Networks of Foreign Affiliates: Evidence from Japanese micro-data

Author Name Francesca SPINELLI (OECD) / Dorothée ROUZET (OECD) / ZHANG Hongyong (Fellow, RIETI)
Creation Date/NO. September 2018 18-E-057
Research Project Studies on Firm Management and Internationalization under the Growing Fluidity of the Japanese Economy
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First draft: September 2018
Revised: June 2020


The paper provides evidence of the investment patterns of Japanese multinational enterprises (MNEs) across countries and industries and analyses the main drivers of their location strategies, using detailed micro-data on Japanese parents and their affiliates including the final destination of affiliate sales. The main stylised facts point to differences in size and productivity depending on parents' and affiliates' main industry groups. The breakdown of affiliate sales by destination market reveals that Japanese MNEs establish services affiliates primarily to maximise proximity to local customers, while foreign affiliates in manufacturing sectors tend to engage more widely with third countries. Yet, some economies emerge as strategic gateways to other destinations in their region. The empirical analysis delves into the drivers of host country attractiveness for FDI that is seeking new markets, production efficiency and to act as regional or global platforms. Important factors shaping Japanese FDI decisions include parent characteristics and host market specificities such as market size, proximity, labour costs, technology and trade policy barriers. The largest and most productive parents are more likely to invest in FDI-export platforms, particularly in host countries with efficient customs procedures and more favourable services trade and investment regulation. Distance and comparative advantage in terms of skills and digital infrastructure play a stronger role in intra-firm trade, while the size of the domestic market and the local trade regulatory environment are important drivers for affiliates that sell mostly locally. Overall, the paper stresses the factors behind better integration into global production networks and the policy priorities that are suitable for attracting various types of FDI inflows.

Published: Francesca Spinelli, Dorothée Rouzet, and Hongyong Zhang, 2020. "Networks of foreign affiliates: Evidence from Japanese micro‐data," The World Economy, Vol. 43(7), pp. 1841-1867.