Determinants of Value Added in Exports and Their Implications

Abstract

This study decomposes the value added in gross exports into its components, including domestic value added and foreign value added. In contrast to previous studies, we exclude transaction costs such as net taxes on products for this study, which accounted for about 3 percent of total gross world exports from 1995 to 2011 on average. The share of Korean domestic value added in exports to exports in gross value turned out to decrease from 69.9 percent in 1995 to 55.4 percent in 2011, comparable to the shrinkage in the world average from 83.5 percent to 78.3 percent during the same period. This result reveals that Korean exports of parts and raw material have been utilized in a relatively small degree, while foreign components imported to Korea have been utilized for Korean exports in a relatively large degree.This study also investigates the determinants of value added in exports by estimating the expanded multi-sector gravity model, with panel data covering 13 countries and 18 sectors for 17 years from 1995 to 2011. Empirical evidence shows that trade costs such as tax and transportation costs reduce value added in exports, implying that trade facilitation measures and tax policy lowering trade costs are vital for the promotion of value added in exports. We also find that material and service offshoring have a significant positive effect on value added in exports, supporting the notion that efficient offshoring of material and services inputs raises productivity and competitiveness in manufacturing as well as services industries.