Japanese foreign direct investment : recent trends, determinants, and prospects

In the late 1980s, Japan became the biggest source of foreign direct investment (FDI) in the world. The main beneficiaries of the rapid increase in investment flows were industrial countries, but the developing world (especially East Asia and Latin America) also received substantial inflows. In East Asia, the newly industrial economies (NIEs) of Hong Kong, Republic of Korea, Singapore, and Taiwan (China) were, at first, production bases for Japanese manufacturing in the 1970s and early 1980s. But in the late 1980s, these countries became new, expanding consumer markets, attracting huge Japanese investments in the tertiary (service) sector, while investments in manufacturing shrank rapidly because of rising labor costs. The Association of Southeast Nations (ASEAN) and China became Japan's new production base. In Latin America (mostly small Caribbean countries) Japan's focus is almost exclusively on tax havens. Globally, Japan's investments in the secondary (manufacturing) and service sectors of the major Latin American nations are only marginal. Japanese investment flows declined drastically after 1989, mostly because of the depressed global and domestic economy, after rapid asset price deflation in Japan. Hardest hit by the decline were the United States and Europe. Japanese FDI flows to developing countries also declined, but less. The biggest losers were the NIEs and the Caribbean tax havens. The biggest losers were the NIEs and the Caribbean tax havens. Japanese investments continued to grow in other Latin American countries and, even more, in the ASEAN and China. Japanese investors sharply reduced tertiary sector investments, primarily geared to maintaining or expanding markets. Investments in the secondary sector, making use of low-cost production, continued to expand. This trend is expected to continue in the near future, with FDI flows declining further, albeit more slowly. Low-wage production countries such as China and Indonesia will attract an increasing share. Investment to expand markets in the industrial countries and the NIEs are likely to decline. But medium-term prospects for Japanese FDI in developing countries are brighter, as economic recovery and continuing current account surpluses in Japan will lead to a resumption of active foreign investment by Japanese multinational corporations.