Distribution Keiretsu, FDI and Import Penetration in Japan

An independent wholesaler with many different upstream suppliers is likely to be better at market coverage than if it were the subsidiary of just one supplier. But where wholesale efforts are focused on resolving externalities (by establishing and administering a directed marketing channel), efforts at expanding market coverage have greater marginal cost and will be commensurately retrenched, so independent wholesaling has a smaller payoff. This suggests that directed marketing channels-in Japan known as distribution keiretsu- are more likely than others to be headed by a primary wholesaler that is vertically integrated with the manufacturer. We demonstrate the empirical validity of this by showing that foreign direct investment in Japanese wholesaling is heavily concentrated in marketing channels with relatively high incidence of distribution keiretsu. These same marketing channels tend to have a slightly lower rate of import penetration which is indirect evidence that impediments to inward foreign direct investment still existed in Japan in 1997, our year of observation.