Choice of Invoice Currency in Global Production and Sales Networks: The case of Japanese overseas subsidiaries

This paper empirically investigates the invoicing decision in trade of Japanese production subsidiaries, using the novel dataset obtained from a questionnaire survey. We sent out questionnaires in August 2010 to all Japanese subsidiaries located in North America, Europe, and Asia to collect product-level information on the choice of invoice currency in importing intermediate inputs and exporting production goods along the production chain. By conducting a logit estimation, we demonstrate that the invoicing choice of intra-firm trade along the production chain depends on the destination of the subsidiary's exports as well as the degree of exchange rate volatility. Subsidiaries tend to choose yen invoicing only in exports of intermediate inputs to Japan, while major currencies such as the U.S. dollar and, to a lesser extent, the euro are typically chosen in the subsidiary's exports of finished goods to other countries. To accommodate the currency mismatch caused by the choice of foreign currency invoicing, Japanese subsidiaries need efficient management of the exchange rate risk in the face of large fluctuations of the local currency.