Complex Vertical FDI and Firm Heterogeneity: Evidence from East Asia

In this paper we statistically test the validity of the mechanics of complex VFDI in Japanese machinery FDI to East Asia; we do this by estimating a multiple-spatial lag model. From the theoretical point of view, in complex VFDI, the production activity of affiliates in a given country is positively related to that in neighboring countries which have large differences in factor prices with the given country. Our empirical results show that such mechanics of complex VFDI work in Japanese FDI to East Asia, and that they work more strongly in the MNEs with higher productivity. These results have an important implication for the policies of developing countries in attracting FDI.

Application of factor decomposition techniques to vertical specialisation measurements

The increasing importance of vertical specialisation (VS) trade has been a notable feature of rapid economic globalisation and regional integration. In an attempt to understand countries’ depth of participation in global production chains, many Input-Output based VS indicators have been developed. However, most of them focus on showing the overall magnitude of a country’s VS trade, rather than explaining the roles that specific sectors or products play in VS trade and what factors make the VS change over time. Changes in vertical specialisation indicators are, in fact, determined by mixed and complex factors such as import substitution ratios, types of exported goods and domestic production networks. In this paper, decomposition techniques are applied to VS measurement based on the OECD Input-Output database. The decomposition results not only help us understand the structure of VS at detailed sector and product levels, but also show us the contributions of trade dependency, industrial structures of foreign trade and domestic production system to a country’s vertical specialisation trade.