Abstract
This chapter examines whether and how the entry of foreign multinational firms affects productivity growth of domestically owned firms, using Japanese firm-level data. The data are taken from a comprehensive annual survey conducted by the Japanese government on firms in manufacturing, wholesale, retail, information services, business services, and other service industries. The results of the analysis suggest that foreign multinationals perform better than domestically owned firms in many sectors. Moreover, once firm-specific fixed effects are controlled for, the presence of foreign firms in an industry tends to negatively affect the productivity growth rate of domestically owned firms in that industry. However, firms that are catching up toward the productivity frontier enjoy positive foreign direct investment spillovers, implying that foreign entry accelerates productivity catch-up.
This chapter is a modified and updated version of the author’s previous papers (Ito 2011, 2012), which are based on the results of research conducted as part of the project entitled “Research on Productivity Growth in Service Sector (sic)” for the Research Institute of Economy, Trade, and Industry (RIETI). The author is grateful for the helpful comments and suggestions made by Hyeog Ug Kwon, Yasuyuki Todo, Noor Aini Khalifah, participants at the 12th International Convention of the East Asian Economic Association, and seminar participants at RIETI. In addition, financial support from the Japan Society for the Promotion of Science (KAKENHI Nos. 19683003, 23683003) is gratefully acknowledged.
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Notes
- 1.
In this chapter, “inward FDI” denotes the entry of foreign-owned firms or expansion of activities by foreign-owned firms through direct investment.
- 2.
See Crespo and Fontoura (2007) for a survey of the literature on FDI spillovers.
- 3.
Along similar lines, Kugler (2006) highlighted the importance of outsourcing foreign multinational firms’ relationships with local upstream suppliers as a channel for technology diffusion and argued that positive FDI spillover effects can be seen between industries but not within industries.
- 4.
Ito (2015), using data on listed Japanese firms, found that firms in the non-manufacturing sector achieved faster productivity growth at home than firms in the manufacturing sector after conducting direct investment abroad. This result suggests that the learning effect of FDI is larger for services firms than for manufacturing firms.
- 5.
Kiyota (2014) surveyed papers on the impact of foreign firms in Japan, and he also discussed that there is limited and mixed evidence on this subject.
- 6.
OECD (2001), comparing service sector labor productivity across countries, also reported that labor productivity growth in Japan drastically declined in major service industries. For example, labor productivity growth in wholesale and retail trade and the transportation and telecommunication industry stood at 4.4% and 4.1%, respectively, for the period 1979–1989, the highest among the ten major developed countries. However, for the period 1990–1997, the corresponding growth rates dropped to 1% (placing Japan fifth among the ten countries) and 0.5% (the lowest among the ten countries). On the other hand, Morikawa (2007), using Japanese firm-level data for the period 2000–2004, found that productivity levels in service industries are not significantly lower than those in manufacturing industries, although the dispersion in productivity within the former is greater than the dispersion in productivity in the latter.
- 7.
In contrast, for the US, service industries were the drivers of overall productivity growth (e.g., Triplett and Bosworth 2004).
- 8.
Morikawa (2008), for example, argued that to improve service sector productivity, the diffusion of best practice and greater firm and industry-level dynamism through firm entry and exit is necessary.
- 9.
In Japan, the Commercial Law prescribes that important matters should be decided by obtaining more than two-thirds of the voting rights at a shareholders’ meeting. Therefore, an ownership share of 33.4% is critical to exercise a veto. For this reason, METI defines foreign-owned firms as firms with a foreign ownership ratio of 33.4% or more. However, the number and share of foreign-owned firms show a similar trend when defining foreign-owned firms as firms with 50% or more foreign ownership.
- 10.
In Fig. 11.1, the number of foreign-owned firms in the service sector is only slightly larger than that in the manufacturing sector. In fact, however, both in Japan and other developed countries, foreign entry is more prominent in the service sector (see, e.g., Directory of Foreign-owned Firms in Japan published by Toyo Keizai Shimposha). Relatively small foreign-owned firms, which are likely to be firms in the service sector, are not included in our dataset. Moreover, in the case of several service sectors, such as transportation, telecommunication, financial intermediation, insurance, and real estate, most of the firms are not included in the BSJBSA. The BSJBSA only includes firms in these sectors if they have an establishment in a sector administrated by METI. Refer to Ito and Fukao (2005) for more comprehensive statistics on foreign-owned firms in Japan.
- 11.
The results can be obtained from the author upon request.
- 12.
The survey contains detailed information on firm-level business activities such as the three-digit industries in which the firm operates, its number of employees, sales, purchases, exports and imports, R&D and patents, the number of domestic and overseas subsidiaries, and various other financial data such as costs, profits, investment, and assets. Although the survey also includes non-manufacturing firms for information on exports and imports, the firms are required to provide the amount of trade in goods only. The survey does not cover international transactions in services. The firm-level data of the BSJBSA were obtained through the Trade and Investment Facilitation Division, Trade and Economic Cooperation Bureau, Ministry of Economy, Trade and Industry (METI). However, the views expressed in this chapter are solely those of the author and do not represent those of the METI.
- 13.
- 14.
For details of the definition and data source for each variable for the TFP calculation, see the Appendix.
- 15.
To calculate FDIshare, a firm’s total number of employees is counted as foreign if the sum of the share held by foreigners is 33.4% or more. The variable FDIshare is calculated as the total number of workers employed by foreign-owned firms divided by the total number of employees in the industry.
- 16.
The frontier firms include some foreign-owned firms. If the 33.4% foreign ownership ratio is applied, approximately 8% of the frontier firms are foreign owned, while if the majority of foreign ownership definition is applied, approximately 5% of the frontier firms are foreign owned. The frontier productivity growth indicates the growth potential of each industry and it seems reasonable to include foreign-owned firms among the frontier firms. However, the variable FPROD proxies the productivity growth rate of foreign-owned firms when the frontier firms consist largely of foreign-owned firms. Estimation using the FPROD variable calculated excluding foreign-owned firms produces almost the same results as when using the FPROD variable calculated including foreign-owned firms.
- 17.
For frontier firms, the technological distance from the frontier (GAP) is set to zero.
- 18.
The observations of which industry classification differs between year t − 1 and year t are dropped from the estimations.
- 19.
The definition of catch-up firms here follows Arnold et al. (2008).
- 20.
I obtained similar results when using labor productivity as a productivity measure.
- 21.
Supplementary analysis of extensions of the models above that include various measures of industry-level competition, such as the Herfindahl index (calculated by industry using the firm-level dataset), the import penetration ratio (calculated using the JIP Database 2009), and regulation weights (taken from the JIP Database), show that the Herfindahl index tends to be negatively correlated with firm productivity, suggesting that competition promotes productivity growth. However, the import penetration ratio is negatively associated with firm productivity growth while the regulation weight is positively associated with firm productivity growth, suggesting that competition restrains productivity growth. Although it is difficult to obtain a conclusive result regarding market competition effects on firm productivity, the estimated coefficients on the FDI variable are mostly consistent.
- 22.
Possible candidates for an instrument may include inward FDI in the US or indicators of regulation. However, there are several difficulties in employing these variables as instruments. For example, inward FDI in the US is not highly correlated with inward FDI in Japan, implying that the inward FDI in the US may not work well as an instrument. In addition, although an instrumental variable should be correlated with foreign entry but not with the productivity of domestic firms, it is difficult to find a proxy for regulations that only affect foreign entry and do not affect productivity of domestic firms. Nevertheless, although employing an IV approach presents considerable difficulties, doing so in the future would be worthwhile.
- 23.
Panel (b) of Table 11.3 shows only the estimation results using TFP as a productivity measure. I obtained similar results when using labor productivity as a productivity measure.
- 24.
Note that, in Japan (as in many other countries), a substantial share of the stocks issued by listed firms is owned by foreign institutional investors in the form of portfolio investments.
- 25.
Definitions of foreign-owned firms in official statistics vary across countries. For example, in the US, foreign-owned firms are defined as firms with 10% or more ownership by a single foreigner or foreign firm while, in Japan, foreign-owned firms are defined as firms with 33.4% or more ownership by one or more foreigners. In some countries, firms are considered foreign-owned with any foreign ownership share or with ownership shares of at least 5% or 10%. However, the majority ownership definition is employed worldwide.
- 26.
- 27.
Based on the firm-level panel data used in this study, the value-added-to-output ratio is 28% for manufacturing firms, while it is 46% for services firms. The industry-level data from the 2005 Input-Output Tables show similar figures. At the aggregated level, the gross value-added-to-domestic-output ratio is approximately 30% for the manufacturing sector and approximately 60% for the service sector.
- 28.
For example, according to the 2005 Input-Output Tables, the share of final demand in total demand is 44% for the manufacturing sector while the corresponding figure for the service sector is 58%.
- 29.
For example, as mentioned above, BSJBSA only covers firms in sectors administrated by METI and does not cover firms in many other service sectors.
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Appendix: Variable Construction and Data Sources
Appendix: Variable Construction and Data Sources
Output
Except for the commerce sector, gross output is defined as firms’ total sales. For the commerce sector, gross output is measured as sales minus expenses for purchased materials. Gross output is deflated by the output deflator taken from the JIP Database 2009 for years 2000–2006. For 2007, the output deflator was extrapolated using the growth rate of various price indexes from 2006 to 2007 published by the Bank of Japan. The output price index was used for manufacturing industries, and the corporate service price index was used for service industries.
Intermediate Inputs
For the commerce sector, intermediate inputs are calculated as (Cost of sales + Operating costs) − (Wages + Depreciation costs + Expenses for purchased materials). The intermediate inputs of other sectors are defined as (Cost of sales + Operating costs) − (Wages + Depreciation costs). Intermediate inputs are deflated by the intermediate input deflator taken from the JIP Database 2009 for the years 2000–2006. For 2007, the intermediate input deflator was extrapolated using the growth rate of various price indexes from 2006 to 2007 published by the Bank of Japan. The input price index was used for manufacturing industries. For service industries, the intermediate input deflator for 2007 was calculated using the output deflator and the 2006 JIP Input-Output Table.
Labor Input
Labor input is calculated as each firm’s total number of workers multiplied by the sector’s working hours taken from the JIP Database 2009 for the years 2000–2006. For 2007, the data on working hours by sector are extrapolated using the growth rate of working hours from 2006 to 2007 taken from the Monthly Labor Survey published by Ministry of Health, Labor and Welfare.
Capital Stock
For capital stock, the only data available are the nominal book values of tangible fixed assets. Using these data, the net capital stock of firm i in industry j in constant 2000 prices is calculated as follows:
where BV it represents the book value of firm i’s tangible fixed assets in year t, INK jt stands for the net capital stock of industry j in constant 2000 prices, and IBV jt denotes the book value of industry j’s capital. INK jt is calculated as follows. First, the data on the book value of tangible fixed assets in 1975 from the Financial Statements Statistics of Corporations published by Ministry of Finance were taken as a benchmark. Then, the book value of year 1975 was converted into the real value in constant 2000 prices using the investment deflator taken from the JIP Database 2009. Second, the net capital stock of industry j, INK jt , for succeeding years was calculated using the perpetual inventory method. The sectoral depreciation rate used was taken from the JIP Database 2009.
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Ito, K. (2017). Entry of Foreign Multinational Firms and Productivity Growth of Domestic Firms: The Case for Japanese Firms. In: Honjo, Y. (eds) Competition, Innovation, and Growth in Japan. Springer, Singapore. https://doi.org/10.1007/978-981-10-3863-1_11
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