Do sourcing networks make firms global? Microlevel evidence from firm-to-firm transaction networks
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Economics and Complex Networks
Do sourcing networks make firms global? Microlevel evidence from firm‑to‑firm transaction networks Ryo Itoh1 · Kentaro Nakajima2 Received: 22 June 2020 / Revised: 18 October 2020 / Accepted: 19 October 2020 © The Author(s) 2020
Abstract This study investigates how the structure of a domestic firm-to-firm transaction network influences the foreign direct investment (FDI) decisions of embedded firms in the network. We theoretically describe firms’ FDI decisions using an incomplete information game that considers the firm-to-firm transactions of intermediate inputs and in which firms have an incentive to collocate with their trading partners in foreign markets. We show that the probability of a firm engaging in FDI increases with its Katz–Bonacich centrality, which is defined as aggregated accessibility to all other firms and represents expected profit gained from colocation with its partners. We empirically show that this prediction is supported using disaggregated inter-firm transaction network data on Japanese firms. We also extended both theoretical and empirical frameworks to consider the dynamic aspect of FDI. When we consider existing foreign affiliates, accessibility to prior investors in the transaction network, named Katz–Bonacich accessibility, positively influences FDI as well as Katz– Bonacich centrality. Keywords FDI · Firm-to-firm transaction · Network game · Katz–Bonacich centrality JEL classification F21 · F23 · D22 · D85
An earlier version of this paper was circulated under the title “Impact of Supply Chain Network Structure on FDI: Theory and Evidence.” * Kentaro Nakajima [email protected] Ryo Itoh [email protected] 1
Tohoku University, Aramaki aza aoba 3‑6‑09, Aoba‑ku, Sendai 980‑8579, Japan
2
Hitotsubashi University, Naka 2‑1, Kunitachi, Tokyo 186‑8603, Japan
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The Japanese Economic Review
1 Introduction Increasingly many firms enjoy the benefits of extending their market or accessing cheap production resources from foreign direct investment (FDI). However, they also face difficulties in procuring from local firms in the host country due to a mismatch in the design and quality of the products and their delivery systems.1 Therefore, there is an incentive to replicate transaction partnerships in the domestic market, form supply links with home-country suppliers, and maintain sales in foreign countries (e.g., Martin et al. 1995; Hackett and Srinivasan 1998). This type of FDI, which is called “follow-sourcing” (Humphrey 2003), is observed in various industries, such as the automotive industries in India and Brazil (Humphrey 2003), supermarkets (Reardon et al. 2007), and machinery sectors, which require numerous components that are supplied by subcontractors (Urata 1994). The discussion regarding the follow-sourcing incentive implies the importance of focusing on the network of domestic firm-to-firm transactions when we consider outward FDI from a home country. Although each follow-sourcing incentive is originally gene
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