Hi-Stat

Discussion Paper Series
No.191Are Japanese Firms Failing to Catch up in Localization?
An Empirical Analysis Based on Affiliate-level Data of JapaneseFirms and a Case Study of the Automobile Industry in China
Kyoji Fukao
Keiko Ito
Shigesaburo Kabe
Deqiang Liu
Fumihide Takeuchi
November 2006

Hitotsubashi University Research Unit
for Statistical Analysis in Social Sciences
A 21st-Century COE Program

Institute of Economic Research
Hitotsubashi University
Kunitachi, Tokyo, 186-8603 Japan
http://hi-stat.ier.hit-u.ac.jp/

Are Japanese Firms Failing to Catch up in Localization?
An Empirical Analysis Based on Affiliate-level Data of Japanese Firms and a Case Study of theAutomobile Industry in China*

Kyoji Fukao
Hitotsubashi University and JCER

Keiko Ito
Senshu University

Shigesaburo Kabe
JCER

Deqiang Liu
Tokyo Gakugei University

Fumihide Takeuchi
JCER* The original version of this paper was presented at the JCER Workshop, Multinational Firms’
Strategies in East Asia: A Comparison of Japanese, U.S., European, and Korean Firms, June 1, 2006,
Tokyo, Japan. The authors would like to thank the discussant, René Belderbos, and participants of
the workshop for their helpful comments. We gratefully acknowledge the Grant-in-Aid from the
Ministry of Education and Technology for the project “Productivity Effects of International Trade,
Foreign Direct Investment and Privatization on the Chinese Manufacturing Sector: An Empirical
Analysis Based on Firm-Level Data.”

Are Japanese Firms Failing to Catch up in Localization?
An Empirical Analysis Based on Affiliate-level Data of Japanese Firms and a Case Study of theAutomobile Industry in China

Abstract
This paper analyzes the degree and the current status of localization of Japanese affiliates in
China. For this purpose, we (1) compare the localization (measured in terms of the number of
expatriates, local sales, local procurement, and local management) of Japanese and U.S. affiliates in
China and other major regions; (2) analyze the impact of localization on the profitability of Japaneseaffiliates in China and in other major regions; and (3) conduct a detailed investigation of inter-firmtransactional relationships in China between automobile manufacturers and parts suppliers. We findthat compared with U.S. affiliates, Japanese affiliates tend to be less localized. Using acomprehensive affiliate-level panel data set on Japanese multinationals and concentrating on China,
we then examine the effect of localization quantitatively and find that Japanese affiliates with higher
procurement ratios and/or local CEOs and procurement managers enjoyed high profits. Next, turning
to the factors determining trading relationships between assemblers and suppliers of different
nationalities in China, our analysis suggests that even when taking various control variables into
account, such as suppliers’ productivity level and the distance between assembler and supplier, thetransactional relationships of Japanese suppliers are more limited than those of suppliers of othernationalities. Moreover, Japanese automobile assemblers do not choose suppliers based on theircurrent labor productivity level and transactional relationships between assemblers and suppliers are
more closed in the case of Japanese firms than in the case of firms of other nationalities. On the other
hand, we find that auto parts suppliers dealing with Japanese assemblers see their productivity growfaster regardless of the supplier’s nationality. The results indicate that Japanese assemblers may well
be choosing business partners which they expect to realize sustainable productivity increases in the
future rather than focusing on present productivity levels. This finding provides evidence of businesspractices based on a long-term perspective characteristic of Japanese enterprises.

11. Introduction
Most Japanese multinationals are relative newcomers in the global arena when compared with
their European and U.S. counterparts, some of which started to engage in foreign direct investment(FDI) before World War II. Until the end of the 1960s, Japan’s outward FDI was very small andconcentrated in two areas, commerce and natural-resource-related industries.1 Japan’s outward FDI
stock in the manufacturing industry at that time was negligible.2
Probably reflecting their shorter experience in operating internationally, Japanese affiliates –even those in the machinery industry, where Japanese firms tend to be most competitive – were lessprofitable than U.S. affiliates until the second half of the 1990s (see Table 1). A similar fact isreported by Ramstetter (1999), who uses the statistics of a single host country, Singapore.
Comparing various characteristics of the Singaporean plants of firms from the U.S., Europe, Japan,
and other Asian countries, he found that, during the period 1980-1996, the average profit-to-sales
ratio of manufacturing plants was significantly higher for U.S.- and European-owned ones than forJapanese-owned ones.
INSERT Table 1
Although the gap between the average profit rate of Japanese manufacturing affiliates and U.S.
affiliates has been diminishing since the second half of the 1990s (Table 1), Japanese multinationals
may still have something to learn from U.S. and European multinationals.
Many earlier studies have found that one of the most important characteristics of Japaneseaffiliates is that they are less localized than affiliates from other countries. Such studies suggest thatJapanese firms exercise tight control over their overseas affiliates (Mason and Encarnation 1994) andare slow to promote local staff to managerial positions (Westney 1996; Belderbos 1997). Ramstetter(1994), focusing on the Thai manufacturing sector in 1990, also shows that in all industries except
the motor vehicle and the precision machinery industry, the share of expatriate workers in skilledemployment was much higher for Japanese affiliates than for affiliates from other developed
industries. For example, in non-oil manufacturing industries, the share of expatriate workers inskilled employment was 5.77% for Japanese affiliates but only 2.67% for affiliates from otherdeveloped economies. Table 2 shows that in almost all regions and countries, the share of expatriates
in the total number of employees is much higher for Japanese than for U.S. affiliates.
1

Until the end of the 1960s, Japan suffered a chronic current account deficit and strictly regulated
outward investment, including FDI. Each case of outward FDI was screened by the Ministry of
Finance and the Ministry of International Trade and Industry. To promote processing trade, theJapanese government permitted outward FDI in commerce and natural resource-related industries.
For more details on the history of Japan’s outward FDI, see Komiya (1988).
2
Japanese manufacturing firms actively engaged in FDI before World War II, mainly in Japan’scolonies and in China.
2

INSERT Table 2
Japanese firms also tend to have lower local procurement ratios. Graham and Krugman (1990),
Froot (1991), and Murray, Wildt, and Kotabe (1995), for example, found that Japanese affiliates in
the U.S. rely more on imported components from their parent firms than affiliates from othercountries. Similarly, Maruya (2000) reports that the local procurement ratios of Taiwanese affiliates
in China in the electronics industries are around 70-80%, which is much higher than that of Japaneseaffiliates (approximately 40%).
Japanese firms are, moreover, less local market-oriented than affiliates from other countries.
In case studies on Japanese, European and U.S. affiliates in the electrical machinery and electronics
industry in Malaysia, Kasuga et al. (2004) found that Japanese affiliates were more
exported-oriented than their Western counterparts. One result of this is that, as the Malaysian
economy has developed and wage rates have increased, many Japanese firms have retreated from
Malaysia. As Table 3 shows, this pattern is widespread: Japanese affiliates tend to have lower local
sales ratios than U.S. affiliates. Especially in China, the Japanese affiliates show much lower local
sales ratios, except in the transportation equipment industry.
INSERT Table 3
These findings, i.e., that Japanese affiliates are less localized, do not necessarily mean thatJapanese affiliates could improve their performance through greater localization. For Japaneseaffiliates in Asia, whose competitiveness springs from the superior quality of their products, a rapid
increase in procurements from local low-tech suppliers would potentially jeopardize the quality of
their products and reduce their competitiveness. And the promotion of too many local employees toadministrative positions could harm affiliates’ close ties with their parent firm and parent firms’
global production networks.
The purpose of this paper is to examine what the potential effects of localization are andwhether Japanese firms are falling behind in localizing their affiliates abroad. The benefits fromlocalization may depend on the economic conditions in the host country, the industry, andmultinationals’ characteristics. In the following section, we examine this issue by estimating the
profit functions of Japanese affiliates abroad. One of the most interesting findings from ourregression analysis is that the profit rate of Japanese affiliates in large and low-wage countries, suchas China, is an increasing function of the local procurement ratio. This result is consistent with thefact that in low-wage countries, affiliates can substantially reduce production costs by increasing
local procurement. In addition, if the host country is large, it is easier for affiliates to find appropriate

3

suppliers.
In order to confirm our above regression result on the effects of local procurement on
affiliates’ performance, we conducted interviews with Japanese affiliates in the automobile industry
in Guangdong Province, China. We summarize our interview results in Section 3. Most Japaneseaffiliates we interviewed answered that the expansion of local procurement plays a key role in
reducing production costs. However, we also found that it is very difficult for Japanese affiliates toincrease procurements from local firms while at the same time maintaining output quality andsmoothly introducing new models.
Another finding from these interviews is that for Japanese affiliates in China, procurementsfrom other Japanese affiliates, which are costly but reliable in quality, and procurements from local
suppliers, which are much cheaper but quality is highly uncertain, are two completely different
matters. Procurements from other Japanese affiliates are costly because the affiliates import a largepart of their intermediate inputs and capital goods from Japan. This finding implies that preceding
empirical studies on multinationals’ procurement behavior are problematic because they usually do
not distinguish between procurements from local suppliers and other types of procurement.3 This
raises the question whether Japanese affiliates procure less from local firms than U.S. or European
affiliates.
We examine this question in Section 4 using firm level data of automobile assemblers andparts suppliers in China. In most developing countries and most industries, it is usually very difficult
to obtain detailed information on supplier-customer relationships. One important exception is theautomobile industry, where parts supplier directories usually report each supplier’s customers. An
additional reason for focusing on the automobile industry is that automobile assemblers procure
many costly-to-transport parts and it is very important for assemblers to find good suppliers in thevicinity of their factories. Section 5 summarizes our results.

2. Does Localization Determine the Profitability of the Chinese Affiliates of Japanese Firms?
In this section, we consider the role of the localization of procurements, sales, andmanagement in determining the profitability of Japanese MNEs’ foreign affiliates. We do so by
referring to the empirical results of Ito and Fukao (2006), who, using a comprehensive affiliate-level3

A small number of empirical studies do make this distinction. Kreinin (1992), for example, foundthat Japanese affiliates in Australia rarely use open tenders for machinery procurements but (incontrast with European and U.S. affiliates) routinely buy from long-standing suppliers at home.
Based on data on Japanese subsidiaries in the Malaysian electronics industry, Capannelli (1993)
found that an overwhelming share of Japanese firms’ local components purchases are fromJapanese-owned suppliers, including those within the same corporate group or vertical ‘keiretsu.’
However, these studies are based on relatively small samples. There are also several case studies that
distinguish these types of procurement (Hiramoto 1992, Guyton 1995, and Paprzycki 2005).
4

data set for the period from 1989 to 2002 collected by the Ministry of Economy, Trade and Industry(METI), conducted several regression analyses for the five major regions ― China, the USA, theEU15, the NIEs4, and the ASEAN4 ― and examined what key factors determine the profitability offoreign affiliates of Japanese MNEs. The results of that study suggest that local procurement andlocal sales can play a very important role in improving profitability in China, although the impact of
localization on profitability differs across the five regions. In the remainder of this section, let us
describe the results in more detail.4
Ito and Fukao (2006) conduct a regression analysis to investigate the major determinants ofthe profitability of Japanese MNEs’ foreign affiliates, estimating the following profit equation:

Π it = β 0 + Z it′ β1 + γ j + λk + ω t + ε it(1)

where Пit is the measure of profitability for affiliate i in year t, β0 is the intercept, Zit is a vector ofaffiliate-level control variables likely to influence affiliate performance, γj is the industry-specificfixed effect for industry j in which affiliate i operates, λk is the country-specific fixed effect for hostcountry k where affiliate i operates, ωt is the year-specific effect for year t, and εit is the error term.
Various measures of profitability (the dependent variable) are employed, but the study mainly uses
return on sales (ROS), which is defined as the ordinary profit over sales.5 Ito and Fukao (2006)
hypothesize that the following characteristics of affiliates may contribute to their profitability andinclude them as affiliate-level control variables:(1) The level of local procurements and local sales: Higher local procurements and sales mayhelp to improve foreign affiliates’ profitability if they successfully develop local supplierand distribution networks. This is because local linkages, as stressed by Belderbos et al.
(2001: 190), “are associated with frequent information flows, which allow for quality
improvements, reduced delivery times, and fast upgrading of designs in response tochanging demand conditions for final products.” However, a greater local procurement ratio
may not always have a positive impact on profitability when more efficient suppliers can beeasily found in neighboring countries and imports from these countries are cheaper. As forthe local sales ratio, a greater penetration of the local market should result in higher profits
4

The analysis in Ito and Fukao (2006) is based on the affiliate-level data underlying the Basic
Survey on Overseas Business Activities conducted annually by METI (METI, various years).
5
One may argue that the return on sales is not an appropriate measure for profitability because
particularly for processing and assembly-type industries, value added is relatively small comparedwith the total sales amount. However, information on affiliates’ total assets to calculate profitability
in terms of the return on assets is available only in the comprehensive survey conducted every three
years, which results in a much smaller sample for the regression analysis. Because of the smaller
number of observations on the return on assets (ROA), Ito and Fukao (2006) mainly employ the
ROS as the dependent variable, using the ROA, defined as the ordinary profit over total assets, for
supplementary estimations. The results they obtain when using ROA as the dependent variable aresimilar to those using ROS.
5

when Japanese MNEs have competitive advantages over local firms. However, in vertical
FDI-type foreign affiliates which are intended as low-cost production and export bases tothird countries, a lower local sales ratio may result in higher profits.
(2) The Japanese ownership ratio: It may be hypothesized that profitability is positively
associated with the Japanese ownership ratio when the firm’s competitive advantage rests on
knowledge-based intangible assets. As a greater equity ownership enables parent firms tomaintain a higher degree of control over affiliates, affiliates for which knowledge-based
intangible assets are important may be able to achieve better performance by protecting theirintangible assets from leaking out to other firms in the host country. On the other hand,particularly in developing countries, joint-ventures with local firms sometimes enjoy
advantages in negotiations with local government and other local clients. In such cases, ahigher Japanese ownership ratio may not be always associated with higher profits.
(3) The assignment of locals to positions of responsibility: If locals can be found in many
positions of responsibility, this may be an indication that intra-firm technology transfersfrom the parent firm to the affiliate have been successfully achieved. In this case, more local
managers at foreign affiliates may be associated with better performance.6(4) The size and length of operation of the foreign affiliate: Profitability is expected to bepositively correlated with the size and length of operation of a foreign affiliate, because
larger affiliates are likely to have stronger market power and be more efficient, while
affiliates with longer experience in a host country usually have better location-specific skills
and know-how than new foreign entrants. The variables used for the regression analysis are
summarized in Table 4.7
INSERT Table 4
The OLS regression results of the basic estimation equation are shown in Table 5. Columns(1) to (5) show the results of pooled OLS regressions without parent firm dummy variables, while
columns (6) to (10) show the results of pooled OLS regressions including parent firm dummy
variables which control for parent firm-specific factors. The results in Table 5 suggest that in manycases, the size and experience of affiliates (LnSALE and AGE), as expected, have a significant
positive effect on profitability, while the Japanese ownership ratio (J_OWN) has a negative effect inall cases (the negative effect is significant in many equations).8 The coefficients on the other
6

Urata et al. (2006) have analyzed the determinants of the assignment of local staff to positions ofresponsibility based on this assumption.
7
For a more detailed explanation of the hypotheses on the determinants of affiliates’ profitability,refer to Sakakibara and Yamawaki (2004) and Ito and Fukao (2006).
8
When the squared value of the Japanese ownership ratio (J_OWN) is added as an explanatory6

explanatory variables, however, vary across regions. As for the effect of localization on profitability,
the results show some conspicuous differences between China and the other regions: (1) For
affiliates in China, profitability is positively associated with the local procurement ratio (L_PRC)
and negatively associated with the local sales ratio (L_SALE), whereas the opposite tends to be thecase for affiliates in the other regions; (2) the localization of management, i.e., making a local theCEO (L_CEO), has a significant positive impact on profitability for affiliates in China but nosignificant effect for affiliates in other regions; (3) having a local as procurement manager(L_PRC_MNG) also has a significant positive impact on profitability for affiliates in China.9 Even
when parent firm-specific factors are controlled for (columns (6) to (10) in Table 5), the sign of thecoefficients in the regression for China does not change.
INSERT Table 5
The results shown in Table 5 indicate that the impact of localization on the profitability ofaffiliates differs across regions, which in turn suggests that the impact of localization may be
associated with wage levels, local market size, and host countries’ local production capacity andpurchasing power. In addition, in the case of China, before the country’s accession to the World
Trade Organization (WTO), foreign-owned firms had to contend with a variety of wholesale andretail regulations that may have prevented Japanese affiliates from earning higher profits from local
sales in China. Ito and Fukao (2006) therefore also examine how the economic conditions of a hostcountry affect foreign affiliates’ profitability and whether China’s accession to the WTO had apositive impact on profitability. Table 6 shows the estimation results of equations which include a
WTO-accession dummy and various sets of interaction terms with the WTO-accession dummy.10
Column (1) shows that the interaction term of the local sales ratio and the WTO dummy has asignificantly positive coefficient while the interaction term of the local procurement ratio and the
WTO dummy does not have a statistically significant coefficient. As the overall effect of the local
sales ratio on profitability (the sum of the coefficient on L_SALE and the coefficient onvariable, the estimated coefficient on J_OWN squared is negative, while the estimated coefficient on
J_OWN is positive in most cases. Using the estimated values, the Japanese ownership ratio at which
profitability in China, for example, is highest is approximately 56%.
9
A possible explanation of this result was pointed out by Hideshi Itoh, who suggested that a higher
Japanese ownership ratio may mean stronger intervention by parent firms and this stronger
intervention may negatively affect affiliates’ incentives to increase their own profits. In such a case,by assigning a local as CEO and lowering the Japanese ownership ratio, parent firms may be able toconvince the affiliate that the parent will not intervene in the affiliate’s operation. As a result, theaffiliate’s profitability may improve.
10
As for China, the WTO accession dummy takes 1 for years after China’s accession to the WTO,
i.e., for 2001 and 2002. Although the WTO was established in 1995, the WTO dummy takes 1 foryears before 1995 for the original WTO member countries.
7

L_SALE*WTO) is positive, the local sales ratio contributes to higher profitability in China after theaccession to the WTO. Specifications (2) and (3) in Table 6 include the logarithm of GDP as a proxy
for local market size (or the size of local production capacity) and the logarithm of GDP per capita
as a proxy for local purchasing power (or wage levels). According to the results for these
specifications (2) and (3), profitability is negatively associated with the local procurement ratio but
positively associated with the local sales ratio. Looking at the interaction terms of the localization
variables and GDP or GDP per capita, a higher per capita GDP has a negative impact on profitability
for affiliates with a higher local procurement ratio and has a positive impact for affiliates with ahigher local sales ratio. The results are the exact opposite for the GDP level. The sign of theestimated coefficients suggests that local procurement may lower profitability in countries with ahigher per capita GDP, probably because a higher per capita GDP is associated with higher wage
levels and higher production costs. However, per capita GDP also determines the purchasing powerof a country and may therefore contribute to the profitability of local sales-oriented affiliates. As for
GDP, the results may suggest that a higher GDP, when interpreted as a proxy for a country’s
production capacity, will improve the profitability of local procurement, probably because foreign
affiliates can easily find efficient suppliers in the host country. On the other hand, GDP, interpreted
as a proxy for a country’s market size, will not improve the profitability of local sales, maybe
because there are more competitors in the market and fierce competition lowers firms’ profitability.
INSERT Table 6
The above empirical results have important implications for the Chinese affiliates of Japanese
MNEs. As China has a better industrial infrastructure and an abundant labor force when comparedwith other developing countries, promoting local procurements will contribute to higher profitabilityof affiliates in China. Moreover, local sales expansion is becoming an important strategic element toimprove profitability in China as income levels increase and regulations in favor of local firms,
particularly in the wholesale and retail sector, have been relaxed under the WTO scheme. Based on
the findings of Ito and Fukao (2006), we suggest that localization of both procurement and sales is
an important determinant of profitability in China and that the Chinese affiliates of Japanese MNEs
should become more aggressive in penetrating China’s local market and industries.

3.

Multinationals’ Local Procurement Practices in China

3.1 Local Procurement Practices of Japanese Manufacturing Firms
The results of the empirical analysis based on affiliate-level data on Japanese MNEs presented
in the previous section suggest that the localization of procurements and sales in China is of crucial

8

importance. In this section, we therefore look more closely at the local procurement and local salesof the Chinese affiliates of Japanese MNEs.
According to a questionnaire survey conducted by the Japan Industrial Policy ResearchInstitute (JIPRI) in 2006, the overseas subsidiaries of Japanese manufacturing firms imported only
41 percent of their total purchases from Japan, while local procurements accounted for 53 percent. A
breakdown of local supplies reveals that nearly half of local purchases were from the subsidiaries oraffiliates of Japanese firms operating in the same country. Transactions with genuinely indigenous
firms and the local subsidiaries of foreign firms from other countries accounted for only a quarter of
total purchases. Although at first glance the local content ratio appears to have increased, it should be
noted that this is due to the high dependence on Japanese firms since, broadly-defined, transactions
with Japanese firms (imports from Japan plus transactions with Japanese firms operating in hostcountries) accounted for 65 percent of the total.
This very trend is also observable in China, where many Japanese firms are operating. Maruya(2000) shows that in 1998, 52 percent of local parts manufacturer supplying Japanese firms in the
Huanan region (Guangdong Province) were other Japanese firms operating in China. In fact,
purchases from indigenous Chinese firms accounted for less than 20 percent of local procurement.
Next, let us look at the business performance and the localization of procurement and sales byJapanese affiliates in the automobile industry. Table 7 provides summary statistics of various
measures of localization based on the affiliate-level data underlying METI’s annual survey.11 The
figures indicate that the average local content ratio of assemblers in China rose from 42 percent in1996 to 91 percent in 2002. This figure is much higher than that for the ASEAN countries, whichstood at 45 percent in 2002. This discrepancy is thought to be due to the fact that it is relatively easy
to purchase domestically in China because of the size of the country’s economy. In contrast, theaverage local contents ratio of suppliers in 2002 stood at only approximately 50 percent, the same asin the ASEAN countries.12 This suggests that while assemblers operating in China are actively
purchasing from Japanese suppliers, boosting the apparent local content ratio, suppliers’ purchasesfrom indigenous Chinese firms have not made much progress.
INSERT Table 7

3.2 Case Studies of Automotive Companies Operating in China
The authors visited Japanese automotive firms in the Huanan region (Guangdong Province) of
11

Keiko Ito participated in a project on the internationalization of Japanese business undertaken at
the Research Institute of Economy, Trade and Industry (RIETI) in fiscal 2005 and was able to gain
access to the affiliate-level data underlying METI’s Basic Survey on Overseas Business Activities.
The figures in Table 7 were calculated by Ito using the affiliate-level data.
12
Affiliates of non-assemblers in Table 7 are regarded as suppliers.
9China in March 2006 in order to study the status of local procurements.13 The case studies confirm
the following two commonly observed facts: (1) Local procurement is important for reducing costs;
however, (2) it is difficult to increase purchases from independent indigenous firms if a firm wishes
to maintain and/or improve product quality.
3.2.1 Case Study I: The Procurement Strategy of an Assembler
As stated in section 3.1, the local content ratio of Japanese assemblers is high, but the
proportion of purchases from independent, indigenous Chinese firms is extremely small. In the caseof Guangzhou Honda Automobile Co., Ltd. (Guangzhou City), out of total purchases from primary
suppliers, those from Japanese suppliers account for 90 percent in value-terms. The firm states that it
wishes to do business with genuinely Chinese suppliers but it finds it difficult to do so because suchsuppliers are unable to keep pace with the development and production of new car models. Suppliers
should be able to cope with design changes required for new car models (e.g., they should have thecapacity to make metal molds quickly).
The firm picks suppliers on the basis of their product quality, and geographical distance froma supplier is not much of a concern. Even for heavy materials, such as steel plates, Chinese-madeproducts still present problems with respect to their strength and anti-corrosiveness. Although thefirm has purchased from indigenous firms on a trial basis, such as roofing material from China’s
largest steel-maker, Baoshan Iron and Steel (Group) Corporation, it basically still depends onimports from Japan.
The basic policy of Guangzhou Honda Automobile pertaining to suppliers is to forge
long-term business relationships, but this does not mean that it guarantees future business. In allcases, the company requires suppliers to win business in a competitive environment.14
3.2.2 Case Study II: The Procurement Strategy of a Parts Maker
An important consideration for primary suppliers is how to raise the local content ratio bypurchasing from secondary or lower-level suppliers because this is central to lowering costs. For
example, Guangzhou TS Automotive Interior Systems Co., Ltd. (Guangzhou City), which assembles
automobile seats, purchases all the urethane foam it uses for seat cushions. It also outsources 55
percent of the sewing of cushion covering and 20 percent of welding work for seat frames. Out of its
13

The authors carried out interviews with the Chinese affiliates of Japanese auto industry incooperation with Professor Yanyun Zhao of Renmin University, China, and Mr. Liang Jian of theSouth China University of Technology.
14
Among the primary parts suppliers for Guangzhou Honda Automobile, there are at present a few
Chinese firms. One example is Guangzhou Xin Zhong Plastic Co., Ltd., a plastics molding company,
which the authors visited. However, since this company employs an expert in metal molds who is aformer employee of Honda Motor Co., Ltd., this can be considered a special case in which
technology transfer has taken place.
10

81 parts suppliers, 36 are Japanese and 45 are Chinese. In value, local purchases account for 90
percent of its total purchases, with independent Chinese firms accounting for 54 percent of the local
purchases.
According to an official at the plant, the firm wishes to raise the share of local supplies, which
are less costly, but the quality inspection of Honda, its customer, is extremely rigorous. In order topurchase locally, Guangzhou Honda sends parts and materials to Honda Motor in Japan forinspection, and Honda Motor not only examines them but also tests them in use in its vehicles. Local
procurement is authorized only after a product passes these tests. Consequently, there is a high wall
to be scaled before the local procurement of secondary parts can proceed.
3.2.3 Case Study III: The Supply Strategy of a Materials Maker
Some Japanese parts and materials makers regard this emphasis on product quality on the partof Japanese assemblers as an excellent business opportunity. For example, Toray Plastics (SZ)
Limited (Shenzhen City), an engineering plastics maker, hopes to supply engineering plastics forconnectors in dashboards and bonnets. Procedures call for the primary parts maker (Toray Plastics’customer) to inspect Toray Plastics’ plants and equipment even after the assembler decides to choose
Toray Plastics’ products for a specific car model. Because quality reliability from the viewpoint of
the customer is given top priority under this system, Toray Plastics is not able to change plants orequipment at its own discretion. Toray Plastics (SZ) Limited reckons that the capacity to cope withthe rigorous standards and specifications of assemblers is an element which local materials makers
do not possess.
3.2.4 Case Study IV: The Balance between Price and Quality
At present, production costs for Honda’s compact car “Fit,” which Guangzhou Honda
manufactures for export to Europe, are the same in China as in Japan. Guangzhou Honda is aiming
to lower local production costs to about 90 percent of the Japanese level within the next few years.
To attain this goal, greater localization of secondary suppliers is very important. Unless the firm
pushes further ahead to achieve greater genuine local procurements, it will not be able to reduce
costs while maintain or improving quality. The key challenge is how to strike a balance between
maintaining quality and achieving cost reductions. In the face of criticism that Japanese firms’
excessive concern with quality is increasing their costs, Guangzhou Honda states that the emphasis
on quality is as it should be, and that it is confident that the firm will earn an excellent reputation foritself by focusing on performance and building vehicles that will not break down even after logging
many miles under tough Chinese road conditions.
Striking a balance between product quality and costs is a problem that also besets Guangqi
Toyota Engine Co., Ltd., which builds engines. At present, the company’s production costs for11

engines are the same as those in Japan. Hence, if it wishes to export to Japan, it must reduce its costs
to at least offset exporting costs, a fact which makes it necessary to raise the local content ratio ofparts. The current local content ratio is high at 86 percent in value, but in terms of the number ofparts, local purchases account for only 20-30 percent. The company depends on imports from Japanfor most of its parts. Guangqi Toyota Engine plans to reduce costs by purchasing parts made in
China, but it has no intention of compromising on quality. The firm believes that pursuing the best
quality eliminates waste and losses in production, and thus reduces total costs. Therefore, it will not
reduce the level of quality, even if this would make it possible to increase local content.

4. Empirical Analysis of Factors Determining Local Procurements in the Chinese Auto
Industry
The analysis so far has suggested that Japanese manufacturing enterprises operating in China
could improve their profitability by increasing their reliance on local procurements. At the same time,
however, it has frequently been remarked that, generally speaking, Japanese assemblers prefer to dobusiness with Japanese suppliers and tend to be reluctant to expand local procurements. The
descriptive analysis in the previous section has shown that this pattern can also be observed in the
Chinese automotive industry. Here, we will expand the scope of the analysis and include U.S. andEuropean enterprises in order to identify factors which determine trading relationships between joint
venture assemblers and parts suppliers of different nationalities in China.
Specifically, the key point of the analysis is to determine to what extent business relationships
are affected if auto assembler and supplier are of different nationalities. Some argue that the close
relationship between Japanese enterprises is based on the technological capabilities of Japanesesuppliers and that Japanese assemblers’ decisions are made on rational grounds. This view holds thatJapanese enterprises are not engaged in “closed” practices, in which they select suppliers simply
because they are of the same nationality.
In the analysis which follows, various variables relating to suppliers, such as their productivity(which may be considered a proxy for technical capabilities), scale of business, geographic distancefrom auto assemblers, and number of years of operation in China are controlled.
Many studies have been conducted on the supplier system (i.e., the relationship between
assemblers and suppliers) in the Japanese automotive industry. One of the aims of these studies has
been to identify the sources of the strong international competitiveness of Japanese enterprises andmany of these studies have therefore been made from the viewpoint of international comparison (e.g.,
Fujimoto, Nishiguchi and Itoh, 1998). However, as Marukawa (2006) pointed out, (1) there havebeen very few analyses of the automotive industry in China, and (2) little attention has been paid tothe spatial dimension of core company-supplier relations. The latter refers to the impact of

12

geographic distance between an assembler and a supplier on their business relationship. Marukawa’s
model takes two conflicting factors into account: While clustering (suppliers and assemblers locate
in close proximity) reduces transaction costs arising from geographic distance, it also reduces sales
per supplier due to the opportunity costs which make it impossible to take advantage of economies
of scale (i.e., building relatively large plants apart from a specific assembler and deal with a wide
range of assemblers).
We will attempt to remedy the two above-mentioned shortcomings of earlier studies. Based on
Marukawa (2003) and Marukawa (2006), our analysis pursues the following strategy: (1) It
explicitly incorporates the technological capabilities (productivity) of suppliers as an explanatory
variable to ascertain if Japanese enterprises give priority to trading with their compatriots even after
taking productivity into account; and (2) it focuses on a dynamic relationship in that it examines theeffect of differences in the nationalities of assemblers and suppliers on the subsequent performance(change in productivity) of the latter.

4.1 Factor Analysis of the Supplier System
4.1.1 Data
The data used for this analysis were obtained from the “China Automotive Industry Yearbook
2004” and the “China Auto Parts Supplier Directory 2004.” The former provides such data as (i) theamount of output, (ii) the amount of value added, (iii) the number of employees, and (iv) the amountof sales, on approximately 1,900 auto parts suppliers in China. The latter contains information suchas (i) the nationality of the capital, (ii) a product outline and (iii) customers, on approximately 1,100
suppliers. A set of data was compiled by selecting enterprises on which data were available fromboth of these sources. The number of observations for transactional relationships is 9,688, whichwere obtained by multiplying 346 joint venture and Chinese suppliers and 28 joint ventureassemblers and excluding transaction relationships for which some data were missing (Table 8). The
information was used to construct the following variables for the estimation: (1) for the dependent
variable, a binary choice variable indicating whether there was a transactional relationship between
an assembler and a supplier (taking 1 when there is a supply of parts and 0 when there is not); (2)variables for the nationality of assemblers and suppliers; 15 (3) suppliers’ labor productivity(representing the technological level); (4) suppliers’ amount of capital (representing economies ofscale); (5) the location of a parts maker (to examine the agglomeration effect; 1 when located in a
major car producing area, i.e., Shanghai, Hubei, Tianjin, Jiangsu, or Jilin; 0 when located in anotherarea); (6) distance between an assembler and a supplier (representing transaction costs); (7) numberof years since assembler’s operation started (experience effect).
15

In the case of non-Chinese, nationality refers to the origin the of capital employed to establish a
joint venture with a Chinese counterpart
13

INSERT Table 8
4.1.2 Major results
Before presenting the results of the probit estimation, we briefly examine the data pertaining
to the relationship between the number of transactions and supplier productivity, the distance
between assembler and supplier, and the nationalities of assembler and supplier.
First, we compared suppliers which have transactions with an assembler and those which donot, in order to see if there was a significant difference between these two groups in productivity or
distance to an assembler (Table 9). Although there was no difference in productivity between these
two groups, with respect to distance, it appears that assemblers from Japan, Germany and the UnitedStates all purchased from suppliers that were located relatively close to them.
INSERT Table 9
Next, we were interested in the average number of suppliers that Japanese, German, and U.S.
auto assembler did business with and divided these suppliers into those with relatively high andrelatively low productivity (Table 10). Overall, the comparison of the procurement behavior ofJapanese, American, and German assemblers revealed the following patterns: (1) The number oftransactions of Japanese assemblers’ with indigenous Chinese suppliers was small. (2) With respect
to transactions with same-country suppliers, the Japanese assemblers stood out somewhat in theirpractice of purchasing from low-productivity parts makers. In relation to the latter finding, theindicator of relationship with same-country suppliers was obtained by dividing the average numberof transactions with low-productivity suppliers by the average number of transactions withhigh-productivity suppliers. This ratio was 9 (=1.8/0.2) for Japanese assemblers, 4.8 (=4.8/1) for
German assemblers and 4.7 (=2.8/0.6) for U.S. assemblers.
INSERT Table 10
Finally, we looked at the number of assemblers that each supplier did business with,
distinguishing also between customers of the same and of a different nationality. The results,
displayed in Table 11, suggest that Japanese suppliers tend to supply only a small number ofassemblers and these tend to be predominantly Japanese. Table 11 also shows the average
productivity of Japanese, German, U.S., and Chinese suppliers. As can be seen, the average
productivity of Chinese suppliers makers is by far the lowest. The average productivity of Japanesesuppliers is lower than that of German firms, but is comparable to that of U.S. firms.

14

INSERT Table 11
Using the above-mentioned cross section data, we estimate a probit model designed to elicit
the factors determining transactional relationships between assemblers and suppliers. The key point
is to determine to what extent differences in nationalities between assemblers and suppliers affectbusiness relationships. We therefore prepared five nationality dummy variables: (1) a dummy taking
1 when both the assembler and the supplier are Japanese (same nationality, Japanese; SN_J); (2) adummy taking 1 if both the assembler and the supplier are of the same non-Japanese nationality(SN_NJ); (3) a dummy taking 1 if the assembler is Japanese and the supplier is non-Japanese andalso non-Chinese (JNJ); (4) a dummy taking 1 if the assembler is non-Japanese and the supplier is
not Japanese but also not Chinese (NJNJ); 5) a dummy taking 1 if the assembler is Japanese and the
supplier is Chinese (JC). The coefficient on each dummy can be interpreted as the effect of each typeof relationship relative to the omitted case, which is transactional relationships between
non-Japanese assemblers and Chinese suppliers.
Table 12 presents the results of the estimation. Columns (1), (2), and (3) are the results using
9,688 observations16 as mentioned above and (4) is the result for the specification taking thesimultaneity bias into account. Specifications (1)-(3) assume that the level of productivity affects theprobability of a transactional relationship. It is, however, possible that the causality is in the opposite
direction (a transactional relationship with assemblers enables suppliers to enjoy high productivity)in the cross-sectional data for 2004.
INSERT Table 12, Table 13
Because only statistical data for 2002 and 2004 were available this time, transaction records
for 2002 and 2004 were compared in order to choose observations which initiated transactions
between 2002 and 2004 and to make the same estimation as (1)-(3) with independent variables in
2002.17 The major conclusions are as follows.
1) Even when various variables, including productivity, are controlled for, it is found that Japanesesuppliers’ transactional relationships are more restricted than those of other suppliers (asindicated by the coefficient on the dummies JNJ, NJNJ, and JC) , which is a reflection of their
weak ties with assemblers of other nationalities. Note, however, that the extent of the16

Descriptive statistics (means and standard deviations) for the 9,688 observations are shown in
Table 13.
17
The number of observations on transactional relationships in 2002 is 5,124. Even in this case,companies could have initiated transactions in 2003 or 2004, and hence the duration of theirtransactions could be different.
15

contribution to the transaction probabilities same nationality condition has is almost the same
between Japanese and non-Japanese cases (SN_J, SN_NJ).18
2) With respect to non-Japanese assemblers, high-productivity suppliers are engaged insignificantly more transactional relationships. By contrast, the same was not found for Japaneseassemblers (productivity and its cross effects with nationality dummies for Japan, Germany andUSA).
3) Generally speaking, joint venture assemblers are more likely to deal with suppliers that are also
joint ventures than with local Chinese suppliers.
4) The distance between assemblers and suppliers is assumed to have a nonlinear effect on thetransaction probability and the squared distance term is also included. When the magnitude of
the impact of distance on assemblers’ procurement behavior is viewed in terms of the marginal
effect (elasticity), the value is -3.5 percent, confirming the negative impact of distance.19
5) We did not find any significant effects of the amount of suppliers’ capital used as a measure ofscale economies on transactions. These results are in line with results obtained by Marukawa(2003), who used the amount of assets, the number of employees, etc., although he used these toproxy suppliers’ technological capabilities.
6) The results for the dummies relating to suppliers’ location (agglomeration effect) show that thecoefficients for Hubei and Tianjin were significantly negative. These results are the same as
those obtained by Marukawa (2003). Marukawa’s interpretation of the negative coefficients wasthat in comparison with Shanghai, where the quality requirements of foreign firms are rigorous,transactions in other regions were primarily with Chinese assemblers and product quality was
lower.
7) The results of specification (4) are the same as those of (1), (2) and (3), in that the transactional
relationships of Japanese suppliers’ are more limited than those of other suppliers (JNJ, JC).

4.2 Analysis of the Impact of Business Relationship on Productivity
In the preceding section, we examined whether suppliers’ level of productivity influences theexistence or non-existence of business relationships with assemblers. In this section, we examine thereverse relationship, that is, whether business relationships with JV assemblers subsequently
improve suppliers’ productivity (i.e., whether technology transfer takes place). If the concentrationof business relationships between Japanese assemblers and suppliers reflects Japanese businesspractices, there remains the question of how to interpret the result of the analysis above, namely that
suppliers’ productivity level does not positively affect whether or not there will be a business
18

The null hypothesis that the coefficient on SN_J and SN_NJ are the same cannot be rejected using
the Wald test.
19
In contrast with productivity, the cross effects of distance and nationality are not included since
there are no significant influences.
16

relationship with a Japanese assembler.
In the Japanese automotive industry, suppliers enter into long-term business relationships withassemblers and are expected to actively participate in product development rather than merely act as
subcontractors. In this sense, parts makers may be expected to have a latent potential for long-term
improvements of their technological level rather than a high level of technology at the beginning. In
order to test this hypothesis, albeit indirectly, we examine whether a business relationship with aJapanese assembler subsequently improves a supplier’s productivity.
4.2.1 Data and methodology of estimation
As in the preceding analysis, data from the 2002 and 2004 editions of the “China Automotive
Industry Yearbook” and the “China Auto Parts Supplier Directory” are used. This analysis covers
183 parts makers, for which data were available for both 2002 and 2004. The regression is conductedusing OLS. The dependent variable is suppliers’ productivity growth rate (2004/2002) and the
independent variables are: (1) suppliers’ productivity level in 2002 (convergence effect, the predicted
sign is negative); (2) the growth rate of suppliers’ capital-labor ratio; (3) dummies for the nationalityof assemblers which suppliers deal with (Japan, Germany, U.S.A); (4) a same-nationality dummy (adummy variable that takes 1 if the supplier sells parts to an assembler of the same nationality, and 0
otherwise); (5) suppliers’ location (agglomeration effect; 1 when the supplier is located in Shanghai,
Hubei, Tianjin, Jiangsu, or Jilin, and 0 otherwise). As for the two kinds of nationality dummies, if, inaddition to the Japanese-nationality dummy for assemblers, the coefficient on the same-nationality(Japanese) dummy were significantly positive, this would mean that spillover effects are greater if a
supplier is Japanese than if it were not. By contrast, if the Japanese-nationality dummy of anassembler is significantly positive but the same-nationality (Japanese) dummy for suppliers is not,this would lead to the conclusion that Japanese assemblers practice technology transfer regardless ofthe nationality of their business partners.
4.2.2 Results
The results of the estimation are presented in Table 14. Column (1) shows the result based on
the rate of change in labor productivity, a dependent variable obtained by dividing the amount of
output by the number of workers. Column (2) shows the result based on figures obtained by dividing
value added by the number of workers.
Looking at columns (1) and (2), we find that the level of productivity in 2002 and the rate ofincrease in the capital-labor ratio both show the predicted signs. With respect to the nationality
dummies and the same-nationality dummies, the dummy for the Japanese nationality of an assembler
is significantly positive, but the effect of the other dummies on the increase in productivity was not
significant. This means that an increase in productivity is achieved only when a supplier has a17

business relationship with a Japanese assembler and that this effect is not influenced by thenationality of the suppliers.
The information on the nationalities of enterprises used in this analysis relates to assemblers,
which had dealings with parts makers in 2002. These observations were not limited to enterprisesthat began transactions with suppliers in 2002 and the duration of their business relationships mightvary from company to company. If suppliers have been dealing with assemblers for different periodsof time, the extent of their productivity change might well vary. Hence, in a strict sense, it is not
appropriate to compare the impact on productivity based exclusively on the nationality dummies.
The results of the estimation which was designed to solve this problem are shown in column(3). As in the factor analysis of the supplier system, we select observations of companies which
initiated transactions between 2002 and 2004 and make the same estimation as in theabove-mentioned analysis. Even in this case, companies may have initiated transactions in 2003 or
2004, and hence the duration of their transactions could be different. The results in column (3) are
the same as those in specifications (1) and (2), in that the Japanese-nationality dummy of assemblers
alone had an impact on changes in productivity.
INSERT Table 14
4.2.3 Implications
The above results indicate that Japanese assemblers may well be choosing business partners
which they expect to realize sustainable productivity increases in the future rather than focusing on
present productivity levels. This finding provides evidence of business practices based on along-term perspective, which is considered to be a defining characteristic of Japanese enterprises.
Given the trend of convergence in productivity levels, it is safe to say that this is consistent with thefindings in the preceding section, namely, that a supplier’s (present) level of productivity does
negatively affect the probability of doing business with a Japanese assembler.
Another important point of argument is that once a supplier has a business relationship with aJapanese assembler, technology transfer to the supplier takes place without regard to its nationality.
This finding shows that the reason why Japanese assemblers buy parts primarily from theircompatriots is not their irrational “closed nature,” as is often claimed. Transactions between
Japanese assemblers and suppliers may simply mean that Japanese suppliers have latent potential
and can be expected to increase their productivity.

5. Conclusions
This paper has analyzed the degree and the current status of localization of Japanese affiliates18

in China. For this purpose, we (1) compared the localization (measured in terms of the number of
expatriates, local sales, local procurement, and local management) of Japanese and US affiliates in
China and other major regions; (2) analyzed the impact of localization on the profitability ofJapanese affiliates in China and in other major regions; and (3) conducted a detailed investigation ofinter-firm transactional relationships in China between automobile manufacturers and parts
suppliers.
The first half of this paper looked closely at the degree of localization of the overseas affiliatesof Japanese firms. We found that compared with U.S. affiliates, Japanese affiliates tended to be lesslocalized: Particularly in China, Japanese affiliates were less local market-oriented than U.S.
affiliates, and the share of expatriates in the total number of employees was much higher forJapanese than for U.S. affiliates in almost all regions and countries. The quantitative analysis basedon comprehensive affiliate-level panel data of Japanese multinational firms for the period from 1989
to 2002 confirmed that in China, Japanese affiliates with higher local procurement ratios enjoyedhigher profits. Similarly, Japanese affiliates with local CEOs and/or local procurement managers also
registered higher profits. Although affiliates in China oriented toward the local market were lessprofitable before the country’s WTO accession, they became more profitable than other affiliates
after the accession when other factors are controlled for. Thus, our results suggest that localization
may contribute to higher profitability, and particularly in the post-WTO accession period (whenrestrictions on the distribution of products made by foreign-owned firms were relaxed), Japanesefirms were able to increase profits by increasing local sales ratios.
The second half of this paper was concerned with supplier relationships in the automobile
industry in China. In addition to presenting some stylized facts based on interviews, we statisticallyexamined the determinants of assembler-supplier transactions and of parts suppliers’ productivity
using firm-level data taken from a directory of auto parts suppliers in China. We found that in theautomobile industry in China, Japanese-owned suppliers tend to supply only a small number ofassemblers and these tend to be predominantly Japanese, which differs conspicuously from thebehavior of other foreign-owned suppliers, such as suppliers from Germany or the U.S. Moreover,Japanese automobile assemblers did not choose suppliers based on their current labor productivity
level and transactional relationships between assemblers and suppliers were more closed in the caseof Japanese firms than in the case of firms of other nationalities. On the other hand, we found that
auto parts suppliers dealing with Japanese assemblers saw their productivity grow faster regardlessof the supplier’s nationality, which suggests the presence of technology transfers to suppliers once a
supplier has a business relationship with a Japanese assembler – regardless of the supplier’s
nationality. Put differently, the results of this paper suggest that although the assembler-supplier
relationships of Japanese firms in China tend to be closed, this “closed” nature of transactional
relationships has a positive aspect in that it promotes technology transfer from assemblers to

19

suppliers. But another interpretation is also possible, namely that “closed” transactional relationships
enable Japanese assemblers to transfer technology to their suppliers, because the smaller the numberof suppliers the easier it is for the assembler to prevent opportunistic behavior.
Therefore, based on the evidence obtained here, it is difficult to provide a clear answer as towhether Japanese assemblers should engage in more open transactional relationships with otherforeign-owned or local suppliers. For assemblers, choosing suppliers involves a tradeoff between
quality and costs. Managers of Japanese-owned automotive firms in China that we visited told usthat Japanese automobile manufacturers give product quality top priority. Thus, even though they
were aware that increasing local procurement was important to achieve cost reductions, they found it
difficult to increase purchases from indigenous firms. Taking such comments into account, thequestion arises whether it would not be possible to design an incentive system involving Japaneseassemblers and other foreign- or locally-owned suppliers in China that aims to combine both costand quality considerations. What such an incentive scheme could look like and how it could beincorporated in transactional relationships between Japanese firms and firms of other nationality areissues worthy of further investigation.
In addition, although this paper investigated assembler-supplier transactions in detail, due todata availability, the investigation was limited to the automobile industry. Local procurement is a
crucial issue in the automobile industry because many of the parts automobile assemblers purchaseare costly to transport. However, in the electrical machinery industry, for example, parts andcomponents are less costly to transport and therefore, assembler-supplier relations in such anindustry may have totally different implication for the issue of localization. Further studies on otherindustries are required in order to judge whether Japanese affiliates in China should attempt toachieve greater localization of sales, procurement, and management.

20

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23

Table 1: Return on sales for manufacturing foreign affiliates of nonbank Japanese parents and nonbank U.S. parents
Manufacturing Total

Affiliates of Japanese Firms
1989
1994
1999
2002
2.20
2.90
3.20
4.10
0.40
1.90
3.30
3.70
0.10
2.00
3.20
3.80
—
—
—
—
1.20
1.20
2.20
1.60
1.10
1.20
2.70
1.60
5.70
7.60
-1.80
4.70
4.00
4.10
4.00
5.60
n.a.
3.80
4.60
5.10
n.a.
2.70
6.70
3.30
2.40
3.60
4.90
5.60
3.20
4.90
3.00
5.80
—
—
—
—

1989
6.20
—
—
4.86
6.48
6.42
8.70
4.97
8.79
11.06
8.01
7.86
3.03

Affiliates of U.S. Firms
1994
1999
4.83
4.68
—
—
—
—
3.66
4.98
4.39
4.98
4.31
5.02
8.38
3.59
4.29
4.37
8.36
6.57
10.61
3.91
7.96
7.10
7.32
4.67
1.48
2.56

2002
4.13
—
—
3.09
4.84
4.79
2.63
3.64
6.95
2.19
4.71
5.71
1.84

Affiliates of Japanese Firms
1989
1994
1999
2002
1.80
2.00
3.90
3.00
-0.90
2.10
4.70
0.10
-1.10
2.00
5.10
0.10
—
—
—
—
-0.30
-0.90
1.50
2.60
-0.20
-0.90
1.50
2.60
24.50
8.20
3.10
5.70
10.20
4.80
5.30
5.70
n.a.
0.40
3.30
5.40
n.a.
2.60
1.90
3.20
9.60
5.10
8.50
7.80
12.50
4.90
5.50
4.80
—
—
—
—

1989
6.61
—
—
4.81
6.33
(D)
7.59
7.89
22.81
17.26
(D)
(D)
6.39

Affiliates of U.S. Firms
1994
1999
3.24
3.65
—
—
—
—
(D)
(D)
1.91
4.72
1.85
4.73
5.01
0.98
5.48
1.89
(D)
0.47
9.06
13.33
(D)
7.67
(D)
(D)
1.83
1.29

2002
4.29
—
—
6.62
4.45
4.56
2.50
3.71
6.95
20.43
(D)
(D)
1.93

All countries
North America
USA
CanadaEurope†European Union††
Latin America
Asia
China
Hong Kong
NIEs3
ASEAN4Japan

Affiliates of Japanese Firms
1989
1994
1999
2002
1.00
2.90
2.70
3.00
-0.10
2.90
0.80
-3.80
-0.10
2.90
0.80
-3.90
—
—
—
—
2.20
1.70
2.60
2.50
2.10
1.70
3.60
2.70
0.40
5.20
-4.10
-3.00
2.40
3.40
4.10
5.20
n.a.
3.50
6.30
5.50
n.a.
3.30
9.90
7.30
2.40
3.30
3.30
5.50
2.70
3.60
3.50
4.90
—
—
—
—

1989
5.72
—
—
5.62
4.54
(D)
12.16
6.02
(D)
(D)
(D)
(D)
5.73

Affiliates of U.S. Firms
1994
1999
5.71
4.41
—
—
—
—
(D)
(D)
4.53
4.13
4.16
4.08
8.15
(D)
6.33
6.23
13.94
8.60
(D)
(D)
(D)
(D)
(D)
(D)
3.67
2.12

2002
2.25
—
—
(D)
1.72
2.04
(D)
3.66
5.44
(D)
(D)
(D)
-0.18

Transportation
Equipment
All countries
North America
USA
CanadaEurope†European Union††
Latin America
Asia
China
Hong Kong
NIEs3
ASEAN4Japan

Affiliates of Japanese Firms
1989
1994
1999
2002
0.50
2.50
2.60
4.20
-0.70
2.10
3.30
3.60
-0.70
2.30
3.10
3.60
—
—
—
—
0.30
0.10
0.20
-0.10
0.00
0.30
0.60
-0.10
2.70
-0.70
2.90
7.90
2.30
4.60
3.40
8.50
n.a.
3.20
4.30
11.50
n.a.
10.30
11.60
-11.40
2.90
4.40
6.20
9.10
1.10
4.70
0.90
7.70
—
—
—
—

1989
4.04
—
—
(D)
6.15
6.06
8.09
1.62
(D)
(D)
(D)
n.a.
0.63

Affiliates of U.S. Firms
1994
1999
2.84
2.44
—
—
—
—
(D)
(D)
2.43
1.96
2.18
1.84
8.34
1.08
0.42
(D)
(D)
5.24
(D)
10.61
(D)
(D)
(D)
(D)
(D)
(D)

2002
0.52
—
—
(D)
-0.58
-0.90
(D)
1.48
14.60
21.05
(D)
(D)
(D)

All countries
North America
USA
CanadaEurope†European Union††
Latin America
Asia
China
Hong Kong
NIEs3
ASEAN4Japan
General Machinery
All countries
North America
USA
CanadaEurope†European Union††
Latin America
Asia
China
Hong Kong
NIEs3
ASEAN4
Japan
Electrical Machinery†

European Community in the case of the 1989 data.
Latin America and other Western hemisphere in the case of the data for U.S. affiliates.
Return on sales is defined as net income divided by total sales for the data on U.S. affiliates and as ordinary profit
divided by total sales for the data on Japanese affiliates.
n.a. = not available
A "(D)" in a cell indicates that the data were suppressed to avoid the disclosure of information on an individual company.
Sources: METI (various years); U.S. Bureau of Economic Analysis (1992, 1998, 2004, 2005).

††

24

Table 2: Share of expatriate employees(a) Majority-Owned Foreign Affiliates of Nonbank U.S. Parents
All industries
Share of Expatriates
1989
1994
1999
All countries
0.39%
0.38%
0.26%
Canada
0.15%
0.15%
0.64%
Europe
0.33%
0.26%
0.17%
0.32%
0.25%
0.16%
European Union †
††
0.28%
0.15%
0.20%
Latin America
Asia and Pacific
0.42%
n.a.
0.22%
Japan
0.76%
0.43%
0.29%
China
n.a.
0.32%
0.12%
Hong Kong
0.69%
0.44%
0.64%
Korea, Republic of
0.38%
n.a.
n.a.
Singapore
0.28%
0.32%
0.35%
Taiwan
0.19%
n.a.
n.a.
Indonesia
1.94%
1.15%
0.97%
Malaysia
n.a.
n.a.
n.a.
Philippines
0.16%
n.a.
n.a.
Thailand
0.27%
0.14%
0.10%

(b) All Foreign Affiliates of Nonbank Japanese Parents
Share of Expatriates
All industries
1989
1995
1998
All countries
2.80%
2.00%
2.20%
North America
5.10%
3.00%
2.90%
USA
4.90%
2.90%
2.80%
Europe
4.00%
3.20%
2.90%
4.60%
3.10%
2.80%
European Union †Latin America
1.30%
1.40%
2.20%
Asia
1.20%
1.60%
1.90%
China
n.a.
1.30%
2.10%
Hong Kong
n.a.
n.a.
4.30%
NIEs3
1.40%
2.90%
3.50%
ASEAN4
1.40%
1.30%
1.60%
†

2001
2.30%
3.90%
4.00%
3.20%
3.30%
1.90%
1.80%
1.80%
3.70%
3.20%
1.60%

European Community in the case of the 1989 data.
Latin America and other Western hemisphere in the case of the data for U.S. affiliates.
n.a. = not available
Sources: METI (various years); U.S. Bureau of Economic Analysis (1992, 1998, 2004).

††

25

Table 3: Local sales ratio for majority-owned manufacturing foreign affiliates of nonbank U.S. parents

1989
62.17
—
61.47
59.01
58.90
78.00
65.19
83.07
87.60
31.36
32.33
(D)

Local Sales Ratio (%)
1994
1999
2002 Japan 2002*
59.33
58.88
57.23
66.13
—
—
—
87.23
53.06
54.79
57.49
n.a.
56.52
58.57
53.49
48.83
56.24
1.89
53.78
50.56
75.50
65.18
61.27
53.28
63.82
58.89
65.07
49.53
85.49
90.24
90.07
—
75.44
63.07
66.12
48.07
56.15
31.82
50.90
31.94
33.64
(D)
52.05
57.06
48.68
31.64
(D)
43.63

1989
55.05
—
69.01
52.05
52.19
71.79
53.59
(D)
82.35
23.28
(D)
(D)

Local Sales Ratio (%)
1994
1999
2002 Japan 2002*
44.59
60.06
46.01
57.45
—
—
—
83.35
50.80
62.94
63.90
n.a.
45.70
54.31
38.29
44.80
45.70
(D)
37.94
44.80
65.21
67.80
54.38
65.02
38.30
79.95
56.23
41.47
(D)
93.75
63.45
—
(D)
87.17
56.45
29.92
(D)
65.19
(D)
7.58
(D)
(D)
(D)
63.05
(D)
71.20
(D)
51.12

1989
55.04
—
80.24
59.42
59.41
56.78
38.94
78.48
(D)
33.07
25.35
(D)

Local Sales Ratio (%)
1994
1999
2002 Japan 2002*
59.45
41.33
47.32
56.13
—
—
—
90.01
74.97
62.17
(D)
n.a.
60.41
46.52
49.15
57.02
61.03
0.47
50.77
58.06
46.60
48.33
54.11
89.24
57.74
(D)
43.23
34.53
84.99
74.16
75.26
—
55.86
43.51
56.47
36.02
(D)
(D)
(D)
30.75
49.89
(D)
(D)
45.08
(D)
(D)
(D)
26.26

1989
53.15
—
41.11
55.16
55.45
67.10
93.35
97.26
n.a.
(D)
(D)
n.a.

Local Sales Ratio (%)
1994
1999
2002 Japan 2002*
47.22
47.63
46.16
72.78
—
—
—
87.01
35.03
34.32
36.69
n.a.
48.94
51.47
48.42
39.12
49.48
2.01
48.97
42.58
61.80
51.87
42.05
52.59
90.25
(D)
79.30
63.85
96.12
(D)
95.73
—
n.a.
74.32
(D)
75.93
(D)
18.18
36.84
7.28
(D)
(D)
(D)
80.72
(D)
(D)
(D)
51.50

Manufacturing Total
All countries
North America
CanadaEuropeEuropean Union †Latin America ††Asia and Pacific
Japan
China
Hong Kong
NIEs3
ASEAN4General Machinery
All countries
North America
CanadaEuropeEuropean Union †Latin America ††Asia and Pacific
Japan
China
Hong Kong
NIEs3
ASEAN4
Electrical Machinery
All countries
North America
CanadaEuropeEuropean Union †Latin America ††Asia and Pacific
Japan
China
Hong Kong
NIEs3
ASEAN4
Transportation Equipment
All countries
North America
CanadaEuropeEuropean Union †Latin America ††Asia and Pacific
Japan
China
Hong Kong
NIEs3
ASEAN4†

European Community in the case of the 1989 data.
Latin America and other Western hemisphere in the case of the data for U.S. affiliates.
*
For the Japan data, local sales ratios are calculated using data on all foreign affiliates of Nonbank Japanese parents.
n.a. = not available
A "(D)" in a cell indicates that the data were suppressed to avoid the disclosure of information on an individual company.
Sources: METI (various years); U.S. Bureau of Economic Analysis (1992, 1998, 2004, 2005).
††

26

Table 4: Description of variables and their predicted signs
Variable nameROS

Definition
Ordinary profit / total sales

LnSALEAGE

Logarithm of total sales in million yen
Years in operation: Number of years passed since the establishment of an affiliate.

L_PRC

Local procurement ratio: Procurement from within the host country / total
procurement.
Local sales ratio: Sales within the host country / total sales.
Japanese equity ownership ratio.
A dummy variable that takes 1 if the affiliate is located in the coastal provinces ofChina, otherwise 0.
A dummy variable that takes 1 if the host country of the affiliate is a WTO member,otherwise 0. (1 for all years for original WTO members)
Local CEO: A dummy variable that takes 1 if the CEO is a local, otherwise 0.

+/-

Local sales manager: A dummy variable that takes 1 if the sales manager is a local,
otherwise 0.
Local procurement manager: A dummy variable that takes 1 if the procurement
manager is a local, otherwise 0.
Established through a joint venture: A dummy variable that takes 1 if the affiliate
was established through a joint-venture, otherwise 0.
Established as a wholly-owned affiliate: A dummy variable that takes 1 if theaffiliate was established as a wholly-owned affiliate.
Established by acquisition: A dummy variable that takes 1 if the affiliate wasestablished by acquisition.
Established by taking an equity stake: A dummy variable that takes 1 if the affiliate
was established by taking an equity stake. --> This is used as the standard case in
the regression analyses.
Logarithm of GDP per capita in 1995 constant US dollars. Data are taken fromWorld Bank (2004) and ICSEAD (2005) for Taiwan.
Logarithm of GDP in 1995 constant US dollars. Data are taken from World Bank
(2004) and ICSEAD (2005) for Taiwan.

+

L_SALE
J_OWN
COAST
WTO
L_CEO
L_SLS_MNG
L_PRC_MNG
JVWHOLLYACQUIREEQUITY

LnGDPPC
LnGDP

Source: Ito and Fukao (2006), Table 5.

27

Predicted sign
Dependent
variable+++/+/+/++++/+/+/standard case+/+/-

Table 5: Determinants of affiliate's profitability: Pooled OLS, by region

LnSALE
AGE
L_PRC
L_SALE
J_OWN
COAST
L_CEO
L_SLS_MNG
L_PRC_MNG
JVWHOLLYACQUIRE_cons
2-digit industry dummies
Year dummies
Country dummies
Parent firm dummies
Number of observations
R-squared
Root MSE

China(1)0.0126 ***(3.93)
0.0030 *(1.87)
0.0199 *(1.77)-0.0194 *(-1.74)-0.0496 **(-2.40)0.0070(0.44)
0.0241 **(2.45)-0.0019(-0.18)0.0225 **(2.19)
0.0363 **(2.13)
0.0469 **(2.39)-0.025(-0.70)-0.0811 *(-1.68)
yes
yes
no
no
910
0.11270.1147USA(2)0.0114 ***(5.78)
0.0012 ***(2.85)
0.0076(0.86)
0.0310 **(2.15)-0.0227(-1.57)

ROS
EU15
(3)
0.0028(1.09)
0.0010 ***(2.66)-0.0213 **(-1.99)-0.0078(-0.87)-0.0555 ***(-2.87)NIEs4
ASEAN4(4)(5)
0.0080 ***0.0047 **(4.45)(2.13)
0.00030.0015 ***(0.94)(4.49)-0.0019-0.0162 **(-0.27)(-2.00)0.0114 *0.0232 ***(1.79)(2.84)-0.0155-0.0275 *(-1.20)(-1.91)0.0001(0.01)
0.0088(1.36)-0.0156 **(-2.35)0.0076(0.60)-0.0058(-0.45)-0.009(-0.66)-0.1290 ***(-4.39)
yes
yes
no
no
1498
0.07370.10360.0102(1.20)-0.0004(-0.05)-0.0030(-0.35)0.0261 *(1.79)
0.0357 **(2.30)
0.024(1.41)
0.0193(0.70)
yes
yes
yes
no
771
0.14980.08800.0069(1.04)
0.0061(1.01)
0.0079(1.34)
0.0088(1.22)
0.0136(1.58)
0.008(0.67)-0.0289(-1.31)
yes
yes
yes
no
1614
0.04720.08680.0014(0.18)-0.0006(-0.09)0.0127 **(2.12)
0.0022(0.22)
0.0195(1.59)
0.010(0.58)
0.0020(0.08)
yes
yes
yes
no
1679
0.07390.1056

Notes: The figures in parentheses are t-statistics based on White's robust standard errors (White 1980).
* significant at 10% level, ** significant at 5% level, *** significant at 1% level (two-tailed test).
Source: Ito and Fukao (2006), Tables 6 and 7.

28

China
(6)
0.0249 ***(9.73)
0.0022 *(1.80)
0.0154 **(2.07)-0.0184 **(-2.20)-0.0358 ***(-3.04)-0.0056(-0.48)USA(7)0.0187 ***(10.18)0.0006 **(2.38)-0.0011(-0.18)0.0278 ***(2.92)-0.0198 **(-2.40)

ROS
EU15
(8)
0.0100 ***(4.08)
0.0007 ***(2.85)-0.0140 **(-2.33)0.0118 **(2.13)-0.0093(-0.95)NIEs4ASEAN4(9)(10)
0.0117 ***0.0125 ***(7.91)(7.61)
0.00020.0012 ***(0.97)(5.52)-0.00190.0004(-0.45)(0.08)
0.0081 *0.0228 ***(1.95)(4.23)-0.0106-0.0185 **(-1.52)(-2.57)-0.2582 ***(-2.84)
yes
yes
no
yes
3932
0.42680.0968-0.2422 ***(-8.92)
yes
yes
no
yes
6532
0.38890.0886-0.0227(-0.52)
yes
yes
yes
yes
3896
0.38620.07760.1225 ***(5.42)
yes
yes
yes
yes
7206
0.39510.07230.0365(1.56)
yes
yes
yes
yes
7366
0.3611
0.0932

Table 6: Determinants of affiliate's profitability:
Japanese affiliates in China and in the rest of the world

LnSALE
AGE
L_PRC

China
ROS
(1)
0.0247 ***(9.67)
0.0023 *(1.93)
0.0175 **(2.09)

L_PRC*LnGDPPC
L_PRC*LnGDP
L_PRC*WTO
L_SALE-0.0045(-0.41)-0.0271 ***(-3.03)

L_SALE*LnGDPPC
L_SALE*LnGDP
L_SALE*WTO
J_OWN
COAST

0.0314 ***(3.26)-0.0355 ***(-3.02)-0.0058(-0.49)LnGDP-0.0852 ***(-4.23)0.0614 **(2.87)

LnGDPPCWTO_cons
2-digit industry dummies
Year dummies
Country dummies
Parent firm dummies
Number of observations
R-squared
Root MSE

World
ROS
ROS
(2)
(3)
0.0078 ***0.0078 ***(17.20)(17.23)0.0009 ***0.0009 ***(12.22)(11.92)-0.0573 **-0.0600 **(-2.06)(-2.16)-0.0035 **-0.0037 **(-2.70)(-2.64)0.0030 **0.0031 **(2.71)(2.87)-0.0012(-0.23)0.1021 **0.0773 **(2.91)(2.19)
0.0051 ***0.0026 **(4.11)(2.00)-0.0051 *** -0.0040 **(-3.87)(-3.03)0.0220 ***(5.01)-0.0240 *** -0.0242 ***(-9.29)(-9.38)0.0070(0.16)-0.2517 ***(-2.69)
yes
yes
no
yes
3932
0.4286
0.09671.8421 ***(4.64)
yes
yes
yes
no
31169
0.05940.1006-0.0820 ***(-4.04)0.0562 **(2.53)-0.0072(-1.50)1.8025 ***(4.53)
yes
yes
yes
no
31169
0.06020.1006

Notes: The figures in parentheses are t-statistics based on White's robust standard errors (White 1980).
* significant at 10% level, ** significant at 5% level, *** significant at 1% level. (two-tailed test)
Source: Ito and Fukao (2006), Table 10.

29

Table 7: Business performance and localization of Japanese affiliates in the automobile industry(a) China
1996

Affiliates of assemblers
1998
2000
2002

Profit on sales
Mean-0.057
Std. Dev.
0.139
No. of obs.
11
Sales per employee (mil. yen)
Mean
11.4
Std. Dev.
11.4
No. of obs.
11
Local sales ratio
Mean
1.00
Std. Dev.
0.00
No. of obs.
11
Local procurement ratio
Mean
0.42
Std. Dev.
0.27
No. of obs.
6

Affiliates of non-assemblers
1996
1998
2000
2002

-0.033
0.176
12

0.027
0.081
15

0.039
0.133
22

0.017
0.093
14

-0.001
0.128
40

0.030
0.134
50

0.026
0.134
57

12.5
8.4
12

23.6
32.7
15

14.7
13.5
22

4.7
4.1
14

6.1
9.2
40

5.7
7.2
50

6.3
7.5
57

0.92
0.29
12

1.00
0.01
10

0.89
0.30
11

0.59
0.49
10

0.79
0.37
39

0.78
0.36
42

0.71
0.37
47

0.63
0.27
8

0.68
0.34
9

0.91
0.20
8

0.51
0.48
8

0.56
0.40
35

0.49
0.37
35

0.58
0.32
45

Affiliates of assemblers
1996
1998
2000

2002

Affiliates of non-assemblers
1996
1998
2000
2002

(b) ASEAN

Profit on sales
Mean
0.070
Std. Dev.
0.078
No. of obs.
45
Sales per employee (mil. yen)
Mean
30.7
Std. Dev.
26.8
No. of obs.
45
Local sales ratio
Mean
0.99
Std. Dev.
0.04
No. of obs.
35
Local procurement ratio
Mean
0.41
Std. Dev.
0.25
No. of obs.
22

-0.036
0.113
27

0.027
0.097
38

0.083
0.076
44

0.088
0.096
86

-0.001
0.129
100

0.061
0.110
149

0.087
0.092
177

14.4
10.3
27

18.4
12.7
38

25.7
18.2
44

11.5
17.8
86

5.8
4.7
100

11.6
35.1
149

8.8
14.1
177

0.92
0.21
25

0.83
0.27
21

0.60
0.44
28

0.74
0.36
73

0.69
0.36
93

0.70
0.34
144

0.73
0.32
165

0.45
0.27
12

0.41
0.26
21

0.45
0.29
21

0.45
0.31
61

0.46
0.33
83

0.46
0.34
122

0.56
0.33
146

Notes: Profit on sales = ordinary profit divided by total sales.
Sales per employee = total sales divided by number of employees.
Local sales ratio = sales to the host country divided by total sales.
Local procurement ratio = purchases from the host country divided by total purchases.
Affiliates of assemblers are affiliates of the major Japanese automobile manufacturers Toyota, Nissan, Honda,
Isuzu, Mazda, Subaru, Mitsubishi, Daihatsu, Suzuki, Hino, and Nissan Diesel.
Affiliates of non-assemblers are affiliates which are classified into the automobile industry but are not affiliatesof the major Japanese automobile manufacturers listed above.
Source: Authors' calculation based on the affiliate-level data underlying METI (various years).

30

Table 8: Observations on suppliers and assemblers
1 Number of Suppliers
Joint Ventures
81
Japan
22
Germany
15
France
1
Italy
1
USA
20
Korea
1
Other
21
Chinese
265
Total
346
2 Location of Suppliers
Shanghai
42
Jilin
39
27
Tianjin
Jiangsu28
Hubei
26
Shandong
21
20
Beijing
Liaoning
18
Zhejiang
19
Sichuan
13
Hunan
12
Anhui
9
Chongqing
7
Guizhou
10
Shaanxi
8
6
Hebei
Henan
7
Guangdong
6
6
Shanxi
Guangxi
6
Jiangxi
5
Fujian4
Heilongjiang
31
Inner Mongolia
Yunnan1
Gansu
1
Qinghai
1
Total
346

3 Assemblers and Number of Transactional Relationships
Japan
Tianjin FAW Toyota Motor Co. Ltd.（TFTM）(12)
Sichuan FAW Toyota Motor Co. Ltd.
Dongfeng Honda Automobile Co. Ltd.
Guangzhou Honda Automobile Co. Ltd.
Dongfeng Motor Corporation
Zhengzhou Nissan Automobile Co., Ltd
Hunan Changfeng Motor Co. Ltd.
Chongqing Changan Suzuki Automobile Co. Ltd.
Jiangxi Changhe Suzuki Automobile Co. Ltd.
Qingling Motors Co. Ltd.
Jiangling-Isuzu Motors
Shenyang Shenfe Hino Automobile Manufacturing Co. Ltd.
Germany Yaxing-Benz(4)
Beijing Jeep Corporation Limited
Faw-Volkswagen
Shanghai Volkswagen
FranceDongfeng Peugeot Citroen Automobile Company Ltd.
(3)
Dongfeng Citroen
Sanjiang Renault
Italy
Nanjing Iveco(2)
Nanjing Fiat Inc.
USA
Shanghai General Motors Co. Ltd.
(5)
SAIC-GM-Wuling Automobile Co. Ltd.
Shanghai GM (Shenyang) Norsom Motors Co. Ltd.
Changan Ford Automobile Co. Ltd.
JMC Motors
Korea
Beijing Hyundai Motor Company(2)
Dongfeng Yueda KIA Motors Co. Ltd.
Total

31

10
8
0
14
9
8
2
16
5
7
4
1
4
62
85
85
1
56
2
49
9
52
33
15
10
5
2
12
566

Table 9: Supplier's average productivity and distance to assemblers
in transaction group and no transaction group(a) Average productivity of supplier
Average productivity (10,000 Yuan/persot-test (p value)
Transaction
No transaction
Ho：difference of mean value＝0
Japanese assembler
12.3
11.4
0.785
German assembler
13.1
11.7
0.447
14.1
12.2
0.546
U.S. assembler(b) Average distance of supplier to assembler
Average distance (km)Transaction
No transaction
Japanese assembler
1180.11488.1
German assembler
1096.21357.5908.6
1652.2
U.S. assembler

32

t-test (p value)
Ho：difference of mean value＝0
0.001
0.000
0.000

Table 10: Assembler's average number of transactions with supplier(a) Japanese assemblers
Supplier's nationality assemblers deal withJapanese
U.S./German
Chinese
Productivity of suppliers
high
low
total

0.2
1.8
2.0

1.0
3.7
4.7

0.5
2.9
3.4

No transaction

Total

75.8
263.2
339.0

77.5
271.6
349.1

No transaction

Total

63.5
223.5
287.0

76.0
264.0
340.0

No transaction

Total

72.0
251.0
323.0

76.6
266.2
342.8

(b) German assemblers
Supplier's nationality assemblers deal withGermanJapanese/U.S.
Chinese
Productivity of suppliers
high
low
total

1.0
4.8
5.8

1.0
7.3
8.3

10.5
28.5
39.0

(c) U.S. assembler
Supplier's nationality assemblers deal withU.S.
Japanese/German
Chineseproductivity of suppliers
high
low
total

0.6
2.8
3.4

1.2
2.0
3.2

2.8
10.4
13.2

Note: High and low productivity suppliers are distinguished based on the average productivity level of all the33

Table 11: Average number of assemblers each supplier does business with and suppliers' average productivity
Number of assemblers supplier does business with Average productivity
Same nationality Different nationality
Total (10,000 Yuan/person)
1.1
0.5
1.5
29.3
Japanese suppliers (22)German suppliers (15)
1.4
1.8
3.3
43.8
U.S. suppliers
(20)
0.9
2.3
3.2
29.7
1.4
1.4
9.2
Chinese suppliers (265)－Note: Figures in parentheses represent the number of enterprises.

34

Table 12: Determinants of the supplier system in the Chinese auto industry(1)0.0228(0.22)PRODUCTIVITYPRODUCTIVITY*Japan_dummy
PRODUCTIVITY*Germany_dummy
PRODUCTIVITY*U.S._dummy
CAPITAL

1.2492(0.50)-1.0716(-13.18)
0.3066(11.30)DISTANCE
DISTANCE^2

***
***

(2)
0.2085(1.57)-0.7292(-2.53)-0.0824(-0.40)-0.1874(-0.79)1.8475(0.76)-1.0765(-13.22)0.3083(11.34)

**

***
***

(3)
0.0505(1.76)-0.1640(-2.47)-0.0213(-0.50)-0.0336(-0.64)2.0882(0.87)-1.0741(-13.21)0.3075(11.32)*(4)0.4004(1.46)*****

21.1485(3.11)-0.1124(1.99)***

0.4003(3.06)
0.1411(0.78)-0.2727(-1.57)-0.1449(-0.87)-0.2412(-1.13)-1.3615(-1.94)

***

**

***

LOCATION
Shanghai
Hubei
Tianjin
Jiangsu
Jilin
OPERATION YEARS (Assembler)
NATIONALITY (Assembler / Supplier)
SN_J（Both Japanese）
SN_NJ（Both Non-Japanese）
JNJ（Japanese / Non-Japanese and Non-Chinese）
NJNJ（Non-Japanese / Different Non-Japaneseand Non-Chinese）
JC（Japanese / Chinese）_cons
Number of observations
Log-likelihood
McFadden R^R

0.4132(5.94)-0.2159(-2.16)-0.2173(-2.14)-0.0316(-0.35)-0.1304(-1.52)
3.9753(10.41)

***
**
**

***

0.4108(3.40)
0.6685(5.35)-0.4693(-4.02)0.1662(2.21)-0.6009(-8.61)-1.2419(-16.63)9688-1769.20
0.16

***
***
***
**
***
***

0.3972(5.65)-0.2266(-2.26)-0.2095(-2.05)-0.0446(-0.50)-0.1367(-1.57)3.9906(10.43)0.5601(4.18)
0.6600(4.99)-0.4839(-4.02)0.1521(1.93)-0.6109(-8.74)-1.2465(-16.57)
9688-1765.22
0.17

***
**
**

***

***
***
***
*
***
***

0.4183(6.03)-0.2214(-2.20)-0.2410(-2.28)-0.0336(-0.38)-0.1588(-1.84)4.0266(10.54)0.5654(4.21)
0.6099(4.69)-0.5137(-4.32)0.1190(1.53)-0.6178(-8.78)-1.2558(-16.70)9688-1767.8
0.17

***
**
**

*
***

***
***
***

***
***

0.2097(1.08)
0.0976(0.41)-0.4744(-2.45)-0.0132(-0.08)-0.5322(-4.51)-1.7712(-14.58)5124-518.39
0.08

*

**

***
***

Note: The figures in parentheses are z-statistics.
Productivity levels in (1), (2) and (4) are calculated as value-added/number of workers while that in (3) is calculated as
output / number of workers*Significant at the 10% level.
**Significant at the 5% level.
***Significant at the 1% level.

35

Table 13: Means and standard deviations of variables used for the regression analysis
in equations (1) - (3) in Table 12
Mean
S.D.
Transaction
0.06
0.23
PRODUCTIVITY (value added)
12.34
23.81
PRODUCTIVITY (value added)*Japan_dummy
1.90
12.28
PRODUCTIVITY (value added)*Germany_dummy
1.80
11.73
PRODUCTIVITY (value added)*U.S._dummy
1.74
11.31
PRODUCTIVITY (output)
52.20
107.52PRODUCTIVITY (output)*Japan_dummy
7.67
49.31
PRODUCTIVITY (output)*Germany_dummy
8.92
59.20
PRODUCTIVITY (output)*U.S._dummy
7.06
48.24
CAPITAL
42445.57
98955.02
DISTANCE
1384.85811.72DISTANCE^2
2576637.00
2553860.00
LOCATION_dummy
Shanghai
0.12
0.33
Hubei
0.08
0.26
Tianjin
0.07
0.26
Jiangsu
0.08
0.27
Jilin
0.11
0.32
OPERATION YEARS (Assembler)
7.89
5.96
NATIONALITY_dummy (Assembler / Supplier)
Both Japanese
0.03
0.16
Both Non-Japanese
0.02
0.13
Japanese / Non-Japanese and Non-Chinese
0.07
0.26
Non-Japanese / Different Non-Japanese and Non-Chinese
0.08
0.27
Japanese / Chinese
0.33
0.47

36

Table 14: Determinants of the productivity of auto suppliers in China(Dependent variable is the productivity growth between 2002 and 2004)(1)(2)-0.7547 *** -0.3577
LnPRODUCTIVITY_2002(-2.60)（-3.64）
1.3617***1.9169Ln(CAPITAL/LABOR)_2004(14.10)-Ln(CAPITAL/LABOR)_2002（4.60）
Nationality of assembler supplied
Japanese
1.4183**0.5847(1.86)（2.02）
German -0.6447-0.0229(-0.09)（-1.19）American0.2650-0.1486(-0.49)（0.40）
Nationality of supplier and assembler
when these are the same
Japanese -0.4160-0.0383(-0.05)（-0.24）German1.62440.7629(1.27)（1.21）
American0.8586
0.9185(0.99)（0.40）
Location
Shanghai
0.0890-0.0707(-0.15)（0.08）
Hubei -0.2896-0.1362(-0.26)（-0.25）
Tianjin
0.51990.4010(0.90)（0.53）
Jiangsu -0.6568-0.2872(-0.73)（-0.74）
Jilin
0.04840.0517(0.11)（0.04）_cons
3.9496***2.5705(10.90)（6.76）
Number of observations
179
172
0.17530.6060Adj R＾R
F stat
3.91
***
21.23
(0.00)(0.00)

**
***

*

(3)
-0.3345(-2.38)0.9040(2.22)****

0.6791(1.98)-0.0936(-0.22)0.2642(0.79)*

0.2391(0.35)
0.9527(1.14)
0.6024(0.70)

***

***

2.169
(4.14)
63
0.13522.21(0.04)***

Notes: The figures in parenthesis are t values.
The dependent variable (productivity) is calculated as output / number of workers for (1)(3)and value added / number of workers for (2).
Observations with negative value-added figures are omitted in specification (2).
*Significant at the 10% level.
**Significant at the 5% level.
***Significant at the 1% level.

37**