Determinants of Decoupling and Friend-Shoring of Japanese MNCs in China

• In Event: Political Risk and Foreign Direct Investment

Abstract

How are MNCs and the global supply chains that link them to China adjusting to the heightened political risks in the era of decoupling? Since the U.S.-China Trade War, Western governments have increased efforts to encourage MNCs to divert investment from an increasingly authoritarian China. Japan is one of the largest sources of foreign direct investment (FDI) in China and also one of the earliest countries to adopt a strategy of FDI diversification away from China. In 2020, the Japanese government even launched an ambitious $2.2 billion subsidy scheme to incentivize Japanese companies to move production out of China. Are Japanese firms exiting China? If so, where are they investing instead? We draw a weighted sample of 500 Japanese firms from the universe of 15,114 registered Japanese firms from the Foreign Investment in China (FIEC) dataset. We match these firms to parent companies in Japan and map the expansion and contraction of their foreign operations between 2017 to 2020. We will analyze whether MNCs that leave China are more likely to relocate production to democratic or allied countries. We will also examine the net effect of Chinese and Japanese industrial policies on FDI.

Authors

• Jiakun Zhang, University of Kansas

• Timothy Cichanowicz, University of Kansas

• Samantha Vortherms, University of California, Irvine