PRODUCTION FRAGMENTATION, UPSTREAMNESS, AND VALUE ADDED

EVIDENCE FROM FACTORY ASIA 1985-2005

Tadashi Ito (IDE-JETRO)Pierre-Louis Vézina (U of Birmingham)

Introduction

• "A Barbie doll costs $20, but China only gets about 35 cents of that."– New York Times 2006

Introduction

• Two questions may come to mind:– Is Chinese production really only about adding

cents of value to imported inputs? – Is China adding so little value to Barbie dolls

because its stage is at the downstream end of the production chain?

What we (think we) know

• China – which is physically in the middle of ‘Factory Asia’ – is not using Chinese factors of production…for most of Chinese exports (Baldwin 2011)

• The Chinese content of its ‘processing exports’ is less than 20% (Ma and Van Assche 2010), and processing exports accounted for more than 50% of the nation’s boom in manufactured trade

• China must solve the value added problem (Elliott 2014)

What we (think we) know

• Example: Apple’s iPad• Made in China?

The iPhone supply chain

• WHEN Apple launched the iPhone in 2007, it deployed a state-of-the-art global supply chain. Although the pioneering smartphone was designed in America, and sold first to consumers there, it arrived in stores from Shenzhen, China. It had been assembled there by Foxconn International from parts made by two firms in Singapore, six in Taiwan and two in America.

– The Economist, 13 Dec 2014

Why it matters

• Focusing on downstream production stages (i.e. assembling Barbie dolls) maybe isn't the best way to generate value and thus GDP…

Why it matters• Before 1985, successful industrialisation

meant building a domestic supply chain. Today, industrialisers join supply chains and grow rapidly... These changes have not been fully reflected in “high development theory” – a lacuna that may lead to misinterpretation of data and inattention to important policy questions (Baldwin 2011)

What we do

• We use newly-released Input-Output data from the Institute of Developing Economies (IDE-JETRO) to:– Dress a picture of the geographic fragmentation of

the value added embedded in Factory Asia’s final output from 1990 to 2005

– Establish a link between upstreamness and value-added contribution

How we measure value added

• Sale value = intermediate inputs + value added

wages profits

How we measure value added

Sale

Made in China means 94% Made in China (on average)

0 .05 .1 .15 .2 .25Share of foreign value added

MYS

SGP

IDN

TWN

THA

PHL

KOR

CHN

JPN

1990 2005

0 .1 .2 .3 .4Share of foreign value added

SGP

MYS

TWN

THA

KOR

PHL

IDN

JPN

CHN

1990 2005

Manufacturing

China’s manufacturing final products embed a smaller share of foreign value added than any other Factory Asia countries!

The end of a myth?

• A persistent myth about Chinese manufacturing is that the country is only good for assembly, with the more profitable parts of the operation, such as design and marketing, remaining in the West and Japan.

The Economist, 14 Mar 2015

CHN

CHN CHN

CHN

IDN

IDN

IDN

IDN

JPN

JPN

JPN

JPN

KOR

KOR

KOR KOR

MYS

MYS

MYS MYS

PHL

PHL

PHLPHL

THA

THA

THA

THA

TWNTWN

TWN

TWN

.05

.1.1

5.2

.25

.3F

ore

ign

sh

are

of

valu

e a

dd

ed

(w

eig

hte

d a

vera

ge

)

1990 1995 2000 2005

Manufacturing

0 .05 .1 .15 .2 .25Share of foreign value added

Other basic industrial chemicals

Electronics and electronic products

Non-ferrous metal

Iron and steel

Synthetic resins and fiber

Glass and glass products

Other electric machinery and appliance

Other rubber products

Refined petroleum and its products

Heavy electric machinery

Tires and tubes

Plastic products

Weaving and dyeing

Other chemical products

Engines and turbines

Spinning

Motorcycles, bicycles, aircrafts, other

Precision machines

Chemical fertilizers and pesticides

Metal products

1990 2005

.97.97.97.97.97

00000

.02.02.02.02.02

00000

00000

00000

00000

00000

00000

.01.01.01.01.01

.01.01.01.01.01

.86.86.86.86.86

.09.09.09.09.09

.01.01.01.01.01

00000

00000

00000

00000

.01.01.01.01.01

.02.02.02.02.02

00000

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.98.98.98.98.98

00000

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.01.01.01.01.01

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.96.96.96.96.96

00000

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.02.02.02.02.02

.02.02.02.02.02

00000

.09.09.09.09.09

.03.03.03.03.03

.73.73.73.73.73

.01.01.01.01.01

.04.04.04.04.04

.02.02.02.02.02

.01.01.01.01.01

.05.05.05.05.05

00000

00000

.03.03.03.03.03

00000

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.94.94.94.94.94

00000

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.02.02.02.02.02

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.88.88.88.88.88

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.95.95.95.95.95

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.92.92.92.92.92

.03.03.03.03.03

CHNCHN

IDN

JPNJPN

KOR

MYSMYS

PHL

SGPSGP

THA

TWNTWN

USA

CHN IDN JPN KOR MYS PHL SGP THA TWN

1990

Made in…

VA goes to…

.94.94.94.94.94

00000

.01.01.01.01.01

.01.01.01.01.01

00000

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00000

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.02.02.02.02.02

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.85.85.85.85.85

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.96.96.96.96.96

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.03.03.03.03.03

00000

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.92.92.92.92.92

00000

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00000

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.01.01.01.01.01

.02.02.02.02.02

.06.06.06.06.06

.01.01.01.01.01

.05.05.05.05.05

.02.02.02.02.02

.73.73.73.73.73

.01.01.01.01.01

.02.02.02.02.02

.02.02.02.02.02

.01.01.01.01.01

.07.07.07.07.07

.02.02.02.02.02

00000

.02.02.02.02.02

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.9.9.9.9.9

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.01.01.01.01.01

.03.03.03.03.03

.05.05.05.05.05

.01.01.01.01.01

.03.03.03.03.03

.03.03.03.03.03

.02.02.02.02.02

.01.01.01.01.01

.8.8.8.8.8

.01.01.01.01.01

.01.01.01.01.01

.04.04.04.04.04

.03.03.03.03.03

.01.01.01.01.01

.03.03.03.03.03

.01.01.01.01.01

.01.01.01.01.01

00000

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.88.88.88.88.88

.01.01.01.01.01

.03.03.03.03.03

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.01.01.01.01.01

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.87.87.87.87.87

.03.03.03.03.03

CHNCHN

IDN

JPNJPN

KOR

MYSMYS

PHL

SGPSGP

THA

TWNTWN

USA

CHN IDN JPN KOR MYS PHL SGP THA TWN

2005

Made in…

VA goes to…

Take-home message

• In 2005 China’s value added accounted for around 6% of production in Malaysia, 4% in Korea and Thailand, and 5% of Taiwan

• The US and Japan were and still are important sources of value added in all of these countries’ production

CHN

IDN

JPNKOR

MYS

PHL

SGP

THA TWN

USA

1990

CHN

IDN

JPNKOR

MYS

PHL

SGP

THA TWN

USA

2005

Back to the second question

• Is China adding so little value to Barbie dolls because its stage is at the downstream end of the production chain? • How can we measure the upstreamness of production?

Upstreamness

• Intuition: An industry whose output is used mostly as intermediate input for other industries should be relatively upstream

• Antras et al. (2012) suggest the ratio of final use to input use of an industry’s output measures upstreamness

Upstreamness

• Let’s denote the total output of the industry Y and the value of this output that goes to final uses F. We can express each industry’s output as:

• where is the value of inputs from industry i that are required by industry j to produce $1 of output and N is the number of industries

𝑌 𝑖=𝐹𝑖+∑𝑗=1

𝑁

𝑑𝑖𝑗𝑌 𝑗

Upstreamness

• If we replace repeatedly the output terms on the right-hand side we get:

𝑌 𝑖=𝐹 𝑖+∑𝑗=1

𝑁

𝑑𝑖𝑗𝐹 𝑗+∑𝑗=1

𝑁

∑𝑘=1

𝑁

𝑑𝑖𝑘𝑑𝑘𝑗𝐹 𝑗+∑𝑗=1

𝑁

∑𝑘=1

𝑁

∑𝑙=1

𝑁

𝑑𝑖𝑙𝑑𝑙𝑘𝑑𝑘𝑗𝐹 𝑗+…

Upstreamness

• If we assume that the distance between each sector is 1, upstreamness can be expressed as

𝑈 𝑖=1∙𝐹𝑖

𝑌 𝑖

+2 ∙∑𝑗=1

𝑁

𝑑𝑖𝑗𝐹 𝑗

𝑌 𝑖

+3 ∙∑𝑗=1

𝑁

∑𝑘=1

𝑁

𝑑𝑖𝑘 𝑑𝑘𝑗𝐹 𝑗

𝑌 𝑖

+4 ∙∑𝑗=1

𝑁

∑𝑘=1

𝑁

∑𝑙=1

𝑁

𝑑𝑖𝑙𝑑𝑙𝑘𝑑𝑘𝑗𝐹 𝑗

𝑌 𝑖

+…

Upstreamness

• Industry i’s upstreamness is akin to a weighted average of its sales along the production process, where the weights are the production distances to Final use.

• The intuition is that the more sales are used as inputs in faraway industries, the more upstream the industry

Upstreamness

• Antras et al. (2012) show that, in matrix form, where is a column vector of ones and is a matrix with in entry (i,j):

𝑈 𝑖=[ 𝐼−∆ ]−11

Industry Upstreamness Industry UpstreamnessNon-ferrous metal 5.90 Other chemical products 1.74Other electric machinery and appliance 3.59 Leather and leather products 1.71Other basic industrial chemicals 3.30 Other wooden products 1.71Spinning 3.29 Other machinery 1.63Synthetic resins and fiber 3.26 Motor vehicles 1.57Heavy electric machinery 3.07 Other non-metallic mineral products 1.56Iron and steel 2.70 Oil and fats, Sugar, Other food products 1.41Weaving and dyeing 2.47 Furniture 1.39Pulp and paper 2.30 Motorcycles, bicycles, aircrafts, etc… 1.35Plastic products 2.24 Printing and publishing 1.33Other rubber products 2.21 Milled rice, Other milled grain and flour 1.33Glass and glass products 2.17 Shipbuilding 1.29Tires and tubes 2.12 Tobacco 1.29Refined petroleum and its products 1.97 Cement and cement products 1.26Electronics and electronic products 1.93 Slaughtering, meat and dairy products 1.24Timber 1.87 Chemical fertilizers and pesticides 1.20Metal products 1.82 Fish products 1.18Knitting 1.81 Drugs and medicine 1.17Precision machines 1.80 Beverage 1.15Engines and turbines 1.77 Wearing apparel 1.14Other made-up textile products 1.75 Other manufacturing products 0.87

0.0

005

.001

.001

5

VA

sh

are

of f

ina

l sal

e va

lue

1 2 3 4Upstreamness

China Indonesia Japan Korea MalaysiaPhilippines Singapore Taiwan Thailand Quadratic fit

The smile curve

CHN

IDN

JPN

KOR

MYS

PHL

SGP

TWN

THA

.000

2.0

004

.000

6.0

008

.001

.001

2V

A s

har

e o

f sal

e va

lue

1.2 1.4 1.6 1.8 2 2.2upstreamness

Motor vehicles

CHN

IDN

JPN

KOR

MYS

PHL

SGP

TWNTHA

.000

02.0

0003

.000

04.0

0005

.000

06.0

0007

VA

sh

are

of s

ale

valu

e

1.4 1.6 1.8 2 2.2upstreamness

Electronics

0.0

005

.00

1.0

015

VA

sha

re o

f sa

le v

alu

e

1 2 3 4Upstreamness

China

0.0

005

.00

1.0

015

VA

sha

re o

f sa

le v

alu

e

1 1.5 2 2.5 3Upstreamness

Indonesia

0.0

005

.00

1.0

015

VA

sha

re o

f sa

le v

alu

e

1 1.5 2 2.5 3Upstreamness

Malaysia0

.00

05.0

01

.00

15V

A s

hare

of

sale

va

lue

1 1.5 2 2.5 3Upstreamness

Philippines0

.00

05.0

01

.00

15V

A s

hare

of

sale

va

lue

1 2 3 4Upstreamness

Taiwan

0.0

005

.00

1.0

015

VA

sha

re o

f sa

le v

alu

e1 2 3 4

Upstreamness

Thailand

The smile curve

(1) (2) (3) (4) VA share VA share VA share VA share

upstreamness -0.186*** -0.183*** -0.0568*** -0.0376**

(0.0341) (0.0353) (0.0213) (0.0183)

upstreamness2 0.00640*** 0.00634*** 0.00239*** 0.00193*** (0.00114) (0.00115) (0.000708) (0.000584)

Country FE X X Industry FE X X Observations 378 378 378 378 R-squared 0.185 0.199 0.673 0.699 Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. (VA share is multiplied by 1000).

The smile curve

• The data suggests that the early middle of the stream is where production contributes less to the total value added embedded in a final product

Conclusion

1. Is Chinese production really only about adding cents of value to intermediate inputs?

No.

2. Is China adding so little value to Barbie dolls because its stage is at the downstream end of the production chain?

Probably not.

But is international fragmentation linked to growth?

Foreign shareof value added

67

89

10

.05

.1.1

5.2

.25

.3

1990 1995 2000 2005

CHN

67

89

10

.05

.1.1

5.2

.25

.31990 1995 2000 2005

IDN

67

89

10

.05

.1.1

5.2

.25

.3

1990 1995 2000 2005

MYS

67

89

10

.05

.1.1

5.2

.25

.3

1990 1995 2000 2005

PHL

Foreign shareof value added

GDP per capita(logs, right axis)

67

89

10

.05

.1.1

5.2

.25

.3

1990 1995 2000 2005

TWN

67

89

10

.05

.1.1

5.2

.25

.3

1990 1995 2000 2005

THA

Acknowledgments

• Richard Baldwin, Fuku Kimura, Kozo Kyota, Naoto Jinji, Nobu, seminar participants at the Universities of Birmingham, Keio, Hiroshima Shudo, Kyoto, and Hokkaido.