Diversification in Trade and Foreign Investment and Resilience to the <scp>COVID</scp> ‐19 Shock: Firm‐Level Evidence Using Japanese Customs Data

ABSTRACT Using data from the COVID‐19 period, this study examines whether firms' participation in global value chains (GVCs) makes them more resilient to external negative shocks, distinguishing between multinational and nonmultinational firms and between trading and nontrading firms. Using Japanese customs data matched with firm‐level data and a survey on foreign direct investment (FDI), we construct a dataset that contains export destinations, import origins and investment destinations. We then examine which firms were more affected by the COVID‐19 pandemic. We find that diversity in export destinations and import sources mitigates the negative effect on export levels during the pandemic. Multinational firms tend to have greater diversity in their import sources and export destinations, which contributes to their superior performance. On the import side, however, diversification does not alleviate the decline in imports. Nevertheless, firms engaged in GVCs, as measured by two‐way trading status, tend to better maintain their imports of intermediate goods. Additionally, firms with a broader network of foreign affiliates, as measured by the number of FDI destination countries, are more resilient to the shock on the import of final goods.