Firm capabilities, technology ladders, and evolution of Japanese production networks in East Asia

Why does a multinational corporation (MNC) locate its activities in one country rather than another? Decisions regarding locational choice of various activities in a global network have been viewed as a key to a firm's global strategy. However, most studies of locational choice of MNCs have focused on factors external to firms such as exchange rates and local wages. Few studies have analyzed how firm capabilities have affected location decisions of MNCs. The main goal of this thesis is to investigate the underlying firm-level mechanisms behind sequential foreign direct investment (FDI) location decisions of MNCs. In response to the same environmental change in a host country, why do some firms upgrade the activities and roles of their subsidiaries, while other firms downgrade or exit? To seek the answer to this question of firm heterogeneity in sequential investment patterns, we develop a firm capability-based model of sequential FDI decisions. The main proposition of this paper is that investments in certain types of capabilities offer platforms for the future upgrading of activities in response to major environmental changes. In the empirical setting of Japanese electronics firms in East Asia, this thesis tests how prior investments in firm capabilities affect upgrading and downgrading of activities in the existing production bases in response to major environmental changes. In our empirical investigation, based on descriptive statistical analysis, panel data regression analysis, and field studies, we find supporting evidences for our main argument that sequential FDIs are firm-specific, evolutionary processes in which prior investments in firms capabilities influence future sequential FDI behaviors. Statistical findings from a series of panel data regressions clearly show that firm capabilities such as local engineering and sourcing capabilities do matter in location decisions of MNCs, even after controlling for country differences in terms of productivity, wages, and government incentive policies. Our field research further reveals that upgrading of activities in certain East Asian subsidiaries led to the emergence of a new organizing mode of Japanese overseas networks based on regional technology platforms.