1 CGP International Conference (May 2004) Foreign Outsourcing and Firm-level Characteristics: Evidence from Japanese Manufacturers Eiichi Tomiura

2 Foreign Outsourcing (FO)  Increasing international fragmentation of production processes  Active foreign trade in intermediate inputs  Political reactions and widespread debates  But, very little quantitative information, other than aggregate statistics, business anecdotes or future projections.

3 Purposes of our research  Directly measuring FO, explicitly distinguished from domestic outsourcing, at the firm level, from a comprehensive sample.  Discussing its relationship with various firm- level characteristics. (Who choose FO?)

4 Previous studies  Imported inputs in input-output tables (Campa and Golberg (1996), Feenstra and Hanson(1997))  Foreign trade of parts & components (Yeats(2001))  Processing trade, foreign trade zones (Feenstra et al.(2000))  Micro data (Swenson (2000), Gorg and Hanley (2003))  Theoretical models of incomplete contract (Antras (2003), Grossman and Helpman (2002))

5 Our firm-level data  Survey conducted by MITI in 1998  Covering all manufacturing industries  Without firm-size thresholds  Including firms without outsourcing  Firm-level data on Q, L, K, R&D, IT, etc.  118,300 manufacturing firms as a sample

6 Definition of FO in the survey  Def: “contracting out of manufacturing or processing to other firms”  Non-production services not included.  Arm’s-length purchase of standardized parts not included.  Partly-owned FDI affiliates included.  Contracts by “wholesalers” not included.

7 Number of Firms

8 Share of FO

9 Firm size

10 Productivity

11 IT (Use of computers)

12 Empirical models  Heckman’s two-step estimation

13 Estimation results  significant (Selection by Human skill (or Firm size) & Foreign business experience).  Productivity (+) (esp. FO)  IT (+) (both FO & DO)  K/L, H/L (  ) (esp. FO)  R&D (+) (both FO & DO)  Firm size (  ) (esp. FO)

14 Concluding remarks  Confirmed previous aggregate findings by firm- level data, and revealed previously unnoticed inter- firm heterogeneity.  Outsourcing of non-production services is not covered in this survey.  International comparison necessary. But, no other comprehensive firm-level data are currently available.