An extended approach to value chain analysis

Abstract

In the article, we propose a comprehensive methodology of value chain analysis in the international input-output framework that introduces a new measure of value chain participation and an extended typology of value chains, with the novel inclusion of domestic value chain to address the extent of fragmentation of purely domestic production. This allows for the simultaneous analysis of both global and domestic production fragmentation, the complex patterns of their evolution and their impact on economic development. The main contribution of the proposed methodology is conceptual: it permits the measurement of all value chain paths that pass through each country-sector from production to final consumption, whether the path includes downstream linkages, upstream linkages or their combination. Empirical application of this methodology shows the importance of including domestic fragmentation in value chain analysis: The fragmentation of both global and domestic levels of production has a significant positive correlation with economic growth. This implies that the effects of global production fragmentation must be analysed together with the changing structure of the fragmentation of domestic production to obtain the whole picture, one that might provide important information for policymaking and industrial policy.

Keywords: Domestic value chain; Global value chain; Input–output framework; Participation rate; Value chain typology; Value chains.

Fig. 1

Value chain tree. Source: own conceptualisation and design. Arrows represent production-sharing transactions—buying and selling of intermediate products for production. Orange colour denotes production that does not involve any production sharing, while any combination of red or orange paths denotes domestic production fragmentation. Any value chain path which includes a cross-country production-sharing transaction (a black arrow) is part of a global value chain from the perspective of the particular unit in focus. The paths of value creating and value realisation in a general case continue to branch ad infinitum (three levels are chosen only for demonstration purposes)

Fig. 2

World average participation rates Source: WIOD, 2016; own calculations.

Fig. 3

World average of manufacturing. Source: WIOD, 2016; own calculations

Fig. 4

World average of services. Source: WIOD 2016; own calculations

Fig. 5

China manufacturing participation rates. Source: WIOD, 2016; own calculations

Fig. 6

New EU countries manufacturing. Source: WIOD, 2016; own calculations

Fig. 7

USA manufacturing participation rates. creditSource: WIOD 2016; own calculations