International Production/Distribution Networks and Domestic Operations in terms of Employment and Corporate Organization: Microdata Analysis of Japanese Firms

This paper empirically investigates patterns of globalizing corporate activities and their domestic operations and trade, using firm-level panel data on Japanese firms in 1998-2003.

Journalistic literature in North America and Europe often claims that the globalization of corporate activities, particularly the expansion of operations in less-developed countries, is prone to reduce domestic corporate activities. This paper proves that such a claim of industrial hollowing-out is unwarranted, at least at the firm level, in the case of Japanese manufacturing firms investing in East Asia.

The manufacturing sector in Japan has had a secular trend of reducing domestic employment in the past decades. The regression analysis, however, finds that manufacturing firms expanding operations in East Asia are more likely to increase domestic employment than other manufacturing firms, while non-manufacturing firms, mostly in the wholesale sector, do not present such a significant pattern; the growth of domestic employment of globalizing manufacturing firms is higher by as much as three to eight percent.

As for domestic establishments and affiliates, manufacturing firms expanding operations in East Asia do not present any statistically significant differences from other manufacturing firms, while non-manufacturing firms tend to reduce it. Furthermore, firms expanding operations in East Asia tend to intensify export/import activities with East Asia more than other firms, suggesting the complementarity between trade and FDI. This is further supporting evidence for expanding fragmentation of production by Japanese firms and their involvement in further development of production/distribution networks in East Asia.

Overall, Japanese manufacturing firms globalizing corporate activities seem to retain larger domestic operations than other firms. Such tendency is actually stronger in machinery industries in which international production/distribution networks are actively extended.