This paper analyzes the impact of firm networks on Japan's national border effect. We estimate gravity equations using data on Japan's international and interregional trade in four machinery industries (electrical, general, precision and transportation machinery). The machinery sector is the most important manufacturing sector for exports and outward foreign direct investment (FDI) in Japan. By taking into account international as well as interregional firm networks, we find that ownership relations usually enhance exports from parent firms to establishment. Consequently we can explain 15% (7%, 1% and 0.5%) of the decline in Japan's border effect from 1980 to 1995 in precision (transportation, general electrical) machinery sector by the increase of international networks.

JEL Classification: F14, F17, F21, L14