Lessons from the Past: How Interwar Japanese Investment Shaped China’s Cotton Spinning Industry

In a newly published study in the Journal of Development Economics, economists Holger Görg, Toshihiro Okubo, Eric Strobl, and Maximilian von Ehrlich examine a pivotal but underexplored chapter in Chinese industrial history: the wave of Japanese “Zaikabo” investment in China’s cotton spinning sector during the interwar period. The research provides one of the first systematic analyses of foreign direct investment spillovers in a historical context, tracing how the presence of Japanese-owned mills influenced the productivity, behaviour, and market position of domestic Chinese spinners.

The study matters well beyond its historical frame. For scholars of development economics, it offers a rare natural experiment in which technological transfer, capital mobility, and geopolitical tension interacted within a rapidly industrialising economy. The cotton spinning industry was the engine room of early Chinese manufacturing — a sector where productivity gains had outsized effects on employment, urbanisation, and the broader industrial ecosystem. By documenting how domestic firms absorbed — or struggled to absorb — knowledge and efficiencies from foreign entrants, the authors deliver insights that resonate with contemporary debates about foreign investment, supply-chain resilience, and indigenous innovation capacity.

For China, this historical lens is especially instructive. The path from foreign-dominated industry structure to domestic technological leadership did not happen overnight — nor did it occur without friction. The study’s findings underscore the importance of absorptive capacity, institutional arrangements, and market structure in determining whether FDI becomes a catalyst for genuine local development or a force for dependency. In an era where China once again occupies a central position in global manufacturing and technological competition, understanding the economic dynamics of earlier waves of foreign investment is not merely an academic exercise — it is a practical guide for interpreting the long arc of the country’s remarkable industrial ascent.

Why it matters:
This research gives international economists, investors, and policymakers a historically grounded model for understanding how foreign capital interacts with a large, developing host economy. Its conclusions carry practical implications for any market seeking to balance openness with domestic capacity building.

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