Japanese plants' heterogeneity in sales, factor inputs, and participation in global value chains

A widespread traditional perception is that the Japanese manufacturing sector has strong forward linkages in global value chains (GVCs), i.e. Japanese firms' value added accounts for an important share of foreign final demand and Japanese firms therefore benefit substantially from foreign final demand (e.g. OECD 2018). However, recent trade and other statistics imply that some industries in Japan's manufacturing sector, such as electric machinery, have been losing competitiveness and forward linkages may be weakening. In this column, we present and discuss evidence on these trends based on a new study we recently completed (Ito et al. 2017).

The role of GVCs has recently become an important topic due to the increased fragmentation of production across countries and industries. Multi-country input-output tables (MIOTs) have been extensively used to measure the significance of GVCs (e.g. Koopman et al. 2014). Several initiatives, such as the joint initiative by the OECD and the WTO on Measuring Trade in Value Added (TiVA) (Piacentini and Fortanier 2015) and the World Input-Output Database initiated at the University of Groningen within the framework of a European Commission project, have attempted to construct such tables (Timmer et al. 2015). The idea underlying these databases is to link national supply-use tables via international trade flows.

Both theoretical and empirical research suggests that there is considerable heterogeneity across firms and their export activities within the same industry (Melitz 2003, Bernard et al. 2007), and recent studies using MIOTs have sought to incorporate such heterogeneity by splitting industries into groups of firms in terms of their size, ownership, trade mode, and so on (Ahmad et al. 2013, Ma et al.2014, Fetzer and Strassner 2015). However, there are few such studies focusing on Japan, even though neglecting such heterogeneity may produce biased results in analyses relying on MIOTs.

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