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Production Chains, Exchange Rate Shocks, and Firm Performance

Zhigang Li, Shang-Jin Wei and Hongyong Zhang ()

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Using unique Japanese firm-level production network data combined with international trade data, we examine the upstream/downstream propagation effects of exchange rate shocks on the performance of indirect exporters/importers. Indirect exporters (importers) are defined as firms which do not export (import) by themselves but supply to (buy from) at least one exporting (importing) firm. We construct firm-specific export and import effective exchange rates to take account of the variations of exchange rate exposure across trading firms. We find significant and robust responses in sales and profitability of indirect exporters to exchange rate shocks of downstream exporting firms, which suggests the upstream propagation effect of exchange rate shocks. Both the sales and profitability of the indirect exporters improved significantly with yen depreciation in downstream industries. However, on the other hand, there is weak evidence on the responses of indirect importers to exchange rate exposure of upstream importing firms. Furthermore, the responses in sales and profitability are heterogeneous among direct and indirect exporters/importers by relative firm size and upstreamness in the production chains. Our results suggest that the stabilization of exchange rates is crucial to firm performance, especially to the small and medium enterprises engaging in indirect exporting, from the perspective of supply chains.

New Economics Papers: this item is included in nep-bec, nep-int and nep-opm
Date: 2018-09
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