Impact of participation in a strong global value chain on productivity

Impact of Strong Global Price Chain Participation on Productivity: A Case of Japanese Manufacturing Companies

Participation in the global value chain is generally seen as an important driver of productivity growth. This column uses Japanese firm-level data to estimate the productivity-enhancing effects of participation. On average, companies that form part of the global value chain have been shown to show higher productivity than non-participating companies. In addition, greater participation reinforces the productivity-enhancing effect. Policymakers should support companies by protecting intellectual property rights, ensuring competition, and minimizing the costs and risks associated with participating in the global value chain.

According to the World Bank (2020), 50% of world trade involves global value chains (GVCs). GVCs are manufactured by multinational corporations because they divide production processes into different jobs and base them on different countries / locations, where specific jobs can be managed most efficiently, to achieve efficient production systems, through foreign direct investment. As GVC grows in importance in international economic activity, policymakers and researchers are focusing on GVC as a driving force for further economic growth and developing policies to involve domestic companies in the GVC. These interests are based on the experiences gained by the numerous companies that have experienced productivity improvements since GVC participation and the theoretical background that GVC participation can benefit GVC participating companies and countries (Li and Liu 2014, Baldwin and Robert-Nicoud 2014).

Much empirical research has been done to test the productivity-enhancing effects of GVC. These are mainly divided into macro-level studies at the industry level and micro-level studies at the solid level. Macro-level empirical studies using trade data or international input-output tables typically find productivity-enhancing effects of GVC, but macro-level analysis does not include strong differences in the analysis, so it is not clear which channels gain firmness. . Unlike macro-level studies, micro-level studies have the advantage of incorporating strong variation in the analysis to identify channels of productivity growth. Micro-level studies have recently begun due to the availability of necessary information, but the number of studies on the effect of GVC on productivity is very limited.

By defining a GVC firm as a firm that simultaneously exports and imports, we examined whether GVC participation has improved the productivity of Japanese firms using firm-level data covering approximately 10,000 firms for the period 1994-2018. To validate this hypothesis, we used the Trend Score Matching (PSM) method to identify election effects (whether highly productive firms participate in GVC), and the Difference-in-Difference Methodology (GVC Participation Productivity) to test the impact of learning. Increases)) Examining whether GVC firms exhibit higher productivity than non-GVC firms does not reflect the effect of GVC participation on productivity, as it is not known whether a firm is a new GVC participant or a continuing participant. Needless to say, we are interested in new GVC participants. To identify new participants, you need to confirm a firm’s GVC status in the previous period. To test the effect, we compare the productivity of new GVC firms with non-GVC firms with the same characteristics of the previous period. The trend score matching method is effective in identifying non-GVC firms with which GVC firms are aptly compared for GVC’s productivity-enhancing effects.

Our findings can be summarized as follows: There are significant differences in Total Factor Productivity (TFP) between GVC firms and non-GVC firms, as shown in Figure 1. On average, GVC firms show higher productivity than non-GVC firms, but there are some non-GVC firms that register higher productivity. Wakasugi et al. (2008) found a similar pattern between exporters and non-exporters in the Japanese manufacturing sector.

To test the importance of experience in GVC participation on productivity (education impact), we estimated the impact of GVC participation on production not only for the first year of GVC participation, but also for the next five years. Our analysis shows that the effect of GVC participation (productive effect) on productivity is positive for about 110 estimates with few exceptions, and the estimated coefficients are statistically significant in about 35% of cases. These results indicate that the impact of GVC participation on productivity is generally positive for Japanese manufacturing companies, but the impact is not very strong. We also found that the level of positive coefficient increased over time, indicating that it took time for GVC participating organizations to gain experience in integrating new technologies and how they gained management knowledge through GVC participation.

Figure 1 Distribution of total factor productivity by GVC participation

Source: Urata and Bayek (2022). Our calculations are based on the Basic Survey of Japanese Business Structure and Activities (METI).

We draw several policy implications from empirical results. First, recognizing the importance of a firm’s high productivity to participate in the GVC, which we have determined is a potential source of further productivity improvement, the government should provide technical assistance such as training courses and R&D assistance to protect intellectual property rights. And in addition to establishing a favorable environment for technological advancement by ensuring competition. Second, the government should provide support to non-GVC organizations to participate in GVC. As shown above, there are many Japanese companies with high productivity that do not participate in GVC, mainly due to the high cost and risk associated with GVC participation. The government should implement measures to reduce such costs and risks. For example, marketing support such as dissemination of market information related to foreign countries will start to involve non-GVC companies in GVC. In addition, trade liberalization and accessibility will help non-GVC companies to participate in GVC. In particular, the government should actively establish free trade agreements (FTAs), which include trade liberalization and benefits. Free trade agreements will reduce or eliminate tariffs by promoting imports and exports. Trade facilitation in various forms, including improvements to the tariff system and simplification of core rules, will also help reduce barriers to trade and promote GVC participation.

Author’s Note: This column is based on a major study (Urata and Baek 2022) first published as a discussion paper by the Research Institute of Economy, Trade and Industry (RIETI) of Japan.

References

Baldwin, R. and Robert-Nicode (2014), “Trade-in-Goods and Trade-in-Tasks: An Integrating Framework”, Journal of International Economics 92 (1): 51–62.

Lee, BG and Y Liu (2014), “Moving the Price Chain Forward”, University of Miami, Boston.

Urata, S and Y Baek (2022), “Empacts of Fram GVC Participation on Productivity: A Case of Japanese Firms”, Research Institute of Economy, Trade and Industry (RIETI), RIETI Discussion Paper Series 22-E-021.

Wakasugi, R, Y Todo, H Sato, S Nishioka, T Matsuura, B Ito and A Tanaka (2008), “The Internationalization of Japanese Farms: New Findings based on Firm-level Data”, Research Institute of Economy, Trade and Industry (RIETI), RIETI Discussion Paper 08-E-036.

World Bank (2020), World Development Report 2020: Trading for Development in the Age of Global Value Chain, World Bank.

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