Abstract
Using firm-level data for Japan, this chapter examines the determinants of export and foreign direct investment (FDI) decisions. We contribute to the literature by employing a mixed logit model to incorporate any unobserved firm heterogeneity and by paying special attention to the quantitative significance of the determinants. We find that although the effect of productivity on export and FDI decisions is positive and statistically significant, this effect is economically negligible. The quantitatively dominant determinants of the export and FDI decision are instead the prior status of firms in terms of internationalization and unobserved firm characteristics. This finding suggests that foreign market entry costs, which vary substantially in size across firms, play an important role in the export and FDI decision. Using a unique dataset for small and medium enterprises, we further show that such non-productivity factors of firm internationalization that are unobserved in standard firm-level data include the risk and time preferences and international experience of decision makers.
This chapter is a revised version of Todo (2011) based on research conducted in a project on “International Trade and Firms” at the Research Institute of Economy, Trade, and Industry (RIETI). The author would like to thank RIETI for financial support and RIETI and the Ministry of Economy, Trade, and Industry (METI) for providing firm-level data sets for Japan. The opinions expressed and arguments employed in this chapter are the sole responsibility of the author and do not necessarily reflect those of RIETI, METI, or any institution with which the author is affiliated.
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Notes
- 1.
Existing works on this issue include the works of Clerides et al. (1998) for Columbia, Mexico, and Morocco; Bernard and Jensen (1999, 2004) and Bernard et al. (2003) for the US; Head and Ries (2003) and Tomiura (2007) for Japan; Barrios et al. (2003) for Spain; Greenaway and Kneller (2004) for the UK; Mayer and Ottaviano (2007) for various European Union (EU) countries; Damijan et al. (2007) for Slovenia; and Eaton et al. (2011) for France. Useful surveys of this literature can be found in the works of Bernard et al. (2007), Greenaway and Kneller (2007), and Wagner (2007, 2012).
- 2.
Throughout this chapter, the internationalization of firms is defined as engaging in export, foreign direct investment, or international sourcing (offshoring).
- 3.
The figure is taken from Wakasugi et al. (2008), who employ the same firm-level data for Japanese firms used in the current analysis.
- 4.
As an experiment, we distinguished between firms engaging in FDI but not in exports and firms engaging in both FDI and exports. However, our central findings remained unchanged.
- 5.
Using firm-level data from Mexico, Aitken et al. (1997) first investigated whether spillovers from other firms promote exports, finding evidence of spillovers from multinational enterprises but not from exporting firms. Using UK data, Greenaway et al. (2004) obtain similar results. Conversely, Bernard and Jensen (2004) use US data and Barrios et al. (2003) examine Spanish data, both finding positive spillover effects.
- 6.
Manova (2008) employs cross-country data and finds that equity market liberalization increased exports more in credit-constrained sectors than in other sectors, concluding that credit constraints are an important determinant of international trade flows. Muûls (2008) re-examines a similar issue using firm-level data for Belgium and employing a bankruptcy risk measure provided by Coface, a credit insurance company, as a measure of the extent of credit constraints. Muûls (2008) concludes that credit constraints indeed affect the export decisions of Belgian firms.
- 7.
This definition implies that when firms did not report their exports, we define these firms as firms that do not engage in exporting.
- 8.
In the survey, ‘foreign subsidiaries’ are overseas firms in which the Japanese parent holds an equity stake of more than 50%, whereas ‘foreign affiliates’ are overseas firms in which the Japanese parent holds between 20 and 50% of equity. However, we do not distinguish between foreign subsidiaries and affiliates in this study.
- 9.
When constructing the data set, we relied heavily on Stata programs provided by Matsuura (2004).
- 10.
When we assume that the coefficients on the dummies for previous status, the values of γ in Eq. (2), are not stochastic but rather constant across firms, the predicted probabilities are closer to the actual probabilities. The respective predicted probability that the average domestic firm becomes an exporter or an FDI firm is 2.34 and 1.22%, as compared to the actual probabilities of 2.51 and 1.37%. However, as discussed in Sect. 2, assuming random coefficients on the dummies is necessary to correct for possible biases from the correlation between the error term and the dummies for prior status. Nevertheless, our main results do not change using the alternative specification.
- 11.
We consider a 9-year period, as our data set covers the 1997–2005 period.
- 12.
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© 2014 Ryuhei Wakasugi
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Todo, Y. (2014). The Role of Non-productivity Factors in the Internationalization of Firms. In: Wakasugi, R. (eds) Internationalization of Japanese Firms. Springer, Tokyo. https://doi.org/10.1007/978-4-431-54532-3_4
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