Production Networks in East Asia: Strategic Behavior by Japanese and U.S. firms

This paper investigates production networks in East Asia, focusing on strategic behavior by Japanese and U.S. firms, to discuss implications of the production sharing and fragmentation and of the role of MNEs in creating and coordinating the activities within production networks. For that purpose, our study first theoretically examines the effect of fragmentation and the issues from the viewpoint of firms and then empirically analyzes the activities of Japanese and U.S. firms not only in developing East Asia but also in Latin America. Our empirical findings indicate that the regional investment climate is more important in promoting production networks than differences in firm nationalities. In East Asia, both Japanese and U.S. firms display very similar patterns in exploiting the international division of labor extended and both present close links between geographical proximity and arms length fragmentation. On the other hand, such patterns for both firms are very different in Latin America, suggesting that the explanation lies in differences between the two regions. This finding has various important implications for policy makers.