In this period, Japan was a developing country and adopted various kinds of regulations on trade and FDI. Thus, it was very difficult for foreign producers to enter the Japanese market through FDI and exports. On the other hand, there was an urgent need for the Japanese government to increase food production. Thus, demand for agrochemicals was increasing constantly, and it was indispensable for the Japanese agroindustry to import/transfer foreign technology for the production of chemical compounds. Another important aspect is that licenses were contracted by firms in the chemical/upstream industry, in which a scale economy works. On the other hand, there were many small-scale firms in the agrochemical/downstream industry.
We find that the importation of technology and new products in the upstream sector positively influenced the downstream industry, which in turn increased not only the import but also the domestic production of chemical compounds (products of the upstream industry). We also find that the increase in demand and the removal of import quotas positively influenced the production amounts of chemical compounds. The reasons are that (a) the import of new technology increased the demand for chemicals, which provided the room for entry of domestic producers; and (b) the learning effect worked. Moreover, the increase in production in the downstream sector increased the ratio of domestic production in the upstream sector. Thus, it is verified that both forward and backward linkages existed.
Our results indicate a possibility that importation of technology encourages economic development through forward and backward linkages that increase the domestic production of both upstream and downstream sectors.