1. Department of Economics
17th Northeast Asia Economic Forum
Tianjin, China October 2008
Japan-Korea-China E3 Econometric Simulation of CDM through FDI: Energy Saving Investment of Japanese Firms in China
Mitsuo Yamada
Department of Economics
Chukyo University,
Nagoya, JAPAN

2. 1 Background and Motivation
East Asian Economies, called “Economic Center of Growth” by World Bank, are expanding their economies.
Japan, Korea, and China are the core countries of this area.
Japan has to attain the KP goal in , and thereafter has to create further energy saving society.
Decreasing huge Energy Use without losing economic development is an important issue for China.
Concentrating the resources into the advantageous sector, Korea seeks the way to keep technological advantage in the world market.
Economies of these countries are closely connected, and their policy actions affect not only the own economy but also neighbors.
Developing an E3 econometric model, we conduct some simulation analysis for energy saving economies.

3. Issues for China
Improving energy efficiency without losing economic growth.
How attained?
Clean Development Mechanism (CDM)
Government-based cooperative activities
Technology transfer through Foreign Direct Investment (FDI)

4. Issues for Korea
Relatively smaller population than the other countries means small resource and small domestic market.
International trade and overseas production are important for Korea.
Concentrating the resources into the advantageous sector, Korea seeks the way to keep technological advantage in the world market.

5. Issues for Japan
About 12% reduction in GHG emission is needed to attain the Kyoto target in 2010.
Further improvement of energy efficiency will be required after KP.
Voluntary efforts in the domestic economy
Use of Kyoto Mechanism( CDM, JI, ET )
Introduction of Environmental Taxes

6. 2 Comparison of the Three Economies

7. Foreign Direct Investment in 2003
Net Export in 2000 Asia I-O Table
Foreign Direct Investment in 2003

8. Comparison of the Three Economies
Economic Scale and Growth
Japan is the biggest among the three countries.
China grows faster than Japan and Korea.
Korea’s GDP per capita becomes one-third of Japan’s one.
International Trade
Trade among the three countries is not so large in scale.
Japan and Korea compete in the trade of transport equipment.
The three countries compete in trade of the electrical machinery, though they produce cooperatively in some parts.
Capital Flow
In China, Japan and Korea’s investment becomes large recently.
They contributes to the growth of China.

9. Comparison of the Three Economies
Energy
Korea is energy use per capita expands to the almost same level of Japan.
China’s energy use is the largest among them, though energy use per capita is lower than those in Japan and Korea.
Japan’s Energy Use per GDP seems almost stable comparing the other countries.
GHG emissions
China’s CO2 emission is the biggest among them.
Korea’s CO2 emission per capita becomes almost same as that in Japan.
CO2 emission per GDP in China has declined, though it is still larger than those of Japan and Korea.

10. Our Research Interest
Overseas production of Japanese firms is expanding.
One-third of Japanese FDI is brought in East Asian region.
Some Japanese firms starts to seek the possibility to introduce high-energy efficient technology into the own overseas factories to reduce energy consumption and to attain CO2 emission right through CDM.
Panasonic’s case
In ten factories of electrical machinery in Malaysia, they invested energy saving CDM projects to attain emission right of 8,100 ton per year for ten years.
In China, they have the same plan of introducing energy saving CDM projects to attain the emission right of 5,000 ton per year, which is the amount of 2.5% emission in their factories in Japan.

11. Our research interest
Japanese firms is competing with Korean firms in the electrical machinery market.
They have invested in China and have produced their products and parts mainly to reduce production costs.
Such foreign investment in China induces intra-industrial trade among them.
Japanese firms start to introduce energy-saving technology into the own overseas factories to attain CO2 emission right.
Approving as CDM project is important motivation for such investment of the private firms.
To introduce energy-saving technology into Chinese economy, it might become one of important measures.
We would like to evaluate not only social effects of such CDM projects in China but also induced impacts on Japan and Korea.

12. 3 Model and Simulation Our model( KY-MERIT-E3 ) consists of
Three countries’ sub-models; Japan, Korea and China
One sub-model of international trade.
Each country’s sub-model is developed as an E3 multi-sectoral model, which integrates a macro model and an input-output model into one model, including energy and environment parts.
There are 21 sectors in each country’s model
KY-MERIT-E3: Kinoshita-Yamada Multi-sectoral and Multi-regional Econometric Model for the Research on Industry and Trade – E3 version

13. Figure : The structure of the Model: KeYMERIT-E3

14. Figure : Economy (Macro & Sectors) Part

15. Figure : The Energy & Environment Parts

16. 4 Simulation and the Results
Some Japanese companies invest to settle energy-saving equipment in their own factories in China using CDM mechanism.
Their main purpose is both saving the production cost and acquiring certification to CO2 emission right.
The more they might to shift the production factories to China, the more they have burden to reduce CO2 emission in Japan.
For China, such FDI might become one of the important measures to introduce energy-saving technologies in its own country, because such investment mainly reduces the demand of electricity.

17. Simulation assumption
Shift the production from Japan to China by one percent of Chinese production in electric machinery sector.
Decrease in the electricity-efficiency by 10 percent for the additional Japanese overseas production in the same sector.
Investment factor is important because it induce further production which offset the energy-saving effect. However, we ignore the effect because of lack of the data.

18. Changes from the base, the 7th period in the Simulation

19. Japanese companies of electrical machinery sector invest in China and expand their production by 1 percent amount of electrical machinery production in China.
This expansion requires additional demands of intermediate input mainly in China. Textile and miscellaneous manufacturing product are induced, percent and percent in the 7th period respectively. Total product in China increases 0.12 percent in China
For GDP base, nominal GDP in China, rises by percent, the real GDP decreases by percent, because of increase in GDP deflator by 0.5 percent.

20. Through the international trade, production in Japan and Korea is increased. This impact is stronger in Korea than in Japan.
Though production of electrical machinery in Japan is shifted to China, it increases by percent. The total production in Japan rises by percent. Prices do not rise so much.

21. Japanese electrical machinery companies improve the electricity consumption in their own factories in China by 10 percent.
Chinese final consumption of electricity is saved by percent, and primary energy supply is reduced by 0.05 percent, which brings the reduction in CO2 emission, percent in the 7th period.
In Japan and Korea, both electricity consumption and primary energy consumption increase. This effect is bigger in Korea than in Japan.
The reduction in Chinese energy consumption is larger than the increase in both Japanese and Korean energy consumption in summation.
So we expect that the reduction in CO2 emission of Japan, Korea, and China as a whole.

22. Concluding Remarks
Even if the production shift from Japan to China is happened, the domestic production would not decrease in Japan, because import demand from China offset the reduction of the production.
The energy saving activities in electrical machinery sector in China brings the reduction of the energy consumption in the economy as a whole, so the reduction in CO2 would be expected in China.
The energy consumption in Japan and Korea might be increased a little bit, but not so large comparing the reduction in China.
Then we expect that the energy consumption in three counties would be reduced, which brings reduction in CO2 emission in three countries, as a whole.

23. This means that there are some rooms for three countries to act cooperatively to promote such activities of the private sectors.
Using an E3 econometric model linking Japan, Korea, and China, our simulation analysis focus on the evaluation of production shift of Japanese companies from Japan to China and their energy-saving investment
However, in this analysis, we don’t include the effect through investment demand increase, because of lack of sufficient information on the cost of the investment, which we have to improve in the next research.
We should consider not only partial effect on the firms that invest CDM project to attain CO2 emission right but also social impact on the economy as a whole.