Production sharing and trade flows: A comparative analysis of Japan and the US

This paper examines the determinants of trade flows in parts and components related to global production sharing in machinery industries, using a newly compiled panel dataset for Japan and the US over the period 1988-2005. The findings show the importance of labour costs, and the quality of the legal system and physical infrastructure in attracting production sharing, as suggested by theory. It is also found that US production networks in the electronics industry have a regional focus on Asia, while those in the automobile industry are concentrated in North America. On the other hand, Japanese production networks in both industries are concentrated in Asia.

► The econometric results show that labour costs adjusted for productivity, the quality of physical infrastructures and the legal system of countries were important for attracting production sharing activities from US and Japan. ► Both Japanese and US firms are influenced by the quality of governance and the level of infrastructure when trading with middle-low income countries. ► While US firms in electronics machinery industry have a larger presence in Asian countries, those in the automobile industry are more focused on neighbouring countries in the North America region, which share borders and have preferential trade agreements with the US. ► Japanese firms both in the electronic machinery and transport equipment industries are more attracted to Asia, even without any preferential trade agreements.