|Author Name||Willem THORBECKE (Senior Fellow, RIETI)|
|Research Project||East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances|
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This Non Technical Summary does not constitute part of the above-captioned Discussion Paper but has been prepared for the purpose of providing a bold outline of the paper, based on findings from the analysis for the paper and focusing primarily on their implications for policy. For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI).
Macroeconomy and Low Birthrate/Aging Population (FY2020-2023)
East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances
How does a depreciation of the yen or other currencies affect firms in Japan and other countries? If Japanese exporting firms pass through exchange rates into foreign currency prices, then their export volumes should increase. If Japanese exporting firms keep foreign currency prices constant, then their profit margins in yen should increase. Either way, their profits should increase. If Japanese import-competing firms find that a depreciation of the yen causes foreign firms to raise yen prices, then the volume of imports that compete against Japanese goods should decrease. If Japanese import-competing firms find that a yen depreciation causes foreign firms to keep their yen prices constant, then the foreign firms' profit margins should decrease. Either way, foreign firms should be less able to compete against Japanese firms in the Japanese market.
A country's firms do not only compete with foreign firms, but also cooperate with them. Japanese firms supply parts and components, primary goods, and capital goods that are inputs for foreign firms and also purchase inputs from foreign firms. When the yen depreciates, foreign firms can either purchase more of these inputs, purchase the same quantity at lower cost, or purchase higher quality imported inputs. This should benefit foreign firms.
One way to investigate the overall impact of exchange rate changes on firm profitability is to examine how they impact stock prices. Finance theory indicates that stock prices equal the expected present value of future cash flows. If a domestic firm competes with foreign firms, then a depreciation of its currency relative to its competitor's currency should increase the domestic firm's profitability through the channels discussed above. If a domestic firm cooperates with foreign firms by purchasing imported inputs, then a depreciation should decrease the home firm's profitability by decreasing its ability to purchase imported inputs. If a firm is both competing and cooperating with firms in another country, then the overall reaction of stock prices to the exchange rate indicates whether the cooperation or competition channel predominates. Thus examining the response of stock prices to exchange rate changes can shed light on whether domestic and foreign firms are competitors or comrades.
This paper examines the stock market exposures of sectors in France, Germany, Japan, and South Korea. If a firm in one country competes with firms in another country, an appreciation of its currency relative to its competitors' currency should lower its profitability and its stock price. If a firm cooperates with firms in another country by purchasing imported intermediates from them, an appreciation of its currency relative to its comrades' currency should increase its ability to purchase inputs and raise its profitability and stock price.
Figure 1 indicates the proportion of sectors in France, Germany, and South Korea that benefit and are harmed when their country's currency appreciates relative to the Japanese yen. The figure indicates that 60 percent of the sectors examined in France and Germany and 27 percent of the sectors examined in Korea benefit when their currency appreciates against the Japanese yen and that virtually no sectors are harmed by yen depreciations. This implies that Japanese firms play a vital role as suppliers of intermediate goods to firms in France, Germany, and Korea. By contrast, the results in the paper point to substantial competition between European and Korean firms.
Hausmann et al. (2014) reported that Japan had the most complex economy in every year from 1995 to 2019. On the other hand, France's complexity ranking fell from 8th in 1995 to 19th in 2019. Emlinger, Jean, and Vicard (2019) also found that France's export dynamism has fallen, with its global share of exports of goods and services falling 40 percent between 1999 and 2017.
The finding that Japan produces vital manufactured goods points to a way for France to regain its manufacturing prowess. France could do this by attracting Japanese foreign direct investment (FDI). Ozawa (2007) noted that Japanese firms transmit a ‘package’ of capital, managerial skill, and technical knowledge to host country partners. Kojima (1973) observed that Japanese partners impart know-how and general industrial experience concerning assembly techniques, material selection, combination, and treatment techniques, machine operation and maintenance techniques, provision of blueprints; and technical data, training of engineers and operator, plant lay-out, selection and installation of machinery and equipment, quality and cost controls, and inventory management. The IMF (2012) presented econometric evidence that a 1 percent increase in Japanese FDI over the 1985-2011 sample period raised growth in the host economy by between 0.58 and 0.69 percent. The IMF reported that this far surpassed growth caused by FDI from other countries.
How could France attract Japanese FDI? Dunning (1988) demonstrated that a country's ability to draw in FDI depends among other factors on its locational advantages. Locational characteristics include factor endowments, technology transferability, wage levels, human and physical infrastructure, and market-friendly institutions. Bénassy-Quéré et al. (2019) observed that France has lost attractiveness as a manufacturing location. They noted that high taxes on production multiply costs throughout the production chain. France's Conseil National de Productivité (2019) remarked that these taxes are distortionary. The Conseil also reported that the skills of French workers are below the OECD average, that older workers lose skills, and that there is a large gap between skills of students from different socio-economic backgrounds.
To attract FDI, France should address these locational disadvantages. Tax reform to ameliorate distortions and high costs would help. In addition, educational reforms to raise the average skills of workers is important. This is difficult because students from disadvantaged neighborhoods face heavy challenges. Often there is only one parent in the house, and that parent works long hours. Drugs and crime proliferate in their neighborhoods. Students become detached from schools and other institutions of the French Republic. Overcoming these obstacles and facilitating learning requires focused attention from parents, educators, government officials and other stakeholders.
- Bénassy-Quéré, A., Blanchard, O., Boone, L., Cette, G., Criscuolo, C., Epaulard, A., Jean, S., Kyle, M., Martin, P., Ragot, X., Roulet, A., and Thesmar, D. 2019. Productivity and Competitiveness in the Euro Area: A view from France. VoxEU Weblog. 24 July.
- Conseil National de Productivité. 2019. Productivité et Compétitivité: Où En Est la France Dans la Zone Euro? Paris: Conseil National de Productivité.
- Dunning, J. H. 1988. The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions. Journal of International Business Studies 19, 1–31.
- Emlinger C., Jean, S., and Vicard, V. 2019. The Surprising Sluggishness of French Exports: Reviewing Competitiveness and its Determinants. CEPII Policy Brief 24. Paris: CEPII.
- Hausmann, R., Hidalgo, C.A., Bustos, S., Coscia, M., Chung, S., Jimenez, J., Simoes, A., and Yıldırım, M. 2014. The Atlas of Economic Complexity. Cambridge, MA: MIT Press.
- International Monetary Fund (IMF). 2012. 2012 Spillover Report. Washington: International Monetary Fund.
- Kojima, K. 1973. A Macroeconomic Approach to Foreign Direct Investment. Hitotsubashi Journal of Economics 14, 1-21.
- Ozawa, T. 2007. Professor Kiyoshi Kojima's Contributions to FDI Theory: Trade, Structural Transformation, Growth, and Integration in East Asia. The International Economy 11, 17–33