India most attractive for Japanese firms, China lags

India has overtaken China as the most attractive overseas investment destination for Japanese manufacturers over the next decade amid increased labor costs in China, a survey said.

China, however, remained the most popular investment destination over the next three years in the survey conducted last summer, having retained top spot since fiscal 1992 when the state-backed financial institution began conducting the survey by the Japan Bank for International Cooperation.

The result suggests an increasing number of Japanese companies are aiming to diversify foreign investment amid caution about rising labor costs and anti-Japanese demonstrations in China.

An additional survey conducted in November in the wake of bilateral tension over the Senkaku Islands in the East China Sea provided further evidence of the trend.

China no longer dominates Japanese foreign investment and Japanese companies "are increasingly turning their attention to such (emerging) markets as India and Vietnam," said Toshiharu Mimura, a senior economist at JBIC.

In the survey conducted in the summer of 2010, in which multiple responses were allowed, 74.9 per cent of the 605 Japanese manufacturers selected India as their investment destination over the next 10 years, compared with 71.7 per cent that chose China. In the previous year, China was first and India second.

As a destination over a shorter period, China came top at 77.3 per cent, followed by India at 60.5 per cent, Vietnam at 32.2 per cent, Thailand at 26.2 per cent, and Brazil at 24.6 per cent.

The companies that chose China and India said they viewed the two markets as having high growth potential.

Many companies, however, expressed concern over rising personnel costs in China amid the country's rapid economic growth, as well as labor issues, apparently reflecting a recent rise in disputes between Japanese firms and Chinese workers seeking wage hikes.

In the follow-up study to gauge the investment stance of Japanese companies after maritime collisions between a Chinese trawler and Japanese patrol boats near the disputed Senkaku Islands in September, 24.8 per cent responded that China was not as attractive as before, while 46.9 said it was important to reduce their dependence on China and diversify investment risks.