RIETI Report May 27, 2022

Impacts of firm global value chain participation on productivity: A case of Japanese manufacturing firms

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Welcome to RIETI Report.
This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition we present topics related to firms’ participation in global value chains (GVCs) and its impact on productivity growth. Using Japanese firm-level data, Urata and Baek found that firms participating in GVC show higher productivity than those do not participate in GVCs. Based on the policy implications that they drew from their research, they claim that the government should provide support to firms that haven’t joined such GVCs and also actively engage in trade liberalization including establishing free trade agreements.

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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

Impacts of firm global value chain participation on productivity: A case of Japanese manufacturing firms

URATA ShujiroFaculty Fellow, RIETI

Youngmin BAEKAssistant Professor of Economics, Fukuyama University

“Impacts of firm global value chain participation on productivity: A case of Japanese manufacturing firms”
URATA Shujiro (Faculty Fellow, RIETI) / BAEK Youngmin (Fukuyama University)

Participation in global value chains is commonly seen as an important driver of productivity growth. This column uses Japanese firm-level data to estimate the productivity-enhancing impacts of participation. On average, firms that form part of global value chains are found to exhibit higher productivity than non-participating firms. In addition, longer participation strengthens the productivity-enhancing effects. Policymakers should support firms by protecting intellectual property rights, ensuring competition, and lowering costs and risks associated with global value chain participation.

According to the World Bank (2020), as much as 50% of world trade involves global value chains (GVCs). GVCs have been constructed by multinational corporations as they fragment production processes into various tasks and base them in various countries/locations where particular tasks can be conducted most efficiently, to achieve efficient production systems, through foreign direct investment. As the importance of GVCs in international economic activities increases, policymakers and researchers have been paying attention to GVCs as a driving force for further economic growth and attempting to develop policies to engage domestic firms in GVCs. These interests are based on the experience gained from the cases of numerous firms experiencing productivity improvements after GVC participation and the theoretical background that GVC participation can benefit the firms and countries participating in GVCs (Li and Liu 2014, Baldwin and Robert-Nicoud 2014).

Many empirical studies have been conducted to examine the productivity-enhancing effect of GVCs. They are largely divided into macro-level studies at the industry level and micro-level studies at the firm level. Macro-level empirical studies using trade data or international input-output tables generally find productivity-enhancing effects of GVCs, but macro-level analysis does not include firm heterogeneity in the analysis, so it is unclear through what channels firm productivity increases. Contrary to macro-level studies, micro-level studies have the advantage of including firm heterogeneity in the analysis to identify the channels of productivity increase. Micro-level studies have begun recently as necessary data became available, but the number of studies on the impact of GVCs on productivity is very limited.

Defining a GVC firm as a firm that exports and imports simultaneously, we examined if GVC participation improved the productivity of Japanese firms by using the firm-level data covering approximately 10,000 firms for the 1994-2018 period. To verify this hypothesis, we used the propensity score matching (PSM) method to identify the selection effect (whether high productivity firms participate in GVCs), and the difference-in-differences method to examine the learning effect (whether participation in GVCs increases productivity). Simply testing if GVC firms exhibit higher productivity than non-GVC firms does not reveal the impact of GVC participation on productivity, because it is not known if a firm is a new GVC participant or a continued participant. Needless to say, we are interested in new GVC participants. To identify new participants, the GVC status of a firm in the previous period must be ascertained. To test the effect, we compare productivity of new GVC firms with non-GVC firms with similar characteristics in the previous period. The propensity score matching method is useful in identifying those non-GVC firms with which GVC firms are appropriately compared for the productivity-enhancing effect of GVCs.

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