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Using factual affiliate-level data of Japan’s multinational firms from 2017 through 2019, this study investigates the impact of a trade shock (the 2018 US-Sino trade war in this case) on multinational firms’ overseas production activities. Focusing on Japanese affiliates in the Association of Southeast Asian Nations (ASEAN) countries, we find evidence of a potential production shift from China to the ASEAN member countries. According to our empirical results, in response to the trade war, those affiliates in the ASEAN with vertically integrated Chinese siblings belonging to the same multinational parent’s value chains may increase their export to North America and see a growth in total sales. Fast substitution of export and production occurs through the production network within Japanese multinationals when a part of which is negatively affected by the trade shock. In addition, this group of affiliates are also likely to increase both the share and value of local procurement. The study highlights the positive role of setting up a diversified production network for multinationals.

A recent debate on globalization addresses the importance of skills for firms’ performance in developing countries. Employing microdata from Indonesian manufacturing, we examine the externality effects of inward foreign direct investment (FDI) on labor demand by skill in local firms and identify the relative contribution of each effect to their skill structure. The results show that local firms replace unskilled workers with skilled ones to enable transactions with foreign firms in downstream industries. However, severe labor market competition for skilled workers with foreign firms hinders them from upgrading the skill structure. Moreover, severe product market competition decreases demand for unskilled workers in local firms. Thus, an adequate supply of skilled workers is crucial for the better performance of local firms. The results also highlight the necessity of policies to mitigate the negative impact of inward FDI on unskilled employment in the host economy.