The nature of the new wave

The new wave of Japanese direct investment in manufacturing in ASEAN since 1985 differs from the old wave in both scale and character. Japanese direct investment in ASEAN over the three years from 1985 to 1987 totalled over US$3.3 billion compared to an accumulated total of US$12.5 billion over the previous three decades. Manufacturing investment in the old wave focused mostly on resource-based and import-substitution industries, producing for the domestic markets of host countries. Ventures usually involved the assembly of components and parts imported from Japan. The old wave increased exports of semi-raw materials, parts, components and machinery from Japan. The investment was mostly joint venture with local partners. Big Sogo Shosha played an important role in matching and organizing the joint ventures, and sometimes were directly involved in the local production jointly with the Japanese manufacturers and local partners.

The new wave is significantly more export-oriented. The Japanese firms involved are both final manufacturers and their subcontractors, including a large number of small and medium-sized enterprises. They prefer 100 per cent ownership to joint ventures, particularly in competitive export-oriented sectors such as electronics components, electrical machinery, food processing and automobile parts. As Japanese overseas investment is becoming more export-oriented, the new wave leads to an increase in exports of manufactures from ASEAN to Japan and to third countries. Several Japanese firms are developing complex production networks spanning several countries, resulting in increased infra-firm trade among Japanese subsidiaries, and between subsidiaries and the headquarters. There is also evidence of increased local sourcing by Japanese subsidiaries or joint-venture firms, thereby increasing backward linkages with local subcontractors and material producers. Japanese firms are also developing new forms of investment, usually involving contractual sales of innovative technology and management to local producers in return for minority equity share.

The analysis of Japanese overseas investment

Foreign direct investment is a distinct form of capital movement because investors have direct control over management and production in their overseas operations.