We explore the interdependent location choice behavior of Japanese auto parts firms in China at both the industry level and the product level. The international business literature has shown that foreign entrants prefer locations near other firms, particularly other firms from the same country or other firms from the same industry.
We test several hypotheses using a sample of 279 manufacturing plant entries into China by Japanese auto parts manufacturers between 1989 and 2005. First, the results show that Japanese auto parts firms are more likely to prefer locations near other Japanese firms in the same industry for subsequent entries into any region in China rather than for their first entry. Conversely, they are more likely to prefer locations near other Japanese firms that produce the same category of products for their first entry into any region in China rather than for subsequent entries. These findings are inconsistent with those of previous studies, which argue that FDI (Foreign Direct Investment) agglomerations no longer have an impact on location choices for subsequent entries by firms in a given industry. Our results suggest that there is a time lag between the effects at the industry level and those at the product level.
Secondary, the results show that Japanese auto parts firms are more likely to prefer locations near other firms in the same industry for entries that involve JVs with Japanese trading companies. These findings suggest that the roles played by Japanese trading companies include not only reducing information asymmetries but also integrating business groups.