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Journal of Economic Integration 2011 December;26(4) :651-671.
Why Has the Border Effect in the Japanese Machinery Sectors Declined?: The Role of Business Networks in East Asian Machinery Trade

Kyoji Fukao Toshihiro Okubo 

Hitotsubashi University
Keio University
Copyright ©2011 Journal of Economic Integration

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

Keywords: Gravity Model | Border Effect | Firm Networks | Fragmentation
1. Ahn, S., K. Fukao and K. Ito. (2008), The impact of outsourcing on the Japanese and South Korean labor markets: International outsourcing of intermediate inputs and assembly in East Asia, Global COE Hi-Stat Discussion Paper Series 08-015, Hitotsubashi University, Japan.
2. Anderson. J. E., and E. van Wincoop. (2003), Gravity with Gravitas: A Solution to the Border Puzzle, American Economic Review, 93(1), 170-192.
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