ABSTRACT
This chapter analyzes the exit strategy. “Exit” takes multiple forms, including hard departure from China or softer diversification to third countries. Both forms have increased following political crises. The chapter shows that political crises do trigger diversification through an analysis of Japan’s economic relationship with China and the countries that are seen as replacements or complements for China, particularly within Southeast Asia. The effects are not even across sectors or time: firms that have both high risk perception and a high degree of direct damages from political crises are more likely to exit from China. Those that have low damages but high risk perception may also exit, though more likely through diversification rather than complete withdrawal. All forms of diversification increased after the 2012 political crisis. This chapter uses four sources of data: firm-level data from the private firm Toyo Keizai, government surveys of overseas Japanese subsidiaries from the Ministry of Economy, Trade, and Industry (METI), narrative interviews, and news reports of Japanese businesses throughout Southeast Asia.
