Structuring of transborder flows of national industrial Capital: Japan in the 1970s and 1980s, and China in the 2000s and 2010s

Abstract

This study employs a broad, “Northian” framework of institutional analysis to investigate the effects of institutions of different national jurisdictions on the structuring of transborder outflows of Japanese industrial capital in the 1970s and 1980s and Chinese industrial capital in the 2000s and 2010s. While general theories, such as the stage theory of industrial development, can explain the growth of national industrial capital in the source country, this study focuses on the effects of institutions on the surge and the regional and sectoral destinations of Japanese and Chinese industrial capital outflows. These institutions are laws, policies and guidelines of the state; rules and normal practices in corporate organization and financing, and mechanisms of state-industry relations in the source country; laws, regulations, policy and practices of the host country in regulating and managing inflow foreign industrial capital; and intergovernmental arrangements for transborder industrial capital flow and operation. The study finds these three sets of institutions formed an effective transborder institutional environment that influenced national industrial capital to invest in certain countries and industrial sectors. The distinct institutional forms of organizing transborder industrial production in Japan’s case then and China’s case now are different from the multilateral institutional approach that dominated East Asia from the 1990s.

Notes

1 Industrial capital is capital generated from and invested in value added production and service provision in sectors in the real economy, or more precisely, in 实体经济/実体経済 in the Chinese/Japanese language environment. “Industrial” here is used to mean 产业/産業 (production sectors) rather than 工业/製造業 (manufacturing) which is one sector in the economic structure.

2 This time series data is available only for years from the 1970s. The point on Japan’s FDI boom in the 1960s and supporting data are covered in prior discussions.

3 JETRO’s Historical Data on Japan’s FDI outflow underlying Figure 3 has no data on ASEAN 4 before 1994, no data on NIEs and China before 1987. Japan’s first FDI boom is empirically confirmed with data on Figure 2, backward projected on the basis of the patterns shown after 1994 and the literature on Japan’s FDI in the 1970s and 1980s discussed earlier. In this context, Jump of FDI to US in the 1980s suggests an unusual effect of US trade policy toward Japan and the new current exchange regime arising from the Plaza Accord involving USD and YEN.

4 Data from UNCTAD shows, global capital investment increased from around US$19.8 trillion in 2001 to 70.7 trillion in 2016. Clearly there is a great amount of capital capacity available and a significant level of global capital movement. But 2/3 of this is in portfolio investment rather than in foreign direct investment. Even in FDI itself, much of the actual flows goes to developed economies, amounting to 67.2% in 2000, and 59.1% in 2016. Only 37% goes to developing economies, the trend is continually developing (UNCTAD 2017b, x).

5 A major OECD report advised 10 years ago that between 2005 and 2030, global infrastructure need for investment will be between US$53–71 trillion (OECD 2006, 29). ADB on developing Asia’s infrastructure needs. The report finds that capital investment in the infrastructure sector in the 45 developing economies in Asia will need 26 trillion for the next 15 years, 2015–2030, with 1.7 trillion each year (ADB 2017, xi). This is the actual size of global foreign direct investment in 2016. The report finds infrastructure investment in developing Asia only meets half of the demand at the present.

6 These projects include Chinese power station projects in Angola and Ghana in 2000s, for evidence in particular of the shift from “loan-based”, or “resources for infrastructure” development financing to “investment-led” development financing (Chen 2017, 19–33); China-Egypt Tada Suez Economic and Trade Cooperation Zone (SETC), for how industrial park/special economic zone operates for Chinese industrial capital; AVIC Energy Cambodia, for building global value and supply chains through Chinese transborder capital investment; China-Pakistan Economic Corridor (CPEC), for the BRI partnership as a platform for Chinese enterprises to participate collectively in transnational infrastructure projects in a project country; and Alibaba in PayTM in India, for how the need for industrial development in the project country drives transborder flow of Chinese industrial capital.

7 Douglas North and Robert Thomas discuss “efficiency” as a quality in economic organization that establishes institutional arrangements which “create an incentive to channel individual economic efforts to activities that bring private rates of return close to the social rates of return” (North and Thomas 1973, 1).