Discussion Papers

No.805 The Turning Point of Domestic Value Creation in Exports Based on the Knowledge-Capital Model

by Kazuhiko Oyamada, Hiroyuki Taguchi

December 2020


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

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