Wholesalers, indirect exports, geography, and economies of scope: Evidence from firm transaction data in Japan
For regional firms to survive, they need to find export markets using wholesalers as intermediaries. This column uses a dataset of export activity in Japan to show that this type of indirect export activity occurs predominantly from metropolitan areas, with the probability of direct exports negatively correlated with the distance between manufacturer and wholesaler. Wholesaler productivity (though not manufacturer productivity) was correlated with the probability of these indirect exports, suggesting that wholesalers search for suitable manufacturers, but not vice versa.
One of the core policy objectives of many countries, including Japan, is to reinvigorate ailing regional economies. The low fertility rate among young people, and their preference to relocate from local areas to cities, makes it tougher for firms in local areas to expand – or even survive – in ever-shrinking local economies. Those firms, and governments, are increasingly looking for overseas markets.
We know that wholesalers play an important role in economic activities (Ahn et al. 2011, Bernard et al. 2010, or Crozet et al. 2013). This is especially the case in Japan, where wholesalers are involved in many business transactions. But we do not know enough about the role of wholesalers in the overseas sales of manufacturers. Using a unique data set of firm transactions in Japan, we were able to investigate the influence of wholesalers on indirect exports from manufacturers in regional economies. More specifically:
- What proportion of exports are intermediated by wholesalers? Also, the location of the wholesalers who intermediate exports for manufacturers in local regions.
- Is there a threshold distance for the relationship between manufacturers and wholesalers? This is an especially important issue for regional economies.
- What kinds of matching exist between manufacturers and wholesalers, in terms of productivity? Our initial expectation was that there would be assortative matching, in which high-productivity manufacturers export their products through high-productivity wholesalers. The data shows a different picture.
- Are there are the economies of scope effects? That is, do wholesalers export many kinds of goods from many producers, and are thus able to spread the fixed cost of exports? This would make it easier for manufacturers to export through them (Akerman 2016).
Data and methodology
We used a unique dataset on Japanese domestic transactions between firms compiled by Tokyo Shoko Research (TSR) Ltd. The dataset contains basic firm information, such as address, establishment year, number of employees, sales amount, profits, and so on for approximately 800,000 firms. It also has information on about four million purchases or sales transactions between them.
We extracted the transaction data of sales to wholesalers by manufacturers. If the manufacturer’s export status was recorded as “yes,” we counted a sale as a direct export, whereas when the manufacturer’s answer is “no exports”, but wholesalers to which the manufacturers sold their products had export status, we defined it as an indirect export.
This is a very loose definition, which will overestimate the true number of indirect exports in which wholesalers just act as intermediaries. Given the available information, however, this is the best we could do, and mirrors what other researchers have done using the same dataset (Fujii et al. 2016, for example).
We used both labour productivity and total factor productivity (TFP) as measures of productivity. To compute TFP, we used the Basic Survey of Japanese Business Structure and Activities (kigyo katsudo kihon chosa), administered by the Ministry of Economy, Trade and Industry (METI), and matched the dataset with the TSR transaction dataset.
- We found that out of 163,249 manufacturing firms, 4.5% had directly exported their products, and 14.5% indirectly exported their goods, through wholesalers. Manufacturers that indirectly exported their products through wholesalers were predominantly located in metropolitan areas, especially Tokyo.
- The average distance for a transaction was approximately 198 km, whereas the average distance for an indirect export transaction was approximately 227 km, indicating that manufacturers needed to overcome an additional 30 km to reach wholesalers who indirectly export their goods. The probability of indirect exports was negatively correlated with the distance between manufacturers and wholesalers, but there were threshold distances at 300 km to 500 km over which the chance of indirect exports turns null.
- Most notably, wholesaler productivity had a positive correlation with the probability of indirect exports, whereas manufacturer productivity did not matter. This finding suggests that it was wholesaler firms that were searching for potential manufacturing firms, and they needed to be productive enough to cover search costs, rather than manufacturing firms searching for potential wholesalers.
- We also obtained indicative evidence of the economies of scope effect.
Editors’ note: The main research on which this column is based first appeared as a Discussion Paper of the Research Institute of Economy, Trade and Industry (RIETI) of Japan.
Akerman, A (2018), “A Theory on the Role of Wholesalers in International Trade Based on Economies of Scope”, Canadian Journal of Economics 51(1).
Ahn, J, A K Khandelwal, and S Wei (2011), “The Role of Intermediaries in Facilitating Trade.” Journal of International Economics, 84(1): 73–85.
Bernard, A B, J B Jensen, S J Redding, and P K Schott (2010), “Wholesalers and Retailers in U.S. Trade”, American Economic Review, Papers & Proceedings 100(2): 408–413.
Crozet, M, G Lalanne, and S Poncet (2013), “Wholesalers in International Trade”, European Economic Review 58: 1–17.
Fujii, D, Y Ono, and Y Saito (2016), “Indirect Exports and Wholesalers: Evidence from interfirm transaction network data”, RIETI Discussion Paper 16-E-068.
Ito, T, R Nakamura, and M Morita (2017), “Wholesalers, Indirect Exports, Geography, and Economies of Scope: Evidence from firm transaction data in Japan”, RIETI Discussion Paper 17-E-114.