Backward Vertical Linkages of Foreign Manufacturing Affiliates: Evidence from Japanese Multinationals

Abstract

We examine the determinants of backward vertical linkages established by multinational firms in host economies through an analysis of the local content ratio of 272 Japanese electronics manufacturing affiliates in 24 countries. Host country factors promoting vertical linkages are the quality of infrastructure and the size of the local components supply industry, while restrictive trade policies have a detrimental effect. Local content regulations have a positive impact but do not stimulate procurement from locally owned suppliers. Experienced affiliates, joint ventures and acquired affiliates, and—in less-developed economies—affiliates of less R&D-intensive firms exhibit more extensive vertical linkages. Firms belonging to Japanese vertical industrial groups ( keiretsu) show higher procurement from local clusters of affiliated Japanese suppliers.