Follow FDI: Production Networks and the Geography of Globalization

Follow FDI refers to the phenomenon whereby a supplier of a multinational firm establishes foreign affiliates in the same countries as their multinational customer, effectively replicating the supply chain abroad. Using novel Japanese data, we show that roughy one third of local affiliate sales (and purchases) are to other Japanese affiliates operating in the same country, indicating that a substantial share of multinational activity takes place within replicated domestic supply chains. Event studies confirm that when a firm starts selling to a multinational in Japan, the supplier is more likely to become a multinational itself. Our findings provide new micro-level evidence on how domestic value chains shape global value chains and the geography of globalization. The results highlight (i) the importance of domestic production networks in mediating access to international markets and (ii) a novel channel through which multinational activity spills over to domestic suppliers. These findings broaden and enhance our understanding of (i) why firms become multinationals, (ii) the dynamics of affiliate sales and (iii) the potential spillover effects of multinational activity.