The value-added creation effect of industry position in global value chains: implications for Asia-Pacific economies

Abstract

We analyse the value-added creation effect of global value chain (GVC) participation activities of APEC member economies, using a fixed-effects regression model analysis based on country-industry data from Organisation for Economic Co-operation and Development (OECD) Inter-country Input-Output Tables. We find that forward participation in GVCs is more desirable than backward participation for creating domestic value-added and that the industry position in the middle stages of the production line creates higher domestic value-added per output unit. These results hold regardless of the application of standard Ordinary Least Squares (OLS) or fractional logit for panel data and of the characteristics of the interconnected countries in GVCs (APEC member vs. non-APEC member economies, Asian APEC vs. non-Asian APEC members, developed vs. developing countries). This implies that the conventional firm- or product-specific U-shaped 'smile curve hypothesis' is not applicable at the economy-wide, country-industry level. This finding suggests that depending on the product type, manufacturing industries can be a major driving force for less-developed APEC member economies to climb the development ladder. Since GVC participation gains are diversified across industries and upgrading country-industry positions in GVCs are challenging for APEC member economies, we strongly recommend that they construct effective domestic value chains and coordinate with other members while upgrading their GVC participation.