Help! Not just anybody: The locational choice of Japanese MNC affiliates

Sandra Poncet 16 February 2009

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Japanese firms are pessimistic about current and future domestic sales growth, given Japan’s declining birth rate and aging society. Facing weak domestic demand in recent years, Japanese firms have increased their sales and profits by exporting more, especially to the US.

The export share of Japanese GDP increased from 11% in 2002 to 18% in 2007. On the other hand, the share of private consumption stagnated around 57% during the same period. Hence, exports played a major role in the Japanese economic recovery initiated in 2002. However, the recent financial turmoil in the US and the subsequent rapid appreciation of the yen are making it increasingly difficult for the Japanese economy to sustain its international competitiveness and rely solely on exports to the US for its expansion. Toyota announced in December 2008 that it will experience its first operating deficit since the Second World War this year, mainly because of the large decline in its overseas sales.
Japanese firms are now reconsidering their global strategies and aiming to diversify into g more sales destinations abroad. The most promising destinations for Japanese firms are the emerging Asian countries.

But it is not an easy task for ordinary firms to bear the high fixed costs associated with exporting, and the costs are even higher when they relocate their plants overseas (Head and Ries 2003). While the bulk of these costs are firm-specific, some may be shared, in particular the collection of information on remote or uneasy markets. Superstar firms, such as Toyota or Toshiba, might not need help from anybody, but average firms in Japan would benefit from any arrangements that would mitigate the risks and costs associated with international expansion. Japanese firms are familiar with markets in developed countries and China, but are less so with those in developing countries.

The task for Japanese policy makers is to identify what impedes or favours Japanese firms moving abroad. To design the best assistance, it is key not only to investigate potential barriers to the internationalisation of Japanese firms but also to determine whether they differ across firms and markets. We investigate the host-country determinants of location choices by Japanese firms and their relationship to firm productivity and size.

Main findings

In our paper (Inui, Matsuura and Poncet 2008), we investigate whether Japanese parent firms of different productivity and size respond differently to host-country characteristics such as distance from Japan, institutional quality, access to markets, and networks and spillovers. Much evidence suggests that Japanese affiliates tend to cluster in the same regions.
We consider three forms of relatedness. The first two concern the host location: (1) affiliates in the same industry originating from the same country (Japan); and (2) downstream affiliates originating from the same country. The third form (3) captures proximity at home (in the same Japanese prefecture) to parents having affiliates in the same destination country. Clusters of Japanese affiliates may form regional production networks, selling intermediate inputs to each other, sharing knowledge and therefore lowering production costs. We also investigate whether location choices are influenced by the presence of a JETRO agency.1

In this investigation, we employed the most comprehensive data set that covers nearly all of the affiliates created by Japanese manufacturing firms in 54 host countries over the period 1995-2003.

Our results confirm the economic importance of information-sharing and network effects, both at home and in the host country, as well as the traditional determinants such as production and transaction costs, and market and supply access. The effects of the key determinants of location choice vary substantially with the characteristics of the investing firm and the affiliates. Less-productive and smaller parents are more likely to create affiliates in China than in Western Europe or an OECD country. This result suggests that the choice of investing in more distant and competitive markets is positively correlated with firm productivity. This is line with recent advances in the literature explaining FDI decisions by firm-specific features. Moreover, less-productive firms appear to be more sensitive to distance-related costs and low institutional quality, but are more responsive to the presence of Japanese firms and JETRO presence in the country. Ordinary firms clearly need help, but not just anybody. They need help from old friends in Japan.

Policy implications

We interpret our findings of the greater sensitivity to distance and institutional quality for less-productive firms as evidence of greater impediments to internationalisation when productivity is low. Alternatively, the greater responsiveness of low-productivity firms to the presence of a JETRO agency or a Japanese community indicates that networks and spillovers may help to mitigate those impediments. These results would appear to support policies encouraging collaboration between Japanese firms and the dissemination of information targeted at small and less-productive firms.

References

Greenaway, D. and R. Kneller, 2007, Firm heterogeneity, exporting and foreign direct investment, The Economic Journal 117(February), 134-161.
Head, K., Ries, J., 2003. Heterogeneity and the FDI versus export decision of Japanese manufacturers, Journal of the Japanese and International Economies 17 (4), 448-467.
Helpman, E., Melitz, M., Yeaple, S., 2004. Export versus FDI with heterogenous firms. American Economic Review 94 (1), 300-316.
Inui, T., Matsuura, T. and Poncet, S., 2008. The Location of Japanese MNC affiliates: agglomeration, spillovers and firm heterogeneity, CEPII Working Paper, No. 2008-24


1 JETRO (the Japan External Trade Organization) describes themselves in their website as "a government-related organization that works to promote mutual trade and investment between Japan and the rest of the world. Originally established in 1958 to promote Japanese exports abroad, JETRO's core focus in the 21st century has shifted toward promoting foreign direct investment into Japan and helping small to medium size Japanese firms maximize their global export potential."

 

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Topics:  International trade

Tags:  FDI, Japan, firm productivity

Professor at the University of Paris I and Scientific Adviser at CEPII.

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