Cross-Border Outsourcing and Boundaries of Japanese Firms

As a prelude to the reports of our research results, this chapter introduces our main theme. The first section explains why we focus on cross-border outsourcing among various modes of globalization. We also refer to the reasons for the emergence of cross-border outsourcing, and how critical it is for our economies. To facilitate readers’ understanding, the second section explains the definitions of our keywords, such as outsourcing and offshoring. This explicit clarification is important because these words are often used with varying meanings. The final section explains how this book is structured by briefly introducing the main content of each chapter.

This chapter reviews the evolution of Japan’s trade with foreign countries and the globalization of Japanese firms. This review is not intended to be chronological or exhaustive, but selective to motivate our discussion on cross-border outsourcing by Japanese firms in the main body of this book.

This chapter discusses how to measure cross-border outsourcing based on statistical data. We refer to the advantages and limitations of each measurement, primarily Japanese official statistics, in capturing and quantifying cross-border outsourcing. Statistics covered in this chapter include Input–Output (I-O) tables, custom-clearance statistics, Balance of Payment (BoP), and FDI statistics. Japanese unique statistics, through which we derive micro-data for our original research, are not included in the discussion of this chapter, but will be separately explained in detail in the next chapter. Although our research depends solely on statistical data, we briefly refer to business cases that motivate our research.

This chapter describes Japanese statistical data directly or indirectly related with cross-border outsourcing. Our research introduced in later chapters of this book derives firm-level data from some of these statistics. Pertinent statistics, even if we do not directly use their micro-data, are also covered in this chapter, as they are useful for our discussions of cross-border outsourcing. Most of the statistics are collected by the government, but we also refer to other related databases. This chapter explains basic information of each statistics; especially, it emphasizes the advantages and limitations involved in analyzing cross-border outsourcing. Our description of Japanese statistics in English is informative chiefly for international readers, as the explanations given by government agencies are mostly in Japanese language. This chapter can be a convenient summary of Japanese statistics on firms and plants from the perspective of outsourcing and offshoring. Readers who do not plan to use Japanese data or are not interested in technical details of the dataset used in this research may skip this chapter.

This chapter presents an overview of cross-border outsourcing of Japanese manufacturing firms based on statistical data. We start from the presence of firms outsourcing production across national border, and then, compare them with firms outsourcing within the national border, as well as those sourcing from their own offshore affiliates. While we primarily focus on cross-sectional variations based on firm-level micro-data, we briefly refer to recent developments based on publicly available aggregate data.

This chapter examines whether and how the productivity of a firm outsourcing to offshore suppliers differs from those not active in cross-border outsourcing based on Japanese firm-level data. We also compare them with firms outsourcing within the same country and with firms sourcing within the firm boundary. Before reporting our empirical findings, we briefly summarize predictions from theoretical models in international economics.

This chapter investigates innovation by outsourcing firms. The motivations for this topic choice are twofold. First, innovation is a critical factor determining productivity, specifically Total Factor Productivity. As innovative firms tend to be productive, they are likely to have ample capacity to be active in global activities, including foreign outsourcing. Second, innovativeness of firms is likely to determine barriers to foreign outsourcing. Firms may find it unsafe or difficult to outsource technologically complex tasks across national borders. The study of R&D by Japanese firms is useful even from a global perspective, as Japan is the third largest country in the world in terms of R&D expenditure following the U.S. and China, and records large surplus of trade in technology only next to the U.S., according to the annual report of the Survey of Research and Development by Statistics Bureau, Japan’s Ministry of Internal Affairs. Bearing in mind these issues, we discuss how foreign outsourcing firms differ in their innovativeness from non-outsourcing and domestic outsourcing firms. Third, as firms in developed countries normally outsource production to developing countries, cross-border outsourcing is intrinsically connected to development stage differences across countries in the world. The main issue in the third context includes whether innovative firms outsource their production to developing countries. While firms can outsource any activities including R&D activities, outsourcing of R&D is rare possibly due to the fact that output of R&D is inherently hard to measure or be verifiable. Therefore, we do not discuss the outsourcing of innovation itself, as less than 4% of the firms in the RIETI survey outsource R&D across national borders.

While we have examined productivity and innovation in the previous two chapters, this chapter discusses capital-labor ratio and composition of workers in outsourcing firms. Capital intensity is as important as innovation for analyzing the determinants of productivity, particularly labor productivity. In this sense, this chapter is arrayed just after the previous two chapters on productivity and innovation. However, the investigation of capital-labor ratio has been critical for analyzing the outsourcing decision since the seminal work by Grossman and Hart (1986). As some firms are more capital-intensive than other firms even within narrowly defined industries, we exploit firm-level data to consider within-industry variations across firms in capital intensities. We inspect how capital-labor ratio is associated with the firm’s outsourcing decision and how outsourcing affects the boundary of firms, especially in the lens of employment. Labor is further divided into production versus non-production workers, as well as skilled versus unskilled workers. Although it is not directly about outsourcing, this chapter also discusses the firm’s decision of multiplant operation, as it links critically to the ownership and firm boundary.

This chapter examines the barriers to cross-border outsourcing, particularly impediments for Japanese firms related to differences in languages. Almost all the Japanese firms exclusively use the Japanese language for internal communications and business with other Japanese firms, but they normally have to use nonnative languages, often English, for outsourcing to foreign firms. Based on RIETI survey, we distinguish the firm’s FDI subsidiaries, subsidiaries owned by other Japanese firms, and foreign firms in order to investigate how entry barriers to outsourcing vary depending on the types of suppliers. Although not directly on outsourcing, this chapter also reports our research results on task content of Japan’s manufacturing trade. As cross-border outsourcing and international trade in tasks are tightly linked each other, we discuss how task content of Japanese trade changed. We highlight how a new mode of globalization, namely, cross-border outsourcing, affects Japanese firms, which are traditionally insulated from intense global competition by impediments at the national border.

This chapter offers concluding comments based on our research results. However, we design this chapter not as a convenient summary list of our findings. We try to derive broad policy implications from our micro-data analyses. We also discuss issues not addressed in our research.