This paper examines investment in foreign technology by Japanese firms, using previously unexplored data on technology transfer to Japan. The relationship between the acquisition of foreign technology and firm size, liquidity and affiliation with a corporate group, or keiretsu, is analyzed. Our results indicate that the number of licensing agreements a firm signs is positively and strongly related to its size, although the relationship is concave. We also find that liquidity is an important consideration in the firm's decision to invest in foreign technology. Keiretsu-affiliated firms acquire relatively more foreign technology than independent firms, suggesting that corporate groups have played an important role in Japan's technological progress.
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Correspondence to: Yishay Yafeh, Department of Economics, Harvard University, Cambridge, MA 02138, USA. *We wish to thank Josh Angrist, Eli Berman, Richard Caves, Paul Geroski, Dale Jorgenson, participants of the Econometrics and IO workshops at Harvard, participants of the ‘Summer in Jerusalem’ Workshop and an anonymous referee for helpful comments and suggestions. Fumio Hayashi and Robert Lawrence kindly provided some of the data on tape. We acknowledge financial support provided by the Spanish Ministry of Education and the Harvard Academy for International and Area Studies respectively. The usual caveat applies.