The Case of Japanese Manufacturing Firms

This paper examines how international production/distribution networks provide individual firms with exporting/importing responsiveness to exchange rate movements. With the micro-data of Japanese manufacturing firms from 1994 to 2004, we find that firms' exports tend to respond to exchange rate movements, in particular (1) when firms are large in size, (2) when majority-owned affiliates are dominant among their foreign affiliates, and (3) when their intra-firm trade ratio is moderately high. Furthermore, these tendencies are more salient for machinery firms, one of the major players in international production networks in East Asia. The results suggest that Japanese manufacturing firms, particularly machinery firms, with greater foreign operations under their own corporate control would better absorb shocks of exchange rate movements by adjusting intra-firm transactions more significantly. We do not find such tendencies for imports, however. The study provides implications for international production networks, which have developed drastically in East Asia.International production networks, Trade, Exchange rates, Japanese MNEs.

The Formation of International Production and Distribution Networks in East Asia

The international production and distribution networks consist of vertical production chains and distribution networks extended across a number of countries. This paper claims that the international production and distribution networks in East Asia present distinctive characters in their significance in the regional economy, their geographical extensiveness involving a large number of countries in the region, and their sophistication of both intra-firm and arm's-length relationships across different firm nationalities. The paper starts from reviewing crucial changes in policy framework observed in the developing East Asian countries a decade ago and sketching the theoretical thoughts explaining the mechanics of international production and distribution networks. Then, the empirical part of the paper examines the micro data of Japanese corporate firms to make a closer look at the nature of networks through the pattern of FDI after analyzing overall trade patterns of the major East Asian countries to confirm the importance of international trade of machinery parts and components. In addition, the paper quantifies the magnitude of economic activities of Japanese firms through different channels of transactions, using the firm nationality approach. The last part of the paper discusses policy implication of the networks.

Impacts of FTAs in East Asia: CGE Simulation Analysis

In light of the recent movement toward regional integration through bilateral/plurilateral FTAs in East Asia, this paper attempts to estimate the impacts of several FTA scenarios in East Asia, using a CGE model. Although most previous simulation studies on the impacts of FTAs focus only on the liberalization of trade in goods, our paper attempts to consider other possible aspects of FTAs such as various trade and investment facilitation and technical assistance to developing countries in the region. Our results suggest that the economic effects of FTAs with a larger number of members are likely to be greater. Moreover, for the establishment of FTAs among countries such as ASEAN+3, ASEAN+6, and APEC, a high quality of trade liberalization including the agricultural sector is essential. Furthermore, it is vital for an agreement to be comprehensive, covering not only intraregional trade liberalization but also other elements such as facilitation measures and technical assistance. The larger the coverage, in terms of membership and contents, the greater the benefits accrued to the members.

Impacts of Japanese FTAs/EPAs: Post Evaluation from the Initial Data

This paper attempted to assess impacts of existing Japanese EPAs in their initial years and to draw policy implications for possible future FTAs/EPAs. Our gravity model estimations as well as detailed analysis on trade and actual tariff reduction by EPAs demonstrated that the Japan-Singapore EPA has almost no direct impact on trade since actual reduction of tariffs by the EPA is quite limited. On the other hand, our empirical investigation confirmed a certain degree of positive impact of the Japan-Mexico EPA on trade, particularly on the export side, and investment. Several important outcomes of the EPA beyond tariff removal are also revealed. Discussion on future designs of FTAs/EPAs includes issues on some possible abuse of phasing out tariffs, desirable structure of EPA tariffs, effective utilization of EPAs beyond trade liberalization, and the relationship with multilateral trade liberalization.

Fragmentation in East Asia: Further Evidence

This paper analyzes the spatial pattern of production/distribution networks in East Asia. Two issues are investigated. The one is how the formation of networks has changed the intra- and inter-regional trade pattern. We find that an explosive expansion of intra-regional trade in machinery parts and components, in particular among developing countries, contributes to the current dense networking. The other is how corporate firms effectively organize fragmentation in terms of geographical distance and disintegration. The micro data of Japanese firms indicate that long-distance transactions are mainly intra-firm while transactions in local markets are predominantly arm's-length (inter-firm), suggesting the formation of agglomeration.

Complements or Substitutes? Preferential and Multilateral Trade Liberalization at the Sectoral Level

This paper explores the relationship between preferential and multilateral trade liberalization at the sectoral level using a unique dataset that includes data on most favored nation (MFN) and bilateral preferential tariffs at the 4-digit ISIC level for 11 Latin American countries over the period 1985–2005. We find evidence of heterogeneity across sectors. While in some industries, complementary effects between both kinds of trade liberalization are observed, in others no significant links are detected and—in a few cases—even substitutability seems to prevail. Variation across sectors appears to be systematically related to both import demand elasticities and countries’ sectoral comparative advantages.Trade liberalization; regionalism; Latin America

Impacts of the Japan-Mexico EPA on Bilateral Trade

This paper examines the impacts of the Japan-Mexico EPA on bilateral trade by using two different types of information, trade statistics and the EPA utilization rate. Using trade data, we found that Japan's exports of built-up cars, auto parts, base metals, electrical machinery, precision machinery, and ballpoint pens to Mexico increased sharply. We also found that Japan's imports of live animals and products, leather, and footwear with leather from Mexico increased significantly. These are some of the products that are protected by the respective governments. Using the results of a questionnaire survey of Japanese firms on their utilization of the Japan-Mexico EPA, the overall utilization rate was found to be rather low. However, the utilization rate for Japanese exports to Mexico was found to be high for iron and steel and transport machinery, which are the products most protected by the Mexican government. These findings indicate that the EPA has contributed to the opening up of Japan's and Mexico's protected markets. The questionnaire survey identified two problem areas for the EPA: one is the difficulty in getting information on the use of the EPA, and the other is the high cost of obtaining the certificate of origin for utilizing the EPA. These findings indicate the need for the government to provide information on the use of EPAs and to simplify the application procedures for obtaining the certificate of origin.

International Production/Distribution Networks and Domestic Operations in terms of Employment and Corporate Organization: Microdata Analysis of Japanese Firms

This paper empirically investigates patterns of globalizing corporate activities and their domestic operations and trade, using firm-level panel data on Japanese firms in 1998-2003. Journalistic literature in North America and Europe often claims that the globalization of corporate activities, particularly the expansion of operations in less-developed countries, is prone to reduce domestic corporate activities. This paper proves that such a claim of industrial hollowing-out is unwarranted, at least at the firm level, in the case of Japanese manufacturing firms investing in East Asia. The manufacturing sector in Japan has had a secular trend of reducing domestic employment in the past decades. The regression analysis, however, finds that manufacturing firms expanding operations in East Asia are more likely to increase domestic employment than other manufacturing firms, while non-manufacturing firms, mostly in the wholesale sector, do not present such a significant pattern; the growth of domestic employment of globalizing manufacturing firms is higher by as much as three to eight percent. As for domestic establishments and affiliates, manufacturing firms expanding operations in East Asia do not present any statistically significant differences from other manufacturing firms, while non-manufacturing firms tend to reduce it. Furthermore, firms expanding operations in East Asia tend to intensify export/import activities with East Asia more than other firms, suggesting the complementarity between trade and FDI. This is further supporting evidence for expanding fragmentation of production by Japanese firms and their involvement in further development of production/distribution networks in East Asia. Overall, Japanese manufacturing firms globalizing corporate activities seem to retain larger domestic operations than other firms. Such tendency is actually stronger in machinery industries in which international production/distribution networks are actively extended.

Globalizing Corporate Activities in East Asia and Impact on Domestic Operations: Further evidence from Japanese manufacturing firms

This paper empirically investigates the pattern of globalizing corporate activities of Japanese manufacturing firms and its impact on their domestic operations and international trade, using 1998-2006 firm level data. More specifically, we compare changes in the domestic operations and international trade of firms expanding operations in East Asia against firms not expanding operations in two periods, 1998-2002 and 2002-2006. For our analysis in the latter period, we also incorporate the information on the firms' globalizing behavior in the former period. In addition, we conduct analyses to compare changes of firms becoming MNEs with firms choosing to remain domestic, and we also compare MNEs that are expanding operations with those not expanding operations. Although the globalization of corporate activities in less developed countries is thought to negatively affect operations and employment at home, our analysis finds that Japanese manufacturing firms expanding operations in East Asia are more likely to increase domestic employment and both the number of domestic affiliates and establishments. Such a tendency is particularly observed in the latter period, when the international division of labor in the region is more active. Furthermore, manufacturing firms that expand operations in East Asia tend to intensify their export and import activities in the region, suggesting the existence of complementary operations. At the individual firm level, the fragmentation of production by Japanese manufacturing firms seems to generate additional jobs and boost operations at home by effectively utilizing the mechanics of production process-wise division of labor in East Asia.