Intrafirm trade, input–output linkage, and contractual frictions: evidence from Japanese affiliate-level data

This paper revisits how vertical linkages between overseas affiliates and their parents are related to intrafirm trade by shedding light on variations in contractibility across sectors in the case of Japanese multinational enterprises based on affiliate-level data. We confirm that intrafirm trade is observed only in a limited fraction of affiliates. To include a large number of affiliates with zero intrafirm trade into our regressions, we estimate our model by Poisson Pseudo Maximum Likelihood. We find that Japanese multinational affiliates tend to export relatively more to their parents in vertically linked sectors especially if they trade goods with low contractibility. This relationship is evident for affiliates located in developing countries. This result indicates that input–output linkage is a significant determinant of intrafirm trade when the trade is affected by contractual frictions. We also confirm the robustness of the results regardless of the definition of contractibility indices by previous studies.