Moving Out of China? Evidence from Japanese Multinational Firms

Author Name Changyuan LUO (Fudan University) / Chunxiao SI (Fudan University) / ZHANG Hongyong (Senior Fellow, RIETI)
Creation Date/NO. October 2020 20-E-077
Research Project Studies on the Impact of Uncertainty and Structural Change in Overseas Markets on Japanese Firms
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Against the background of the decline in foreign direct investment in China and the rest of the world, this study examines the firm-level and macroeconomic factors that affect foreign divestment in China. It employs a unique dataset of Japanese multinational enterprises (MNEs) from 1995 to 2016 and survival analysis. Foreign divestment involves a dissolution or withdrawal and a reduction in control share. The study resulted in the following findings. First, affiliate firm size, Japanese capital share, profitability, labor productivity, and export proportion to Japan are all negatively associated with divestment. The probability of divestment increases with the size of the parent firm and experience in the Chinese market but decrease with business relatedness between affiliate and parent firms, entry threshold, and market concentration. Second, an affiliate's firm size and profitability as well as market competition are the main determinants of a dissolution or withdrawal (more extreme methods of divestment). Meanwhile, an affiliate's capital structure and productivity are the main determinants of a reduction in control share (a relatively moderate method of divestment). Third, larger parent firms are likely to make spatial adjustments in their production across regions in China and to adjust their activities from manufacturing to services. We also examine the heterogeneous effects of foreign divestment by region, industry, and period. Based on this study, China would benefit from monitoring and reacting to the dynamic trend of foreign capital withdrawal and creating a favorable business environment for MNEs.