Application of Nationality-Adjusted Net Sales and Value Added Framework: The Case of Japan

Abstract

This paper applies the nationality-adjusted net sales and value added framework proposed in Baldwin and Kimura (1996) to Japan. Despite possibly large estimation errors due to statistical deficiencies, the framework is very useful for analyzing the relationship of the Japanese economy to the world economy. We find that Japan is special in the following four aspects. First, Japanese-owned firms have become increasingly dependent on the marketing activities of their foreign affiliates, rather than depending on cross-border exports by parent firms located in Japan. Second, the much smaller activities of Japanese affiliates of foreign firms (JAFF) relative to those of foreign affiliates of Japanese firms (FAJF) are apparent in terms of sales, value added, and employment, at both the macroeconomic and sectoral levels. Third, Japanese net sales to foreigners are consistently larger than cross-border net exports of Japan. Fourth, among the activities of FAJF, the importance of commercial FAJF is particularly large; these commercial FAJF handle a large portion of Japanese exports and imports. The paper concludes by discussing a number of statistical improvements required by the Japanese government in order to apply our analytical framework more rigorously.