A Subnational Analysis of Japanese Direct Investment in Canada

Abstract This study examines longitudinal aspects of Japanese foreign direct investment in Canada. In looking at the longitudinal aspects, the focus was on a descriptive analysis of entry and exit rates and on an econometric analysis of the determinants of subsidiary survival and exit. In these analyses, we,find that exit rates are related to subsidiary-level variables such as business size, expatriate employment levels, equity-ownership levels, and entry mode. The sector and region in which the investments are made is also related to subsidiary survival, with manufacturing-sector subsidiaries located in Ontario being the least likely to exit. The results of our study suggest that region and industry interact, both to draw investment to a region and to influence the likelihood of survival of foreign-owned businesses. Furthermore, the focus on regional issues for Canada shows that even within a small open economy subnational (interprovincial) variance can have important effects on the characteristics and performance of foreign direct investment. Resume La presente etude porte sur l'evolution des investissements directs japonais d l'etranger, realises au Canada. De fafon plus precise, cette recherche s'interesse, sur une base longitudinale, a l'analyse descriptive des taux d'entree et de sortie ainsi qu'a l'analyse econometrique des facteurs expliquant la survie ou la sortie de filiales japonaises. A la lumiere de ces analyses, il ressort que les taux de sortie sont influences par certaines caracteristiques des filiales telles que la taille, la proportion d'expatries, la part du capital-action et le mode d'entree. Le secteur et la region ou l'investissement s'ef fectue influencent egalement les chances de survie dune filiale ; la probabilite la plus foible de quitter le pays appartiendrait aux filiales manufacturieres situees en Ontario. Les resultats de l'etude suggerent que la region et l'industrie interagissent de facon a attirer les investissements dons une region donnee et d influencer les chances de survie de compagnies appartenant a des interets strangers. Ces resultats sur les disparites regionales du Canada suggerent que, meme ae l'interieur d'une economie de marche restreinte, la variance sousnationale (ou interprovinciale) peut avoir d'importantes repercussions sur les caracteristiques et la performance des investissements directs a l'etranger. The increasingly prevalent role that Japanese multinational enterprises (MNEs) have played as sources of outward foreign direct investment (FDI) in the 1980s and 1990s has been matched by a growth in empirical studies of Japanese FDI (UNCTAD, 1997). Recently, much has been written about the locational determinants of Japanese FDI (e.g., Yamawaki, 1993), the motivations of Japanese MNEs for FDI (e.g., Kogut & Chang, 1991), and the determinants of foreign entry strategies and entry modes (e.g., Hennart & Park, 1993). The majority of studies on Japanese FDI, as well as on trade and investment in general, have adopted a cross-sectional approach to analysis. However, as is becoming increasingly apparent in the literature on FDI, there is an evolutionary component to a firm's and a country's FDI (e.g., Chang, 1996), and cross-sectional analysis is not suited to the study of longitudinal patterns in FDI strategies. Along with the cross-sectional emphasis in existing studies on FDI, there has also been a focus on the nation as the geographical unit of analysis. However, a number of studies point to the significant and important differences that can be observed in the pattern of investment within countries. This variance in the nature of investment occurs both in geographically large and populous countries such as the United States (Kasoff, Benedict, & Lauer, 1997), and geographically smaller and less populous countries like the United Kingdom (Dicken, Tickell, & Yeung, 1997). In this study, we extend the literature on the subnational characteristics of FDI by exploring the regional characteristics of Japanese investment in Canada. …