Global Performance of Japanese Manufacturing Multinational Firms: Productivity comparison between parent firms and their affiliates abroad

We analyze the productivity level for parent firms and their affiliates in foreign countries, using large-scale parent-affiliate-linked data for the Japanese manufacturing multinational firms. We first measure the labor productivity level converted to the internationally comparable unit using the purchase power parity (PPP) rates for industry-level output and inputs. Comparing the average labor productivity between parent firms in Japan and their affiliates abroad, we find that the productivity level for affiliates in the United States and Taiwan already surpassed that of their parent firms in the early 2000s. Affiliates in Korea reached their parent firms' level in 2008. Although the productivity of affiliates in China is still much lower than that of parent firms, it has been gradually catching up. We also examine the determinants of productivity catch-up by foreign affiliates and find that the higher the parent firms' productivity is and the lower the initial productivity of their affiliates, the faster is the affiliates' productivity in catching up. The result suggests that the pull from the parent firms is an important source of productivity growth for their affiliates, and that the improvement of productivity by parent firms will consequently drive up the worldwide productivity level for multinational firms.