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Determinants of the Profitability of Japanese Manufacturing Affiliates in China and Other Regions: Does Localisation of Procurement, Sales and Management Matter?

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Author Info

  • Keiko Ito
  • Kyoji Fukao

Abstract

Does localization of procurements, sales, and management contribute to the profitability of overseas affiliates? This study examines this question by analyzing the performance of Japanese multinationals' manufacturing affiliates in China using a comprehensive affiliate-level dataset for the period from 1989 to 2002 collected by the Ministry of Economy, Trade and Industry (METI). We find that even though foreign multinationals often seem to enter China for the local market potential, affiliates with a higher local sales ratio tend to be less profitable - a pattern that is conspicuously different from that observed for Japanese affiliates in other regions such as the USA or the ASEAN-4, where local sales orientation has a positive impact on profitability. On the other hand, we find that Japanese affiliates' profitability was positively associated with their local procurement ratio. Using the coefficients of the profit function estimated from data on all Japanese manufacturing affiliates around the world, we can calculate the effect of localization (local sales and local procurements) on profitability by country, controlling for the level of GDP and per-capita GDP. In the case of China, the localization effects are positive following the country's accession to the WTO, suggesting that both local procurement and sales expansion contribute to higher profitability in China.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The World Economy.

Volume (Year): 33 (2010)
Issue (Month): 12 (December)
Pages: 1639-1671

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Handle: RePEc:bla:worlde:v:33:y:2010:i:12:p:1639-1671

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References

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  1. Kyoji Fukao & Hikari Ishido & Keiko Ito, 2003. "Vertical Intra-Industry Trade and Foreign Direct Investment in East Asia," Discussion papers 03001, Research Institute of Economy, Trade and Industry (RIETI).
  2. Jefferson, Gary H. & Rawski, Thomas G. & Li, Wang & Yuxin, Zheng, 2000. "Ownership, Productivity Change, and Financial Performance in Chinese Industry," Journal of Comparative Economics, Elsevier, vol. 28(4), pages 786-813, December.
  3. Mitsuyo Ando & Fukunari Kimura, 2005. "The Formation of International Production and Distribution Networks in East Asia," NBER Chapters, in: International Trade in East Asia, NBER-East Asia Seminar on Economics, Volume 14, pages 177-216 National Bureau of Economic Research, Inc.
  4. Kozo Kiyota & Toshiyuki Matsuura & Shujiro Urata & Yuhong Wei, 2007. "Reconsidering the Backward Vertical Linkages of Foreign Affiliates: Evidence from Japanese Multinationals," Working Papers 563, Research Seminar in International Economics, University of Michigan.
  5. Belderbos,R. & Carree,M., 2000. "The Location of Japanese Investments in China: Agglomeration Effects, Keiretsu, and Firm Heterogeneity," Research Memorandum 002, Maastricht University, Netherlands Institute of Business Organization and Strategy Research (NIBOR).
  6. Belderbos, Rene & Capannelli, Giovanni & Fukao, Kyoji, 2001. "Backward Vertical Linkages of Foreign Manufacturing Affiliates: Evidence from Japanese Multinationals," World Development, Elsevier, vol. 29(1), pages 189-208, January.
  7. Keith Head & John Ries & Deborah Swenson, 1994. "Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investment in the United States," NBER Working Papers 4767, National Bureau of Economic Research, Inc.
  8. Fukunari Kimura & Kozo Kiyota, 2007. "Foreign-owned versus Domestically-owned Firms: Economic Performance in Japan," Review of Development Economics, Wiley Blackwell, vol. 11(1), pages 31-48, 02.
  9. Robert E. Lipsey, 2004. "Home- and Host-Country Effects of Foreign Direct Investment," NBER Chapters, in: Challenges to Globalization: Analyzing the Economics, pages 333-382 National Bureau of Economic Research, Inc.
  10. Fukao, Kyoji & Ito, Keiko & Kwon, Hyeog Ug, 2005. "Do out-in M&As bring higher TFP to Japan? An empirical analysis based on micro-data on Japanese manufacturing firms," Journal of the Japanese and International Economies, Elsevier, vol. 19(2), pages 272-301, June.
  11. Kimura, Fukunari & Ando, Mitsuyo, 2003. "Fragmentation and agglomeration matter: Japanese multinationals in Latin America and East Asia," The North American Journal of Economics and Finance, Elsevier, vol. 14(3), pages 287-317, December.
  12. Kyoji Fukao, 2004. "Do Foreign Firms Bring Greater Total Factor Productivity to Japan?," Discussion papers 04014, Research Institute of Economy, Trade and Industry (RIETI).
  13. repec:idb:brikps:9179 is not listed on IDEAS
  14. Robert E. Lipsey, 2002. "Home and Host Country Effects of FDI," NBER Working Papers 9293, National Bureau of Economic Research, Inc.
  15. World Bank, 2004. "World Development Indicators 2004," World Bank Publications, The World Bank, number 13890, October.
  16. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  17. Shujiro Urata & Toshiyuki Matsuura & Yuhong Wei, 2006. "International Intrafirm Transfer of Management Technology by Japanese Multinational Corporations," Discussion papers 06006, Research Institute of Economy, Trade and Industry (RIETI).
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