Quantitative Analysis Of Newly Evolving Patterns Of International Trade: Fragmentation, Offshoring Of Activities, And Vertical Intra-industry Trade

Fragmentation, Offshoring of Activities, and Vertical Intra-Industry Trade

Robert M Stern

• Publisher: WSPC
• Year: 2012
• Print ISBN: 9789814383479
• eBook ISBN: 9789814452175
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

Quantitative Analysis of Newly Evolving Patterns of International Trade offers a variety of perspectives on new forms and developments of international trade and related activities for Japan, the United States, China, and some other important trading countries, to develop new methods and data for measuring the factor contents of emerging new modes of international trade. Such methods and data are crucially important for evaluating impacts of the new modes on factor markets in the United States, Japan, and other major trading countries, and also for forecasting the future development of world trade and foreign direct investment (FDI), evaluating welfare gains from trade, estimating impacts of free trade agreements, and designing effective trade and FDI policies.

Contents:

• • Introduction and Overview (Robert M Stern)
• Fragmentation and Outsourcing:
  • The Determinants of Offshore Production by Multinational Corporations: A Comparison of Japanese and U.S. Multinational Corporations (Toshiyuki Matsuura, Kiyoyasu Tanaka and Shujiro Urata)
  • Does Material and Service Offshoring Improve Domestic Productivity? Evidence from Japanese Manufacturing Industries (Keiko Ito and Kiyoyasu Tanaka)
  • Does Firm Boundary Matter? The Effect of Offshoring on Productivity of Japanese Firms (Banri Ito, Eiichi Tomiura and Ryuhei Wakasugi)
  • Global Sourcing: Evidence from Spanish Firm-Level Data (Wilhelm K Kohler and Marcel Smolka)
  • The Effects of Offshoring on the Composition of Employment in Italy (Anna M Falzoni and Lucia Tajoli)
• Effects of Trade and Foreign Direct Investment:
  • International Production/Distribution Networks in East Asia and Domestic Operations: Evidence from Japanese Firms (Mitsuyo Ando and Fukunari Kimura)
  • Japan's Exports and Employment (Kozo Kiyota)
  • What Determines the Extensive Margin of International Trade? An Investigation of the Cross-Section of U.S. Imports (Peter Debaere and Shalah Mostashari)
  • Modes of East Asian Trade and Foreign Direct Investment: U.S. and Japan (K C Fung, Hitomi Iizaka and Alan Siu)
  • The Influence of Multinational Exposure on Private Chinese Trade (Deborah Swenson)
  • The Effects of Foreign Direct Investment on China's Labor Market (Theresa M Greaney and Yao Li)
  • Clusters, Productivity, and Exports in Taiwanese Manufacturing Industries (Eric Y Cho and Hideki Yamawaki)

Readership: Academic trade specialists as well as graduate and undergraduate students studying international trade theory and policy.

PART I

FRAGMENTATION AND OUTSOURCING

CHAPTER 1

The Determinants of Offshore Production by Multinational Corporations: A Comparison of Japanese and U.S. Multinational Corporations

Toshiyuki Matsuura,^*,§ Kiyoyasu Tanaka,^†,¶ and Shujiro Urata^‡,||

*Institute for Economic and Industrial Studies (Keio Economic Observatory)

Tokyo, Japan

^†Interdisciplinary Studies Center

Institute of Developing Economics, Chiba, Japan

^‡Graduate School of Asia Pacific Studies

Shinjuku, Tokyo, Japan

^§[email protected]

^¶[email protected]

^||[email protected]

I.INTRODUCTION

Economic integration across borders has been rapidly developing as policy and technical barriers to foreign direct investment (FDI) and international trade have declined in recent decades. According to UNCTAD (2008), the volume of global GDP and exports of goods and non-factor services in current prices increased 4.5 and 7.1 times from 1982 to 2007, respectively. World FDI inflows, however, increased even more rapidly, 31.6 times for the period. In 2007, the presence of multinational corporations (MNCs) in the world economy, measured by the value-added of all foreign affiliates, accounted for an estimated 11% of global GDP. Furthermore, global trading chains by MNCs represent a substantial portion of world trade flows. Indeed, U.S. MNCs accounted for close to 80% of U.S. exports and imports in 2000 (Bernard et al., 2005). MNCs have been a driving force in the process of economic globalization.

In order to understand the role of MNCs in the conduct of international commerce and production, it is crucial to understand the nature of offshore production by MNCs. It has long been documented that manufacturing firms are widely engaged in global production networks by geographically fragmenting particular stages of the production process (Feenstra, 1998). For instance, MNCs maintain headquarter services and production of intermediate goods at home, and their foreign subsidiaries assemble intermediates that are imported from the home country so as to produce final goods. The fragmentation of production by MNCs is motivated by the desire to shift production activities to countries in which factor costs are relatively low (Helpman, 1984; Markusen, 2002). As many markets are geographically segmented by borders, MNCs face a rich array of production organization to serve final consumers around the globe. An optimal form of global supply chains that stretches over various countries concerns the degree of vertical specialization within multinational production networks in order to save international transportation costs (Yeaple, 2003a; Grossman, Helpman, and Szeidl, 2006).

A large number of empirical studies have investigated a fundamental force in MNC decisions as to the location of offshore production. From a policy perspective, this issue is at the center of the debate over the extent to which the recent waves of trade and investment liberalization induce MNCs to relocate domestic production abroad. As briefly described, MNCs may systematically shift production facilities to countries with lower wages and factor costs. As such, multinational behavior raises great concern that a reduction of trade barriers for freer trade could accelerate the pace of hollowing-out of domestic manufacturing sectors if MNCs organize offshore production primarily for factor-cost considerations.

Although the concern is critically dependent on the question of what factors determine FDI activity, the prevalence of evidence indicates that MNCs primarily pursue horizontal FDI that is motivated by access to foreign markets in the face of trade barriers (Brainard, 1997; Carr, Markusen, and Maskus, 2001). On the other hand, there is mixed evidence of vertical FDI that is motivated by international differences in factor costs, as predicted by the factor-proportions theory of trade (Blonigen, 2005). These findings suggest that the factor-cost motivation may not be prevalent in accounting for the general location of multinational production. Instead, only a few particular manufacturing industries such as machinery and electronics are conducive to offshoring of production in the host countries that have comparative advantage (Yeaple, 2003b). From a theoretical point of view, the existing evidence does not appear to bear out the significance of production fragmentation by MNCs. Thus, the empirical literature remains largely inconclusive as to whether a hollowing-out scenario afflicts the global economy in a quantitatively important way.

However, one of the key issues in prior research concerns the prevalence of evidence based on offshore production by U.S. MNCs. There is considerable evidence that U.S. MNCs have extensively engaged in vertical production networks in Canada and Mexico — the members of the North American Free Trade Agreement (NAFTA) — by exporting intermediate inputs to their affiliates for further processing (Feinberg and Keane, 2001; Hanson, Mataloni, and Slaughter, 2001, 2005). Apparently, these countries enjoy low trade costs for shipments, and wage-cost advantages in the case of Mexico. Their geographic location could present a strong incentive for U.S. firms to consolidate vertical production chains in the NAFTA. As such, FTAs may generate a strong force against the shift of production to non-FTA member countries with lower factor costs, which would make it difficult to take the prediction of factor-proportions theory to U.S. MNCs data. An open question is whether U.S. MNCs–based results can be generalized to apply to the nature of offshore production by MNCs originating from other parent countries. Furthermore, the issue is aggravated by the limited existing data on multinational activity. A number of data problems on the measurement of multinational production, including the definition of foreign affiliates, sectoral classification, and survey methods, undermine comparability of the measures of multinational production. Thus, currently available data pose a challenge for an empirical analysis of multinational activities of MNCs of different nationality on a uniform basis as well as for the exploration of the peculiarity of the structure of U.S. multinational production.

To fill these gaps in the current literature, we exploit confidential affiliate-level panel data from the Ministry of Economy, Trade, and Industry, Japan, in order to construct improved measures of foreign affiliate sales by Japanese MNCs (Matsuura, 2004). In particular, we assemble the official surveys to estimate missing sales of a large number of foreign affiliates during 1989–2005. The estimated data on affiliate sales that vary by destination market are aggregated over industry and country solely for majority-owned foreign subsidiaries to match the Japanese data with U.S. data.¹ This new dataset enables us to make a rigorous comparison on the nature of offshore production between Japanese and U.S. MNCs. Then, we combine the Japanese and U.S. data to explore the following questions. What are the characteristics of offshore production by Japanese and U.S. firms? What are the determinants of their foreign production? To what extent is the pattern of Japanese and U.S. multinational production consistent with factor-cost and market-access motives of FDI? These questions should shed new light on the distinctiveness of U.S. multinational production as compared to Japanese MNCs. Furthermore, a comparative analysis helps us to evaluate the influence of the U.S. data on the empirical evidence that factor-seeking motivation is not prevalent in the general pattern of FDI activity.

The descriptive analysis illustrates several features of Japanese and U.S. multinational activities. In the past decades, foreign affiliate sales by Japanese and U.S. MNCs substantially increased alike. But the employment growth of Japanese affiliates was much more rapid than that of U.S. affiliates. For both Japanese and U.S. MNCs, local sales explain the majority of affiliate total sales across country and industry categories, indicating the importance of local markets for attracting offshore production by multinationals. Second, the similarity between Japanese and U.S. affiliates figures prominently in the composition of affiliate sales across three regions: Asia, Europe, and South America. Regional-market characteristics, rather than sectoral characteristics, are influential in explaining the target market for offshore production by Japanese and U.S. MNCs. In contrast, there also exist some differences between Japanese and U.S. MNCs. In particular, Japanese affiliates are distinctive in that the composition of affiliate exports for a home country becomes progressively larger across sectors as the income level of host country declines; it also becomes progressively greater across country-income levels as the sectoral skill intensity decreases.

In the regression analysis, we use a comprehensive panel data on foreign affiliate sales disaggregated by country, industry, and destination market to explore what factors motivate multinational sales. Our interest lies in examining comparative advantage (vertical) and market access (horizontal) motives of offshore production by Japanese and U.S. MNCs. In this respect, we find several interesting patterns. First, foreign affiliate sales by Japanese MNCs tend to be larger in unskilled-labor–abundant countries, with the more pronounced impact of unskilled labor on Japanese affiliates in Asia. Since this pattern is consistent with the model of vertical FDI, Japanese MNCs appear to engage substantially in vertical production chains across borders to take advantage of international differentials in factor costs. In contrast, the evidence suggests that foreign affiliate sales by U.S. MNCs are only marginally sensitive to variation in host country’s unskilled-labor abundance. This is not to say that U.S. MNCs do not pursue vertical FDI strategies. Rather, we find that the comparative ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Acknowledgments
• Introduction and Overview
• Part I. Fragmentation and Outsourcing
• Part II. Effects of Trade and Foreign Direct Investment