Has the Offshore Service Network Been Expanded by Japanese Firms?

Using the Basic Survey on Overseas Business Activities and the Basic Survey of Japanese Business Structure and Activities from the Ministry of Economy, Trade and Industry (METI) covering 1996-2014, we document how headquarter-foreign subsidiary network in service (hereafter offshore service network) has been expanded relative to the network of manufacturing. The main question is whether service network (inputs and outputs) co-move with the manufacturing network of Japanese multinational firms. This analysis intends to clarify the "trade co-movement puzzle," or the missing propagation mechanism between trade and economy in macroeconomic research. We break down the affiliates' purchasing modes into local sellers and imports and, in the same manner, their supplying modes into local buyers and exports. Then we aggregate these flows for each country. In contrast to Johnson (2014) which found "near-zero correlations" between goods and services on the country level, we suggest evidence for co-movement of manufacturing and service, transmitting international shocks through bilateral trades.