RIETI Report April 2020

Location choice and sales patterns of Japanese foreign affiliates

The complex decisions that are involved in locating overseas operations represent significant challenges for multinational enterprises. Using micro-data on Japanese foreign affiliates, the authors, including RIETI fellow ZHANG Hongyong, examine the relationships and complementarities between parent firms and affiliates that shape their productivity in both the services and manufacturing sectors, comparing their organizational patterns and operations. Sales and market penetration strategies are analyzed to discover the factors that determine the final location of foreign affiliates and the distribution of FDI, providing insight for both export-oriented enterprises and policymaking.

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Location choice and sales patterns of Japanese foreign affiliates

Francesca SPINELLIEconomist, OECD

Dorothée ROUZETSenior Economist, OECD

ZHANG HongyongFellow, RIETI

Multinational firms face complex decisions regarding where and how to set up their activity. Their location choices also take into account complementarities between activities and between markets. This column uses micro-data on Japanese foreign affiliates to shed light on what drives these complex location strategies for Japanese multinationals, and argues that policies to foster FDI attractiveness, especially to be chosen as the location of export platforms, need to take into account these complementarities.

The rising role of global value chains in the production of goods and services, advances in technology, shifting patterns of global demand towards emerging economies, as well as the landscape of trade and foreign investment policies are shaping multinational enterprises' (MNE) location strategies. The decisions of where to set up affiliates are likely to go beyond a ‘proximity-concentration’ trade-off, the exporting versus establishing dilemma to serve a given market, or the exploitation of cost differences to determine an optimal production site. The blurring of boundaries between physical products and services as digitalization progresses, and the role of complementary services adding value to manufacturing goods provision, create further interlinkages between sectors. MNEs set up affiliates in industries different from their own and can exploit synergies between their production plants and services affiliates, for instance in distribution or logistics, to gain efficiency and market share in their various markets.

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