California ranks far ahead of other states and all but a handful of countries in Japanese manufacturing investment, but the state's dominant position is slowly eroding as Japanese corporations are turning their attention to Mexico and other parts of the United States, according to a recent report by Martin Kenney, a professor of applied behavioral sciences at UC Davis. Kenney, with research assistant James Gordon, found that the companies are choosing sites outside of California both for new plants and as sites to transfer existing operations within the state. High labor and land costs are the primary factors underlying the trend, but Japanese executives also expressed a belief that other locations, especially in the Southeast and Midwest, offer equal or superior work forces and supplier networks, Kenney says. Although Japanese investment in the U.S. economy has become a political issue, it will play an increasingly important role in the future, especially if U.S. industry continues to decline and there are rapid cuts in defense spending. At the moment, Kenney says, California lacks coherent economic policies to attract foreign, and especially Japanese, investment. "California has to seriously re-evaluate its perception of itself and its attractiveness to Japanese firms," Kenney says.