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Impact of historical conflict on FDI location and performance: Japanese investment in China

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Abstract

Historical relations between countries bring important explanatory power for foreign direct investment (FDI) decisions, yet little is known on whether a home–host country relation exhibits heterogeneous effects on FDI across the country’s subnational regions. In this study, we examine the long-term impact of historical conflict on FDI location choices and performance. Using a sample of 8,646 Japanese FDI in China, we show that civilian casualties in different provinces of China during the Second Sino–Japanese War exert deterring effects on Japanese FDI location choices. Furthermore, we demonstrate that civilian casualties negatively affect Japanese FDI performance and political capital accumulation strategies, in the forms of excessive tax payment and local employment, can reduce this negative effect. This study contributes to the discussion on how within-country differences of historical factors affect FDI location decisions and performance. The findings on firms’ political capital accumulation strategies also provide important implications for FDI operation in an environment characterized by historical animosity.

Résumé

Les relations historiques entre pays ont un pouvoir explicatif important concernant les décisions d’investissements directs étrangers (IDE), mais on sait peu de choses sur la question de savoir si une relation ‘pays hôte – pays d’accueil’ provoque des effets hétérogènes sur les IDE dans les régions d’un pays. Dans cette étude, nous examinons l’impact à long terme des conflits historiques sur les choix de localisation et la performance des IDE. À l’aide d’un échantillon de 8 646 IDE japonais en Chine, nous montrons que les victimes civiles dans les différentes provinces de la Chine pendant la Seconde Guerre sino-japonaise exercent des effets dissuasifs sur les choix de localisation des IDE japonais. En outre, nous démontrons que les pertes civiles affectent négativement la performance des IDE japonais et que des stratégies d’accumulation de capital politique, sous la forme de paiement excessif de taxes et d’emplois locaux, peuvent réduire cet effet négatif. Cette étude contribue au débat sur comment les différences de facteurs historiques au sein d’un pays affectent les décisions de localisation et la performance des IDE. Les conclusions sur les stratégies d’accumulation de capital politique des entreprises fournissent également des implications importantes pour le fonctionnement des IDE dans un environnement caractérisé par une animosité historique.

Resumen

Las relaciones históricas entre los países traen un importante poder explicativo sobre las decisiones de inversión extranjera directa, sin embargo, poco se sabe sobre si la relación de país de origen y país receptor muestra efectos heterogéneos en la IED entre las regiones sub-nacionales del país. En este estudio, examinamos el impacto a largo plazo de los conflictos históricos sobre las decisiones y rendimiento de la ubicación de la IED. Usando una muestra de 8646 IED japonesas en China, mostramos que las bajas civiles en diferentes provincias de China durante la Segunda Guerra Sino-Japonesa ejerce efectos disuasorios sobre las elecciones de la ubicación de la IED japonesa. Además, demostramos que las bajas civiles tienen un efecto negativo en el rendimiento de la IED japonesa y las estrategias políticas de acumulación de capital, en las formas de pagos excesivos de impuestos y empleo local, puede reducir este efecto negativo. Este estudio contribuye a la discusión de cómo las diferencias dentro de un país de factores históricos afectan las decisiones de ubicación IED y el rendimiento. Los hallazgos sobre las estrategias políticas de acumulación de capital también tienen importantes repercusiones en la operación de la IED en un ambiente caracterizado por animadversión histórica.

Resumo

As relações históricas entre os países trazem um poder explicativo importante para as decisões em relação ao investimento direto estrangeiro (FDI), no entanto pouco se sabe se a relação entre país sede e país destino apresenta efeitos heterogêneos no FDI em regiões subnacionais do país. Neste estudo, examinamos o impacto do conflito histórico sobre as escolhas de localização e o desempenho do FDI no longo prazo. Usando uma amostra de 8.646 FDI japoneses na China, mostramos que as baixas civis em diferentes províncias da China durante a Segunda Guerra Sino-Japonesa exercem efeitos dissuasivos sobre as escolhas de localização do FDI japonês. Além disso, demonstramos que as vítimas civis afetam negativamente o desempenho do FDI japonês, e que as estratégias de acumulação de capital político na forma de pagamento excessivo de impostos e emprego local podem reduzir esse efeito negativo. Este estudo contribui para a discussão sobre como em cada país, as diferenças internas de fatores históricos afetam as decisões de localização e desempenho do FDI. As conclusões sobre as estratégias de acumulação de capital político das empresas também fornecem importantes implicações para a operação do FDI em um ambiente caracterizado por histórica animosidade.

概要

国家之间的历史关系为外国直接投资(FDI)决定带来重要的解释力,但很少知道母国 – 东道国关系是否对全国地方区域的FDI表现出异质影响。在这项研究中,我们研究历史冲突对FDI位置选择和业绩的长期影响。使用8646个日本在中国的FDI样本,我们显示中国不同省份在第二次中日战争中平民的伤亡对日本FDI位置选择产生遏制影响。更进一步,我们展示了平民伤亡对日本FDI业绩造成负面影响,同时政治资本积累策略,以过量纳税和解决当地就业的形式,可减少这一负面影响。本研究对关于历史因素的国内差异如何影响FDI位置决定和业绩的讨论做出了贡献。对公司政治资本积累策略的研究发现也为在带有历史敌意的环境中的FDI运作提供了重要启示。

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Acknowledgements

We thank the Editors John Cantwell, Ron Boschma, and three anonymous reviewers for their insightful suggestions. We also appreciate the helpful comments from Ram Mudambi, Shige Makino, Gongming Qian, Xufei Ma, Grazia Santangelo, and participants at the JIBS Special Issue Conference, New Orleans, 2016. Special thanks to Sjoerd Beugelsdijk for the advices on method improvement. The support from Office of International Studies and Programs at University of Missouri-St. Louis and Shanghai Pujiang Program (16PJC048) is gratefully acknowledged.

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Authors and Affiliations

  1. Department of Marketing, University of Missouri-St. Louis, St. Louis, MO, USA

    Gerald Yong Gao

  2. Department of Marketing, Hong Kong Baptist University, Kowloon Tong, Hong Kong

    Danny Tan Wang

  3. Antai College of Economics and Management, Shanghai Jiao Tong University, 1954 Huashan Road, Shanghai, 200030, China

    Yi Che

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Accepted by Ron Boschma, Guest Editor, on 8 October 2016. This article has been with the authors for two revisions.

Appendix: Variable Definitions and Sources

Appendix: Variable Definitions and Sources

Variable

Definition

Source

Civilian casualty

Ratio of civilian casualties to total population in 1936

A historical account of the surveys of China’s losses during the war with Japan; Statistical Abstract of the Republic of China

Wars

Number of major and moderate wars

A historical account of the surveys of China’s losses during the war with Japan

Property losses

Log of movable property and real estate per capita

An estimate of China’s losses in the war against Japan

Distance

The minimum Great Circle Distance of the province to four major seaports, plus the distance of these sea ports to Japan or each foreign country (unit: km)

The Great Circle Distance method

Infrastructure

Log of the length of highway per square kilometer in a province

China Statistical Yearbook

Agglomeration

Ratio of the number of firms in the same industry-region cell to the national total in the same industry, with domestic and foreign firms calculated separately

Annual Survey of Industrial Firms (ASIF), conducted by National Bureau of Statistics of China (NBSC)

Special economic zone

A dummy variable indicating whether a province contains any special economic zones

Ministry of Foreign Affairs

Property rights protection

Average ratio of a firm’s extralegal payment to its total revenue in a province

Survey of China’s private enterprises

GDP

Real province gross domestic product with 1992 as the base year

China data online (University of Michigan)

Education

Secondary school enrollment rate at the province level

China Data Online (University of Michigan)

Geographic distance

Log of Great Circle Distance between a Chinese province’s capital and a foreign country

The Great Circle Distance method

Cultural distance

Each province culture score minus a foreign country’s cultural score

World Values Survey; Mahalanobis Distance (Berry et al., 2010)

Institutional distance

Standardized province measures of institutional quality minus a foreign country’s standardized institutional quality score

Survey of China’s Private Enterprises; The Polity IV Project

Economic distance

Province GDP per capita minus a foreign country’s economic proxy

China Statistical Yearbook; Mahalanobis Distance (Berry et al., 2010)

State capital

A dummy variable indicating whether a Japanese FDI contains investments from the Chinese government

Survey of Foreign-invested Enterprises conducted by NBSC

Tax payment

Ratio of extra tax paid by a firm to its total assets

Survey of Foreign-invested Enterprises conducted by NBSC

Local employment

Ratio of number of local workers employed by a firm to local labor forces

Survey of Foreign-invested Enterprises conducted by NBSC

Exporting

A dummy variable equal to 1 if a firm exports and 0 otherwise

Survey of Foreign-invested Enterprises conducted by NBSC

Debt-to-equity ratio

Ratio of debt to firm equity

Survey of Foreign-invested Enterprises conducted by NBSC

Capital labor ratio

Ratio of capital to total employment

Survey of Foreign-invested Enterprises conducted by NBSC

Herfindahl index

Sum of the square of firm market shares in an industry

ASIF conducted by NBSC

Return on assets

Ratio of firm profit to total assets

Survey of Foreign-invested Enterprises conducted by NBSC

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Gao, G.Y., Wang, D.T. & Che, Y. Impact of historical conflict on FDI location and performance: Japanese investment in China. J Int Bus Stud 49, 1060–1080 (2018). https://doi.org/10.1057/s41267-016-0048-6

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