RIETI Report October 2016

The global value chain and the competitiveness of Asian countries

The international competitiveness of industries is a central issue in business and economics, and is traditionally measured by shares in the world export markets. However, with increases in intermediate inputs trade, "the conventional indicators of competitiveness based on gross exports become less informative" as a large export share is not necessarily indicative of a large value added if the main production process consists of simple assembly activities. In the October issue of the RIETI Report, we present the column "The global value chain and the competitiveness of Asian countries" originally published on VoxEU by Research Associate Kozo Kiyota, Consulting Fellow Keita Oikawa, and Katsuhiro Yoshioka of the Shoko Chukin Bank.

Kiyota et al. first look at the case of the iPod in the global value chain (GVC). Previous studies focusing primarily on European countries have shown the growing importance of the intermediate inputs trade, finding that gross exports overestimate competitiveness when industries depend heavily on the imports of intermediate inputs, among others. As Asian countries work in a network-like pattern that differs from the hub-and-spoke system seen in Europe and North America, Kiyota et al. examine specifically the competitiveness of industries in six Asian countries: China, India, Indonesia, Japan, South Korea, and Taiwan. They find that the competitiveness of manufacturing is increasing in China, India, and Indonesia, whereas it is decreasing in Japan, South Korea, and Taiwan, and, in contrast to the EU countries, Asian countries have generally been able to combine an increase in GVC job opportunities with a rise in real income.

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The global value chain and the competitiveness of Asian countries

KIYOTA KozoResearch Associate, RIETI

OIKAWA KeitaConsulting Fellow, RIETI

YOSHIOKA KatsuhiroShoko Chukin Bank

The international competitiveness of industries has long been one of the central issues in the literature on business (e.g. Porter 1990) and economics (e.g. Fagerberg 1988). Traditionally, shares in the world export markets are used to measure the competitiveness of industries. However, as a result of increases in the intermediate inputs trade, "the conventional indicators of competitiveness based on gross exports become less informative" (Timmer et al. 2013: 613). This is because a large export share does not necessarily mean that an industry has a large value added if its main production process consists of simple assembly activities, based on imported intermediate inputs.

The case of the iPod

A typical example to illustrate this is Chinese exports of the iPod. Dedrick et al. (2009) focused on the production process of the iPod and examined the distribution of profits across firms that supplied intermediate inputs and other related services. They found that, although the iPod was designed by Apple Inc. in the US and assembled by Inventec Appliances in China, its intermediate goods came from various firms in various countries. As a result, the value added (measured by the operating margin) was distributed across these firms in different countries. Lead firm Apple in the US earned 11.8% of the operating margin. The remaining margins were shared by such firms as Samsung Corporation in South Korea, which provided primary memory (9.4% of the operating margin), TDK Corporation in Japan, which provided the battery (7.6%), Japan Display Inc. in Japan, which provided the display (3.9%) and Toshiba Corporation in Japan, which provided the hard drive (3.8%). In China, in contrast, the value added was very low even though the iPod was assembled there.1 This clearly indicates that the iPod being exported from China does not necessarily mean that all of the value added of the iPod is distributed to Chinese factory owners.

To read the full text
http://www.rieti.go.jp/en/columns/v01_0071.html

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