S. Majumder

ACCORDING to a recent survey, Japanese firms operating in China are a worried lot owing to the anti-Japanese protests in April. A third of the 414 Japanese firms surveyed expected the stir to cripple their business activities this fiscal. While some are planning to postpone or cancel investment projects, a few are even considering shifting their production base elsewhere.

Realising the graveness of escalating tension between the two economic giants of Asia, the People's Daily of China alerted that Japan-China relations were moving through "chilly politics and hot economics." It warned that unless efforts were made to ease the tension, it could transform into "chilly politics and cool economics." It observed that China's top talent was unwilling to work for Japanese companies, especially after calls by Chinese activists to boycott Japanese goods. Many Japanese companies are realising that the `original sin' cannot be wiped off from the Chinese hearts.

The transformation from "hot' to "cool' economics began last year. Until 2003, Japan had always been China's biggest trade partner. However, during the first three quarters of 2004, China-Japan trade dropped to No. 3. Between 1999 and 2003, Japan's reliance on China increased but not vice-versa, as China's trade with other countries rose at a faster pace. Does the resurgence of anti-Japanese sentiments in China bode well for India? The possibility of Japanese investments drifting into India is not unlikely. In this context, it is pertinent look at how the Japan-China economic relation deepened, notwithstanding the historical scar.

Until the Asian currency turmoil in 1997, Japanese direct investments were shifting from developed to developing countries, mainly to the Asean. It was in the late 1990s that economic ties between Japan and China deepened. In 2000, Japanese investment in China soared for the first time since 1995. The revision in China's preferential policies to attract MNCs and its entry into the WTO lured the Japanese. As a result, China emerged the biggest receiver of Japanese foreign direct investment (FDI) among the Asian countries.

The main factors that helped boost Japanese investments in China are: low production costs; high potential for expansion; the possibility to take on domestic competition in Japan by re-exporting the products manufactured by Japanese affiliates in China; and using it as a base for third country exports. Thus, China emerged a workshop for Japanese manufacturers.

What about Japanese investments in India? As in China, these have largely been confined to the manufacturing sector. While Japan's investment motive in India is basically host country sales, in China it includes re-export to Japan and third country exports as well. In the Asean region, Japan's intent is again mainly third country exports.

Much of Japanese investments in China go into manufacturing, with electrical machinery taking the biggest share, followed by transportation equipment such as passenger cars and vehicles. In India, too, Japanese investments are largely in these two sectors.

India and China are the two pillars of the Asian economies. With high GDP growth and buoyant domestic sales, thanks to booming private consumption, they hold immense growth potential, unlike the West, which is under a prolonged spell of recession.

Against the background of escalating Sino-Japanese tension, can India garner a higher share of Japanese investments? With the US pressuring China to revalue the yuan, the country's status as a low-cost economy may take a hit.

India has huge domestic demand and this only likely to rise what with GDP on a high growth trajectory. Interestingly, much of the country's growth has of late come from non-agricultural activities. These factors insulate investors from long-term recession or any unforeseen economic adversity.

India scores over China in offering a larger market to Japanese investors through intra-regional trade. The seven-nation SAARC, scheduled to operate in the SAARC Free Trade Area from January 1, 2006, offers a trade opportunity of $14 billion annually. In addition, a number of free trade agreements (FTAs) are in the pipeline.

India also has an edge over China in the supply of skilled manpower, both technical and managerial. Though China is the world's biggest workshop, over the decades, its development has been marred to an extent by a dearth of talent.

According to a survey by The Economist, India, with a number of market-oriented drug companies, is ahead of China in pharmaceuticals.

The Chinese pharmaceutical industry, on the other hand, is dominated by sluggish, state-owned enterprises that are not internationally competitive. But the most important area where India outscores China is on the political front.

Japan has hardly faced political hurdles or anti-Japanese sentiments in India. Japan's timely help during the drought of the 1980s and with the Delhi metro are but few instances of Indo-Japanese cooperation.

Though Japan is one of the biggest contributors to the Chinese economy's growth, xenophobia, especially of the Japanese, can never be erased from the hearts of the Chinese.

For Japanese investors, who have also always put economic factors above political relations, the China experience should be at the back of their minds in their quest for building closer economic ties with other countries.

(The author is Senior Researcher in a Japanese MNC in New Delhi.)

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