Gains from Fragmentation at the Firm Level: Evidence from Japanese Multinationals in East Asia

The unprecedented development of production networks in East Asia has been investigated, both theoretically and empirically, employing the conceptual framework of fragmentation theory and its extensions. However, the benefits of production fragmentation at the firm level, particularly benefits deriving from different location advantages, have never been directly measured empirically. This paper presents the very first attempt, to the authors' knowledge, to empirically capture the benefits of fragmentation. Specifically, using Japanese firm-level data, we find that the larger the gap in the capital-labor ratios between fragmenting firms' home and overseas activities, the more greatly their cost efficiency improves.