Japan. This naturally adds costs to imports, and erodes competitiveness of Chinese products. Improvements in China's infrastructure such as transport is also indispensable for further development of the Chlinese manufacturing industry, not to mention development of manufacturing skills themselves. 10/ According to the renewed Sino-Japanese Long-term Trade Protocol, frame- work for coal export to Japan was expanded. The range for coking coal is now between 2.5 and 3.5 mil:Lion metric tons instead of 2.3 to 2.5 million metric tons. But the range for fuel oil was also expanded marginally. - 17 - II. DIRECT INVESTMENT 2.1 The volume and content of Japan's direct investment has been an object of Chinese complaint throughout the last decade. The Chinese expected the Japanese to be a major investor in China to the same extent as its impor- tance in trade. They wanted Japan's direct foreign investment (DFI) to con- tribute to the development of Chinese industry through transfer of high-tech and state-of-the-art equipment as well as providing foreign currencies. But for the Japanese, China was a risky market to make a large-scale, capital- intensive investment because of uncertainties regarding economic policy and an underdeveloped legal system, not to mention poor infrastructure and shortage of foreign currencies. A big chunk of Japan's DFI in China was directed towards nonmanufacturing sectors, and the average size of each investment was small. However, a sign of change seems to have surfaced very recently. 2.2 This chapter reviews the development of Japan's DFI in China and pciints out its characteristics. Special attention is given to the unique role of small firms. Through analysis of past trends, it attempts to delineate the future course of investment. It consists of five sections: overview; char- acteristics of Japan's DFI in China; impact on trade; role played by small firms; the most recent development; and future prospects. Some policy recom- mendations are given in the final section. A. Overview 2.3 Japanese direct investment to China has been motivated by its iimmense market potential. But, so far, the realized investment falls short of expectations of both sides. According to statistics released by China, the accumulated amount of Japanese direct investment in China, on a commitment basis, stood at $2.64 billion in 951 projects as of end-1989. This represents 8 percent of China's direct investment inflow from abroad. Japan's Ministry of Finance (MOF) also publishes figures on Japan's direct foreign investment (DFI).l/ These data, based on approval or notification by the Ministry, are compiled in fiscal years which run to the end of March. The accumulated amount of approval/notification of Japanese DFI in China as of end-March 1990 came to $2.47 billion, involving 694 projects. This accounts for only 1 per- cent of Japan's total DFI, or 6 percent of such investment in Asia. As a matter of fact, China comprises 4 percent of Japan's total international trade, or 13 percent in its trade with Asian countries in 1989. Moreover, the Japanese manufacturing investment in China accounts for less than 4 percent of its investment in Asia so far. 2.4 In the years following the adoption of the Joint-Venture Law in 1979 by China's People's Congress, the majority of Japanese firms took a wait-and- see attitude. Most of them thought it was premature to go because relevant laws were yet to be written. But there were a few firms which went ahead. The very first joint venture between Chinese and Japanese businesses was set up in Tianjin early in 1981 by the China Medical Industry Corporation and Japan's major pharmaceutical firm, Otsuka Pharmaceutical Co., Ltd. on a 50-50 I/ A discussion concerning the definition of DFI in Japanese statistics is given in the annex. - 18 - partnership. Capitalized at Y 22 million, the firm started production of an injection solution in 1984. The initial move to this venture was taken by the Chinese side. One third of the product was exported. Three fourths of the material was supplied domestically. The operation turned out to be fairly successful. 2.5 Shortly after Otsuka, Hitachi followed suit and established a TV manufacturing venture with Fujian Industrial Investment Corporation (10 per- cent) and Fujian Electronics Import and Export Company (40 percent) with a registered capital of Y 3.6 million and 224 employees. This was also proposed by the Chinese, when Fujian Province sent a mission to Japan in 1979. After the first four years of gradual expansion of production and the following two years of difficulty because of the change in exchange rates, the firm has entered a period of growth since 1986. It gradually increased export of the products. 2.6 Another major Japanese business which started a joint venture with China in 1981 was Orient Leasing.2/ This is a financial leasing joint ven- ture, headquartered in Beijing, with the Chinese taking 50 percent of the equity. In this year, several olther ventures were started by smaller Japanese firms, including two cooperative ventures for hotel operations. According to Japan's MOF data on DFI, in fiscal 1980 which ended in March 1981, Japan's DFI in China numbered six with $12 million, and in fiscal 1981 it grew to $26 mil- lion, involving nine projects. 2.7 However, in the follow:ing two years of 1982 and 1983, Japan's DFI in China stagnated instead of continuing to grow. This reflects the turnaround of China's economic policy. Economic reforms saw a setback in the second half of 1980. Although in 1982 economic reform was resumed and direct investment was given official support during the Communist Party Congress in September, DFI was slow to recover because it took about a year or more to complete the negotiation and procedure and to set up a joint venture. 2.8 It is noteworthy that, in these early years of Japanese DFI in China, large-scale and powerful companies adopted a low profile. They did not initiate ventures but reacted to suggestions or persuasion by the Chinese. In some cases, overseas Chinese played an important role in the process and stayed on as a co-investor when the venture was started. Initially these joint ventures put little emphasis on exports. It was simply a measure of earning foreign currencies needed for importing materials. One exception of a joint venture aimed at exporting its product to third countries in this period was Rikio, a small manufacturer specializing in workboots. This company had adopted a unique policy of transferring all of its production out of Japan to Korea and Taiwan. It had established its own know-how in management of over- seas production and retained a powerful distribution network in Japan for its products. 2/ Currently, Orix Corporation. - 19 - 2.'9 By the middle of 1983, Japanese joint ventures numbered nine, repre- senting 7 percent of all such ventures in China.3/ It was only later that year that the Japanese started seriously considering DFI in China when more detailed rules concerning implementation of foreign joint ventures were made pulblic. According to Japan's DFI data compiled by MOF, in fiscal 1984, Japanese investment in China jumped $114 million from the previous year's $3 million (Chart 2.1). The number of projects registered in this year, 66, was more than twice total outlay since 1979. Chart 2.1: JAPAN'S DIRECT INVESTMENT IN CHINA ($ billion) 1.2- 1.1 0.9 a 0.7- 0.8 0.5 0.4- 0.3 0.2- 0.1 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Note: Dotted line between 1986 and 1988 represents the pattern when a giant oil project in 1987 is excluded. Source: Ministry of Finance, the Japanese government. 2.10 In 1984, services dominated Japan's DFI in China. It accounted for 74 percent of the amount of investment and 24 percent of the number of proj- ects. Leasing and the hotel industry were the major components of the service industry. This was a reflection of China's lack of foreign exchange and its policy toward joint ventures and domestic companies concerning foreign curren- cies. These leasing companies could easily find customers among Chinese firms, as well as joint ventures which had difficulty in borrowing foreign currency to finance production facilities and materials. Most of the firms, 3/ As quoted in JETRO's White Paper on Foreign Investment, 1984 edition, p. 136. - 20 - domestic or foreign, had to acquire foreign currencies by themselves. Safe and quick return was expected. 2.11 A similar situation can be found behind the increase of hotel ven- tures. While newly formed manufacturing ventures were struggling to earn hard-to-get foreign currencies, the hotel industry could largely avoid this problem because its customers, mostly foreign guests, paid in foreign curren- cies. These hotels usually ran a surplus in foreign currency balance and sometimes lent it to other joint ventures. They did not have difficulty in finding enough customers because the opening Chinese market attracted increas- ing numbers of foreign businessmen and their Chinese rivals were not fully prepared for this challenge in terms of accommodations or services. Although Japan's hotel industry was increasingly interested in overseas investment by then, it took a few more years until it started DFI in large scale in the rest of the world. 2.12 By mid-1985, according to Chinese statistics,4/ the Sino-Japanese joint ventures numbered 102 arLd Japan ranked second only to Hong Kong as the home country. But the Chinese remained unsatisfied. Their complaint was not simply based on the fact that Japan's 102 ventures accounted for only 6 per- cent of China's joint ventures, but rather on their argument that Japanese business was more interested in easy-to-earn service and other nonmanufactur- ing industry and reluctant to transfer technology through opening production factories. 2.13 The service industry dominated Japan's investment until 1987. In those years, the amount invested in the service sector alone accounted for two to five times the size of DFI in all the manufacturing sectors. Real estate business became active too. Here, again, the target was foreigners. Residen- tial buildings, industrial sites, golf courses and tennis courts were con- structed to serve them. Major players in this field were large-scale Japanese companies such as banks, leasing, securities firms, construction firms and general trading companies. In most cases, they invested jointly with other Japanese firms to share the risk because the size of the investment was rela- tively large. For some, this process also served as a means of gauging the prospects for manufacturing investment. 2.14 As for the manufacturing industry, large-scale firms were slow to invest. An unstable economic poLicy and the lack of legal transparency were major problems. Chinese restrictions on foreign exchange was also pointed out as a major obstacle. And, particularly for big businesses, the difficulty encountered in obtaining basic data and sometimes unavailability of fundamen- tal figures for feasibility studies of projects was considered to hamper their lengthy in-firm procedures to a great extent. Such problems may have affected more negatively on Japanese big business than their foreign counterparts because Japanese decisions were made "from bottom to top" rather than "from top to bottom" processes. 2.15 However, it needs to be mentioned that the bigger Japanese manufac- turing firms, which had potential to invest in China, were preoccupied with 4/ As quoted in JETRO's White Paper on Foreign Investment, 1985 edition, p. 145. - 21 - their most important market, the United States. In those years, trade fric- tions with America forced these companies to shift their export production facilities to the United States. They mobilized their full strength to this unprecedented venture. Until appreciation of the Japanese yen weakened the competitiveness of their products in 1986, production costs were not their major concern. It was only later than 1986 that Asia drew their serious attention as a destination for their transplants. 2.16 In this period, manufacturing investment in China was mostly con- ducted by smaller Japanese businesses, at least in terms of numbers of proj- ects. Although accurate figures are unavailable, probably no less than 70 percent of manufacturing DFI projects were undertaken by small- and medium- sized Japanese corporations.5/ These companies almost monopolized textile industry investment. They also enjoyed a dominant role in many of the sectors of manufacturing, such as wood and paper products, sundry goods, and chemicals and plastics. These were all labor-intensive industries and smaller firms had suffered a severe shortage of labor force in Japan. 2.17 In 1986, Japanese direct investment to the rest of the world increased sharply. The Japanese data, based on MOF, registered a hefty 62 percent rise in DFI in the Asian countries in this fiscal year. But the Major portion went to Hong Kong, Korea, Singapore and Taiwan. As for manufac- turing investment, Taiwan and Korea enjoyed the largest part of the surge in incoming investment. These countries were the traditional locations of Japanese offshore production and were considered as the easiest and most reli- able destinations in Asia. Some companies simply expanded existing facili- ties. But later, as these countries faced serious trade disputes with the United States and their currencies were forced to appreciate vis-&-vis the US dollar, Japanese manufacturers began exploring other Asian countries (Chart 2.2). It was only then, in 1987, Japanese DFI in manufacturing started to show a distinctive pattern of growth in China. 2.18 Japanese data show an extremely big jump in fiscal 1987 (Chart 2.1). But this was due to an extraordinarily large oil-exploring project which amounted to nearly $1 billion. If this project was excluded, the total amount of DFI would have scored only 3 percent growth. This was mainly because the rest of the nonmanufacturing sector did not show much increase. But manufac- turing DFI marked a sharp increase this year.61 It grew by 53 percent in terms of numbers and tripled in amount compared with the preceding fiscal year (Chart 2.3). But it is interesting to note that China's share in Japan's total DFI in Asia saw a decline in this year in terms of number of DFI. It dropped to 7.5 percent in fiscal 1987 from the previous year's 10.4 percent. 5/ Estimates made for 1985 and 1986. Here, the definitions of small and medium-sized companies follow those given by Japan's Medium and Small Enterprises Agency. Full accounts will be given in Section D. 6/ This is also due to China's DFI policy which favors manufacturing invest- ments. In 1986, the Provision of the State Council of the People's Republic of China for the Encouragement of Foreign Investment was enacted. This gave incentives only to productive investment, particu- larly to export-oriented or high-tech DFI. For more detail, see the World Bank (1990). - 22 - Chart 2.2: JAPAN'S MANUFACTURING DFI IN ASIA ($ billion) 2.4 - _ _ _ _ _ _ _ _ _ 2.2- 2- 1,8 1.4 - NDONESIA, THi] IA QLND, 1.2 - MALA~YSIA,~ PHIL PPINES 1 - / A ND SINGAEPORE 0.6 . - - -- -4 I ~~~~~~~~~::~OREA , TAI]:WAN 0.4 - \ND HONS KONG 0.2- O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I 1981/82 83/84 1985 1986 1967 1988 1969 Source: Ministry of Finance, the Japanese Government. In manufacturing DFI alone, it fell to 7.3 percent. This is less than half of its peak of 15.8 percent marked just a couple of years ago. In amount of DFI, China's share jumped sharply in this year because of the oil project. But if it was excluded, DFI to China accounted for only 6 percent of Japan's DFI to Asia. 2.19 Such a decline of China's relative importance in Japan's direct investment in Asia was a reflection of change in business strategy of Japanese industry. In 1987, Japanese corapanies turned their attention increasingly to Southeast Asian countries. It became evident that the drastic realignment of major currencies was to hold. The Japanese economy had overcome the initial shock of the yen's appreciation.. A booming stock market and soaring land prices improved the financial position of Japanese business. They went to such countries as Thailand, Malaysia and Singapore, where stable political and labor situations were expected. And in countries other than Singapore, with a cheap and ample labor force, the labor-intensive process of production could be transferred not only from Japan but also from Korea and Hong Kong. Developing Southeast Asian countries attracted related nonmanufacturing busi- nesses such as transport, hotel and commerce, as well as smaller manufacturers of parts and materials. China had similar appeal to such investors, too. But it did not enjoy priority because bureaucratic procedures in China were more - 23 - Chart 2.3: JAPAN'S DFI IN CHINA (in manufacturing and nonmanufacturing) ($ million) 240 - 220 - 200- 160 140- 120- =_NONMANUFACTUR ING 100 so 60 40- 20- MUFACTUR ING 1979 1980 1981 1 982 1983 1984 1985 1986 19e7 1988 1969 Note: Nonmanufacturing in 1987 excludes the giant oil project which amounted to $993 million. Source: Ministry of Finance; the Japanese Government. time-consuming.71 And for some, particularly smaller firms lacking in poli- tical clout, China's difficult investment climate was increasingly perceived as a matter of concern despite the attractiveness of an abundant labor force and the potential of China's huge domestic market. 2.20 The Chinese government enhanced the attractiveness of its DFI policy in 1988. The Secretary General, Mr. Zhao, disclosed his economic development strategy for the coastal area early in the year, and coastal economic open zones were expanded. Localization of authority regarding DFI was also extended. In August 1988, Japan's then-prime minister, Mr. Takeshita, visited China and promised the third Yen Credit. At the same time, an investment pro- tection treaty which guaranteed an equal treatment of Japanese ventures as Chinese ventures was concluded between the two countries. Such moves seem to 7/ A survey conducted in late 1989 showed the majority of the firms surveyed spent more than a year for negotiation for setting up a joint venture (Japan-China Association on Economy and Trade, 1990). - 24 - have given the kind of assurance capital-intensive investment awaited. It was in 1988 that Japan's big business started large-scale investment in China, one after another. In September, Nisshin Oil Mills Ltd. signed to build a M 5 billion oil mill in Dalian. In the same month, Matsushita Electric disclosed a plan for a TV tube joint venture in Beijing. In fiscal 1988, Japan's sta- tistics reported a large gain in manufacturing DFI in China, while nonmanufac- turing investment dropped ev(en after the giant oil project of the previous year was discounted. Such a trend continued into the first half of 1989. But the June 4 incident interrup:ed this upsurge.8/ B. Characteristics of Japan's DFI in China 2.21 Compared with other investing countries, Japan's DFI in China has a few distinct features. Table 2.1 is a sectoral breakdown of the venture3 listed in MRI statistics.91 The Japanese ventures differ in many ways from those of the United States and other countries.10/ Firstly, the Japanese invested a much smaller proportion in manufacturing. Out of 466 cases, only 337 or 66 percent were directed to production, compared with 83 percent by the United States and about 73 percent by other countries. Compared with the United States, only a few sectors of manufacturing industry attracted a larger proportion of Japanese investors; namely, textiles and garments, wood and fur- niture, and precision machinery. Except for precision machinery, the share of ventures in the machinery indlustry is much lower than that of American firms. Chemicals, cement and ceramics also drew much less Japanese investment than from the United States. On the other hand, the service industry, real estate, commerce and construction were the sectors where a larger share of Japanese investment was made compared with the United States. In terms of sectoral composition of DFI in China, Japan and the United States stand at the extremes and the other countries as a group fall in the middle. 2.22 In the Japanese government's data on DFI in China, 567 cases are reported as the total number of projects registered with the MOF as of March 1989. Of these, only 304 are classified as manufacturing investment. This represents only 54 percent of the total, an even lower share than MRI data suggested. About one third cf nonmanufacturing investment went to the service sector. With the rest of Asia, manufacturing DFI accounted for 53 percent, hardly different from the case of China (Table 2.2). In nonmanufacturing, however, instead of the service sector, the commerce industry accounts for one third of nonmanufacturing. And the service industry represents only 6 percent of the total number of investments. The difference in sectoral composition of 8/ Analysis of DFI in 1989 and onward is given in Section E of this chapter. 9/ Since 1986 MRI, a Japanese private think-tank, annually publishes 'Chtgoku Gobenkigyo Ichiran" (A List of Joint Ventures in China), a list of brief descriptions of joint ventures with firms of origins other than Hong Kong. This paper is based on its 1990 edition, the most recent version. The statistics in this annual cover 1,252 firms, including wholly foreign-owned ventures. It is estimated that this list covers some 30 percent of the existing firms. 10/ Of 389 companies under the category "other countries", 181 are estab- lished with European firms and 149 with Asian firms other than Japanese. - 25 - Table 2.1: JOINT-VENTURES IN CHINA BY SECTOR AND BY INVESTING COUNTRIES Total Japan USA Others (excl. HK) Sector (number) % number % number % number % Food, tobacco 41 8.0 33 9.4 50 12.9 124 9.9 Textiles, garments 59 11.6 19 5.4 28 7.2 106 8.5 Wood, furniture 1S 2.9 3 0.9 10 2.8 28 2.2 Pulp, paper 2 0.4 1 0.3 4 1.0 7 0.6 Publishing, printing 7 1.4 5 1.4 4 1.0 18 1.3 Chemicals 46 9.0 62 17.7 S0 12.9 168 12.6 Leatherware 11 2.1 17 4.9 18 4.e 48 3.7 Cement, ceramics 14 2.7 22 8.3 8 2.1 44 3.6 Metals 25 4.9 17 4.9 18 4.1 58 4.8 General machinery 12 2.3 22 6.3 18 4.1 50 4.0 Electrical machinery 57 11.1 s0 14.3 40 10.3 147 11.7 Transport equipments 8 1.8 9 2.6 19 4.9 36 2.9 Precision machinery 23 4.5 13 3.7 10 2.6 46 3.7 Firearms, others 17 3.3 le 4.8 11 2.8 44 3.5 Subtotal (manufacturing) 337 86.7 289 82.8 284 73.0 910 72.7 Agricultural/forestry 10 1.9 8 2.3 10 2.6 28 2.2 Fisheries/marine 11 2.1 0.0 8 1.6 17 1.4 Mining/gas/oil 3 0.6 12 3.4 10 2.6 25 2.0 Construction 13 2.5 6 1.7 11 2.8 30 2.4 Utilities 1 0.2 0.0 0 0.0 1 0.1 Commerce 17 3.3 4 1.1 8 2.1 29 2.3 Financial/insurance 5 1.0 0.0 4 1.0 9 0.7 Services 91 17.7 23 6.8 38 9.3 1SO 12.0 Leasing 20 3.9 1 0.3 5 1.3 28 2.1 Hotel 25 4.9 6 1.7 13 3.3 44 3.6 Leisure 13 2.5 1 0.3 0 0.0 14 1.1 Information 24 4.7 11 3.1 7 1.8 42 3.4 Others 9 1.8 4 1.1 11 2.8 24 1.9 Transportation, comm. 10 1.9 6 1.7 18 4.8 34 2.7 Real estate 1s 2.9 2 0.6 2 0.5 19 1.6 fther nonmanufacturing 0.0 1 0.3 0 0.0 1 0.1 Subtotal (nonmanufacturing) 151 29.4 54 15.4 8S 21.9 290 23.2 Total 513 100.0 350 100.0 389 100.0 1.252 100.0 Source: 'Chugoku Goben Kigyo Ichiran (the list of China Joint-Ventures)", MRI, 1990. Japan's DFI between China and the other Asian countries is also distinct within the manufacturing industry, too. While such light-industry sectors as food processing, textiles, and wood and pulp have relatively larger shares, machinery sectors account for a much smaller portion compared with other Asian countries. 2.23 Another feature of Japanese DFI in China is the fact that a larger portion of it consists of small-size investment. Chart 2.4 compares the size of Japan's investment with that of the United States. Each layer of the bar riepresents the number of investments corresponding to a certain range of invested capital amount. As much as 73 percent of Japan's investment in China amounts to less than $3 million, while 60 percent of the investment from the United States falls in this category. In the case of the other countries' investment, such small investments claim an even smaller portion of all investments. - 26 - Table 2.2: JAPAN'S DFI TO CHINA AND OTHER ASIA BY SECTOR (Accumulated numbers of approved/notified DFI cases as of March 1989) DFI to China DFI to Other Asia Cases Z Cases Z Food processing 65 11.5 569 3.8 Textiles 45 7.9 829 5.6 Wood/pulp 17 3.0 362 2.4 Chemicals 30 5.3 961 6.5 Metals 22 3.9 789 5.3 Machinery 25 4.4 874 5.9 Electrical machinery 39 6.9 1,444 9.7 Transport equipments 5 0.9 387 2.6 Others 56 9.9 1,591 10.7 Subtotal, manufacturing 304 53.6 7,806 52.5 Agricultural/forestry 16 2.8 371 2.5 Fisheries/marine 29 5.1 230 1.5 Mining/gas/oil 3 0.5 230 1.5 Construction 11 1.9 463 3.1 Commerce 54 9.5 2,678 18.0 Financial/insurance 1 0.2 368 2.5 Services 106 18.7 915 6.2 Transportation 9 1.6 209 1.4 Real estate 21 3.7 304 2.0 Other nonmanufacturing 4 0.7 519 3.5 Subtotal, nonmanufacturiag 254 44.8 6,287 42.3 Branch offices 8 1.4 606 4.1 Real estate purchases 1 0.2 161 1.1 Total 567 100.0 14,860 100.0 Source: The Japanese Ministry of Finance data, as reported in "Kinyu Zaisei Tokei Geppoo,n MOF, December 1989, and in "Kaigai Toshi Kenkyuujoho," the Ex-Im Bank of Japan, November 1990. 2.24 Even by Japanese sttndards, the average size of Japan's direct investment in China is small. It is smaller than in the rest of Asia in almost all sectors of the manufacturing industry. Chart 2.5 depicts the aver- age size of manufacturing investment of Japanese firms. The lighter bars show the sectoral average in China and the darker bars that in Asia other than - 27 - Chart 2.4: DFI IN CHINA BY SIZE OF MAJOR INVESTORS (by size of capital) 100 ~~~~~~~~~~~~~uS$3OMIL 90 ~~~~~~~~~~~~~OR OVER 80 OR OVER UJS$5MIL 70 - ~~~~~~~~~~~~O-R OVER US$3MIL 60- OR OVER 50 US$1 MIL 40. OR OVER 30- ~~~~~~~~~~~~~~LESS THA~N US$1MI L JAPAN USA OTHEFZ Source: MRI, 1990. China. It is shown that Japan's manufacturing investment in China is smaller, with only one exception: electric machinery industry.ll/ 2.25 The difference is particularly large in such industries as transport equipment, metal, chemicals and textiles. This reflects the fact that in investment in these sectors mostly are directed to the labor-intensive process of the industry and made in many instances by smaller firms, while in other Asian countries more capital-intensive parts of these sectors are also dealt with on a large scale by Japan's big businesses. Take, for example, the tex- tile industry; Japan's major textile companies have set up upstream plants such as synthetic fiber factories, or large-scale spinning mills in Thailand or Indonesia but, in China, these firms invested in more downstream parts of the textile industry such as knitting, sewing or carpeting, where the size of the investment can be smaller. This is partly linked to perceived political risk and also to the relatively early stage of Japan's investment in China. 11/ It should be noted that the stock data of Japan's DFI employed here are simply accumulated values of past investments and, therefore, do not show present values of investment. Since the average vintage is quite new for China compared with the rest of Asia, the real difference should be larger than the chart implies. - 28 - Chart 2.5: AVEFAG'E SIZE OF MANUFACTURING DFI IN ASIA ($ million) 4- (as of March 1990) IN CHINA .3.5 - IN 2.5 OTHER ASIA 2- 1.5- 0.5 1 2 3 4 5 6 7 8 9 10 SITC CODES Note: 1. Food 2. Textiles 3. Wood and Pulp 4. Chemicals 5. Metals 6. General Machinery 7. Electrical Machinery 8. Transport Equipment 9. Other Manufacturing 10. Manufacturing Total Source: Ministry of Finance, the Japanese Government. In other parts of Asia, the Japanese textile investment started from down- stream and moved to upstream 'Later on.12/ 2.26 Geographical distribution within China of Japan's DFI is also dif- ferent from that of other countries. One of its features is a concentration in three municipalities. As rnuch as 41 percent of Japanese ventures went to one of the three major cities,, while the United States allocated only 35 per- 12/ See Yoshihara (1976). - 29 - cent (Table 2.3). Another geographical feature of Japanese DFI is its depen- dence on the coastal provinces; 51 percent of investment was directed to this arlea. Therefore, only a small portion was left for inland provinces. While Japan invested only 7 percent in this area, the United States directed as much as 17 percent, in other words, a larger portion than any of these three major cities. Lastly, in Liaoning Province, Japan took a disproportionately large share of such ventures (Chart 2.6). Table 2.3: GEOGRAPHICAL DISTRIBUTION OF JOINT-VENTURES MADE BY US AND JAPAN Japan USA Others Total Japan USA Others Total --Number of Joint Ventures- ------------ X ------------- Three Municipalities 210 124 121 455 40.9 35.3 31.2 36.3 Beijing 86 51 43 180 16.8 14.5 11.1 14.4 Tianjin 48 26 32 106 9.4 7.4 8.2 8.5 Shanghai 76 47 46 169 14.8 13.4 11.9 13.5 Coastal Provinces 259 164 215 638 50.5 46.7 55.4 51.0 Guangdong 75 57 76 208 14.6 16.2 19.6 16.6 Fujian 30 16 36 82 5.8 4.6 9.3 6.5 Jiangsu 45 42 29 116 8.8 12.0 7.5 9.3 Liaoning 62 16 19 97 12.1 4.6 4.9 7.7 Shandong 23 12 22 57 4.5 3.4 5.7 4.6 Others 24 21 33 78 4.7 6.0 8.5 6.2 Inland Provinces 38 61 40 139 7.4 17.4 10.3 11.1 Not specified 6 2 12 20 1.2 0.6 3.1 1.6 Total 5.13 351 388 1,252 100.0 100.0 100.0 100.0 Source: MRI, 1990. 2.27 Table 2.4 gives sectoral details of Japan's 513 ventures in China. Although the largest number of them are located in Beijing, it is far away from being typical. Its most important industry is not manufacturing but the service industry. Nearly one third of such firms are located in Beijing. And an even heavier concentration exists in commerce, construction and real estate. In all, 56 percent of the firms are engaged in nonmanufacturing activities. Compared with Shanghai, Beijing lags behind in most of the manu- iacturing sectors. But the most impressive exception is electric machinery firms which number ten in Beijing. 2.28 In the electric machinery sector, however, Guangdong enjoys the honor of the most favored location by the Japanese. This is also reflected in the importance of the computer software industry. Jiangsu Province, on the other hand, is more light-industry oriented. If Shanghai is included, more or Less half of the textile and leatherwork ventures are located in this region. About 90 percent of Japanese DFI is directed in either one of the coastal provinces or the three municipalities. In the inland area, which consists of - 30 - Chart 2.6: MAJOR LOCATIONS OF DFI,SHARES BY HOME COUNTRY (O) 100- 90- OTHERS 80- 70- 60 50 U.S. 40- 30 20 10 / BE3JING TIANJIN SHANGH/gUAN~G0CONG FIAN SJIANGSU UJAONINGHANDOMER COASTAULND Source: MRI, 1990. 18 provinces, there are only 10 percent 13/ of Japanese joint ventures or wholly-owned subsidiaries. A large part of it is invested in agriculture or related sectors such as food processing and chemicals (Chinese pharmaceuti- cals). C. Impact on Trade 2.29 According to the statistics recently released from the Chinese cus- toms, DFI firms such as joint ventures, wholly-owned foreign subsidiaries and cooperative ventures increased their exports by 59 percent in 1990. This represents 12.6 percent of China's total exports for the year. The most important export products of these firms were electric and nonelectric machines, accounting for more 'than one third of such products. Also important were textiles and apparels. By the origin of exports, Guangdong province accounted for as much as 70 percent of the total exports of DFI factories. As for machinery exports, a quarter of China's exports of such products were con- ducted by these firms. It is obvious that the very rapid transformation of China's foreign trade over the past few years, particularly the expansion in machinery trade, was largely the result of DFI in manufacturing. 13/ Here, those whose location is unknown are included. - 31 - Table 2.4: JAPAN'S JOINT VENTURES IN CHINA BY SECTOR AND BY LOCATION Three Municipalities Coastal Provinces Sub- Sub- Inland Total total BJ TJ SH total GD LN JS FJ Others Provinces Food, tobacco 41 11 6 3 2 20 3 7 2 3 6 10 Textiles, garment 59 21 6 1 1S 34 6 7 11 3 7 4 Wood, furniture 15 7 2 1 4 3 3 1 1 1 2 Pulp, paper 2 1 1 1 1 0 Publishing, pri. 7 3 2 1 2 2 2 Chemicals 48 12 2 3 7 29 5 4 9 3 8 5 Leatherware 13 6 B 8 2 2 1 1 1 Cement, ceramic 12 3 1 2 8 1 1 3 2 1 1 Metals 25 5 2 1 2 17 S 5 S 2 3 General machinery 12 7 1 4 2 6 1 1 1 2 0 Electrical machinery 57 22 10 8 4 32 21 4 7 3 Transport equipment 7 2 1 1 4 1 1 1 1 1 Precision machinery 24 11 4 1 6 12 3 5 1 1 2 1 Firearms, other 17 9 3 5 1 7 3 1 1 2 1 Subtotal manufacturing 337 120 38 30 52 183 60 43 37 23 30 34 Agricultural/fores. 10 2 1 1 3 1 1 1 6 Fisheries/marine 11 1 1 10 1 3 3 3 0 Mining/gas/oil 3 2 2 1 1 0 Construction 13 9 5 1 3 3 2 1 1 Utilities 1 0 1 1 0 Commerce 17 13 8 3 2 4 1 2 1 0 Financial/insur. b 2 1 1 2 1 1 1 Services 91 48 28 8 14 34 15 8 2 8 a 9 Leasing 20 10 8 1 3 9 4 2 1 2 1 Hotel 25 11 7 1 3 10 3 1 3 3 4 Leisure 13 9 7 1 1 3 2 1 1 Information 24 15 7 2 8 8 6 2 1 1 Others 9 3 1 1 1 4 4 2 Transportation 10 4 3 1 4 2 2 2 Real estate 15 11 6 2 3 3 2 1 1 Other nonmanufacturing Subtotal Non- manufacturing 176 92 48 20 24 66 25 19 8 8 7 19 Total 513 212 88 S0 76 248 76 62 43 31 37 53 Note: BJ-Beljing, TJ-Tianjin, SH-Shanghai, GD-Guangdong, LN-Llaoning, JS-Jlangsu, FJ-FuJian. Source: MRI, 1990. 2.30 Unfortunately, there is hardly any information on the role of Japanese ventures in China concerning international trade. The most recently published detailed survey on overseas operation of Japan's overseas subsidia- ries, which reports on fiscal 1989, gives only aggregated data for Asia as a whole. This survey disclosed that Japan's overseas manufacturing factories shipped M 1.77 trillion ($11.2 billion) of products to Japan. This accounted for 10.4 percent of Japan's imports other than food, raw materials and mineral fuels. About a half of such shipment came from the Japanese overseas subsi- diaries in Asia.14/ 14/ See Takeuchi (1990), Tran Van Tho (1987). - 32 - 2.31 Goods from Japanese subsidiaries and joint ventures in other Asian countries mainly consisted of machinery, in particular electric machines. Electric machines alone accounted for 66 percent of Japan's import from such factories amounting to Y 535 bil]Lion for fiscal 1989. This roughly matches the total customs clearance 15/ of Y 556 billion worth of such goods with Asian origin for 1989, meaning that almost all the electric machines Japan imported from Asia came from Japanese subsidiaries. By comparison, textile products including apparel, which comprise a large portion of Japan's manufac- tured goods imports from Asia, accounted for a rather small portion of ship- ment of such firms to Japan. The! V 37 billion worth of textile products manu- factured by Japanese subsidiaries in Asia and shipped to Japan in fiscal 1989 equal only 3 percent of Japan's textile imports from Asia.16/ 2.32 This contrast reflects the difference in the relative position of Asian industries and also different strategies of Japanese importers. While Japanese electric machinery enjoys a far superior position both in Japan and in neighboring countries, the textile industry shares the market with its Asian rivals. But more importantly, from the fact that electric machinery such as components and low-end consumer goods is one of the fastest growing import items, we can conclude that regional division of labor in Asia is rap- idly expanding with the initiatives of the Japanese electric machine makers. 2.33 As we have seen in the preceding chapter on trade, China accounts for 18 percent of Japan's manufactured imports from Asia. Although a major portion consists of textiles, machinery imports are growing very rapidly. And among machinery imports, electric, machinery is expanding by far faster than other machines. The earlier observation concerning the export policy of Japanese subsidiaries in Asia suggests a strong linkage between China's fast- growing electric machinery export to Japan and the recent upsurge of Japan's electric machinery investment in China. In fact, Japan's electric machinery import from China has been widening its share in imports from Asia almost at 15/ It must be noted that the customs clearance imports are compiled accord- ing to the calendar year. Such data for fiscal 1989 are not available for this category. Since ceLlendar years precede fiscal years by three months, data on a calendar-year basis tend to undervalue the real trend. 16/ Such a ratio for all goods excluding electric machines stands at 6.8 per- cent. This implies the virtual control of imports by the Japanese sub- sidiaries only exists in the electric machinery industry in Asia as an exceptional case rather t1harL the standard. - 33 - the same pace as accumulated DFI in this sector with roughly a one-year lag.17/ D. Role Played by Small Firms 2.:34 Much attention has been paid to the role played by small- or medium- sized companies concerning Japan's DFI, particularly in Asian countries.18| As the analysis in Sections A and B strongly suggests, it appears that these firms played an even more important role in China than in the rest of Asia. As we have seen, particularly in the manufacturing field, small firms took a lead when such investment took off in the mid-1980s, when larger firms gener- ally took a more conservative stance with some exceptions. Therefore, in thinking of the future of Japanese direct investment in China, better know- ledge of DFI of these firms is indispensable. However, due to lack of proper statistics, accurate analysis is fairly difficult to make. The following is a trial in this direction. 2.35 The data concerning small- and medium-size firms in this analysis is taken from various issues of the "White Paper on Small and Medium Enterprises" (henceforth referred to simply as the White Paper) issued annually by the Small and Medium Enterprise Agency of the Japanese government. Although the data are sketchy, limited only to number of projects and not quite on a com- 17l It is important to note that the correlation exists between China's shares in Japan's electric machinery imports and in Japan's electric machinery DFI stock (or accumulated amount), and not annual flows. 1987 1988 1989 China's Share in Japan's Imports from Asia (Z) All manufactured goods 15.8 16.8 17.5 Machinery 2.0 3.0 5.2 Of which: Electric 1.9 3.2 6.2 China's Share in Japan's DFI Stock in Asia (Z) All manufactured goods 1.5 2.8 3.6 Electric machinery 3.4 6.4 7.0 Others 1.1 2.0 2.6 Source: "Tsusho hakusho (White Paper on International Trade)", Ministry of International Trade and Industry, 1989 and 1990. "Dai-4-kai kaigai jigyo katsudo kihon chosa (The 4th Basic Survey of Exter- nal Business Activities)," MITI, 1991. 18/ There are many who count this as one of the major features of Japan's DFI. See Kojima (1977), Ozawa (1979), the World Bank (1988) for exam- ples. But recent studies may indicate this is not very particular to Japan. See United Nations Center on Transnational Corporations (1988). For an international comparison, see UNCTC (1991) and Fujita (1990). - 34 - parative basis with MOF's data, this is virtually the only official data on Japan's DFI in China by smaller companies.19/ 2.36 The White Paper started reporting such enterprises' 201 DFI by sector and by broad region of destination, including a few major host coun- tries in Asia in its 1976 edition. But separate treatment of China became available only for 1985 and onward. As we have seen in the previous sections, Japan's DFI in China first took off in 1984. In 1985, small firms' newly made DFI in China numbered 56 in total. This meant that more than one third of such firms' DFI in Asia went to China. However, in the following two years, this number declined to reach 48 in 1987. And China's share dropped to only 10 percent. In 1988, small enterprises' China investment increased fairly sharply. But China's share did not see much recovery. The other countries also attracted many of the small.- and medium-size companies. 2.37 In 1985, more than a quarter of small firms' DFI in China was directed in the service industry. All combined, almost half of the total DFI was accounted for by nonmanufacturing investment, although it declined in the following years. In the case of small firms' direct investment to Asia other than China, the service sector did not account much. The largest sector in nonmanufacturing was commerce. And nonmanufacturing as a whole took a smaller share than in China. 2.38 There is a difference between DFI in China and in the rest of Asia within the small firm's manufacturing industry, too. While such firms invested heavily in such light-industry sectors as food and textiles in China, machinery investment accounted for a rather small part of their manufacturing DFI. Quite the opposite took place in the other Asian countries 21/ (Table 2.5). 19/ There are two official sources of more or less consistent data on smaller firms' DFI in Japan. The other one is MITI's "Kaigai jigyo katsudo kihon chosa" (Basic Survey of External Business Activities,) which is conducted every three years. Although these statistics give some interesting details of smaller firms' overseas business, individual country data are not published. Detailed information on the data issued by the Small and Medium Enterprise Agency is provided in the annex. 20/ Small and medium enterprises are defined as follows: (a) Manufacturing: with caLpital amounting to Y 100 million or less; or the number of employees totaling 300 or less. (b) Wholesaling: with capital amounting to Y 30 million or less; or the number of employees totaling 100 or less. (c) Retailing and other services: with capital amounting to v 10 mil- lion or less; or the number of employees totaling 50 or less. 21/ This seems to reflect the difference in patterns of the linkage of small firms to large core-firms. For further discussion see page 22. - 35 - Table 2.5: SMALL FIRMS' DFI TO CHINA AND OTHER ASIA BY SECTOR (Accumulated DFI cases between 1985 and 1989) DFI to China DFI to Other Asia Cases Z % Cases % Z Food processing 31 16.3 72 5.8 Textiles 41 21.6 124 10.0 Wood/pulp 10 5.3 30 2.4 Chemicals 14 7.4 81 6.5 Metals 12 6.3 132 10.6 Machinery 35 18.4 488 39.4 Others 47 24.7 313 25.2 Subtotal, manufacturing 190 100.0 57.8 1,240 100.0 67.4 Agricultural/forestry 14 4.3 15 0.8 Mining/gas/oil 0 0.0 5 0.3 Construction 9 2.7 23 1.2 Commerce 58 17.6 281 15.3 Services 42 12.8 109 5.9 Subtotal, nonmanufacturing 85 25.8 284 15.4 Branch offices 16 4.9 168 9.1 Total 329 100.0 1,841 100.0 Source: Compiled from various issues of Chusho Kigyo Hakusho, the White Paper on Small and Medium Enterprise Agency, SMEA, the Japanese Government. - 36 - 2.39 Despite some flaws,22/ the comparison of these two data gives meaningful clues to the actual importance of smaller enterprises in Japan's DFI. Table 2.6 shows the percentage of small firms' DFI to that of all firms' by sector, which is obtained by dividing the former by the latter. To narrow the gap in the time span, the neighboring two years are combined to produce a moving two-year average. But because the numerators are of a narrower defi- nition, the figures in this table undervalue the actual shares of smaller firms.23/ It is obvious that small enterprises play by far the larger role in China than in other parts of Asia in almost all the sectors. The only exception is machinery in 1987/88. 2.40 In manufacturing, China's dependence on small firms in DFI from Japan is most conspicuous in labor-intensive, light-industry sectors such as textiles, sundries (others in manufacturing), and wood and paper. In nonmanu- facturing sectors, in the most. riecent year small firms monopolized the con- struction and commerce sectors. But in the service sector, small enterprises 221 Although the above-mentioned data on the numbers of DFI by small and medium enterprises are originated from MOF's approvallnotification file of DFI, we cannot compare these with the figures which cover all firms to know the actual share of small firms' investment. There are two major problems. Firstly, there is a difference in years in which these data are presented. The Small and Medium Enterprises Agency's data are com- piled in calendar years, while MOF's data on all firms are based on fis- cal years. Therefore, if we! compare the two series of the same year, only three quarters of each year overlap and the other quarter has a difference of one full year. This produces a fairly large gap when DFI is growing so rapidly as now. The other reason concerns the difference in the coverage of DFI. MOF's data on all firms' DFI include long-term loans with the intention of establishing lasting business relationships or between the enterpriseis which have entered such relationships, as well as equity acquisitions. In the past few years, some 30 percent of Japan's manufacturing DFI in Asia is made in such a form of loan. But the Small and Medium Enterprises Agency's data exclude this type of investment. 23/ Although small firms' DFI numbers in broader definition are not avail- able, as for manufacturing DFI by all firms, regional aggregate of DFI numbers in the narrower definition are published. In the past few years, all firms' manufacturing I)FI in Asia in this definition stayed at around 73 percent of the numbers in the broader definition. Therefore, the actual share of small enterprises in DFI in Asia in 1987188 should be 65 percent rather than 47 percent as shown in Table 2.6. Such informa- tion is not available on particular countries but, if we can assume the same ratio to China small firms' share of 66 percent in manufacturing DFI in 1985(86, it would imply an "actual" 91 percent. But it is possibly an overvaluation because, in China where Japanese DFI has not a long history as in other parts of Asia, DFI in the form of loans can be relatively fewer, in other words, the gap in the two definitions is smaller. A safe bet would be somewhere between 70 and 90 percent. - 37 - Table 2.6: SMALL FIRMS IMPORTANCE INDEX DFI to China DFI to Other Asia Sector 1985/86 1986/87 1987188 1985J86 1986/87 1987/88 Food processing 48.0 48.0 51.6 28.4 33.0 40.9 Textiles 100.0 76.9 71.0 33.3 50.0 58.3 Wood/pulp 75.0 75.0 62.5 18.8 26.5 25.7 Chemicals 70.0 50.0 43.8 21.3 29.7 28.3 Metals 60.0 57.1 57.1 24.0 36.7 50.8 Machinery 66.7 45.0 23.3 32.3 41.8 47.2 Others 70.6 106.7 67.7 33.1 44.7 55.1 Subtotal, manufac- turing 66.3 62.5 51.1 30.1 40.0 46.9 Agricultural/forestry 28.6 35.3 33.3 8.3 16.7 18.9 Mining/gas/oil 0.0 0.0 ERR 4.8 0.0 6.3 Construction 40.0 0.0 100.0 8.9 12.5 15.8 Commerce 42.1 76.5 105.0 18.6 26.0 28.5 Services 38.2 35.6 25.6 11.0 13.5 12.2 Total 53.0 53.5 50.2 24.0 33.2 38.0 Note: Explanation is given in the text. Source: Computed by using MOF data and SMEA data. were always limited to a relatively small role.24/ The change of such ratios over the years also gives an interesting insight. While in China the share of small firms in overall investment stayed rather constant during the period, such ratios of the manufacturing sector followed a distinctive down- trend. But in the rest of Asia, such figures showed a growing trend in both the manufacturing and nonmanufacturing sectors. The most conspicuous contrast can be found in the machinery sector. 2.41 Although small and medium enterprises have accounted for a rela- tively large portion of Japan's DFI, they have always invested mainly in neighboring Asian countries. And their shares against all firms have drawn a distinctive pattern in correlation with the change in the yen's exchange rate. This is largely a reflection of the weaker position of smaller firms. They had to rely on cultural and geographical closeness of Asia more than larger 24/ It must be noted that small firms' large share in the number of DFI does not mean a correspondingly large share in the amount of DFI. On the contrary, there has been a substantial difference in average size of investment between the two groups of enterprises. The average size of small firms' DFI was a quarter to one sixth of that of larger firms in 1972 to 1976 (see Annex). - 38 - companies. They were more vulnerable to the changes in the yen's exchange rate than large-scale enterprises whose competitive edge is based not only on price competitiveness. Small firms' investment abroad is also more closely linked to the general business conditions of Japan's economy than large firms. When the economy is booming, they can invest easily but, in a downturn, they have greater difficulty. 2.42 The steady rise in. small firms' shares in DFI in Asia since 1985 is not unusual, but why does this pattern not hold with China? There are three factors. Firstly, the recent rmove to Southeast Asia by the Japanese large- scale manufacturers, accompanied by small subcontractors who supply parts and materials, or related services. Particularly for large machinery assembly makers to have their old and reliable Japanese suppliers of semi-assembled parts close to their offshore plant was considered an indispensable condition for success. These smaller suppliers were sometimes strongly urged to follow their large customers. 2.43 But in China, such a strategy cannot work. When the Japanese set up a joint venture in China, domestic suppliers of parts and materials are often designated by the Chinese government. Even if Japanese suppliers were allowed, they will have difficulty to meet foreign exchange requirements since their sales to the large firn's Chinese venture do not earn the foreign cur- rencies they need for importing necessary materials from Japan or abroad. 2.44 There are two types of small or medium enterprises which go abroad. One is the "independent type" and the other is the "dependent type."25/ The former are those which have their own know-how and strategy supported by technical edge and/or merchandise planning ability. They are often manufac- turers of finished products, although some are parts producers. The "depen- dent type" companies have strong and stable ties with specific customers of their products of a size much larger than themselves. They are typically engaged in making components or parts to be assembled by larger manufacturers of machinery. They may well have highly respected skills or technologies, but such skills are derived from joint work with their larger-size customers and not separable. They cannot rmove independently. 2.45 So far, most of the small- and medium-size firms which invested in China are of the first type. They are mainly engaged in light-industry types of products such as textile clothing, leatherwear and sundries, although some are producing specialized machines or equipment. The smallness of the number of "dependent type" of DFI in China, which is reflected in the relatively small share of the machinery sector, is partly due to the reluctance of Japan's large-scale assembly makers to go to China in the past and, partly due to the low multiplication effect such makers can generate in terms of the number of "dependent type" DFI in China. 2.46 The second reason is the recognition of difficulty of operation in China. Although there are some small firms which are faring rather well in China, generally speaking, smaller enterprises lack political clout to solve 25/ Giddy and Young have categorized the types of small firms in more detailed groups. See Giddy and Young (1982). - 39 - problems in China, unlike larger firms.26/ The last factor is a positive one. The large-scale Japanese makers finally started to pay more attention to China and began investing recently. Small firms' shares have been reduced proportionately to this extent. A number of large projects were announced or being planned by late 1988. But the June 4 incident led to postponements and a general slowdown which lasted well over a year.27/ 2.47 Japan's DFI statistics for the latter half of fiscal 1989 registered a large fall in both number and amount. For fiscal 1989 as a whole, Japanese data recorded a 26 percent decline in number of projects, although the amount of total values increased by 48 percent. The average amount per project dou- bled for this year, reflecting an increase in large-scale investment, particu- larly before the incident. 2.48 But since the middle of 1990, Japan's direct investment in China seems to have recovered. The MOF data for the first half of fiscal 1990, end- ing September last year, saw a pickup in the number of projects, although it still fell short of the previous year's level (Chart 2.7). The reported proj- ects since 1990 are mainly in the manufacturing field spread over a variety of sectors such as electric machinery, apparel, medical supplies, cement and electronics. There also are projects in software development and energy- or agriculture-related businesses. Canon has launched a wholly-owned compact camera production venture, Mitsubishi a joint-venture cement mill and a joint- venture project for coal water-mixture development. Smaller firms are also becoming active.28/ E. Globalization, The New Strategy for Japanese Firms 2.49 Globalization has become a buzzword for Japan's big business since 1985. In short, this means a global deployment of production sites and coor- dinated operation of these facilities. The basic strategy on external markets of Japanese major firms before the "globalization" was "export from Japan." In the early 1970s, when the Japanese yen was first allowed to appreciate, their main task was to streamline their production while exporting from Japan. Even when they shifted a part of their production facilities to Asia, to fol- low their American competitors in some cases, they kept on manufacturing com- ponents in Japan. The life employment policy was sacred, particularly for big 261 Problems DFI faces in China are discussed in Section G. 27/ A survey conducted in November 1989 by the Japan-China Association on Economy and Trade revealed that the majority of the companies which were considering direct investment in China had been forced to change their investment policy because of the incident. Only 25.2 percent of the firms surveyed responded that the effects were negligible. Those who reported suspension of the project amounted to 30.1 percent. Alteration or cancellation of the project was reported by 10.4 percent of the sur- veyed companies. And 7.4 percent of the firms responded that they had already started studies of locations in countries other than China. 28/ JETRO (1991), p.201. - 40 - Chart 2.7: THE RECENT DEVELOPMENT ($ million, cases) 600 - 500 400 VALUE OF TOTAL OUTLAYS 300 200- 100 NUMBER OF F-ROJECTS 1977 1978 1979 1980 1981 15982 1983 1984 1985 1986 19871 988F1988S1 989F19891 990F Source: Ministry of Finance, the Japanese Government. corporations.291 They could not afford to simply shut down domestic facto- ries and go abroad as some of their American rivals did.30/ 2.50 But by the early 1S980s, widening trade deficits had so aggravated trade disputes with the United States and Europe that Japan's big businesses were compelled to build factc'ries in these countries. Color TV, VCR and car production were begun in this way. At first, most of the parts were imported from Japan. When this was also criticized, Japanese companies induced their parts suppliers, with whom they had established long-standing relationships, to join them overseas as well. 2.51 The drastic appreciation of the yen in late 1985 made building fac- tories in foreign countries muclh cheaper and transplanting to the developed world was accelerated. Japanese producers also worked hard to streamline their domestic production facilities and expanded them in some of the advanced NICs, retaining only top-of-the.-line items in Japan. Soon afterwards, labor 29/ Hara (1988). 30/ Sakai (1987). - 41- problems in Korea and the appreciation of the won as well as the Taiwanese dollar prompted Japanese firms to move to the the ASEAN countries.311 2.52 Although the ASEAN countries other than Singapore had the advantage of an abundant labor force and relatively cheap wages, the export processing in these countries was not immediately profitable. Imported parts from Japan were too costly. Therefore, Japanese producers were forced to automate pro- duction to achieve higher efficiency, to cut the number of parts through com- positization, and to reduce the defect ratio. They also tried to raise local content. But there were very few local suppliers which could meet the strin- gent requirements of Japanese producers. Thus, the Japanese started produc- tion of components by themselves or encouraged their old suppliers to invest there. Some of the parts were supplied by Japanese subsidiaries in the East Asian NICs. 2.53 Thus, a fairly large concentration of Japanese transplants emerged in some of the Southeast Asian countries. Currently there are 434 subsidia- ries producing electric machines, including those in Korea and Taiwan. This is almost three times the number of those in the United States. These plants in Asia account for more than half of the total offshore production of Japan's electric machinery industry. Japanese subsidiaries in Southeast Asia can now obtain a fairly large portion of electric components in the local market including neighboring countries. Most of them are supplied by Japanese firms operating locally. For example, in the case of radio-cassette players, 97-98 percent of the needed parts are available in Singapore. But, here, the Japanese subsidiaries account for 80 percent.32/ 2.54 Since Asia became an important offshore production base as well as the United States and Europe, Japanese big businesses now have a global strat- egy of production allocation and intrafirm division of labor. In this grand design, Asia is not only an offshore production base for exports anymore. Within the Asian countries, a horizontal division of labor is being estab- lished. 2.55 As a result of automation, production of lower-end products is not always suitable in low-wage countries.33/ Particularly from the viewpoint of the Japanese market, even low-end goods may be produced more cheaply in the NICs than in the Philippines or Indonesia. This is not only because the former are geographically closer to Japan (which lessens transport costs), but also these countries are good at producing a large quantity of goods with stable quality. If products with a higher value added require more manual operations, these are often best located in the ASEAN countries. There are many examples, such as toys and footwear, where Japanese subsidiaries in NICs produce at lower cost. 31/ The member countries of ASEAN (the Association of South-East Asian Nations) included Brunei, Malaysia, Indonesia, the Philippines, Singapore and Thailand. But Brunei should be excluded in this context. 32/ Sakai (1987), Ex-Im Bank of Japan (1988). 33/ The World Bank (1991). - 42 - 2.56 In the field of machinery, assembly often takes place in the ASEAN area, using components either made locally or in more developed Asian coun- tries with only core parts imiported from Japan. But even in such instances, a cheap and abundant labor force is not sufficient. To secure a consistent level of quality, often a state-of-the-art facility, often with equipment superior to what is installed in Japan, is introduced. F. Future Prospects 2.57 The future course of Japanese DFI in China can be gleaned from two surveys (Table 2.7). One was conducted in November 1985, the other in March 1989. Although the potential of the Chinese market still attracted the larg- est portion of Japanese firms, its relative importance declined. Also, such "cosmetic" motives as "to establish a corporate image in China" or "to counter competitors' advance to China" lost ground. Although such passive reason as "due to solicitation from the Chinese" still retains the second highest posi- tion in the answers, more positive and active motives such as "due to cheap and rich raw materials" have seen an increase in shares of the respondents. The Japanese are attaching more and more importance to realistic rea- sons.34/ Table 2.7: MOTIVES OF DFI IN CHINA (Comparison of surveys conducted in 1985 and 1989) 1985 Survey (Nov. 1985) X 1989 Survey (Mar. 1989) z China's potential 31.4 China's potential 27.0 Request by Chinese 18.9 Request by Chinese 20.0 Corporate image 11.3 China's labor force 16.5 China's labor force 8.4 Corporate image 10.4 Preceding rivals 7.0 China's protectionism 7.0 China's raw materials 5.5 China's raw materials 7.0 Dividend or royalty 5.2 Following rivals 3.5 Following rivals 5.2 Tax privileges 0.9 Geographical closeness 2.3 Other reasons 7.8 Other reasons 1.2 Source: The 1985 survey is from "Kaigai-Toshi-Kenkyushoho," Export-Import Bank of Japan, June 1986. The 1989 survey is from "Chugoku-Keizai," JETRO, April 1990. Both as quoted in Imai, 1990. 2.58 The investors' concerns are, in general: (a) whether the workforce can absorb the needed skills and technology; 34/ It is noteworthy that tax incentives were paid very little attention (0.9 percent). They may be discounted by the frequent changes of basic policy and lack in relevanit rules. - 43 - (b) whether the capacity of the production equipment can be fully mobi- lized (power shortage, maintenance services, transport); (c) whether good-quality parts and materials can be easily obtained. China needs to meet such criteria in order to compete successfully with its rivals in Southeast Asia. 2.59 As regards (a), Japanese investors generally give high marks to Chinese workers, although some of them complain about the indifference of the Chinese toward quality control and teamwork, which are factors the Japanese consider as important as technical skills to ensure high quality of produc- tiona. The majority view on (b) and (c) is that China ranks behind most of the other Asian countries. Two years ago, the Japanese Association of Commerce and Industry of Shenzhen submitted a letter of complaint protesting the fre- quency of power outages to the city authorities. There is no shortage of such episodes.35/ 2.60 According to a survey conducted in 1989,36/ as many as 38 percent of the Japanese joint ventures surveyed reported their operation fell short of the original plan. Only 55 percent replied that they were going more or less as planned. The main problem was related to parts and raw materials. Domes- tically supplied parts and materials are generally considered poor in quality by the Japanese. Even when Chinese factories have the manufacturing capabil- ity, they generally are reluctant to supply the Japanese whose requirement of quality and delivery tends to be exacting. When they do enter a subcontract- ing relationship, they often become more expensive than the international standard. If the Japanese decide to import these parts and materials, they then face a strict requirement to balance the foreign exchange needs by them- selves, or to trade on one of the foreign exchange adjustment centers. Many of the Japa nese joint ventures had been requested to present an export plan. But the majority of them are falling behind.37/ 2.61 On top of these problems directly related to production, there are several others. They are: political uncertainty and relatively unpredict- able, inconsistent economic policy; a nontransparent legal system, the enforcement of which is often conducted by the local authorities. Unstable stop-and-go policies worry high-tech industries which are attracted by China's domestic market rather than export. Other complaints include: obligation to 35/ The recent surge of Japanese direct investment in Dalian is partly due to the successful drive of the local authorities to assure them in this regard. In August 1990, Japanese direct investment in Dalian was reported to number 136. This outnumbers Beijing, Shanghai and Tianjin and represents 30 percent of the total foreign ventures set up in Dalian. See Chapter III. 36/ "Study Report II on Japan-China Joint Ventures," November 1989, published by the Japan-China Association on Economy and Trade. 37/ As of November 1989. Based on "Study Report II on Japan-China Joint Ventures." - 44 - balance foreign exchange, perception gap with the Chinese counterpart, inter- vention into management by the authorities, and high utility charges.38/ 2.62 However, surveys show that, despite all these complaints, Japanese joint ventures in China are generally faring well. In a most recent sur- vey,39/ 71 percent of the firms surveyed reported surpluses and only 15.9 per- cent replied they were running a deficit.40/ There are many which started to become profitable earlier than the original plan.411 Some are reported to have recouped the initial investment in the first few years. Some are reinvesting earnings. A small-size manufacturer of gloves has set up four fully-owned subsidiaries in Eive years. For those which have their own firm- specific advantage, such as production skills and marketing know-how, the above-mentioned obstacles are not insurmountable. 2.63 China may well have a chance to attract an increasingly larger por- tion of Japan's DFI in Asia now that the Japanese traditional locations in Asia are gradually becoming saturated in terms of labor force and land. How- ever, China needs to make further efforts to improve the conditions surround- ing foreign ventures such as infrastructure. To attract large firms which are looking for off-shore production bases in line with their globalization strat- egy, China should give more encouragement to export-oriented DFI. At the same time, small firms should not be ignored. They may not offer state-of-the-art facilities or highly advanced technology as large-scale firms have, but they have plenty of production kncw-how or marketing know-how which is nonetheless valuable to the development cf Chinese industry. Small firms' skills and technologies may be easier to transfer than those of giant corporations and, therefore, more productive for development of local industry such as TVEs. It must not be forgotten that these small firms are indispensable parts of Japanese industry and an important source of its competitiveness.42/ Large-scale companies' DFI is not good enough to make Chinese industry compe- titive enough against the Asian rivals. And coordination in planning, design- ing, production and delivery that exists between large and small Japanese firms is something China needs to adopt to improve its industry. 38/ Based on Imai, 1990, p.102. 39/ "Study Report II," Japan-China Association on Economy and Trade. 401 When interviewed, even those reporting surplus often stress hardship. Some consider reported profits conceals some expenses the Japanese investing firms unilaterally bears. 41/ Because of worries about the uncertainty of China's politics, some firms may be forced to plan in shorter terms than elsewhere. 42/ In this connection, nonmanufacturing investments should not be neglected. They often play vital parts of a linkage-chain. And also, it is known that smaller firms often start with nomanufacturing investment such as commerce when they make overseas DFI, and later on, move to manufacturing investment (see UNCTC, 1S191). - 45 - III. CHINA'S ECONOMIC FUTURE A. Japanese Perception 3.1 Before the June 4 incident in 1989 dented their optimism about China's future as a much more democratic and outward-oriented economy, the Japanese think-tanks used to publish a rosy long-term prospect on Asia with special attention on China. But at least temporarily many of the Japanese research institutions seems to have stopped disclosing a long-term forecast on China. For example, the Research Institute on the National Economy, a Tokyo- based, well-established think-tank, failed to give specific numbers for China in its most recent 1990 issue of the "Annual Report," a ten-year forecast revised each year. There are exceptions, three of them, at least (Table 3.1) .1/ Table 3.1: LONG-TERM FORECAST ON CHINA BY JAPANESE THINK-TANKS AFTER 1989 Forecaster Average GNP growth (Z) Forecast period JCER /a 6.6 1989-94 NRI (b 7.6 1990-2000 YRI /c 8.3 1989-2000 /a Japan Center for Economic Research, March 1990. Ib Nomura Research Institute, March 1990. /fc Yamaichi Research Institute, April 1990. 3.2 Compared with these institutional forecasts, individual researchers tend to be more conservative although there are also those with very optimis- tic views. Those who have a pessimistic view about China's economic future are concerned about the postponement of reforms after 1989; they worry that economic opening will be sacrificed for political discipline; and that econo- mic growth will be hampered to this extent. Some foresee political turmoil after the death of Deng Xiaoping. 3.3 But Japan's business circle generally has a more pragmatic view on China's future. This stems from their perception of the Tiananmen incident which is very different from that of many Japanese intellectuals as well as many Westerners. They see it as a regrettable incident and wish it could have been avoided. But they think it wrong to judge China by the standards of fully developed democratic countries in the West. In their view, an 1/ These forecasts are almost one year old and will be updated shortly. It seems likely that these institutions will revise their forecast a little downward because it has become clear that the Chinese government's own ten-year plan is aimed at much slower growth. - 46 - authoritarian regime is not always avoidable for a developing country undergo- ing rapid change. 3.4 Such a view partly reflects their concern over the possibility of serious social disturbances in China and its spill-over to the neighboring countries in Asia, including Japan, if political reforms are too hastily implemented. Even if a fraction of 1.1 billion people become refugees, its impact would be immense. 3.5 This worry seems to be basically similar to that of the current leadership in China and conservative economic policymakers. They would like a rapid expansion of the economy to catch up with the rest of the world. But they believe economic development cannot be accomplished without political stability. To assure political. stability, excessive growth which leads to inflation needs to be avoided and hasty reforms are also undesirable because they tend to lead to disorder. But the target of quadrupling China's economy by the year 2000 needs to be accomplished to satisfy the aspirations of the Chinese people. Failure would damage the credibility of the leadership, hence, political stability. 3.6 Japanese business leaders are generally optimistic about the future of China's open economy policy, because they believe that without it a growth rate of 6 percent per annum might not be attainable. China has to import technology, DFI, as well as advanced production equipment to improve the effi- ciency of its economy. Economic reforms are also necessary to attract foreign investment as well as to make its own economy more efficient. B. China's Economic Impact on Japan 3 .7 With a GDP of $393 billion in 1989, the size of China's economy was less than one-seventh (13 percent.) of Japan's.2/ If 6 percent growth is maintained during the period, China's GNP will double to reach close to $750 billion by the year 2000. But, assuming 4 percent annual growth for Japan, China will still remain less than one-sixth (17 percent) of the size of Japan in terms of GNP in the year 2000. China's relative size to Japan, then, would roughly match that of Canada in 1988. But, once put in the Asian perspec- tives, China's importance comes out clearly. At present, China's GDP roughly matches the combined GDP of the aLl four NICs in Asia. And if compared with ASEAN economies, China's economy surpasses the total GDP of the five coun- tries 3/ by more than 50 percent. China's exports and imports nearly equal those of Asia's most successful NICs. By the year 2000, China's relative political and economic importance in the Asian economy will grow larger than it is now. If China's huge population and geographical proximity is factored in, China will become an increasingly more important economic partner for Japan. 2/ The World Bank Atlas, 1990. But it must be noted that international comparison of size of economy is not easy with centrally planned economy whose GNP/GDP does not properly represent the service sector which could have a substantial portion. 3/ Indonesia, Philippines, Thailand, Malaysia, and Singapore. - 47 - 3.8 As economic development in the Southeast Asian countries continues to the year 2000, economic interdependence between them will grow. From the viewpoint of Japanese business, this means that Asia will become a more inde- pendent economic entity within which economies of different level of develop- ment complement each other, rather than the collection of export-hungry econo- mies which heavily depend on outside markets such as the United States. Here Japan is considered to serve not simply as a supplier of equipment, material, or capital but also as the import market of products made in the region. And Japanese multinational firms are deemed to work as leading players together with the area's indigenous companies.4/ 3.9 In the future Asian market, China is expected to play a much more important role than now as an integral part of the Asian production network. It has two advantages: (i) abundant labor force and locations fit for pro- duction, with further improvement in infrastructure; and (ii) geographical closeness to Japan, in particular Liaoning, Shandong, and also the region around Shanghai. 3.10 Since Thailand and Malaysia are almost saturated, the Japanese DFI has begun to move to Indonesia. However, if the finished products are to be shipped to Japan or the materials need to be sent from Japan, Indonesia may be too remote for certain products. Indonesia may better serve for those which will use materials or components produced in nearby countries such as Singapore or Malaysia, or for those which export the products to the neighbor- ing countries or the United States rather than to Japan, where China has the advantage. 3.11 Among the three regions of China mentioned above, Liaoning Province, or more precisely Dalian is gaining the largest attention of the Japanese business right now. Its transportation link with Japan is considered to be relatively well developed with a direct passenger flight service regularly operated between Tokyo. Labor, electricity, and land are much cheaper than Shanghai. Water supply is abundant. It has already attracted 136 Japanese ventures as of August 1990. This represents 30 percent of Dalian's total ven- tures with foreign capital, an exceptionally high concentration of Japanese investment. Currently, a group of Japanese major companies are planning to develop a collective industrial site which will accommodate more than 100 factories in Dalian's economic development zone. If this project is material- ized, it will surely introduce many more Japanese ventures.5/ 4/ Such a move has already started. According to a MITI survey on Japan's multinational corporations, Japan's manufacturing subsidiaries in Asia shipped only 11 percent of the products to outside of the region in 1989. In 1986, they exported 17 percent of their products to such countries (MITI, 1991). 5/ Historical or cultural ties are also a very important factor in this instance. Before and during the last War, the Japanese military had established a puppet regime and ruled this region. And in Dalian, there was a very large colony of Japanese. A mixed feeling of nostalgia and remorse still prevails among elder Japanese, including many business leaders. Yoshihara (1976) pointed out the importance of cultural and historical ties in Japan's early investment in Asia. - 48 - 3.12 Shanghai and its Pudong development project is gaining attentior. among the Japanese, too. Shanghai, despite its geographical proximity to Japan, has been viewed as more inclined to the West by the Japanese. But with the strong support given by the central government to Pudong projects and already well-developed industry :Ln the region, Shanghai has irresistible charm to some Japanese industries such as machinery and textiles, among others. 3.13 Shandong province is a]Lso close to Japan, but closer to Korea. Since the governments of Korea and China agreed to open trade representative offices in both capitals last year, the Koreans are showing increasing inter- est in this region. Already a ferry boat service links Weihai and the Korean port of Inchon, off Seoul. Korean firms have started DFI in Qingdao. The Korean government began constructing industrial parks in the area around Inchon last year. As the rapprochement of the two countries deepens, this whole region surrounding the Yellow Sea is expected to work as a core exempli- fying the economic interdependence of China, Korea, and Japan. 3.14 Among the Japanese, there is a view that the Chinese coastal devel- opment centers will strengthen their special economic ties with particular partners. It anticipates, for example, Guangdong will consolidate the rela- tionship with Southeast Asian Chinese businesses; Fujian with the Taiwanese; and Shanghai with the West. But it is more likely that these regions will be more dependent upon each other rather than act as autonomous industrial cen- ters as the economic integration of all of East and Southeast Asia will develop into the year 2000. This is already witnessed by the growing numbers of interregional multinational joint ventures in Hong Kong, Shanghai, or Fujian province involving more than three different countries. 3.15 In the coming years, China is likely to have more economic rivals in addition to already very tough competitors in Southeast Asia. In April 1991, the Soviet president visited Japan for the first time in history. This may well lead to closer economic relationship between the two countries in the near future. Among the Japanese business circles, a notion of "the Japanese Sea Rim Economic Zone" is gaining interest these days. This embraces the far eastern coastal region of USSR,, the northeastern provinces of China, the Korean nations, and relatively, less-developed northwestern coastal regions of Japan. Interchange of technology, capital, national resources, and labor is expected to lead to the revita]Lization of the whole area. Another frontier in Asia also drawing the Japanese attention lately is Indo-China centering on Vietnam. C. '.pan's Other Concerns 3.16 But this does not mean that China, which will have doubled its size by the year 2000, will be treated simply as one of many trade partners of Japan. China already surpasses Japan in some of the most important fields of economic activities. For example, its cement consumption amounts to 2.3 times what Japan consumes 6/ arLd its energy intake exceeded Japan by 86 per- 6/ Watanabe and Zheng, 1990, p. 197. - 49 - cent in 1988.7/ Its steel consumption already amounts to 83 percent of that of Japan in 1988.8/ With more than nine times the size of Japan's popula- tion and 25 times the amount of land, China overwhelmingly outweighs Japan in food and other agricultural products. In 1988, China imported 14 million tons of wheat. This, alone, amounted to 2.4 times total national consumption of the Japanese.9/ 3.17 Since the Chinese economy will be more open as the turn of the cen- tury draws near, change in China's production or demand in these commodities will submit a much large impact on the external world. Japan, as a country heavily dependent upon external supply for basic materials, particularly min- eral fuels and food, will be increasingly vulnerable to disruptive changes in supply or demand in China, if such happens. It is, therefore, Japan's criti- cal interest to secure the steady growth of China's economy. 3 18 The energy problem is even more important to the Japanese. It is understood that China could become a net importer of oil before the turn of the century because of the development of the petrochemical industry, enhance- ment of consumption of plastic consumer goods and advancement of road trans- port. Currently, China supplies 7 percent of Japan's oil imports. However, Clhina is by no means a marginal supplier of oil to Japan. On the contrary, China is an invaluable source to Japan, which imports 99.7 percent of its oil consumption from abroad and relies more than 70 percent upon the Middle East. The idea that Japan and China may someday have to compete for oil in Asia causes apprehension in Japan. 3.19 China, which comprises more than 10 percent of Japans total ODA, is one of the largest recipient countries and has been directed to the energy- related and food production-related projects. Out of 42 projects deemed for the latest round of yen credit, as many as six are for construction of chemi- cal fertilizer plants and three are for hydroelectric power generating plants. There are also four coal-fueled power plant projects. 3.20 But as increase in coal consumption is expected another concern has surfaced--the environment. Traditionally, China is heavily dependent on coal as energy sources. Coal represents more than 70 percent of China's primary energy sources and also as a source for generating electricity. Since demand for electricity is estimated to double by the year 2000, coal-fired power plants will be expanded almost by twice.10/ 3.21 With consumption of almost 1 billion tons of coal each year, China is already a major source of sulfur oxide (SO.) and nitrogen oxide (NO,), not to mention carbon dioxide (CO2) which accounts for 10 percent of the world's total emissions. By the year 2000, 77 million kWh equivalent of thermal power 7/ "Japan 1991, An International Comparison," Japan Institute for Social and Economic Affairs, 1990. 8/ Ibid. 9/ Ibid. :LOI OECF, 1990, p. 74. - 50 - plants need to be added. But due to heavy additional expenses, preventive facilities such as Flue Gas Desulfurization (FGD) are hard to implement.1/ 3.22 As Japan is affected by pollutants originating in China, this is a subject frequently noted by Japainese business 12/ leaders. As a result, there seems a growing recognition of the need of extending technical assis- tance as well as financial support to China in this regard. 11/ OECF, 1990, p. 77. 12/ Environmental problems was one of the topics Japanese business leaders raised during their meeting with China's prime minister, Li Peng, in September 1990 (NicchU Keizai Kyokai Kaih6, October 1990, p. 23). - 51 - REFERENCES Export Import Bank of Japan. "Wagakuni Denshi Denki-Sangyo no Ajia ni okeru Kokusai Bungyo no Tenkai (Development of International Division of Labor in Electric and Electronic Industry of our Country)," Kaigai Toshi Kenkyujoho. February 1988. Fujita, Masataka. "Small- and Medium-Size TNCs," The CTC Reporter, No. 30, Autumn 1990, pp. 37-42. Giddy, I.H. and S. Young. "Conventional Theory and Unconventional Multina- tionals: Do New Forms of Multinational Enterprise Require New Theo- ries?" in Rugman, A.M. (ed.), New Theories of the Multinational Enterprise. New York: St. Martin's Press, 1982. Hara, Masayuki. "On Intra-Firm Industrial Adjustment: An Example of a Japanese Textile Firm," Osaka Economic Papers, Vol. 36, No. 3.4 (March 1987), pp. 198-209. _______. "On Intra-Firm Industrial Adjustment: Revisit," Osaka Economic Papers, Vol. 38, No. 3.4 (March 1989), pp. 116-119. _ "Sangyo Chosei to Naibuka Riron: Takakuka to Chokusetsutoshi (Industrial Adjustment and Internationalization Theory: Diversifi- cation and Direct Investment)," Sekai Keizai Hyoron (World Economic Review). May 1988, pp. 66-69. Imai, Satoshi. "Tai-Chui T-shi: Toshi Kankyo to Goben Kigyo kesu Sutadii (Investment in China: Its Environment and Case Studies of Joint Ventures)." JETRO, Tokyo, 1990. Institute of Developing Economies, "Trade Statistics of China: 1970-1985: Utilization and Appraisal." IDE, 1987. Japan Bond Research Institute. "Tokubetsu Repoto: Chugoku, Tarimu Kaihatsu e no Toi Michinari (Special Report: A Long Way for Developing Tarim Basin, China)," Country Risk Joho. February 4, 1991. Japan-China Association on Economy and Trade. Nicchil Keizai Kyokai Kaiho (Gazette of the Japan-China Association on Economy and Trade). JCAET, 1990. . "Nicchu Goben Chosa Repoto II (Research Report on China-Japanese Joint Ventures II)." JCAET, 1990. Japan External Trade Organization. "Kaigai Toshi Hakusho (White Paper on Overseas Investment)." JETRO, 1974-1991. Koijima, Kiyoshi. Japan and a New World Economic Order. Boulder, Colorado: Westview Press, 1977. - 52 - Komiya, Ryutaro, "Japan's Foreign Direct Investment: Facts and Theoretical Considerations" in Eorner, Silvio (ed.). International Finance and Trade in a Polycentric World: Proceedings of a Conference held in Basel by the International Economic Association. Hampshire: MacMillan Press, 1987. Ministry of Finance, Japanese Government. Zaisei Kinyu Tokei Gepp6 (Fiscal Financial Statistics Monthly). MOF, DFI Issues. Ministry of International Trade and Industry, Japanese Government. "Tsuish6 Hakusho (White Paper on International Trade)." Tokyo, 1978-1990. _ "Dai 4-kai Kaigai Jigyo Katsudo Kihon Chosa (The Fourth Basic Survey of External BusiLness Activities)." MITI, 1991. Mitsubishi Research Institute. "Chuigoku G6ben Kigy6 Ichiran (The List of Joint Ventures in China)." S5s0sha, Tokyo, 1990. Nomura Research Institute. "Nikkei Kigyo no Ajia Senryaku (Asian Strategy of Japanese Subsidiaries)," Zaikai Kansoku. November 1989. Overseas Economic Cooperation Fund, "Chuigoku Kantorii Sekuta Chosa (Country Sector Research on China)," The OECF Research Quarterly. Tokyo: OECF, No. 68, November 1990. Ozawa, T. Multinationalism, Japanese Style: The Political Economy of Outward Dependency. Princeton: Princeton University Press, 1979. Sakai, Takao and Hideki Edokoro (eds.). Nihon Denshi Sangyo no Kaigai Shinshutsu (Overseas Investment of Japanese Economics Industry). Tokyo: Hosei University Press, 1987. Small and Medium Enterprise Agency. "ChUsho Kigy6 Hakusho (White Paper on Small and Medium Enterprises)." SMEA, 1974-1991. Sumitomo Life Insurance Research Institute. "Wagakuni no Kaigaichotusetsutoshii no Shinten to Sono Boekishushi ni Oyobosu Eikyo (Development of DFI of our Country and its Impact on Balance of Trade)," News Release. Tokyo, October 1989. Takeuchi, Kenji. "Does Japanese Foreign Direct Investment Promote Japanese Imports of Manufactures from Developing Economics?" in Asian Eco- nomic Journal. Forthcoming, 1991. Tran Van Tho. "New Trends in Japan's Foreign Direct Investment and Implica- tions for the Division of Labor in the Asian Pacific Region; a Pre- liminary Examination," JERC Discussion Paper, No. 1. Tokyo: JERC, June 1987. - 53 - United Nations Center on Transnational Corporations. "Transnational Corpora- tions in World Development." United Nations, New York, 1988. . "Small and Medium Enterprises in Foreign Direct Investment," A Report for IDRC/CEDREI/UNCTC Project on Technology Transfer to Developing Countries by Small- and Medium-Sized Enterprises. To be published by MacMillan, 1991. Watanabe, Toshio and Lizhi Zheng. "Gekido Chiugoku no 90-nendai o Yomu (Specu- lating on China's Turbulent 90s)." NTT Shuppan, 1990. Yokoi, Yoichi. 'Plant and Technology Contracts and the Changing Pattern of Economic Interdependence Between China and Japan," China Quarterly. December 1990. Yoshihara, Kunio. Japanese Investment in Southeast Asia. Hawaii: The Uni- versity Press of Hawaii, 1976. The World Bank. "Japanese Direct Investment: Patterns and Implications for Developing Countries." Industry Development Division, Industry and Energy Department, World Bank, November 1988. . "The Role of Foreign Direct Investment in Development." Issues Paper for Development Committee Meeting--April 30, 1991. World Bank, 1991. ______. "China: Direct Foreign Investment." Industry and Energy Opera- tions Division, China and Mongolia Department, World Bank, 1990. - 55 - ANNEX JAPANESE STATISTICS ON DFI A. BOJ-Based Data and MOF-Based Data 1. In Japan there are two official statistical sources on annual flows of DFI. One is the balance of payment statistics compiled by the Bank of Japan (BOJ). Here, direct investment flows are recorded in both ways (outward and inward) and by nature (Japan's asset and debt). This data set is based on transactions reported from foreign exchange banks, and published each month. Since this is compiled more or less in accordance with the IMF's guide- line,l/ international comparison of DFI is often based on it. 2. However, the BOJ-based DFI data are not very useful for detailed analysis because it lacks sectoral information and provides very limited details on geographical distribution. 3. The other data source is the approval (until 1980) or notification (after 1981) required under the Foreign Exchange Law, and recorded and pub- lished by the Ministry of Finance (MOF). Although monthly information is available only in an aggregated total, detailed information with industry and country breakdowns is issued for each fiscal year which ends in March in the following year. Therefore, the foregoing analysis of Japan's DFI in Chapter II is based on MOF statistics. 4. But it must be noted that MOF-based DFI tend to overstate the flows of DFI compared with BOJ data. There are three reasons. Firstly, the MOF data are based on a broader definition of DFI. While the BOJ data count only those investments made by investors who hold at least 10 percent of the equity of a foreign enterprise, the MOF data include even those made by investors who control less than 10 percent or none of a foreign firm, as long as a close relationship exists between the investor and the invested firm. A certain type of long-term credit with a product-sharing arrangement without equity participation, which is classified as an indirect investment in BOJ statis- tics, is included as DFI in MOF data. 5. Secondly, the MOF data register only gross flows, and negative flows such as withdrawals of equity investment or repayment of loans are disre- garded. This problem is particularly disturbing because, due to lack of stock data, accumulated annual flows are used as a substitute for DFI stock posi- tion. 1/ The IMF's guideline is shown in its Balance of Payments Manual. But it is not very strict and allows fairly large differences in practice. One of the most important features of Japan's BOJ-based DFI data is the exclusion of reinvestment. - 56 - ANNEX 6. Thirdly, being only plans for investment, approval- or notification- based data may well overstate the actual DFI flows to the extent that firms may cancel, postpone,2/ or scale down the plan. B. Small Firms' DFI Statistics 7. Small firms' DFI data reported in the "White Paper on Small and Medium Enterprises" are recompiled from MOF's approval-/notification-based data by the Small and Medium Enterprise Agency (SMEA). But this data set has some flaws which make complete comparative analysis with larger firms' DFI impossible. Firstly, small firms' data are reported only in numbers of out- lays and the information on t:he amount of such DFI is extremely limited.3/ 8. Another problem comes from the fact that small firms' data cover only "newly acquired entities" and exclude loans and other forms of DFI, and also additional purchases of equities are omitted. Although MOF's DFI data on all firms do not provide detailed information in such a narrow definition, geographical aggregates for manufacturing total are disclosed in the publica- tion of the Ex-Im Bank of Japan.4/ Comparing these data we can know the gap between the MOF's regular, or broader, definition and SMEA's narrower defini- tion amounts to some 37 percent for Japan's manufacturing DFI by all firms in Asia in recent years. 9. Lastly, there is orLe more important difference between the DFI data for small firms and all firms: the difference in reporting years. While MOF's data on all firms' DFI are reported in fiscal years, which start in April of the corresponding caLlendar year and end in March of the following year, SMEA's data are compiled in regular calendar years. 2/ Although Komiya (1987, '. 243) states that "the time of actual investment is generally later--sometimes much later than the time of the approval or notification, ..." it is: unlikely that the delay takes more than a couple of months. According to the Foreign Exchange Law, the notification is to be made within a period of more than 20 days but less than two months prior to the planned investment. 3/ In the "White Paper on Small and Medium Enterprises," sectoral and geo- graphical breakdown of such investment is provided only in number of outlays and the information concerning value is unavailable in most years. Only sporadically is the aggregate total amount of small firms' DFI mentioned. The data in Annex Table 2, obtained by UNCTC directly from MITI, the Japanese government in charge of SMEA, disclosed the aver- age size of small firms' D]FI was much smaller than that of all firms' DFI. 4/ Ex-Im Bank's research monthily, "Kaigai T6shi Kenkyujoho," issued from its Research Institute of Overseas Investment, reviews the preceding year's DFI in detail in one of its fall issues. - 57 _ ANNEX Annex Table 1: JAPAN'S DIRECT FOREIGN INVESTMENT To: China China's Asia North America Europe Total share (Z) in Asia Total Number of Projects Fiscal Years 1977 511 693 162 1,761 1978 669 1,055 Z51 2,393 1979 1 0.1 0.0 759 1,228 301 2,694 1980 6 0.9 0.2 646 1,006 364 2,442 1981 9 1.3 0.4 712 961 229 2,563 1982 4 0.6 0.2 669 907 272 2,549 1.983 5 0.6 0.2 825 888 316 2,754 1984 66 9.8 2.6 674 799 269 2,499 1985 118 17.2 4.5 685 962 313 2,613 1986 85 10.4 2.7 819 1,284 404 3,196 1L987 101 7.5 2.2 1,342 1,885 537 4,584 1988 171 9.8 2.8 1,737 2,543 692 6,077 1989 126 7.4 1.9 1,707 2,848 916 6,589 Fiscal Half Years 1988F 78 10.2 2.8 768 1,179 312 2,760 1988S 93 9.6 2.8 969 1,364 380 3,317 1989F 76 8.5 2.3 898 1,371 434 3,280 1989S 50 6.2 1.5 809 1,477 482 3,309 1990F 75 9.6 2.4 779 1,351 491 3,083 Values ($ million) Fiscal Years 1977 865 735 220 2,806 1978 1,340 1,364 323 4,598 1979 14 1.4 0.3 976 1,438 495 4,995 1980 12 1.0 0.3 1,186 1,596 578 4,693 1981 26 0.8 0.3 3,339 2,522 876 8,932 1982 18 1.3 0.2 1,384 2,905 876 7,703 1983 3 0.2 0.0 1,847 2,701 990 8,145 1984 114 7.0 1.1 1,628 3,544 1,937 10,155 1985 100 7.0 0.8 1,435 5,495 1,930 12,217 1986 226 9.7 1.0 2,327 10,441 3,469 22,320 1987 1,226 25.2 3.7 4,868 15,357 6,576 33,364 1988 296 5.3 0.6 5,569 22,328 9,116 47,022 1989 438 5.3 0.6 8,238 33,902 14,808 67,540 Fiscal Half Years 1988F 170 6.4 0.7 2,659 11,770 4,046 22,857 1988S 126 4.3 0.5 2,910 10,558 5,070 24,165 1989F 254 6.5 0.8 3,906 13,782 7,690 30,824 1989S 184 4.2 0.5 4,332 20,120 7,118 36,716 1990F 180 5.1 0.7 3,553 13,322 6,622 27,678 Source: Ministry of Finance, the Japanese Government. - 58 - ANNEX Annex Table 2: JAPAN'S FLOWS OF FOREIGN DIRECT INVESTMENT BY SMEs, 1974-86 Share (Z) of DFI by SMEs DFI by all firms investments by SMEs No. of Value No. of Value No. of Year/a investments ($ mlln) investments ($ mln) investments Value 1974 615 129 1,912 2,396 32.2 5.4 1976 542 99 1,652 3,462 32.8 2.9 1978 1,219 381 2,395 4,599 50.9 8.3 1980 1,100 806 2,442 4,693 45.0 17.2 1982 927 1,033 2,604 7,808 35.6 13.2 1983 943 839 2,546 7,074 37.0 11.9 1984 1,028 1, 645 2,656 10,276 38.7 16.0 1985 967 1,707 2,513 11,190 38.5 15.3 1986 1,239 2,899 3,053 19,840 40.6 14.6 /a Fiscal year before 1980 and calendar year after 1982. Source: Ministry of International Trade and Industry, as quoted in UNCTC (1991). - 59 - STATISTICAL APPENDIX Table A.l: CHINA'S TRADE PARTNERS ($ million) Total Hong Kong Japan United States Germany Others Exports 1978 9,745 - 1,719 271 326 7,430 1980 18,272 - 4,032 983 711 12,547 1981 21,614 5,288 4,781 1,515 839 9,191 1982 21,948 5,192 4,822 1,767 775 9,392 1983 22,242 5,837 4,548 1,724 865 9,269 1984 26,140 6,910 5,420 2,430 810 10,570 1985 27,350 7,200 6,110 2,340 730 10,970 1986 30,940 9,780 4,780 2,630 1,000 12,750 1987 39,440 13,780 6,400 3,040 1,220 15,000 1988 47,540 18,270 7,920 3,380 1,480 16,490 1.989 52,490 21,920 8,360 4,390 1,600 16,220 Imports 1978 10,893 - 3,105 721 1,030 6,037 1980 19,550 - 5,169 3,830 1,333 9,218 1981 21,513 1,239 6,149 4,649 1,335 8,142 1982 18,853 1,308 3,893 4,274 963 8,415 1983 21,298 1,713 5,506 2,758 1,210 10,110 1984 27,410 2,950 8,500 4,040 1,330 10,590 1985 42,250 4,800 15,040 5,090 2,410 14,910 1986 42,900 5,610 12,440 4,720 3,560 16,570 1987 43,220 8,440 10,070 4,830 3,130 16,750 1988 55,250 11,970 11,060 6,630 3,430 22,160 1989 59,140 12,540 10,530 7,860 3,380 24,830 Note: Figures for 1978 and 1980 based on FTD, others on GAC. Source: Before 1984, IDE (1987); after 1984, OECF (1990). - 60 - STATISTICAL APPENDIX Table A.2: OECD COUNTRIES' TRADE WITH CHINA Exports to China Imports from China Total USA Japan Total USA Japan (1) (2) (3) (4) (5) (6) (7) (8) $ Million 1977 4,121 172 1,939 3,128 203 1,547 1980 13,260 3,755 5,032 8,784 1,058 4,313 1981 12,660 3,602 5,054 10,680 1,895 5,305 1982 10,536 2,912 3,500 10,812 2,284 5,327 1983 11,736 2,173 4,915 10,500 2,244 5,090 1984 15,456 3,005 7,244 12,492 3,065 5,941 1985 24,552 3,856 12,590 14,340 3,862 6,557 1986 22,416 3,107 9,936 15,840 4,771 5,726 1987 21,528 3,497 8,336 21,660 6,294 7,478 1988 25,488 5,039 9,486 28,596 8,513 9,860 1989 5,807 8,516* 11,988 11,146* Shares (Z) 1977 100.0 4.2 47.1 49.1 100.0 6.5 49.5 52.9 1980 100.0 28.3 :37.9 52.9 100.0 12.0 49.1 55.8 1981 100.0 28.5 39.9 55.8 100.0 17.7 49.7 60.4 1982 100.0 27.6 33.2 45.9 100.0 21.1 49.3 62.5 1983 100.0 18.5 41.9 51.4 100.0 21.4 48.5 61.7 1984 100.0 19.4 46.9 58.2 100.0 24.5 47.6 63.0 1985 100.0 15.7 51.3 60.8 100.0 26.9 45.7 62.6 1986 100.0 13.9 44.3 51.5 100.0 30.1 36.1 51.7 1987 100.0 16.2 38.7 46.2 100.0 29.1 34.5 48.7 1988 100.0 19.8 37.2 46.4 100.0 29.8 34.5 49.1 Source: OECD Trade Statistics, as quoted in Tsushohakusho (the White Paper on International Trade), MITI, various issues. The figures with an asterisk are from Japanese MOF statistics. - 61 - STATISTICAL APPENDIX Table A.3: JAPAN'S MANUFACTURED GOODS IMPORTS FROM CHINA ($ '00) Exports 1985 1986 1987 1988 1989 MANUFACTURED GOODS 1,599,445 1,830,285 2,767,098 4,564,130 5,659,971 CHEMICALS 301,899 326,478 444,259 619,414 708,865 MACHINERY & EQUIPMENTS - 37,920 63,136 149,567 340,762 ELECTRICAL MACHINERY - - 34,907 97,159 248,257 Electric power machinery - - - 12,024 39,182 Radio, tape recorders - - 13,356 40,391 94,459 PRECISION MACHINERY - - - 20,319 41,362 Wrist watches - - 1,305 9,710 20,105 TEXTILE 956,806 1,132,537 1,615,848 2,437,824 3,253,985 Apparel 459,960 555,466 833,118 1,447,863 2,206,655 Yarns, fabrics, etc. 496,846 577,071 782,730 989,961 1,047,330 METAL PRODUCTS - - 264,336 711,159 475,491 Iron and steel - 25,410 128,354 446,317 304,643 Nonferrous metals 84,817 39,681 115,267 235,398 131,893 OTHERS 340,740 333,350 379,519 646,166 880,868 Source: The White Paper on International Trade, MITI, corresponding issues. - 62 - STATISTICAL APPENDIX Table A.4: JAPAN'S CRUDE OIL IMPORT FROM CHINA WITHIN THE SINO-JAPANESE LONG-TERM TRADE AGREEMENT (1,000 metric tons) Agreed framework Annual volume Actual import 1978 7,000 7,100 7,110 1979 7,600 7,640 7,637 1980 8,OC00 8,000 8,010 1981 8,300 8,300 8,320 1982 8, 300 8,300 8,300 1983 8,000 - 8,600 8,000 8,001 1984 8,000 - 8,600 8,000 8,000 1985 8,000 - 8,6C00 8,000 7,973 1986 8,800 - 9,3C'0 8,800 9,267 1987 8,800 - 9,300 9,300 9,318 1988 8,800 - 9,3C0 9,100 9,141 1989 8,800 - 9,3C0 9,100 9,099 Source: Japan-China Long-Term Trade Consultation Committee, as quoted in JCAET, March 1990. STATISTICAL APPENDIX Table.§: .AAPAN'S TRADE VIM alIA (s'000) 1977 1978 1979 1980 191 1982 1983 1984 1985 1986 1987 1988 1989 1990 Aoarts RAWD TOTAL 1.938,643 3,048,748 3,698,670 5,078,335 5.095,452 3,510,825 4.912,334 7,216,712 12,477,446 9,856,178 8.249,794 9,475,987 8,515,888 6,127,624 FOODSTtFF 64 35 461 1.306 5,286 5,985 16,258 20,547 19,903 21,733 34,403 25,333 25,016 25.485 aCUDE MATER1ALS k FUELS 11,654 14,537 19,020 24,540 23,890 34,703 23,957 52,090 .88,795 100,637 68,349 66,534 75,310 LICHr-INDUSTRY PRODUCTS 239,607 271,000 306,711 618,532 787.547 516,816 500.424 664,535 882,021 892,097 961.527 1,066,515 1,024,702 TEXTILBS 198,240 197,613 164,339 403.860 599,425 367,913 286,372 382.609 471,403 447,918 475,541 588,726 554,542 609,34B OTERS 41,367 73,387 142,372 214,652 188.122 148.903 214,052 281,926 410,618 444,179 485.986 479,789 470,160 HEAVY-INDUSTRY PRODU5rS 1,665,956 2,745,359 332,179 4,373,056 4,206,387 2,891,276 4.315,788 6,414,454 11,348,978 8,750.704 7,123,665 8,242,037 7,285,505 CN[WCALS 342,952 419,597 459,614 543,090 523,150 469.37 509,735 610,214 713,010 677,525 750,484 941,441 788,161 750,968 METAL PRODUCTS 1,105,660 1,688,842 1,747,972 1,683,300 1,249,845 1,354,332 2,427,908 2,842,849 3,529,859 3,130,463 2,404,268 2,736,134 2,540,951 1,193,197 lRIN & STEEL 1,028,174 1,579,461 1,630,102 1,370,047 967.091 1,271.763 2,202,677 2,668,092 3,192,582 2,715,766 2,115,810 2,471,468 2.323,256 1,058,691 NOWf0S METALS 39,445 27,760 16,412 56,946 43,325 55,62 165.968 80,257 164.515 109,372 88,451 97,908 81,734 55,474 W}ERS 38,041 81,621 101,458 286,307 239,429 26.707 59,063 94,500 172,762 305,315 200,007 166,758 135,961 NIINERY E411PFBITS 217,344 636,921 1,124,593 2,146,665 2,433,392 1,067,107 1,378,146 2,961,392 7,106,109 4,942,727 3,968,913 4,564,462 3,956,393 N8I.1TRIC IACH1JVY 74,639 259,323 425,240 1,172,781 1,454,501 400,501 545,337 870,418 2,055,404 2,295,623 1,647,067 1,753,638 1,596,331 1,031,612 ELECRIC MACHINEY 21,464 80,983 224,070 484,295 657,307 304,836 437,619 1,064,267 2,576,436 1,569,924 1,673,259 2.154.615 1,876,145 1,391.504 T.V. Receiver. 1,499 4,025 70,122 115,377 134,845 56,642 68.896 363,866 1,073,555 358.418 283,294 358,418 283,294 241,256 TRANSPORT EBIPNJT 110,457 274,309 418,737 414,800 209.053 302,827 305,115 871.854 2,200,756 911,795 490,295 524,925 368,845 313,708 Motor vehicles 49,237 201,875 175,129 130.557 155,374 104,026 120,665 471.201 1,501,605 608,038 186,104 260,762 165,507 145,294 Ves el 51,775 52,753 215,597 268,702 18,397 147,221 138.343 256,874 369,713 118,081 89,376 66,683 45,920 53,634 0THERS 10,884 22,306 56,546 74.789 112,531 59,143 90,075 154,a53 273,513 165,385 158,292 131.284 115,072 95,191 1 ItE-OWPORS, Etc. 21,362 17,817 3,040,299 60,901 72,342 62.045 55,907 65,086 137,749 91,007 61,850 75,568 105,355 a, Imports GRAND TOTAL 1,547,344 2,030,292 2,954,781 4,323,374 5,291,809 5,352,417 5,087,357 5,957,607 6,482.686 5,652,351 7,401,429 9,850,823 11,145,762 12,017,613 FOWD FOD PRODUCTS 252,461 361,525 432,087 470,662 556,114 504,419 522.659 630,279 934,679 1,217,207 1.282,254 1,781,167 1,953,632 1,941,053 RAW MATERIALS 281,014 371,914 550,398 500,406 514,270 525.046 641,433 799,960 827,033 804,629 1,071,457 1,318,260 1,351,115 1,085.791 TEXT1LE HATH9ALS 129,750 200,824 223,677 179,415 162,122 176,948 208,238 286,394 354,735 334,109 482.711 581,044 485,918 METAL CRE5 & SCRAP 6,176 5,011 10,515 8,510 16,884 16,601 11.034 9,697 9,268 9,241 27.039 56,361 75,731 0110ES 145,008 166,079 316,206 312,483 335.264 331,497 422,161 503,869 463,030 461,279 561,707 680,855 789,466 HNERA1 RES 684,518 818,718 1,188,717 2,376,618 2,935.059 3,061,365 2,778,614 3,093,067 2.969.982 1,661,120 2.107,084 2,118,550 2,097,827 2,881,304 COAL 19,895 36,793 69,097 116,519 188,676 212,837 212.958 204,300 183,972 179,530 175,912 194,893 209,992 261,644 CUAE k PARTLY REFINED OIL 654,687 758,391 1,006.219 1,951,563 2,332,893 2.340.87 2,080,959 2,344,819 2,198,789 1,188,515 1,553,239 1,601,535.2382,248,690 PETRtOLEi PRODUCTS 9,922 23,348 113,292 307,265 412,823 507,640 483,466 542,659 586,099 292,459 375.716 312.560 338,558 356,885 HVAMFAC7IED 000DS 319,962 467,887 n70,747 953,228 1,263,100 1.227,636 1,098,332 1,408,458 1,599,445 1,630,285 2,767,098 4,564,130 5,659,971 CEICALS 40,535 55,852 124,418 198.019 244,551 230,068 218,014 247,759 301,899 326,478 444,259 619,414 706,865 651,400 NAYVW A E 37,920 63,136 149,567 340,762 513,230 ELIMICAL YAOilNERY 34,907 97,159 248,257 MilZNMCHNR 20,319 41,362 TEXTILE 184,033 307,029 485,716 533.042 551,387 672,759 621,662 887,961 956.806 1,132,537 1,615,848 2,437,824 3,2536985 3,194,309 Apparel 60,840 87,151 173,906 238,979 250,681 273,555 278,369 371,608 459,960 555,466 833,118 1,447.863 2,206,655 2,385,413 Yarn., fabric., etc. 123,193 219,878 311,810 294,063 300,506 299,204 343,293 516,353 496,846 57,071 782,730 989,961 1,047,330 IąTAL PRODUCT 264,336 711,159 475,491 556,329 OTHEFt 87,394 105,006 160,613 222,167 467,162 424,809 258,656 272,738 340,740 333,350 379,519 646,166 880.868 NIOEXTTLE Ml>. 0CD6 135,929 160,858 285,031 420,186 711,713 654,877 476,670 520,497 642,639 697,748 1,151,250 2,126,306 2,405,986 RE-IIPDRTS, Etc. 9,389 10,248 12.832 22,458 23,266 33,951 46,319 25,843 151,547 139,110 173,536 76,716 83,217 Source: Tausho Hukaku, White Paper on International Trade, 14TI, the Japanese Government, 1978 to 1990. - 64 - STATISTICAL APPENDIX Table A.6: JAPAN'S DFI TO ASIAN COUNTRIES Fiscal years 1981/82 1983/84 1985 1986 1987 1988 1989 - Annual rates -- Manufacturing DFI ($ million) To Asia 615 629 465 804 1,679 2,371 3,220 Korea 30 35 37 143 247 254 251 Taiwan 48 67 110 273 255 263 302 Hong Kong 15 9 14 52 108 85 116 Singapore 161 172 93 104 268 173 678 Subtotal 253 282 254 572 878 775 1,347 Indonesia 237 135 66 26 295 298 166 Thailand 49 59 26 87 210 626 789 Malaysia 39 113 32 65 148 346 471 Philippines 27 11 43 15 51 90 128 Subtotal 352 317 167 193 704 1,360 1,554 China 8 22 22 23 69 203 207 Z to Asia 1.30 3.50 4.73 2.86 4.11 8.56 6.43 % to ASEAN 5 1.56 4.51 8.46 7.74 7.10 13.24 9.27 Nonmanufacturing DPI ($ million) To Asia 1,747 1,109 971 1,523 3,189 3,198 5,018 Korea 58 84 97 293 400 229 355 Taiwan 7 18 3 18 113 109 192 Hong Kong 350 478 118 450 964 1,577 1,783 Singapore 63 102 246 198 226 574 1,224 Subtotal 478 681 464 959 1,703 2,489 3,554 Indonesia 1,185 239 342 224 250 288 465 Thailand 14 37 23 37 40 233 487 Malaysia 19 28 47 93 15 41 202 Philippines 26 45 17 6 21 44 74 Subtotal 1,243 349 429 360 326 606 1,228 China 36 95 78 203 1,157 93 231 X to Asia 2.06 8.57 8.03 13.33 36.28 2.91 4.60 ? to ASEAN 5 2.76 21.09 11.56 36.38 209.60 7.88 9.42 - 65 - STATISTICAL APPENDIX Table A.6: (cont'd) Fiscal years 1981/82 1983/84 1985 1986 1987 1988 1989 - Annual rates -- All Industry DFI ($ million) To Asia 2,361 1,738 1,436 2,327 4,868 5,569 8,238 Korea 88 118 134 436 647 483 606 Taiwan 55 84 113 291 368 372 494 Hong Kong 365 487 132 502 1,072 1,662 1,899 Singapore 224 274 339 302 494 747 1,902 Subtotal 731 963 718 1,531 2,581 3,264 4,901 Indonesia 1,422 374 408 250 545 586 631 Thailand 63 95 49 124 250 859 1,276 Malaysia 57 141 79 158 163 387 673 Philippines 53 56 60 21 72 134 202 Subtotal 1,595 665 596 553 1,030 1,966 2,782 China 44 117 100 226 1,226 296 438 Z to Asia 1.86 6.73 6.96 9.71 25.18 5.32 5.32 X to ASEAN 5 2.42 12.47 10.70 26.43 80.45 10.91 9.35 Source: Kaigai Toshi Kenkyujoho, the Export-Import Bank of Japan, May 1989 and November 1990. .- 66 - STATISTICAL APPENDIX Chart A.1: COMPOSITION O]F JAPAN'S EXPORTS TO CHINA 100- - - 90 OTHERS s0 CHEMICALS 70- TEXTILES 60 50- 40 -MACHINERY 30 20- 1I IRON & STEEL 0i 1977 1978 1979 1980 1981 1982 'I963 1984 1985 1966 1967 1968 1969 199 - 67 - STATISTICAL APPENDIX Chart A.2: COMPOSITION OF JAPAN'S IMPORTS FROM CHINA % ¶00- 90 OTHERS so 70 60 TEXTILES 60 40 ~~~~~~~~~~~~MINERAtL FUELS 30 ~~~~~~~~~~~~RAW MA~TERIA~LS 20- 10 FOOD X FOOD PRODUCTS 0- 1 1977 1978 1979 1980 1961 1982 1983 1984 1965 1986 1987 1968 1989 1990 - 68 - STATISTICAL APPENDIX Chart A.3: BREAKDOWNI OF JAPAN'S MACHINERY EXPORTS TO CHINA e- 4- 3 - O g E > GTHER MACHINERY TRANSPORT EQU IPMENT ELECTR IC MACH INERY 2 0-1977 1978 1979 U g g gGENERAL MACHINERY 1977 1978 1979 1980 1981 1982 1983 '1984 1985 1986 1987 1988 1989 1990 - ^ u -_ RTATTSTTC.AL APPE-NDfTX chart A.4: CHINA'S PLANT AND TECHNOLOGY IMPORTS 50 - _ so% :liF-R,l' S SHAFRE IN PERCENT 18% 4'.5 97 197 197P9)N19 PORTIO2N 198 196 1 45% 25 2% o 20 ~ ~ ~ ~ 7 197.981759018 ~ 93 9418 9618 9818 - 70 - STATISTICAL APPENDIX Chart A.5: JAPAN'S IMPORT PRICE OF OIL FROM CHINA 38- 34- 32- 30 26 26- 24- 22- 20- 18 16 114 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 0 PRICE OF OIL ($/BL) Distributors of World Bank Publicationts ARGENTINA FINLAND SEXICo SOIJTH AFIUCA. 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Book Se-Ir (AI Ld. 33. Mdumomod H_ AWd Slrt ro.-d EGYPT AXA8 REPUsLIC OF PO Boo 45245 P.O Bo SMS AJ Ahn Nbkwl i.ddh VENEZUEtA Al Geol Sh Weled dde E C.b. KOREA. REPUSUC OF SINGAPORE. TAIWAN. Aptdo. 6037 P. Koee Book C1.Ibw MYANMAILRiNEI C. 1060 A The Miadalle. ObŁO PO. B"o101 K.oawr.uAoou InormatioPnkiblis 41. S%li Soue S-I Pri,ot LAd YUGOSLAVIA Cobo 02 stR R. Poi-P,nbhd.*iA Jogod 4 mOV KS:Op KUWAIT Bld1- P.nOw 36 EL SALVADOR MEMAR WoM Sen1,t. 24 Nw Indubial iRood TgO R Wt F ode PO. . 5465 S pogsre 1953 YU-IICDBdgde A-sida M-d n q-Ar-p 03532 Ed,fioSISA. 1.. Plo MALAYSiA S5 Sca-odor Unikuiy od Mrlay. CoopverW Bokhop. Limbd P.O Bo- 1127. IJo. P.t" B-u K,.u L uope Recent World Bank Discussion Papers (continued) No. 118 Improving the Pe!formance of Soviet Enterprises. John Nellis No. 119 Public Enterprise Reform: Lessonsfrom the Past and Issuesfor the Future. Ahmed Galal No. 120 The Information Technology Revolution and Economic Development. Nagy K. Hanna No. 121 Promoting Rural Cooperatives in Developing Countries: The Case of Sub-Saharan Africa. Avishay Braverman, J. Luis Guasch, Monika Huppi, and Lorenz Pohlmeier No. 122 Performance Evaluationfor Public Enterprises. Leroy P. Jones No. 123 Urban Housing Reform in China: An Economic Analysis. George S. Tolley No. 124 The New Fiscal Federalism in Brazil. Anwar Shah No. 125 Housing Reform in Socialist Economies. Bertrand Renaud No. 126 Agricultural Technology in Sub-Saharan Africa: A Workshop on Research Issues. Suzanne Gnaegy andjock R. Anderson, editors No. 127 Using Indigenous Knowledge in Agricultural Development. D. Michael Warren No. 128 Research on Irrigation and Drainage Technologies: Fjfteen Years of World Bank Experience. Raed Safadi and Herve Plusquellec No. 129 Rent Control in Developing Countries. Stephen Malpezzi and Gwendolyn Ball No. 130 Patterns of Direct Foreign Investment in China. Zafar Shah Khan No. 131 A New View ofEconomic Growth: Four Lectures. Maurice FG. Scott No. 132 Adjusting Educational Policies: Conserving Resources While Raising School Quality. Bruce Fuller and Aklilu Habte, editors No. 133 Letting Girls Leam: Promising Approaches in Primary and Secondary Education. Barbara Herz, K. Subbarao, Masooma Habib, and Laura Raney No. 134 Forest Economics and Policy Analysis: An Overview. William F. Hyde and David H. Newman, with a contribution by Roger A. Sedjo No. 135 A Strategyfor Fisheries Development. Eduardo Loayza No. 136 Strengthening Public Service Accountability: A Conceptual Framework. Samuel Paul No. 137 Deferred Cost Recoveryfor Higher Education: Student Loan Programs in Developing Countries. Douglas Albrecht and Adrian Ziderman No. 138 Coal Pricing in China: Issues and Reform Strategy. Yves Albouy No. 139 Portfolio Performance of Selected Social Security Institutes in Latin America. Carmelo Mesa-Lago No. 140 Social Security and Prospectsfor Equity in Latin America. Carmelo Mesa-Lago No. 141 China's Foreign Trade and Comparative Advantage: Prospects, Problems, and Policy Implications. AlexanderJ. Yeats No. 142 Restructuring Socialist Industry: Poland's Experience in 1990. Horni J. Kharas No. 143 China: Industrial Policiesforan Economy in Transition. Inderjit Singh No. 144 Reforming Prices: The Experience of China, Hungary, and Poland. Anand Rajaram No. 145 Developing Mongolia. Shahid Yusuf and Shahidjaved Burki The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'lena Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France I -1 Marunouchi 3-chome Chiyoda-ku, Tokyo 100,Japan Telephone: (202) 477-1234 Telephone: (1) 40.69.30.00 Facsimile: (202) 477-6391 Facsimile: (1) 40.69.30.66 Telephone: (3) 3214-5001 Telex: wui 64145 woRLDBANK Telex: 640651 Facsimile: (3) 3214-3657 RCA 248423 WORLDBK Telex: 26838 Cable Address: INTBAFRAD WASHINGTONDC ISBN 0-8213-1993-0