Determinants of international fragmentation of production in European Union

Abstract

The growth in world trade during the last decades was largely caused by increasing bilateral exchanges of parts and components as a consequence of international fragmentation of production. Apparently, the international integration of the Newly Industrializing and Eastern European economies prompted firms in ‘high-wage’ countries to exploit factor price differences in order to increase their international competitiveness. However, theory predicts that, beside factor price differences, international fragmentation of production should be driven by a multitude of additional determinants. Against this background, the present paper reveals empirical evidence on parts and components trade as an indicator for international fragmentation of production in the European Union and determines its main explanatory factors. The results of a panel data analysis show that especially industry specific factors as well as communication and transportation infrastructure are likewise important for shifting production to or sourcing components from foreign countries.