Supply Chain Subsidies and Production Relocation: A new look at Japanese multinational firms

Author Name ZHANG Hongyong (Senior Fellow, RIETI)
Creation Date/NO. January 2023 23-P-001
Research Project Empirical Studies on Crises and Issues in Global Supply Chains
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Using multiple government statistics, this paper first outlines trends in the reshoring of manufacturing industries to Japan and the relocation of overseas production bases (friend-shoring) from China to ASEAN countries. Overseas production and offshoring have stagnated in recent years, but it does not mean that the return to domestic production is progressing. Since the deterioration of Japan-China relations in 2012, the degree of dependence on China for overseas production has decreased, and production in ASEAN countries has expanded. Recently, the number of new entrants to the ASEAN countries has substantially increased.

Next, using a data set that links government statistics with information on subsidy projects for supply chain resilience and diversification, this paper documents the characteristics of firms that obtained supply chain subsidies (hereinafter referred to as SCS firms) with a focus on their trade, investment, and performance before and after the COVID-19 crisis. There are four findings as follows:
(1) Compared to non-SCS firms, SCS firms are more dependent on imported inputs in the years before COVID-19, but the concentration of imports from specific countries/regions is not so high.
(2) Both the overseas production ratio of SCS firms and the concentration of production bases in specific countries/regions are high. In recent years, the overseas production ratio (especially in China since FY2018) has declined slightly, but a declining concentration of production bases was not observed.
(3) Overseas manufacturing affiliates of SCS firms tend to a) be larger in scale than those of non-SCS firms, b) rely on Japan and third countries for procurement and sales, and c) function as export platforms. Since 2018, their capital investment and profit margin have been low, and the probability of withdrawal has increased.
(4) After COVID-19, SCS firms did not show an upward trend in capital investment compared to non-SCS firms, despite the increase in domestic sales and employment. At the same time, there were no significant changes in capital investment, sales, or employment of SCS manufacturing affiliates in ASEAN countries.

These results suggest that some firms have become less dependent on China for trade and investment since before COVID-19. After COVID-19, the return to domestic production was limited until Q2 2021, and relocations from China to ASEAN were limited until the end of FY2020.