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Contents Introduction

This paper investigates the determinants of the regional distribution of Japan’s MNCs in Asian manufacturing. Based on a previous literature review, which suggests that host economy size, labor costs (adjusted to account for the influences of productivity and labor quality), and agglomeration of Japanese investors were among the most important factors influencing the locations chosen by Japanese MNCs, while evidence regarding a wide range of other potential determinants was more mixed, it constructs index of investment attractiveness from a large number of relevant components. It then uses the index to rank 11 larger Asian hosts to Japan’s manufacturing MNCs in a baseline and 11 alternative scenarios. The baseline and nine of 11 alternative scenarios revealed three distinct groups of host economies, three most favorable (China, Singapore, Hong Kong), five intermediate (Malaysia, Taiwan, Korea, Thailand, Indonesia), and three least favorable (India, Vietnam, Philippines) locations. Rankings of the economies within each group differed somewhat depending on the scenario considered, however. This index approach is an important supplement to the existing literature because it allows one to simultaneously examine the influence of a larger number of potential determinants and to explicitly consider investor heterogeneity in greater detail than many other empirical methodologies.