ABSTRACT
Japanese firms are often found to be less inclined to establish such vertical linkages but to rely on imports of components and materials from Japan (Graham and Krugman 1990; Froot 1991; Murray et al. 1995). A number of explanations have been put forward to account for this pattern. It has been argued that Japanese firms’ lower local procurement may be caused by the relatively
to establish relationships with local suppliers and to secure reliable delivery of components, the later ‘vintage’ of Japanese affiliates may leave them still more dependent on existing suppliers in Japan. Another explanation relates to a more idiosyncratic practice of Japanese firms: the reliance on long-term relationships with suppliers in vertical keiretsu (e.g. Mason and Encarnation 1994). Hackett and Srinivasan (1998) argue that Japanese firms face higher supplier switching costs because of their relationship-specific investments associated with the intensive use of cooperative-subcontractor relationships with established Japanese suppliers, in particular suppliers within vertical keiretsu. This implies that Japanese firms are less eager to switch to local suppliers for their overseas manufacturing operations. The empirical findings in Hackett and Srinivasan (1998) suggest that Japanese firms are less than US firms inclined to invest in countries imposing strict local content requirements on foreign investors, in accordance with the hypothesis of higher switching costs. A third possible explanation relates to the motivation for the rapid increase in Japanese overseas investments in the late 1980s and early 1990s. In industries responsible for a major share of Japanese foreign investment, such as electronics, machine tools, and automobiles, an important motive has been to ‘jump’ trade barriers erected against Japanese exports. There is convincing evidence that voluntary export restraints, high tariff levels, and antidumping measures have induced investments substantially over and above levels which would have been reached in the absence of such trade policies, in particular in the EU (Belderbos 1997b; Blonigen 1998; Barrell and Pain 1999). If investments are merely a response to trade barriers, they are not a first best managerial decision based on manufacturing cost and efficiency. Limiting investment to relatively simple assembly tasks while sourcing components from abroad may be the most cost-effective response. In particular, when trade policy measures are seen as temporary (e.g. given the five-year duration limit for antidumping measures), firms may also wish to limit resource commitment, facilitating the relocation of investment when measures have expired. Hence, the role of restrictive trade policies in motivating Japanese investments may also contribute to the explanation of the observed lower level of vertical linkages (Belderbos 1997a).
