Japanese direct investment in East Asia: changing division of labor and technology transfer in the household electric appliance industry

Abstract

Postwar overseas direct investment by Japanese businesses started in the 1960s. Since the appreciation of the yen in 1985, this investment has rapidly been increasing, mainly in the newly industrializing economies (NIEs) and ASEAN countries in East Asia. As a result, the ratio of direct investment to the production activities of Japanese firms has become very high. Direct investment is part of manufacturers' production activities overseas to make profit; it is not a mere transfer of capital to other countries, but involves transferring the technology and knowhow needed for production. The technology and knowhow transferred overseas due to direct investment are changing with the changing international environment and industrial structure, and this changing pattern of technology transfer is affecting both Japan and the host countries. This study deals with the household electric appliance industry which has been positive toward direct investment in East Asia since 1985. It will analyze the transfer of technology and knowhow by Japanese manufacturers through direct investment and the effects of such technology transfer on Japan and the host countries. Many studies have been conducted on Japan's direct investment in East Asia. Kojima [1985, 1989] analyzed from a macroeconomic standpoint what sort of impact Japanese direct investment has had on the industry, trade structure, etc. of Japan and the host countries. Sekiguchi and Tran [1986] studied the relationship between direct investment and technology and knowhow, but their study did not analyze the transfer of technology and knowhow through "linkage effects" (described later). Thus, this study will attempt to analyze the linkage effects of technology and knowhow transfer following direct investment. The linkage is important because even if the amount of direct investment was the same, the effects of investment on the economic development of the host country differ greatly depending on the linkage effect.