Productivity and Modes of Internationalization: Evidence from Japanese Firms

Firms decide to enter international markets, either through exports, or by engaging in foreign direct investments (FDI), based on not only their productivity advantages, but also market and firm-specific factors. This paper empirically investigates what modes of internationalization are chosen by Japanese firms internationalizing in US/European countries and East Asian countries, with a focus on the difference in market-specific factors between regions as well as the productivity heterogeneity between firms. Our analysis, using firm-level data pertaining to 12,000 Japanese organizations, confirms that internationalized firms have higher productivity relative to non-internationalized firms. Further, it reveals that firms engaged in FDI in the U.S. and/or Europe have higher productivity as compared to firms that export to these market destinations. However, this result does not hold for Japanese firms that operate in markets in East Asian markets. The estimated results indicate that the mode of internationalization chosen by a firm is not uniquely determined by its productivity levels, but also reflects market specific-factors in destination countries.