Revisiting High Development Theory to Explain Upgrading Prospects in Business Services Global Value Chains

Abstract

The article revisits two classical approaches to development and trade, and offers an alternative account of the emergence of global value chains (GVCs) involving business services (BS), to trade-in-tasks theory. Based on this account, we propose what we call the Hirschman–Linder hypothesis (HLH), which predicts the need for an adequate ‘representative domestic’ (intermediate) demand for BS for countries to enter and upgrade in BS GVCs. We review the quantitative and qualitative empirical evidence supporting the HLH and find two main results: (i) countries with a substantial manufacturing core are more likely to participate (and eventually to upgrade) in BS GVCs, and (ii) countries endowed or specialized in natural resource industry (NRI), either the primary or extractive sectors are also likely to be part of BS GVCs. If BS GVCs represent globalization’s third unbundling for developing countries, the HLH suggests that on the one hand a core manufacturing sector is essential for entering and upgrading in BS GVCs, and on the other hand that if countries can diversify into BS and upgrade in BS GVCs specialization in natural resources might not necessarily be a curse.

Résumé

L'article revisite deux approches classiques du développement et du commerce, et propose un autre récit de l'émergence des chaînes de valeur mondiales (CVM), qui comprend les services aux entreprises, à la théorie du commerce des tâches. En se basant sur ce récit, nous proposons ce que nous appelons l’hypothèse de Hirschman Linder, qui prédit la nécessité d’une demande « nationale représentative » (intermédiaire) adéquate des services aux entreprises pour que les pays entrent et se modernisent dans les CVM des services aux entreprises. Nous passons en revue les preuves empiriques quantitatives et qualitatives qui appuient l’hypothèse de Hirschman Linder et nous trouvons deux résultats principaux: (i) les pays qui ont un noyau manufacturier important sont plus susceptibles de prendre part (et en fin de compte, de se moderniser) aux CVM du service aux entreprises, et (ii) les pays qui disposent de ressources naturelles ou qui sont spécialisés dans l'industrie des ressources naturelles, que ce soit le secteur primaire ou le secteur extractif, sont également susceptibles de faire partie des CVM du service aux entreprises. Si les CVM du service aux entreprises représentent le troisième dégroupage de la mondialisation pour les pays en développement, l’hypothèse de Hirschman Linder suggère les points suivants: d'une part, un secteur manufacturier de base est essentiel pour entrer et se moderniser dans les CVM du service aux entreprises; d'autre part, si les pays peuvent se diversifier dans le service aux entreprises et se moderniser, la spécialisation des chaînes de valeur mondiales dans le domaine des ressources naturelles peut alors ne pas nécessairement être une malédiction.

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Notes

  1. 1.

    These are defined as knowledge intensive business services (KIBS) and are usually high in value added (Ciarli et al. 2012; Meliciani and Savona 2014).

  2. 2.

    In terms of the International Standard Industry Classification, BS include parts of the sectors classified as sections I (Transport, Storage and Communication); J (Financial Intermediation) and K (Real Estate, Renting and Business Activities). They exclude non-intermediate services related to G (Trade), H (Hotel and Restaurants), L (Public Administration and Defence, Compulsory Social Security), M (Education), N (Health and Social Work), O (Other Community, Social and Personal Activities), P (Private Households with Employed Persons, and Q (Extra-territorial Organization and Bodies) none of which tend to be offshored.

  3. 3.

    As mentioned earlier, in terms of the International Standard Industry Classification and the Inter-Country Input Output (ICIO), business services are intermediate inputs, and contribute to the production of final goods or services. Some BS (e.g. R&D or software) contribute to intangible capital formation within the ICIO. Within the Trade-in-Value-Added data, BS GVCs are measured by the business services value added content of gross exports of all industries. Hence, within the context of international fragmentation of production process, and from an accounting perspective, ‘BS GVCs’ can be included in any GVCs, and the term is used interchangeably with ‘GVCs involving BS’. When considering the opportunities for upgrading, here we intend both those offered by diversifying into BS from manufacturing and natural resource industries GVCs, which implies upgrading to higher value added BS content of these sectors, and those linked to moving up the ladder of value added creation within BS GVCs. For instance, moving from customer research management (CRM) to knowledge process outsourcing (KPO) represents a shift to higher value-added segments of BS GVCs, as mentioned in Gereffi and Fernandez-Stark (2010) and Gereffi et al. (2010), recalled in  “Business Services Global Value Chains: Globalization’s Third Unbundling?” section.

  4. 4.

    This is not a new argument and resonates with Vernon’s (1979) product life cycle theory in an international context. It is argued that highly uncertain innovative activities tend initially to be performed at home, and are relocated abroad only after the products and processes have become standardized, and the decision to move them abroad responds to a cost reduction opportunity.

  5. 5.

    Consoli et al. (2015) build on Autor, Levy, and Murnane’s (2003) task-based approach and empirically test competing explanations of the demand for non-routinized skills over the past decade. They find that technology, and in particular ICT, has become less of a driver than in the 1990s demand for non-routinized skills. Indeed trade, increased access to low skilled markets, and import competition are stronger determinants of increased demand for higher level skills domestically and have resulted in more polarization at the extremes of the skills distribution.

  6. 6.

    Despite the exceptions in the trade-in-tasks literature mentioned earlier, we consider the applicability of the trade-in-tasks framework to services to be not easy. It would require conceptualization of the differences between an intermediate service input, a task and a service output which is far from straightforward. Although beyond the scope of this work, it would provide an interesting direction for trade and economics of service scholars (see the example in Consoli and Rentocchini 2014).

  7. 7.

    The OECD Survey of Adult Skills (PIAAC) allows quantification of the links between GVC participation and employment although not an explicit quantification of trade-in-tasks. Marcolin et al. (2016) look at the relationship between the workforce composition (in terms of shares of routinized/non-routinized and skill/unskilled tasks) and level of participation in GVCs and find “complex interactions between the routine content of occupations, skills, technology, industry structure and trade, which do not allow for a neat identification of ‘winners’ and ‘losers’ in a GVC context” (Marcolin et al., p. 3).

  8. 8.

    “The input-provision, derived demand, or backward linkage effects, i.e. every non primary economic activity, will induce attempts to supply through domestic production the inputs needed in that activity. The output-utilization or forward linkage effects, i.e., every activity that does not by its nature cater exclusively to final demands, will induce attempts to utilize its outputs as inputs in some new activities” (Hirschman 1958).

  9. 9.

    Interestingly, Linder (1961, p. 90) states that: “We have now given three reasons which lend support to the assertion that a particular good will not be produced at a comparative advantage unless there is a domestic market for the good. We have argued (1) that it is unlikely that an entrepreneur will ever think of satisfying a need that does not exist at home; (2) that, even if this alien need was seen, the basically correct product to fill it might not be conceived of; and (3) that, even if the basically correct product was conceived of, it is still improbable that the product could be finally adapted to unfamiliar conditions without prohibitive costs being incurred. In all, what our arguments amount to is the proposition that production functions are not identical in all countries, but that the production functions of goods demanded at home are the relatively most advantageous ones. The necessity of ‘the support of the home market’ is probably stressed by active businessmen as a reflection of the importance of relationships emphasized here.”

  10. 10.

    Note that the reference to Linder in this context departs slightly from the Linder Thesis i.e. the proposition that countries with similar levels of per capita GDP should trade more intensively. Rather, because of the increase in trade in intermediates referred to earlier, this is consistent with the Linder Thesis.

  11. 11.

    López-Gonzalez et al. (2019) use WIOD for 40 economies (including the EU-27 countries, Australia, Brazil, Canada, China, India, Indonesia, Japan, Korea, Mexico, the Russian Federation, Chinese Taipei, Turkey, and the US) and a rest of world grouping of 35 sectors (20 service, 11 manufacturing, and 4 primary sectors) over a 15 year time horizon (yearly from 1995 to 2009). For more details on the data, indicators, and empirical analysis, we refer the reader to López-Gonzalez et al. (2019).

  12. 12.

    The term ‘commodity’ generally refers to homogenous goods whose market cannot be easily fragmented. This most often, although not exclusively, applies to the case for the production of both renewable and non-renewable NR sectors. In this paper, commodity refers to both.

  13. 13.

    In the case of diversifying away from NR, the linkages framework, and the argument of beneficiation (i.e. development of downstream, forward-linked manufacturing industries that process raw materials and NR) has been criticized. For instance, Hausmann et al. (2008) argue that policies aimed at beneficiation are misguided since diversification should be based on similarity of factor and technological capabilities intensities rather than vertical linkages, and especially in the context of NR. The argument prompted by the product space framework (Hidalgo et al. 2007; Hausmann et al. 2007), seems to be related only to beneficiation (i.e. forward-linked industries), and not backward-linked ones used by NRI as intermediate inputs.

  14. 14.

    An attempt to examine the stages of development and participation in GVCs is Lee and Malerba (2017).

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Correspondence to Maria Savona.

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This paper builds upon an earlier contribution titled “Global Structural Change and Value Chains in Services. A Reappraisal.” SPRU Working Paper Series (SWPS), 2015–19: 1–29. ISSN 2057-6668, by systematizing and articulating the background theory and empirics of the Hirschman–Linder hypothesis, empirically tested in López-Gonzalez et al. (2019) and Bontadini and Savona (2019). The author is grateful to the co-authors (Javier Lòpez-Gonzalez, Valentina Meliciani and Filippo Bontadini) for the lengthy and constructive discussions on the HLH. The author also wishes to thank two anonymous referees for the very constructive comments and the Guest Editors of this Special Issue for their excellent remarks.

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Savona, M. Revisiting High Development Theory to Explain Upgrading Prospects in Business Services Global Value Chains. Eur J Dev Res 33, 206–226 (2021). https://doi.org/10.1057/s41287-021-00366-4

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Keywords

  • Hirschman linkages
  • Linder’s representative domestic demand
  • Global value chains
  • Business services
  • Industrial policy

JEL Classification

  • O10
  • O14
  • O19
  • O25