It is widely perceived that the Japanese manufacturing sector has strong forward linkages in global value chains (GVCs), and that Japanese firms' value added accounts for an important share of foreign final demand and therefore benefit substantially from foreign final demand. However, recent trade and other statistics imply that some industries in Japan's manufacturing sector have been losing competitiveness and forward linkages may be weakening. In the January issue of the RIETI Report, we present "Japanese plants' heterogeneity in sales, factor inputs, and participation in global value chains" by Consulting Fellow Koji Ito, Ivan Deseatnicov, and Program Director Kyoji Fukao, where the authors discuss the evidence on these trends based on a new study they recently completed.
Ito et al first discuss the current situation of GVCs and the lack of studies on heterogeneity across firms and their export activities within the same industry in Japan. They find that both the domestic value added in Japan's export and the domestic value added embodied in foreign final demand are lower than the results based on the OECD's Inter-Country Input-Output (ICIO) table, not taking such heterogeneity into account. Ito et al then explain the differences in their results versus the WTO on Measuring Trade in Value Added (TiVA) results, and show that most industries' forward linkages are capital and skilled-labor intensive. This would lead to an expected increase in foreign demand to induce a higher increase in demand for capital and high-skilled workers than for less-skilled workers. Finally, they suggest that differentiating production for exports and production for domestic sales may provide a more complete and better picture of firm heterogeneity within industries in ICIO tables.
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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).
A tool to measure the significance of GVCs
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.
How to accommodate firm heterogeneity in MIOTs
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.