Do Japanese Firms Fail to Catch up in Localization? An Empirical Analysis Based on Affiliate-level Data of Japanese Firms and a Case Study of Automobile Industry in China

This paper analyzed the degree and the current status of localization of Japanese affiliates in China, dealing with the following three major issues- (1) comparison of localization (expatriates, local sales, local procurement, local management) of Japanese and US affiliates in China and in other major regions; (2) Analysis of the impact of localization on profitability of Japanese affiliates in China and in other major regions; and (3) Detailed investigation on inter-firm transaction relationships in China in the case of automobile manufacturers and the parts suppliers. Compared with the U.S. affiliates, Japanese affiliates tended to be less localized. The quantitative analysis based on the comprehensive affiliate-level panel data of Japanese multinational firms for the period from 1989 to 2002, confirmed that in China, Japanese affiliates with higher local procurement ratios, local CEOs, and local procurement managers, had higher profits. The analysis as of factors determining trading relationships between joint-venture assemblers and parts suppliers of different nationalities in China found that even when various variables, including the level of suppliers productivity and the distance between assemblers and suppliers are controlled for, Japanese suppliers transactional relationships are more limited than those of other suppliers. With respect to non-Japanese assemblers, high-productivity suppliers are engaged in significantly more transactional relationships. By contrast, the same was not found for Japanese assemblers. The results indicate that Japanese assemblers may well be choosing business partners which they expect to realize sustainable productivity increases in the future rather than focusing on present productivity levels. This finding provides evidence of business practices based on a long-term perspective characteristic of Japanese businesses.