The Impact of FTAs on Procurement Behavior of Japanese Firms' Overseas Affiliates

In Japan, the effect of free trade agreements (FTAs) has been argued in the discussion of the changes in the external and internal industrial structure. Japanese firms have formed sophisticated regional supply chain networks and increased overseas production over the last decades, with an aim of increasing their competitiveness in the global market. There are contrasting views on export expansion by FTAs in such regionalization and globalization of the Japanese industry. Some policymakers and researchers are concerned as FTAs would facilitate the hollowing out of the Japanese industry. Others argue that FTAs would prevent the hollowing out by increasing the role of the Japanese industry in the supply chains. This paper examines how FTAs affect the supply chains at the firm level by investigating the behavior of overseas affiliates of Japanese firms, and provides statistical evidence for this argument as well as draws implications for industrial policies. The findings indicate that FTAs contribute to the increase in the share of imports from Japan, particularly from their parent firm, to total procurement for the overseas affiliates of Japanese firms, suggesting that FTAs increase the significance of the Japanese industry in the supply chains and possibly have stopped/slowed down hollowing out.