Hair growth in humans is complicated and influenced by several different genes and hormones. The prevailing theory is that we evolved to have less hair than primates because our ancestors evolved sweating as a strategy to keep cool on the African Savannah, and too much hair gets in the way of sweating.
But the evolutionary reasons why hairiness varies with ethnicity are unclear. Caucasian people are generally hairier than the Japanese, for example, even though testosterone levels are the same. The difference seems to be in how sensitive the hair follicles are to those testosterone levels.