Productivity Heterogeneity and Internationalization: Evidence from Japanese Firms

This paper examines whether the rank of Japanese firms' (using 12,504 firm level dataset) productivity sorts the modes of their internationalization and how firms' productivity affects their choice of export and FDI to destinations with similar income level. The empirical results in the paper demonstrate that the mode of firm's internationalization in selected regions shifts from noninternationalization to export, and from export to FDI as the productivity of firms rises. It confirms the theoretical prediction of the HMY model. The paper also finds empirical evidence that the productivity of firms internationalizing in multiple region is much higher than that of firms internationalizing in a single region, regardless of the mode of internationalization. This finding can be justified on theoretical ground that higher share in the global markets by a firm will require higher productivity.