The Location of Japanese MNC Affiliates: Agglomeration, Spillovers and Firm Heterogeneity

We examine the location choices of the foreign affiliates of Japanese manufacturing firms, using a new data set that matches parents to the affiliates they created over the 1995-2003 period. The analysis is based on new economic geography theory, and thus focuses on the effect of market and supplier access, as well as production and trade costs. Our aim is twofold. First, we investigate the importance of agglomeration and spillover effects on firms’ decisions via variables showing the presence of Japanese affiliates in the host countries, and Japanese multinational firms at home. Our results confirm the economic importance of information-sharing and network effects, both at home and in the host country, in addition to traditional factors relating to production and transaction costs, and market and supply access. Second, we explore whether the effects of the key determinants of location choice vary according to the characteristics of the investing firm and the affiliate. We find that less productive and smaller parents are more likely to create an affiliate in China rather than in Western Europe or an OECD country. Moreover lessproductive firms seem more sensitive to distance-related costs and low institutional quality, but are more responsive to the presence of Japanese firms and the presence of a Japanese External Trade Organization (JETRO) agency in the host country.