FTA Use in Export-Platform FDI: Evidence from Exports to China by Japanese Affiliates in ASEAN

Multinational enterprises (MNEs) actively use overseas affiliates to trade with third countries (i.e., neither the home country nor host country). In this paper, we empirically identify significant firm characteristics that influence the use of FTAs in export-platform Foreign Direct Investment (FDI). Specifically, we investigate the correlation of FTA use with: the share of "originating inputs"; intensity of exports to the third country; and experience using FTAs in exporting to other third countries. Then, we further investigate the difference in such characteristics according to the size of the parent company in order to clarify why the use of FTAs from platform countries is different between overseas affiliates owned by large firms versus small- and medium-sized enterprises (SMEs). To this end, we employ a unique dataset collected by the Japan External Trade Organization for 2012 and 2013. We found that Japanese affiliates owned by large parent firms are more likely to use FTA schemes in exporting than those owned by SMEs. In terms of Rules of Origin (ROO) compliance however, most affiliates owned by either SMEs or large parent companies have no difficulty because they already have a sufficiently high share of originating inputs. Therefore, we find that the major obstacle to FTA utilization concerns how to obtain certificates of origins (COOs) rather than complying with ROOs.