Determinants of Decoupling and Friend-Shoring of Japanese MNCs in China

• In Event: Geopolitical Risks and Supply Chain Challenges

Abstract

How are multinational firms (MNCs) and the global supply chains that link them to China adjusting to the heightened political risks in the era of decoupling? Since the U.S.-China Trade War and the Russian Invasion of Ukraine, Western governments have increased efforts to encourage MNCs to divert investment from an increasingly authoritarian China toward politically reliable allies and partners. Using subsidiary-level panel data on the global operations of Japanese MNCs from 2011-2021, we reconcile conflicting expectations offered by "business as usual" and "follow the flag" scholars about the degree to which these firms are decoupling or friend-shoring in response to political risks in China. We find that aggregate Japanese investment in China has continued to grow over the past decade despite heightened political risks and a slight decline in the overall share of global subsidiaries based in China, suggesting that the pace and extent of decoupling are quite limited. However, we also find a positive relationship between investment size and the strength of host country security ties at the subsidiary level. This lends support to the idea that alignment of security interests promotes greater investment and that friend-shoring is happening on the margins.

Authors

• Timothy Cichanowicz, University of Kansas

• Jiakun Zhang, University of Kansas