Networks of Foreign Affiliates: Evidence from Japanese Micro-Data

The paper provides evidence on the investment patterns of Japanese multinational enterprises (MNEs) across countries and industries and analyses the main drivers of Japanese FDI location strategies, using detailed micro-data on Japanese parents and affiliates statistics. The main stylised facts point to the high degree of concentration of the activity of Japanese multinationals and differences in size and productivity depending on parents’ and affiliates’ main industry groups. The breakdown of affiliate sales by destination markets reveals that Japanese MNEs establish services affiliates primarily to maximise the proximity to local customers, while foreign affiliates in manufacturing sectors tend to engage more with third countries. Yet, some economies emerge as strategic gateways to other destinations in the region. The econometric analysis further analyses the drivers of Japanese MNEs’ expansion abroad in search of new markets, production efficiency, and regional or global platforms. Important factors shaping Japanese FDI decisions include firm 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 regulatory environment are important attractive points for affiliates that sell mostly locally. Overall, the paper stresses the importance of better integration into global production networks and the policy priorities to attract and maximise the benefits of FDI inflows.