Do Foreign Firms Bring Greater Total Factor Productivity to Japan?

ABSTRACT

In recent years, deregulation and a boom in global merger and acquisition activity has significantly increased inward foreign direct investment in Japan, although the level remains lower than in other developed countries. Using micro data on Japanese manufacturing firms, this article investigates whether foreign-owned firms are more productive than domestically owned firms. The article also addresses the question of whether firms targeted in mergers and acquisitions improve their business efficiency after the transaction has taken place. Results show that foreign-owned firms have 10% higher total factor productivity, a higher R&D intensity and higher growth rates of tangible assets and wages. They also show that, after a merger or acquisition, out–in targeted firms increase their productivity and sales whereas in–in targeted firms and other independent firms fail to do so. These results offer policy recommendations that Japan should create conditions to further increase inward foreign direct investment and to improve productivity through mergers and acquisitions by foreign firms.

Keywords:

• Japan
• foreign direct investment
• total factor productivity
• Greenfield investment
• M&A

JEL CLASSIFICATION:

• F23

Notes

1. The compilation of the micro data of the METI survey was conducted as part of the project ‘Japan's Economic Growth’ at the Economic and Social Research Institute, Cabinet Office, Government of Japan.

2. We exclude all observations with zero values of material costs, employee compensation and tangible fixed assets. We also exclude observations with an extremely high or extremely low capital–labour ratio. By the screening process, the number of observations declined by about 8% compared to the original set of observations.

3. The METI survey covers only firms in manufacturing and commerce with a size larger than the cut-off level. Thus, our data on firms that ‘entered’ include firms that extended or changed their main business.

4. The JIP database was compiled by the four authors, economists at the Economic and Social Research Institute of the Cabinet Office, Government of Japan, and graduate students from Keio, Hitotsubashi, Tsukuba and other universities in Japan, as part of an ESRI project. The database contains annual information on 84 sectors, including 49 non-manufacturing sectors, between 1970 and 1998. These sectors cover the entire Japanese economy. The database includes information on factor inputs, annual nominal and real input–output tables and some additional statistics such as R&D stock, capacity utilization rate, Japan's international trade by trade partner, inward and outward stock of FDI, etc at a detailed sectoral level. An Excel file version of the JIP database is available at: http://www.esri.go.jp/en/archive/bun/abstract/bun1/70index-e.html