Production fragmentation and upgrading opportunities for exporters: An empirical assessment of the case of Brazil

Abstract

• We investigate how GVCs have affected the performance of exporters in Brazil. • Exporting ‘customized’ intermediate products is associated with supplying in GVCs. • GVC suppliers present higher export premia compared to suppliers of other intermediates. • Only exporters of final goods present evidence of learning-by-exporting. • Production fragmentation does not necessarily facilitate upgrading by suppliers. This paper studies how production fragmentation has affected the performance of Brazilian exporters in the manufacturing sector. We begin by combining existing classifications of internationally traded products to identify four different categories of goods, of which one (‘customized intermediates’) we associate more closely with suppliers connected to fragmented trade. We then proceed to compare the productivity premium of international traders for these different categories. Our results confirm that exporting customized intermediates is associated with a superior performance in comparison to other intermediates; although there is a strong influence of sector specificities. We also investigate the existence of learning-by-exporting effects and, unlike previous evidence for Brazil, we find limited evidence of learning-by-exporting for overall exporters; and no such evidence is found for firms that export exclusively customized intermediates. Instead, we observe that exporting customized products in general – i.e. both final and intermediate goods – relates to continuous and significant ex-post gains in terms of performance; and that these trends are explained by firms that sell final goods. These facts indicate that fragmentation, by promoting trade in customized intermediates, can benefit developing countries and their firms by providing them with opportunities to export a range of industrial goods associated with higher productivity levels, but that performance gains after entry are not necessarily facilitated by this process. Our can findings therefore provide relevant insights regarding the actual benefits and the challenges of promoting GVC participation for developing countries.