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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 4 examines a data set based on the questionnaire surveys in 2009 and 2013. Questionnaires were sent to head offices of all Japanese manufacturing firms listed on Japan’s stock exchanges and that reported foreign sales in their consolidated financial statements. Major findings are as follows: while yen invoicing is often chosen for arm’s-length trade, the importer’s currency tends to be used in invoicing in intra-firm trade. In exports to Asian subsidiaries, US dollars are widely used. Firm size does affect the choice of invoice currency because the larger (smaller) the size of a firm, the less (more) likely the yen is to be chosen. Growing and deepening regional production networks in Asia are likely to discourage yen-invoiced transactions, even by Japanese firms. Japanese production subsidiaries that export finished goods to the world tend to choose US dollar-invoiced transactions even for their imports of semi-finished goods from their head offices.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 2 surveys recent developments in theoretical and empirical studies on the question of invoice currency choice. By examining aggregate data on invoice currency, published by the authorities, it is shown that the Japanese invoicing currency pattern violates well-known stylized facts: (1) trade between advanced countries tends to be invoiced in the exporter’s currency; (2) trade between advanced and developing countries tends to be invoiced in the advanced country’s currency; and (3) differentiated products tend to be invoiced in the exporter’s currency. More homogeneous products are typically invoiced in an international currency such as the US dollar. Chapter 2 presents two puzzles. First, Japanese exports to advanced countries tend to be invoiced in the importer’s currency; and second, the share of US dollar invoicing is higher than that of yen invoicing in trade with Asia. In order to solve these puzzles, subsequent chapters examine firm-level data obtained through interviews and questionnaire surveys.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 5 identifies the types of risks to which a firm is exposed and shows a conceptual diagram of exchange rate risk management strategies. New findings on Japanese firms’ exchange rate risk management approaches are also presented. Through detailed and firm-specific investigation from our firm-level surveys, we find the following characteristics. First, firms with higher sales and greater dependency on foreign markets more actively engage in currency hedging activities, including financial and operational hedging. Second, Japanese firms use both financial and operational hedging complementarily. Third, US dollar invoicing is supported by both financial and operational hedging. Fourth, yen invoicing is a substitute for operational and financial hedging. Fifth, exchange rate pass-through is also a substitute for financial hedging. However, most Japanese exporters cannot change their export price easily even if facing a large fluctuation of exchange rates. In addition, larger sized firms are more likely to increase the degree of pass-through than smaller firms.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 3 examines a new data set based on interviews with 23 globally operating Japanese firms. Novel findings here are three-fold. First, Japanese head offices tend to invoice in the importer’s currency in exports to advanced countries so that local subsidiaries can be free from exchange rate risk in their imports from head offices. Second, Japanese firms that export highly differentiated products or that have a dominant share in global markets tend to choose yen invoicing. Third, although Japanese firms have shifted their production bases to Asian countries, exports from these Asian bases tend to be invoiced in US dollars as long as the final destination market is the US. Thus, a smaller share of yen invoicing in Japanese exports even in the 2000s is due to the growing intra-firm trade promoted by the active overseas operations of Japanese electronics firms combined with products having US markets as their final destination.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 1 introduces the theme of this book, exchange rate risk for the exporters, by showing the sensitivity of corporate earnings and stock prices to exchange rate fluctuations. When the yen appreciates, corporate earnings and the Nikkei Index tend to fall. Faced with a long-run trend of yen appreciation, Japanese exporting firms have taken many countermeasures to lessen the exchange rate impact on their sales and profits. By invoicing in yen, they can avoid the exchange rate risk. However, importers suffer from exchange risk and have to absorb the change in import costs by changing their profit margins. Hence, which currency exports should be invoiced in depends on the nature of the products, the relationship between exporter and importer, and whether the exported goods are for the local market or for re-exporting after assembly. The chapter introduces these concepts and sets up the questions to be answered in later chapters.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 6 investigates the invoice currency choices of Japanese production subsidiaries, using the firm-level information obtained through questionnaire surveys with Japanese overseas subsidiaries conducted in 2010 and 2014. We find that Japanese subsidiaries in North America tend to use the US dollar in both exports and imports, while subsidiaries in Europe tend to choose the euro in trade with Japan. Asia-based subsidiaries tend to choose the yen and the US dollar in both imports from and exports to Japan, and the share of the US dollar increases from 2010 to 2014. The US dollar is generally used in trade with other countries. By conducting Logit estimation, we find that intra-firm trade between Asia and Japan facilitates yen-invoiced trade. However, a large dependence of the group company on the US market in terms of consolidated sales impedes the yen-invoiced trade even for Asia-based subsidiaries’ exports to Japan.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 7 defines the internationalization of a currency as the use of a currency in six cells in the 3 _ 2 matrix: 3 functions of money, namely ‘unit of account’, ‘settlement’ and ‘store of value’, and 2 sectors, ‘private’ and ‘public’, and discusses the history of the internationalization of the yen and China’s recent efforts toward internationalization of the RMB. Our latest questionnaire survey indicates that RMB cross-border transactions are not increasing among Japanese multinational firms at the moment. As long as capital controls exist, Japanese firms do not recognize that the RMB is a convenient international currency. These findings suggest that there is a dilemma for Chinese monetary authorities: unless capital controls are lifted, firms will be reluctant to use the RMB due to the restrictions; but as capital controls are being lifted, the exchange rate volatility rises, which makes the firms avoid the use of that currency.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

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The classical origins of Akamatsu’s ideas: a missing link to David Hume’s ‘flying-manufacturers’ theory

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

This chapter examines some important classical origins of Akamatsu’s ideas. While studying in Germany in 1924_26, Akamatsu was strongly influenced by a variety of the stages theories of development expounded by the German Historical School. As he himself acknowledged, ‘his’ idea of the infant-industry protection-driven, three-step sequence of import, domestic production, and export was directly borrowed from Friedrich List’s (1885/1966) book, The National System of Political Economy. However, why did Akamatsu fail to notice what may be called the ‘flying-manufacturers’ theory advanced by David Hume (1754/1985), a theory that no doubt adumbrated Akamatsu’s ‘flying-geese’ theory? This is probably because the German Historical School that stressed inductive reasoning and empiricism was at loggerheads with the British Classical School that by sharp contrast pursued deductive reasoning in search of universal abstract theories. Consequently, Akamatsu must have been blindsided by the German Historical School, missing a chance to read Hume’s writings. References: Hume, David (1754/1985), Essays: Moral, Political and Literary, ed. Eugene Miller, Indianapolis, IN: Liberty Fund. List, Friedrich (1885/1966), The National System of Political Economy, New York: Augustus M. Kelly Publishers.

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The dynamics of MNC-impacted comparative advantage: relevance to Ricardo’s view on FDI and Samuelson’s skepticism about globalization

The ‘Flying-Geese’ Theory of Multinational Corporations and Structural Transformation

Terutomo Ozawa

The notion of ‘pro-trade’ versus ‘anti-trade’ foreign direct investment (FDI) was conceptualized by Professor Kiyoshi Kojima (1921_2010) and theoretically formalized in an article in The Hitotsubashi Journal of Economics (Kojima and Ozawa, 1984a/1993; reproduced in the United Nations Library on Transnational Corporations, Vol. 8). The core idea is that multinational corporations’ (MNCs) overseas investments in emerging markets have two opposing effects on the basis for trade: one is to expand comparative advantage (that is, a pro-trade effect), and the other is to reduce comparative advantage (that is, an anti-trade effect). The pro-trade type of FDI is central to a successful ‘flying-geese’ formation. Furthermore, the above theoretical distinction helps clarify both David Ricardo’s (1817) pessimism about the welfare effect of cross-border investment on the home country and Paul Samuelson’s (2004) skepticism of the long-term benefit of free trade to the United States in an age of globalization. References: Kojima, Kiyoshi and Terutomo Ozawa (1984a/1993), ‘Micro- and Macro-Economic Models of Direct Foreign Investment: Toward a Synthesis’, Hitotsubashi Journal of Economics, 25 (1), 1–20. Reproduced in Gray, H. Peter and John H. Dunning (eds) (1993), Transnational Corporations and International Trade and Payments, Vol. 8 of United Nations Library on Transnational Corporations, London: Routledge. Ricardo, David (1817/1888), ‘Principles of Political Economy and Taxation’, in J.R. McClulloch (ed.), The Works of David Ricardo, London: John Murray. Samuelson, Paul A. (2004), ‘Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization’, Journal of Economic Perspectives, 18 (3), 135–46.