Resource and Labor Cost Differentials between Japan and Asian Host Economies and Location Decisions of Japan's Manufacturing Multinationals

After a brief review of relevant literature, this paper uses survey data collect by JETRO (various years) to examine the extent of labor and energy cost differentials between Japan and major Asian hosts to Japan's manufacturing multinational enterprises (MNEs) in recent years. The comparisons reveal large differences in nominal labor costs, but these differences are often offset by similarly large differences in labor productivity. In other words, differences in productivity adjusted labor costs are generally rather modest, suggesting that they exert only a limited influence on location decisions by most of Japan's manufacturing MNEs. Differences in resource (energy and water) costs are also relatively small, again suggesting that these differences, as well as related differences in the stringency of environmental policy, are also likely to exert a modest influence on location choice. The fact that labor costs and resource costs account for much smaller shares of total costs or output than costs of materials and parts, for example, is another reason to expect that energy and labor-cost differentials exert only a mild influence on location decisions in most cases. This conclusion is broadly consistent with the previous literature on location choice by MNEs, which usually indicates that demand-side factors such as host market size, as well as agglomeration-related reductions in transaction costs, are of more consequence for location choice than resource or labor costs.