Business groups, foreign direct investment, and capital goods trade: The import behavior of Japanese affiliates
René Belderbos, Ryuhei Wakasugi & Jianglei Zou
#2010-066
We examine the impact of buyer-supplier relationships within business
group on capital goods trade in the context of foreign direct investment
by buyer firms and capital goods producers. A simple model in which
cost-reducing relationship specific investments are underlying business
group ties suggests that 1) foreign affiliates of business group firms
have a greater propensity to import capital goods from the home country,
increasing Japanese exports 2) if the establishment of overseas
affiliates by business groups firms attracts FDI by their capital goods
suppliers, the 'trade creating' impact of business group ties may
disappear or even be reversed. Empirical analysis of capital goods
imports by 1790 manufacturing affiliates operated abroad by Japanese
multinational firms in 1996 provides broad support for these predictions
and demonstrates a sizeable impact of buyer-supplier ties in business
groups on trade. Affiliates of member firms of horizontal and vertical
business groups with supplier ties exhibit a greater propensity to
import from Japan, but this impact is mitigated or transformed into a
smaller import propensity if the groups' capital goods producers have
substantial manufacturing investments abroad.
Keywords: Multinational firms, imports, capital goods, FDI, business groups
JEL codes: F23, F14, D21
Running head: Business groups, FDI and capital goods trade