Sourcing patterns of export†platform foreign affiliates: The case of Japanese affiliates in Mexico

This study investigates the sourcing patterns of Japanese export†platform foreign affiliates in Mexico, which mainly export to the United States and Canada. We propose a novel approach to estimate intermediate input elasticities of exports by sourcing country. We find that, on average, Japanese export†platform foreign affiliates in Mexico source intermediate inputs from third countries, including the United States and Canada, rather than from Japan and Mexico, suggesting that Japanese export†platform foreign affiliates in Mexico are mainly integrated into the vertical production networks back and forth between Mexico, the United States and Canada. In turn, Japanese foreign affiliates selling domestically in Mexico source intermediate inputs not only within the North American Free Trade Agreement countries but also from Japan. In addition, we find that export†platform foreign affiliates in Mexico use more labour†intensive production than do foreign affiliates selling domestically in Mexico. This suggests that saving labour costs is one of the motives for export†platform foreign direct investment in Mexico.