East Asian and European Firms: Comrades or Competitors

This paper examines the stock market exposures of sectors in France, Germany, Japan, and South Korea. If a firm in one country competes with firms in another country, an appreciation of its currency relative to its competitors' currency should lower its profitability and its stock price. If a firm cooperates with firms in another country by purchasing imported intermediates from them, an appreciation of its currency relative to its comrades' currency should increase its ability to purchase inputs and raise its profitability and stock price. The results indicate that 60 percent of the sectors examined in France and Germany and 27 percent of the sectors examined in Korea benefit when their currency appreciates against the Japanese yen and that virtually no sectors are harmed by yen depreciations. This implies that Japanese firms play a vital role as suppliers of intermediate goods to firms in France, Germany, and Korea. By contrast, the results point to substantial competition between European and Korean firms.