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Are Japanese Firms Failing to Catch up in Localization? An Empirical Analysis Based on Affiliate-level Data of Japanese Firms and a Case Study of the Automobile Industry in China

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  • Fukao, Kyoji
  • Ito, Keiko
  • Kabe, Shigesaburo
  • Liu, Deqiang
  • Takeuchi, Fumihide

Abstract

This paper analyzes the degree and the current status of localization of Japanese affiliates in China. For this purpose, we (1) compare the localization (measured in terms of the number of expatriates, local sales, local procurement, and local management) of Japanese and U.S. affiliates in China and other major regions; (2) analyze the impact of localization on the profitability of Japanese affiliates in China and in other major regions; and (3) conduct a detailed investigation of inter-firm transactional relationships in China between automobile manufacturers and parts suppliers. We find that compared with U.S. affiliates, Japanese affiliates tend to be less localized. Using a comprehensive affiliate-level panel data set on Japanese multinationals and concentrating on China, we then examine the effect of localization quantitatively and find that Japanese affiliates with higher procurement ratios and/or local CEOs and procurement managers enjoyed high profits. Next, turning to the factors determining trading relationships between assemblers and suppliers of different nationalities in China, our analysis suggests that even when taking various control variables into account, such as suppliers' productivity level and the distance between assembler and supplier, the transactional relationships of Japanese suppliers are more limited than those of suppliers of other nationalities. Moreover, Japanese automobile assemblers do not choose suppliers based on their current labor productivity level and transactional relationships between assemblers and suppliers are more closed in the case of Japanese firms than in the case of firms of other nationalities. On the other hand, we find that auto parts suppliers dealing with Japanese assemblers see their productivity grow faster regardless of the supplier's nationality. The results indicate that Japanese assemblers may well be choosing business partners which they expect to realize sustainable productivity increases in the future rather than focusing on present productivity levels. This finding provides evidence of business practices based on a long-term perspective characteristic of Japanese enterprises.

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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2006-16.

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Length: 37 p.
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:hit:hitcei:2006-16

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  1. Paprzycki,Ralph & Fukao,Kyoji, 2012. "Foreign Direct Investment in Japan," Cambridge Books, Cambridge University Press, number 9781107411289.
  2. Kyoji Fukao & Keiko Ito & Hyeog Ug Kwon, 2004. "Do Out-In M&As Bring Higher TFP to Japan?: An Empirical Analysis Based on Micro-data on Japanese Manufacturing Firms," Hi-Stat Discussion Paper Series d04-41, Institute of Economic Research, Hitotsubashi University.
  3. 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.
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  1. Studies on the automobile industry

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