The impacts of Japanese direct investment in China on the Sino‐Japanese bilateral trade

Purpose - The economic linkages between China and Japan have been strengthened through both trade and Japanese direct investment in China for past decades. The purpose of this paper is to investigate the impacts of Japanese direct investment in China on the Sino‐Japanese bilateral trade. Design/methodology/approach - An index, RRCA, was used to illustrate the changes of relative comparative advantage of major products, and AR(p) models used to examine the effects of Japanese FDI on both Chinese exports and Chinese imports. Findings - This paper shows that Japanese direct investment in China has contributed not only to the increase of Chinese exports to Japan, but also to the increase of Chinese imports from Japan. This suggests that that the relations between Japanese direct investment in China and the bilateral trade are complementary. Research limitations/implications - The sample size used in the empirical studies in this paper is very small. In addition, the studies focus only on the effects of FDI on trade while the effects of trade on FDI are neglected. Originality/value - This paper provides evidence that Japanese direct investment in China is an important determinant factor of the rapid growth of the bilateral trade. It also shows that the appreciation of RMB against Japanese Yen is associated with a decrease in Chinese trade surplus in the bilateral trade.