Global Value Chains (GVCs)

Global value chains(GVCs) have taken a predominant role in today’s global economy and are a fundamental component of firms’ competitiveness. Global value chains allow the international dimension and interconnectedness of production processes to be outlined. The growth in intermediate inputs, for example, is one way through which the fragmentation of production and the increasing importance of outsourcing can be tracked. Between 1995 and 2006, trade in intermediate inputs steadily grew at an

average annual growth rate of 6 percent (OECD, 2009)108

. Moreover, participating in GVCs allows firms to benefit from highly fragmented production processes, complex outsourcing strategies and connections with foreign partners.

Intermediate import ratio:

• Description: ratio between the intermediate import amount and the total intermediate demand for each sector. The methodology that measures trade in intermediates is based onInput-Output Tables.

• Rationale: This indicator is a measure of the geographical fragmentation of production. The intermediate import ratio can be computed also fromOECD-STAN Input-Output dataset. The advantage is that OECD Input-Output tables are harmonised and comparison among countries is more accessible.

Vertical specialisation (VS) share (import content of exports):

• Description: is measured as the share of total intermediate imports used in the production of a country’s total exports. Import content of exports is measured using the domestic input coefficients and import matrices of the OECD’s harmonised Input- Output Database.

u Am(l−Ad)–1_Ex Import content of exports = ———––––––––—

u Ex

• WhereAmandAd are input coefficient matrices (nsectors byn sectors) of

imported and domestic goods and services respectively;Exis the export vector; anduis a (1 byn) vector with all elements equal to 1109

.

• Rationale:VS indicator, proposed by Hummelset al(2001)110_{, provides a good} measure of the importance of the international fragmentation in the production processes. The OECD indicator ‘import content of exports’, by using harmonised national input-output tables, computes the countries’ degree of vertical specialisation. It measures the contribution that imports make in the production of exports of goods and services.

• Problems: one of the drawbacks is that the intensity in the use of imported inputs is assumed to be the same whether goods are produced for export or for domestic 108. Miroudot, S., Lanz, R., Ragoussis, A. (2009) 'Trade in Intermediate Goods and Services', Trade Policy Working Paper

No. 93, OECD Publishing.

109. OECD (2011) 'Import content of exports', in OECD Science, Technology and Industry Scoreboard 2011, OECD Publishing.

110. Hummels, D., Ishii, J. and Yi, K. (2001) 'The nature and growth of vertical specialization in world trade', Journal of International Economics, Elsevier, vol. 54(1), pages 75-96, June.

final demand; the measure in fact is computed as the imported intermediate shares of gross production times exports

VS1 - Share of exports sent indirectly through third countries: • Description: VS1 formula for a particular sector i and country k is:

n _{j’s exports}

VS1 =

∑

[

]

j= 1 j’s gross production

• Rationale:This indicator proposed by Hummelset al(1999)111

is complementary to import content of exports since it captures the other half of the vertical specialisation transaction: VS1 measures the exported intermediates embodied in other countries’ exports. The two indicators VS and VS1 together measure upward and downward participation to global value chains.

• Problems:VS1 is more difficult to measure than VS, because it requires matching bilateral trade flow data to the input-output relations.

Value added export ratio - domestic value added share of gross exports, % based on OECD_TiVA

• Description: EXGRDVA_EX: Value Added Export Ratio - total domestic value added share of gross exports in percent. From OECD TiVA dataset.

• Rationale:Measure of the international fragmentation of production, mapping trade flows in terms of value added and measuring the degree of participation in international production chain. Further decomposition of total gross export allows to more sophisticated indicators of participation in the global value chain: the domestic content of exports includes direct value added in export (ie, exported in final goods, exported in intermediate absorbed by final importers), indirect value added in export (ie, exported in intermediate re-exported in third countries) and exported in intermediate that returns in own imports (including double counting term). It complements the Hummelset al(2001) measure of global value chain participation from the export perspective.

Value added export ratio – domestic value added share of gross exports, % based on WIOTs

Description:

111. Hummels, Ishii and Yi (1999) 'The nature and growth of vertical specialization in world trade', Staff Reports 72, Federal Reserve Bank of New York.

(imported intermediates/gross output)

It is measured as the share of total domestic intermediate used in the production of a country’s total exports. From WIOTs country tables. In order to derive the overall economy imports sum over industry imported inputs; in order to derive overall figures sum over output column; in order to derive overall figures sum over export column. All the measures are available at sector level.

• Rationale:The indicator measures the value of domestic inputs in the overall exports of a country, and can be computed on the basis of national input-output tables. It measures to what extent countries are involved in a vertically fragmented production. VS indicator, proposed by Hummelset al(2001), provides a good measure of the importance of the international fragmentation in the production processes. The OECD indicator ‘import content of exports’, by using harmonised national input-output tables, computes the countries’ degree of vertical specialisa- tion. It measures the contribution that imports make in the production of exports of goods and services. It is a measure of the international fragmentation of production, mapping trade flows in terms of value added and measuring the degree of participation in international production chain. By using international I-O tables it is possible to overcome the ‘proportionality assumption’ on which Hummelset al (2001) measure was based (ie using the same coefficients for the production sold in the domestic and in the foreign market).

Value added export ratio – foreign value added share of gross exports, %

• Description: EXGRDVA_EX): Value Added Export Ratio. Total foreign value added share of gross exports, %. From OECD TiVA dataset.

• Rationale:Measure of the international fragmentation of production, mapping trade flows in terms of value added and measuring the degree of participation in international production chain. Further decomposition of total gross export: Foreign content of Export, it includes other countries’ domestic content in final goods, in intermediate goods and a double counting term. It corresponds to the VS measure in Hummelset al(2001).

Value added export ratio – foreign value added share of gross exports, % • Description:

(imported intermediates/gross output)

It is measured as the share of total intermediate imports used in the production of a country’s total exports. From WIOTs country tables. In order to derive the overall

economy imports sum over industry imported inputs; in order to derive overall figures sum over output column; in order to derive overall figures sum over export column. All the measures are available at sector level.

• Rationale:The indicator measures the value of imported inputs in the overall exports of a country, and can be computed on the basis of national input-output tables. It measures to what extent countries are involved in a vertically fragmented production. VS indicator, proposed by Hummelset al(2001), provides a good measure of the importance of the international fragmentation in the production processes. The OECD indicator ‘import content of exports’, by using harmonised national input-output tables, computes the countries’ degree of vertical specialisa- tion. It measures the contribution that imports make in the production of exports of goods and services. It is a measure of the international fragmentation of production, mapping trade flows in terms of value added and measuring the degree of participation in international production chain. By using international I-O tables it is possible to overcome the ‘proportionality assumption’ on which Hummelset al (2001) measure was based (ie using the same coefficients for the production sold in the domestic and in the foreign market).

BOX 6.8: OTHER SUGGESTED INDICATORS:

Some other measures of GVCs are based on value added, and hence are more computationally intensive. This is the case for the Ratio of Value Added to Gross Exports (VAX) and for the Domestic Value Added that Returns Home (VS1*). These two indicators summarise the amount of information of Hummels’ indicators, but focus on value added, in contrast to many other indicators that use measures of intermediate goods trade or trade in parts and components, as a measure of fragmentation.

Two other useful indicators are the GVC participation index and the GVC position index, suggested by Koopmanet al(2010). The participation index measures to what extent countries are involved in a vertically fragmented production: the higher the foreign value-added embodied in gross exports and the higher the value of inputs exported to third countries and used in their exports, the higher the participation of a given country in the value chain. In conjunction with this measure the position index define the country position in the GVC as the log ratio of a country’s supply of intermediates used in other countries’ exports to the use of imported intermediates in its own production. If the country lies upstream in a supply chain, the numerator tends to be large. On the other hand, if it lies downstream, then the denominator

Bottom-up indicators of GVC:

At the micro level, some measures could help to better account for the inter- connectedness and geographical distribution of production. This is the case for the distribution of exporting (importing) firms by country of destination (origin)or for the distribution of firms with production abroad (foreign affiliate and/or outsourcing) by country of location. These measures allow also the GVC phenomena to be better depicted, outlining if the interconnectedness is at a global level, or more concentrated at a regional level.

On the other side, by focusing on the number of destination countries by firm, we can assess the complexity of foreign operations. The suggested measures arethe average, the median and the variance of the number of export destination countries per exporting firmor thedistribution of exporting firms by number of export destination countries.These indicators estimate the degree of involvement in the global economy.

Finally, firm-level data allows mapping of the ownership and affiliation of domestic registered firms. Thus, we can employ indicators that are normally not available from macro-level surveys such asShare of foreign owned firms in total firmsand theShare of domestic MNFs in total firms.

Measures of foreign direct investment (FDI) should also be mentioned.Inwardand outward FDIindicate the growing transnational ownership of production assets, and they capture different aspects: on the one side is a good proxy for globalisation and international interconnectedness, but on the other is also an indicator of international technological spillovers. We can capture FDI in stocks or flows. Additionally, we can look at the ownership/affiliation of firms from the Eurostat FATS database and retrieve tends to be large. Both these two indices can be computed, starting from input- output tables, for countries and sectors.

Fally (2011) proposes another indicator to measure the relative position in the GVC: the distance to final demand. The distance to final demand can be also interpreted as the length of the value chain when looking forward. The main drawback of this measure is that it comes from the solution of a system of linear equations for each industryiin countryk, where the value of interest (D) is a function of D in all other industries and countries.

the following indicators: Number of foreign-owned firms (affiliates of foreign multinationals), Number of affiliates abroad controlled by domestic firms, Number of domestic firms controlling affiliates abroad.