Global Supply Chains and International Competitiveness

Abstract

The emergence of global supply chains, that is the organization of production processes in factories that are part of a network of suppliers located in different countries and specialized in specific production phases, brings about a number of major changes in the way the global economy works and interacts. To explore more in detail this phenomenon from a microeconomic perspective, in this paper we provide evidence on Business Groups, that is network-like forms of hierarchical organization between legally autonomous firms spanning both within and across national borders. Exploiting a unique dataset of 270,474 headquarters controlling more than 1,500,000 (domestic and foreign) affiliates in all countries worldwide, we find that business groups account for a significant part of value-added generation in both developed and developing countries, with a prevalence in the latter. In order to characterize their boundaries, we introduce an entropy-like metric able to summarize the hierarchical complexity of a group and its trade-off between exploitation of knowledge as an input across the hierarchy and the associated communication costs. When relating these metrics to the performance of affiliates across business groups, we find a robust (albeit non-linear) positive relationship between a group’s hierarchical complexity and productivity which dominates the already known correlation between vertical integration and productivity. Results are in line with the theoretical framework of knowledge-based hierarchies developed by the literature, in which intangible assets are a complementary input in the production processes.