Identifying and Characterizing Global Value Chain Activities in the Presence of Foreign Direct Investment

Speaker:  Zhi Wang,  George Mason University 

Location: online or at Kiel Institute for the World Economy, Chausseestraße 111, 10115 Berlin

Organizers: Kiel Institute for the World Economy, CEPR

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Abstract: We developed a unified framework to decompose production and output in net and gross terms simultaneously to identify, measure and characterize GVC activities in the presence of foreign direct investment (FDI). By decomposing both GDP and gross inputs based on forward linkages and both final production and gross output based on backward linkages, this new framework accounts for the presence of foreign-invested enterprises (FIEs), their interactions with local firms in the host countries as well as their activities in international trade. It not only considers the production position of firms in GVCs (upstream, downstream, or both), but also what mode they used to participate the GVCs (trade, FDI, or both), thus provide a unified decomposition framework that accounts for firm heterogeneities.  We find that GVC activities in GDP are only a relatively small part of all GVC activities, more of them are reflected by upstream intermediate imports and downstream intermediate exports. The import and export of these intermediates are the most important feature of GVC activities, which cannot be identified by decomposing net value (GDP) only; we replace the vaguely defined "simple" and "complex" GVC concepts in the previous literature with a clear economic concept of the position of a particular GVC activity in the production chain and provide accurate economic interpretations of each detailed item of the decomposition; we also extend the Vertical Specialization concept, previously only related to exports, to include intermediate inputs (outputs) used to meet domestic demand. This not only allows us to measure the complexity and degree of Vertical Specialization in pure domestic and traditional trade related production activities but also unifies the decomposition of gross exports into this new framework, because gross exports are only a part of gross output. Based on this new decomposition framework, we redefined various GVC indexes and discussed the macro structure of supply chains and the measure of interdependence among supply chains in different economies at country/sector level. The size of the GVC activities identified and measured by this new framework nearly trebled than what measured in the previous literature that decompose net value only or treats FIEs the same as local firms.