Papers & Books 1999
Vertical Linkages of Foreign Manufacturing Affiliates: Evidence from Japanese Multinationals
Rene Belderbos, Giovanni Capannelli, and Kyoji Fukao
1999
Abstract
The potential benefits of FDI for host economies depend partly on the degree to which investing firms establish upstream vertical linkages. We examine the determinants of such vertical linkages, as measured by the local content ratio of manufacturing operations, for a sample of 272 Japanese electronics affiliates abroad. We find that affiliates that were set up to circumvent import barriers operate with substantially lower local content. Local content is higher for acquisitions and joint ventures, and increases with operating experience of the affiliate. In developing countries, local content is higher for affiliates operated by less R&D intensive parent firms that sell primarily on the local market. Firms that have extensive long-term supplier linkages within a vertical keiretsu generally operate affiliates with higher local content, in particular if there is a relatively strong local presence of apanese-owned suppliers. This suggests that keiretsu membership facilitates the achievement of higher local content levels through co-ordinated investments by the assembler and suppliers within the group. Finally, evidence is found that local content is higher in countries with good infrastructure and strict local content regulations.