Slicing Up Global Value Chains

Studies of the effects of production fragmentation on factor income distributions typically analyze changes at the country, region, industry or firm level. In this paper we take the perspective of a product, and focus on the discrete activities in distinct locations, which altogether form a production network starting at the conception of the product and ending at its delivery. We take a macro-perspective and analyze factor content patterns for a wide set of manufacturing product groups, and study their development over time. Using a decomposition technique originally introduced by Leontief (1936), we ‘slice up the global value chains’ and trace the value added by all labor and capital that is directly and indirectly used for the production of final manufacturing goods. We find that the process of international fragmentation as measured by the foreign value-added content of production has rapidly increased since 1995 in most global value chains, but is still far from ‘completed’. We then turn to an analysis of the value distribution across production factors, and find a strong shift towards value being added by capital and high-skilled labor, and away from less-skilled labor. We also find a major shift in the production location, as the overall value added in advanced countries did not increase over the period 1995-2008 and all growth was realized in other emerging countries. Finally, we present evidence on the importance of manufactures GVCs for employment. We show how advanced nations increasingly specialize in activities carried out by high-skilled workers. Taken together the results suggest that the increasing possibilities for international production fragmentation had pervasive consequences for the factor income distribution both across and within countries.