Intra-firm Trade, Input-output Linkage, and Contractual Frictions: Evidence from Japanese Affiliate-level Data

This paper examines the impact of input-output linkages on intra-firm trade based on affiliate-level data of Japanese multinationals (MNEs). We find that MNE parents tend to trade relatively more with their affiliates in vertically linked sectors if they trade goods with low contractibility, especially with affiliates located in East Asia, which is the major developing-country destination for Japanese MNEs. This result indicates that input-output linkage is a significant determinant of intra-firm trade when the trade is affected by contractual frictions. We also confirm that intra-firm trade is observed only in a limited fraction of affiliates.