Despite a significant rise in geopolitical risks, participation in global value chains (GVCs) is still regarded as a promising and unavoidable gateway to economic development that helps to upgrade countries’ industrial structures for sustainable economic growth. We present a series of empirical findings related to factors that facilitate GVC participation and industrial upgrading, with explicit emphasis on the role of maritime and aviation connectivity and technological intensity of exports.

Background and Motivation

The remarkable economic development of East and Southeast Asian economies has been accompanied by their sequential participation into global value chains (GVCs). In addition, these economies have successfully upgraded their industrial structures, taking advantage of their participation in GVCs by attracting foreign direct investment (FDI) inflows, employing export-oriented open trade policies, developing economic and logistic infrastructures. This dynamic process of geographically-expanding chain reactions has been favorably dubbed as the “flying geese” model of economic development (Akamatsu 1962). Nowadays, participation in GVCs is widely regarded as a promising and unavoidable gateway to economic development accompanied by upgrading of industrial structures.

Against this backdrop, we conducted a series of empirical studies on GVCs to explore the following questions:

• What are the determinants of developing countries’ GVC participation?
• Is there a relationship between GVC participation and income levels?
• Does connectivity matter in promoting GVC participation?
• Once they participate in GVCs, how can developing countries upgrade their industrial structure?
• What are the keys to achieving sustained economic growth while overcoming the middle-income trap?

GVC Participation and Trade

We determine a country’s degree of GVC participation using the method proposed in Borin and Mancini (2019), obtaining data from the Eora Multi-Region Input-Output Table to maximize the number and diversity of our samples. The metrics include both forward and backward GVC participation. Forward participation in GVCs occurs when goods exported from a country are processed in the importing countries and are subsequently re-exported. Conversely, backward participation in GVCs occurs when a country’s exports contain foreign value-added contents in the form of imported intermediate inputs.

The degree of GVC participation differs both by sector and by region. For example, mining and agricultural sectors tend to exhibit high forward and low backward participation, reflecting their high intermediate output and low intermediate input ratios. In contrast, the textile and transport equipment sectors are characterized by low forward participation and high backward participation. By region, Southeast Asia and Europe both have high backward participation and low forward participation, while South Asia and Sub-Saharan Africa have the opposite characteristics, Northeast Asia is somewhere in the middle. We find the degrees of GVC participation, whether forward or backward, increased during the period from 1990 to 2019, with a notable exception of a decrease in backward participation in Sub-Saharan Africa.

Concerning the relationship between GVC participation and income level, we find an inverted U-shaped correlation between backward participation and income. In contrast, we identify a U-shaped relationship between forward participation and income. We attempt to explain the mechanism behind these patterns using implications from the flying geese model and confirm these observations by econometric investigation. An interesting finding is that the inverted U-shaped trend for backward participation has been fading since the early 2000s. The timing of this change aligns with China’s WTO accession and the ensuing increase in globalization. However, this relationship requires further exploration, which we earmark for future research.

Geographical proximity to large markets and/or production bases matters in GVC participation, as confirmed repeatedly by the gravity model literature. Given this, we further explore the influence of maritime and aviation connectivity on GVC participation. Our economic analyses reveal that a rise in maritime and aviation connectivity would significantly increase the level of our GVC participation index. While the validity of the precise impact calls for further examination, these results underscore the potential benefits of policies that promote connectivity encompassing port and airport development, open sky policies, and other liberalization and facilitation initiatives.

Upgrading in GVCs

We utilize a simple technique of structural decomposition to explore the elements influencing the shift in domestic value added (DVA) in exports, specifically the DVA share of exports and the value of DVA exports themselves. The results indicate the DVA shares of several regions, such as Southeast and South Asia, Latin America, and Europe, decreased between 1990 and 2019. Nevertheless, the detrimental effects of this decline were outweighed by the bolstering influences of the growth in exports overall. This hints at the potential necessity of prioritizing export encouragement rather than solely elevating DVA share via protectionist measures.

On a national scale, countries such as India and Mexico showed a decline in their DVA share in exports that coincided with a surge in manufacturing exports. Conversely, China’s DVA share surged in the 2010s, propelled by its sectoral expansion. The diminished DVA shares of countries such as Vietnam and Mexico were potentially due to their geographical proximity to dominant manufacturing hubs, namely China and the US, respectively. In summary, although many countries have achieved upgrading GVC in terms of DVA in exports (not DVA share), only China increased its DVA share in exports in the 2010s.

Our econometric analyses of the factors driving structural upgrading in GVCs yielded three main conclusions. First, even after accounting for standard determinants of GVC participation that are widely accepted in the literature, domestic industrial capacity and the pool of educated labor remain important. Second, an educated labor force enhances both the magnitude and proportion of DVA via structural enhancements that lean toward local rather than international procurement of intermediate inputs. Lastly, this educated workforce is paramount in guiding structural advancement involving DVA share in exports across both the manufacturing and service sectors.

Technological Intensity of Exports in East Asia

We also investigate the technological intensities of exports from East Asia, where middle-income Southeast Asian countries are experiencing a slowdown in economic growth. The empirical results suggest the technological intensity of these exports needs to be enhanced for sustained economic growth. However, the export share of high-technology products may not be an appropriate statistical measure, given ongoing vertical specialization.

The export structure of Northeast and Southeast Asian countries was upgraded during 1975–2005; in particular, the export share of high-technology products increased significantly. However, there is a significant difference between the high-technology export share and domestic content share for countries such as Malaysia and Thailand. While Northeast Asian countries, such as South Korea, developed supplier bases and raised the competitiveness of their intermediate goods after the 1970s, Southeast Asian countries continued to increase their dependency on imported intermediate goods.

There is a tendency for the foreign content share of exports to increase as the technological level of exported products increases, as observed in Malaysia and Thailand. East Asian countries showed an overall increase in foreign content share during the period 1990–2005. These findings may reflect the fact that trade liberalization as well as the decline in transport and communication costs since the 1990s has increased the benefits of production fragmentation (and thus GVC participation) in East Asia.

The decomposition of exports in the semiconductor and pharmaceutical industries shows these industries in Malaysia and Thailand have a high share of Asian content. Moreover, in the semiconductor industry, the Asian content share tends to increase as the technological level of intermediate goods rises. Simultaneously, these industries show a high dependency on intermediate inputs provided by Northeast Asian countries.

Such a disparity in trade and industrial structure could be explained (at least in part) by differences in economic growth drivers. Unlike the manufacturing industries in Northeast Asia, those in Southeast Asia are led by multinational firms, which are not necessarily closely linked to local supplier bases. Moreover, technological upgrading is more difficult in FDI-recipient countries because when multinational firms conduct R&D in their home countries, technology accumulation and diffusion is limited to the FDI-recipient countries.

In summary, GVC participation is helpful in achieving industrial development but may not be sufficient for technological upgrading in FDI-recipient countries. Moreover, as seen in Northeast and Southeast Asia, countries may take a different path to structural upgrading, depending on whether their industrial development is driven by local or multinational firms.

Author’s Note:

This column is based on Kuroiwa, Ikuo, and So Umezaki. 2024. Global Value Chains and Industrial Development: Participation, Upgrading, and Connectivity. Springer Birefs in Economics Series. https://doi.org/10.1007/978-981-97-0021-9

References

Akamatsu, K. 1962. “A Historical Pattern of Economic Growth in Developing Countries.” The Developing Economies 1(s1): 3-25. https://doi.org/10.1111/j.1746-1049.1962.tb01020.x

Borin, A., and M. Mancini. 2019. “Measuring What Matters in Global Value Chains and Value-added Trade.” World Bank Policy Research Working Paper 8804. https://ssrn.com/abstract=3366657

Author’s Profile

So Umezaki is a senior research fellow at Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO). His research interests include economic integration in ASEAN and the surrounding regions, transport connectivity in emerging countries. His work has been published in Publish Policy Review, Journal of Southeast Asian Economies, and the Developing Economies.

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** The views expressed in the columns are those of the author(s) and do not represent the views of IDE-JETRO or the institutions with which the authors are affiliated.