The Effects of Japanese Customer Firms' Overseas Outsourcing on Supplier Firms' Performance

We examine the effects of globalization on firm performance through buyer-seller networks. In particular, we focus on the impact of the start of customer firms' overseas outsourcing on supplier firms' productivity, markups, employment, average wage, and sales. Previous literature examines the direct effect of import activities on firm productivity, but there has been only limited research looking at the effect of import activities through buyer-seller networks. This paper analyzes the effects of changes in customers' import status on supplier firms' performance. We combine propensity score matching with difference-in-differences (DID) estimation, comparing the performance of manufacturing firms whose major customers begin importing with those whose customers continue to procure intermediate inputs within Japan. Our results indicate that the impact of a customer's commencement of importing on suppliers' markups, productivity, and sales is negative but with no significant effects on wage and employment. These results imply that an increase in import activities of customer firms has procompetitive effects on domestic suppliers and leads to a decrease in their markups and productivity.