Networks of foreign affiliates: Evidence from Japanese micro‐data

Abstract

The paper provides evidence of the investment patterns of Japanese multinational enterprises (MNEs) across countries and industries and analyses the main drivers of their location strategies, using detailed micro-data on Japanese parents and their affiliates including the final destination of affiliate sales.The main stylised facts point to differences in size and productivity depending on parents' and affiliates' main industry groups. The breakdown of affiliate sales by destination market reveals that Japanese MNEs establish services affiliates primarily to maximise proximity to local customers, while foreign affiliates in manufacturing sectors tend to engage more widely with third countries. Yet, some economies emerge as strategic gateways to other destinations in their region. The empirical analysis delves into the drivers of host country attractiveness for FDI that is seeking new markets, production efficiency and to act as regional or global platforms. Important factors shaping Japanese FDI decisions include parent characteristics and host market specificities such as market size, proximity, labour costs, technology and trade policy barriers. The largest and most productive parents are more likely to invest in FDI-export platforms, particularly in host countries with efficient customs procedures and more favourable services trade and investment regulation. Distance and comparative advantage in terms of skills and digital infrastructure play a stronger role in intra-firm trade, while the size of the domestic market and the local trade regulatory environment are important drivers for affiliates that sell mostly locally. Overall, the paper stresses the factors behind better integration into global production networks and the policy priorities that are suitable for attracting various types of FDI inflows.

Services trade in the United Kingdom and the global economy

“…The rapid digitalisation of the economies and the change in working and consumption habits since the outbreak of the coronavirus have highlighted the need to limit trade barriers that affect services trade digitally (OECD, 2020a). There is evidence that lowering barriers to digital trade can be beneficial to trade and FDI Ferencz, 2018, Spinelli, Rouzet andZhong, 2020;OECD, 2020b). This could be done unilaterally or through special chapters in bilateral or plurilateral agreements.…”

Foreign direct investment and trade in agro-food global value chains

“…FDI in the agriculture and food sectors may be further affected by market-related factors and differences in policy settings across countries. At the host country level, factors such as size of the economy, distance, macroeconomic stability, and other structural and institutional factors are likely to influence MNEs' investment decisions (Spinelli, Rouzet and Zhang, 2018). FDI attractiveness may also be influenced by investment and trade policies, such as the availability of specific investment incentives, investment restrictions, tariffs, technical requirements, quality standards, and the presence of bilateral and regional trade and investment agreements.…”

Export‐platform foreign direct investment and trade policy uncertainty: Evidence from brexit

“…Using Japanese firm‐level data, Spinelli et al . (2020) show that manufacturing firms in the EU sell predominantly to the domestic market or to the rest of the EU, while exports to other destinations and intra‐firm trade are rather small.…”

“…This description does not seem to fit the UK, therefore vertical FDI should not be a large portion of the UK's inward FDI. Using Japanese firm-level data,Spinelli et al (2020) show that manufacturing firms in the EU sell predominantly to the domestic market or to the rest of the EU, while exports to other destinations and intra-firm trade are rather small.6 The process for a firm arriving in period R is the same as in period D but based on a new information set.7 There might be second-order effects if the domestically sourced inputs also use imported inputs. 8 Data presented byCosta et al (2019) show that the exchange shock that followed the referendum was more similar among European currencies than between European and other world regions' currencies.…”