The Turning Point of Domestic Value Creation in Exports Based on the Knowledge-Capital Model

Discussion Papers

No.805

by Kazuhiko Oyamada, Hiroyuki Taguchi

December 2020

ABSTRACT

This paper explores how the empirical turning point of regaining domestic value-added embedded in exports corresponds to the theoretical transformation in types of foreign direct investment that host emerging market economies invite. Utilizing panel data from of 72 middle-income countries from 1990 to 2018, compiled from the latest UNCTAD–Eora Global Value Chain Database, non-linear U-shaped curves (alternative smile curves) in the relationships between the domestic value-added share to exports and GDP per capita, derived from an extended version of the knowledge-capital model, were empirically estimated and tested for statistical significance. The results show that manufacturing-based middle-income economies have a meaningful U-shaped curve, with the turning point at approximately $2,000 US GDP per capita. Subsequently, we further examined geographical characteristics and found that the Asian and Latin American middle-income economies have their own curves with different turning points.

Keywords: knowledge-capital model, global value chains, alternative smile curve

JEL classification:F12, F14, F23

Please note that discussion papers are works in various stages of progress and most have not been edited and proofread and may contain errors of fact or judgment. Revised versions of these papers may subsequently appear in more formal publication series. The views expressed in this publication are those of the author(s). The IDE does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use.