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Investigation of the "China effect" on crowding out of Japanese FDI: An industry-level analysis (1990-2004)

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  • SALIKE, Nimesh

Abstract

This paper applies a dynamic panel model to investigate whether China is crowding out Japanese foreign direct investment (FDI) from other economies of Asia. We examined this with industry-level data on Japanese FDI flows into Asian economies. In order to deal with possible problems of serial correlation and endogeneity, we estimated coefficients using a difference and system generalized method of moments to examine the "China effect" on industries. We found a significantly high degree of crowding out effect by China on its Asian counterparts. Among twelve industries, a crowding out effect was found in nine industries, including electrical & electronics--the biggest industry for Japanese FDI. However, a complementary effect was found in two industries, one of them being transport, which is the second biggest industry for Japanese FDI. We conclude that while China's rise is a prominent threat for the region, it could be transformed into an opportunity in vertically fragmented industries.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 21 (2010)
Issue (Month): 4 (December)
Pages: 582-597

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Handle: RePEc:eee:chieco:v:21:y:2010:i:4:p:582-597

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Web page: http://www.elsevier.com/locate/chieco

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Keywords: China Asia Foreign direct investment Crowding out Production fragmentation;

References

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  1. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  2. Salike, Nimesh, 2009. "Is China taking away foreign direct investment from other Asian economies?: An analysis of Japanese, US and Korean FDI," MPRA Paper 26583, University Library of Munich, Germany.
  3. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  5. Blomström, Magnus & Kokko, Ari, 2003. "The Economics of Foreign Direct Investment Incentives," EIJS Working Paper Series 168, The European Institute of Japanese Studies.
  6. Chakrabarti, Avik, 2001. "The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions," Kyklos, Wiley Blackwell, vol. 54(1), pages 89-113.
  7. THORBECKE, Willem, 2008. "The Effect of Exchange Rate Volatility on Fragmentation in East Asia: Evidence from the Electronics Industry," Discussion papers 08016, Research Institute of Economy, Trade and Industry (RIETI).
  8. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  9. Kimura, Fukunari & Ando, Mitsuyo, 2005. "Two-dimensional fragmentation in East Asia: Conceptual framework and empirics," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 317-348.
  10. Kozo Kiyota & Shujiro Urata, 2004. "Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 27(10), pages 1501-1536, November.
  11. Barry Eichengreen & Hui Tong, 2005. "Is China's FDI Coming at the Expense of Other Countries?," NBER Working Papers 11335, National Bureau of Economic Research, Inc.
  12. Singh, Harinder & Kwang W. Jun, 1995. "Some new evidence on determinants of foreign direct investment in developing countries," Policy Research Working Paper Series 1531, The World Bank.
  13. Ligang Liu & Kevin Chow & Unias Li, 2007. "Has China Crowded out Foreign Direct Investment from Its Developing East Asian Neighbors?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 15(3), pages 70-88.
  14. Prema-chandra Athukorala & Nobuaki Yamashita, 2005. "Production Fragmentation and Trade Integration: East Asia in a Global Context," Departmental Working Papers 2005-07, The Australian National University, Arndt-Corden Department of Economics.
  15. Benoît Mercereau, 2005. "FDI Flows to Asia," IMF Working Papers 05/189, International Monetary Fund.
  16. John H Dunning, 1988. "The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions," Journal of International Business Studies, Palgrave Macmillan, vol. 19(1), pages 1-31, March.
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Citations

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Cited by:
  1. Athukorala, Prema-chandra & Yamashita, Nobuaki, 2006. "Production fragmentation and trade integration: East Asia in a global context," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 233-256, December.
  2. Du, Yuxin & Teixeira, Aurora A.C., 2012. "A bibliometric account of Chinese economics research through the lens of the China Economic Review," China Economic Review, Elsevier, vol. 23(4), pages 743-762.

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