Inter-area/Border Crossing

Organized Panel Session

4 - Political Conflict and Firm Diversification in East Asia

Friday, March 23
10:30 AM - 12:30 PM
Location: Jefferson, Mezzanine Level

The China+1 strategy is where international firms diversify portions of their overseas investments from China to ASEAN or South Asia. This paper uses “China+1" investment patterns of China’s East Asian neighbors to analyze the differential effects of political conflict on economic strategies. The East Asian economies investing in China face similar economic pressures such as rising wages and a more competitive domestic market, but have different political relationships over time with China. Based on extensive fieldwork in Japan and China as well as systematic statistical analysis, this paper tests how foreign investment patterns shift in reaction to episodes of interstate political conflict. I find that Japanese firms are increasingly sensitive to political risk, a trend that is driving them out of China and into Southeast Asia. The results are particularly strong for consumer-oriented industries such as automobiles and electronics that depend on sales in local Chinese markets, and less so for low-skilled manufactures such as textiles that are export-oriented. The sectoral variation reflects the economic effects of anti-foreign backlash. The findings hold implications for a future shift in China and South Korea’s economic relationship as China’s economic retaliation for the anti-missile system Thaad continues.

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