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Impact of Supply Chain Network Structure on FDI: Theory and evidence

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  • Ryo ITOH
  • Kentaro NAKAJIMA

Abstract

This study investigates how the structure of a supply chain network in the domestic market influences the foreign direct investment (FDI) decisions of firms embedded in the network. We first describe the binary choice of firms on whether to invest through a coordination game of a fixed network with incomplete information of the firms' profits, and we show that the unique equilibrium of the game is represented by the Katz-Bonacich centrality measure, which captures both direct and indirect effects of the network. Then, we also conduct empirical tests to verify our theoretical hypothesis with large disaggregated data of Japanese firms and confirm that the Katz-Bonacich centrality of each firm has a significantly positive effect on its FDI even when sector-specific fixed effects and other attributes are controlled for, as our theory predicted.

Suggested Citation

  • Ryo ITOH & Kentaro NAKAJIMA, 2014. "Impact of Supply Chain Network Structure on FDI: Theory and evidence," Discussion papers 14027, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:14027
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    Cited by:

    1. Itoh, Ryo, 2014. "Tax discrimination against inter-firm networks," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 25-35.
    2. Ryo Itoh & Kentaro Nakajima, 2021. "Do sourcing networks make firms global? Microlevel evidence from firm-to-firm transaction networks," The Japanese Economic Review, Springer, vol. 72(1), pages 65-96, January.
    3. Toshiyuki MATSUURA, 2015. "Impact of Extensive and Intensive Margins of FDI on Corporate Domestic Performance: Evidence from Japanese automobile parts suppliers," Discussion papers 15032, Research Institute of Economy, Trade and Industry (RIETI).
    4. Toshimori OTAZAWA & Yuki OHIRA & Jos VAN OMMEREN, 2018. "Inter-firm Transaction Networks and Location in a City," Discussion papers 18054, Research Institute of Economy, Trade and Industry (RIETI).
    5. Kazunobu HAYAKAWA & Toshiyuki MATSUURA, 2017. "Overseas Production Expansion and Domestic Transaction Networks," Discussion papers 17085, Research Institute of Economy, Trade and Industry (RIETI).

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    More about this item

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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