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The authors examine the impact of buyer-supplier relationships within business group on capital goods trade in the context of foreign direct investment by buyer firms and capital goods producers. A simple model in which cost-reducing relationship specific investments are underlying business group ties suggests that foreign affiliates of business group firms have a greater propensity to import capital goods from the home country, increasing Japanese exports and if the establishment of overseas affiliates by business groups firms attracts FDI by their capital goods suppliers, the 'Trade creating' impact of business group ties may disappear or even be reversed.
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