Abstract
The growth in world trade during the last decades was largely caused by increasing bilateral exchanges of parts and components as a consequence of international fragmentation of production. Apparently, the international integration of the Newly Industrializing and Eastern European economies prompted firms in ‘high-wage’ countries to exploit factor price differences in order to increase their international competitiveness. However, theory predicts that, beside factor price differences, international fragmentation of production should be driven by a multitude of additional determinants. Against this background, the present paper reveals empirical evidence on parts and components trade as an indicator for international fragmentation of production in the European Union and determines its main explanatory factors. The results of a panel data analysis show that especially industry specific factors as well as communication and transportation infrastructure are likewise important for shifting production to or sourcing components from foreign countries.
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Notes
The phenomenon entered the literature under many other terms, such as slicing up the value chain (Krugman 1995), outsourcing (Feenstra and Hanson 1996), disintegration of production (Feenstra 1998), intra-product specialization (Arndt 1997), or vertical specialization (Balassa 1967; Hummels et al. 2001). But the definitions of the phenomenon differ from author to author. For instance, according to Balassa (1967) vertical specialization is already at hand if a product is produced in at least two stages and at least two countries provide value-added during the production process. In contrast, for Hummels et al. (2001) vertical specialization concerns only production processes where imported intermediate goods enter into final products which are later exported. In the present paper, the former, broader definition is used for vertical specialization and international fragmentation of production, respectively.
As stated by Jones, Kierzkowski and Lurong (2005) with respect to an analysis of the determinants of parts and components trade volume: “while the empirical analysis reported here does not contradict the main conclusions of the fragmentation theory, a devil’s advocate could argue that higher income and lower service prices should be promoting trade in general, not only trade in middle products”.
Of course, international fragmentation of production is not necessarily always connected with FDI. Nevertheless, if only parts of fragmentation of production go hand in hand with direct control of foreign firms by the principal companies, FDI flows could act as a robust indicator for the establishment of international production networks.
A list of the SITC groups defined as parts and components on the 5-digit-level can be obtained on request.
Parts and components exports and imports in SITC groups 7 and 8 of a country divided by total SITC 7 and 8 exports to and imports from a country group.
By definition, these relative trade balances range in between −1 and +1.
If parts and components trade is disaggregated by industrial sectors, RCA-coefficients differ from sector to sector, as can be seen from Fig. 4 in the Appendix. With respect to the Western European countries, the latter seem to have comparative disadvantages in parts and components production, especially in SITC groups 82 and 89 (furniture, toys, jewellery and other manufactured articles; in these groups especially vis-à-vis Eastern Europe), in parts and components for textiles, clothing and travel goods (SITC 83 to 85) especially vis-à-vis Southern Europe; and, at least partly, in vehicles’ parts and components (SITC 78 and 79). In contrast, RCA-coefficients in parts and components trade of Western European countries are close to zero in the important product group ‘machinery’ (SITC 71 to 77) and rather positive in SITC groups 87 and 88 (professional, scientific and controlling instruments and apparatus). In comparison, Eastern European countries show comparative advantages especially in parts and components trade of SITC groups 82 and 89 and, with the exception of Slovakia, in vehicles’ parts and components. The indication that Central and Eastern European Countries do have comparative disadvantages in intermediate goods for professional, scientific and controlling instruments and apparatus (SITC 87 and 88) seems quite plausible, since even parts and components of these products are probably manufactured comparatively (human-)capital intensive. Similarly to the Western European countries, the RCA-coefficients of Eastern European countries for machinery parts and components are quite low. For travel goods, textiles and clothing, the results are inconclusive. This is quite astonishing, since one would have probably expected more distinct results. In this group only the Czech Republic and Poland do have comparative advantages vis-à-vis Western Europe. For the three Southern European countries, the results are mixed: Whereas Italy seems to have comparative advantages in parts and components in almost all the product groups considered, the opposite is the case for Spain, having positive RCA-coefficients only in SITC groups 83 to 85 and, in trade with Eastern Europe, in SITC groups 87 and 88. Overall, although the disaggregated RCA-coefficients differ from sector to sector, in the most important industrial sectors—machinery and transport equipment—most countries’ RCA-coefficients are comparatively low.
The OECD indicator for product market regulation (PMR) is only available for 1998, 2003 and 2008. Since the periods considered in the present analysis are 1999, 2002, 2005 and 2008, PMR-data are only available for the last period in the sample. For 1999, the PMR-values of 1998 were used, and for 2002 the PMR-values of 2003 were taken. For 2005, the average values of the PMR-indicator of the years 2003 and 2008 were calculated.
In many cases, unit labor cost differentials instead of labor cost differences are used as an indicator for capital-labor-differences between countries. However, in the present case, this might be inappropriate. If for instance a producer in a high-wage country shifts parts of the production chain abroad via FDI, labor productivity in these production sites is probably higher than that of local firms, since FDI from highly-developed countries goes hand in hand with technology transfer. But due to the fact that technology spillover to domestic firms is rather low, labor productivity e.g. in western affiliates in Eastern Europe remains largely firm-specific (Guenther 2005). As a consequence, unit labor costs would also be firm-specific and below average in western affiliates. Therefore, from a microeconomic perspective, instead of endowment or unit labor cost differences at the macroeconomic level, only labor cost differences between home and foreign countries could be the essential criterion.
Of course, diverging R&D expenditures could also be interpreted in a similar way to CLDiff ij , because they can enlarge factor productivity as well as endowment differences between countries against the background of the neo factor proportions theorem. Therefore, the influence on parts and components trade could also be positive.
Of course, in the fixed effects model the variables DIST ij and Highways ij drop out of the model equation due to perfect multicollinearity.
The results of the simple OLS and the random effects estimates can be obtained on request.
As already mentioned, the two other indicators for service link costs, namely distances and highway-shares, unfortunately drop out of the fixed effects estimations due to perfect collinearity.
The same holds for transportation costs, for instance, since in production networks with several production stages the number of shipments between different production sites and thus transportation efforts are higher than in vertically integrated production processes, where just final goods have to be delivered only once.
Since data on parts and components trade are only available for SITC groups 7 and 8, the total trade variable is also restricted to these product groups. By choosing identical product groups in both estimations, an unbiased comparison of the estimation results is guaranteed.
The results of the simple OLS and random effects estimations can be obtained on request.
It is quite consistent that both the volume of intermediate as well as of final goods is dependent on country-pair specific effects, such as cultural proximity, but that for the quotient of both, i.e. the share of intermediate goods in total bilateral trade, unobserved heterogeneity is randomly distributed.
This is, however, only the case if the total trade in SITC groups 7 and 8 acts as the denominator.
Commonly, industries are grouped into resource intensive (e.g. food and beverages), labor intensive (e.g. textiles and clothing), scale intensive (e.g. vehicles) and science intensive industries (e.g. pharmaceuticals, aircraft).
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Appendix
Appendix
Revealed comparative advantage indices in parts and components trade by country and product groups in 2008. a Machinery (SITC 71 to 77). b Vehicles and other transport equipment (SITC 78 and 79). c Travel goods, textiles and clothing (SITC 83 to 85). d Professional, scientific and controlling instruments and apparatus (SITC 87 and 88). e Furniture, toys, jewellery and other manufactured articles (SITC 82 and 89)
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Zeddies, G. Determinants of international fragmentation of production in European Union. Empirica 38, 511–537 (2011). https://doi.org/10.1007/s10663-010-9138-z
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DOI: https://doi.org/10.1007/s10663-010-9138-z
Keywords
- European integration
- International trade
- International fragmentation of production
- Vertical specialization