Input Linkages Research Articles

Drivers of productivity change in global value chains: Reallocation vs. innovation

We investigate the role of technological improvement and market share reallocation in determining global changes in sectoral labor productivity. Contrary to previous work that neglects dependencies between suppliers in global value chains, we account for input linkages that impact both channels of productivity improvement. Using sector-level data from the World Input–Output Database, we show that reallocation between countries has a larger effect on productivity change than innovation within countries.

Examining Linkage for National Economic Policy Development

Purpose. To study critically examines links as a criterion in shaping Indonesia’s economic policy and to evaluate the relationship between sectors' forward linkages and sectors' contribution to net export earnings, employment generation, and value-added creation of Indonesia's manufacturing. 
 Design/Method/Approach. Statistical analysis of the industries sectors' forward linkages and sectors' contribution to net export earnings, employment generation, and value-added creation of Indonesia's manufacturing between 1995 and 2005.
 Findings. The policies based on intersectoral input linkages have been prevalent and implemented in many developing countries. Indonesia's Government has frequently introduced the policies based on linkages. It is established that a sector with high linkages does not always provide a greater contribution to the economy. During the research window, sectors with lower forward linkages significantly contributed to Indonesian net export earnings, job creation, and value-added. However, this study does not mean that high connections are bad. This study argues that policymakers should also take into account factors other than relationships.
 Practical implications. The results of analysis links of Indonesia`s performance in the industries from 1995 to 2000 suggest that the policies based on interconnections, such as policies to provide greater domestic added value, are unwarranted, and but there is no need to place too much emphasis by forward linkages in policymaking.
 Originality/Value. This study emphasizes that all factors that are direct in the formulation of economic policy should be considered as comparative advantages.
 Paper type. Empirical.

Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake

Abstract Using novel firm-level microdata and leveraging a natural experiment, this paper provides causal evidence for the role of trade and multinational firms in the cross-country transmission of shocks. The scope for trade linkages to generate cross-country spillovers depends on the elasticity of substitution with respect to domestic inputs. Using the 2011 Tōhoku earthquake as an exogenous shock, we structurally estimate production elasticities at the firm level and find greater complementarities in input usage than previously thought. For Japanese affiliates in the United States, output falls roughly one-for-one with declines in imports, consistent with a relationship between imported and domestic inputs that is close to Leontief.

Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 TThoku Earthquake

Support for this research at the Michigan RDC from NSF (ITR-0427889) is also gratefully acknowledged. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure no confidential information is disclosed.

Reassessing the productivity gains from trade liberalization

AbstractThis paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country‐industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non‐tariff barriers. Finally, we find suggestive evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.

Greenhouse Gases Emissions and Economic Performance of Livestock, an Environmental Input-Output Analysis

Abstract: In the last three decades, the developing countries have sharply increased its contribution to global warming. From 2005 to 2012, Brazil has reduced its total emissions in 12% due to deforestation control. In the same period, the total GHG emissions excluding land-use change and forestry have increased 18% (WRI, 2014), while per capita GPD has raised 17%. The Brazilian climate policy must go beyond the deforestation control to avoid an unsustainable pattern of development. Since the mitigation effort bears heavily on primary activities, one must ask: how important are those sectors for Brazilian economy? And how their emissions are connected to other sectors along the productive chain? Specifically, this paper aims to calculate the GHG emissions multipliers of the Brazilian economy in 2009 and associate these results with the employment and income multipliers, particularly of the Agriculture sector. The ‘field of influence’ method (SONIS and HEWINGS, 1992) is applied to calculate the intersectorial relations in terms of input linkages and GHG emissions.

Trade, Quality Upgrading, and Input Linkages: Theory and Evidence from Colombia

A quantitative model brings together theories linking international trade to quality, technology, and demand for skills. Standard effects of trade on importers and exporters are magnified through domestic input linkages. We estimate the model with data from Colombian manufacturing firms before the 1991 trade liberalization. A counterfactual trade liberalization is broadly consistent with post-liberalization data. It increases skill intensity from 12 to 16 percent, while decreasing sales. Imported inputs, estimated to be of higher quality, and domestic input linkages are quantitatively important. Economies of scale, export expansion, and reallocation of production are small and cannot explain post-liberalization data. (JEL F14, F16, J24, L60, O14, O19, O33)

Critically Important: The Heterogeneous Effect of Politics on Trade

There is strong empirical evidence showing that political relations have an impact on aggregate bilateral trade flows. In this paper, we show that the impact is heterogeneous across products, depending on product characteristics. Specifically, imported products used as intermediate inputs intensively may be more sensitive to adverse shocks. This is particularly relevant in the current context of increased international input linkages. We sketch a simple theoretical framework and test the mechanism in reduced-form. We implement a difference-in-differences approach with monthly trade flows and a novel dataset of diplomatic incidents. We find that a negative shock to political relations leads to a general decrease in trade flows, and that the response is larger for products in markets with low price gaps to alternative sourcing partners and high direct and indirect imported input use.

MEASURING THE INTERDEPENDENCE OF MULTINATIONAL FIRMS' FOREIGN INVESTMENTS

Earlier work found evidence for geographic linkages of aggregate foreign direct investment across countries and country‐pairs. From a theoretical point of view, such linkages at the macroeconomic level may root in between‐firm as well as within‐firm linkages and originate from information spillovers across or within firms in exploring unknown markets, and vertical linkages between production plants across different locations within the firm. We use data on the universe of German multinational enterprises (MNEs) to empirically explore how marginal investments at one foreign affiliate depend on investments at other affiliates within the same MNE. The empirical approach employs two channels or modes of cross‐affiliate interdependence: mere geography (capturing horizontal linkages through correlated learning and horizontal competition within the firm) and input–output relationships within or across industries (which capture vertical linkages). Adding to earlier findings at the aggregate level, we find evidence of a significant interdependence of investments within the firm. In the firm‐level data at hand, vertical linkages appear to be more important than horizontal ones. Investments at one location tend to stimulate investments at other locations of the same MNE, particularly if input linkages are strong. The opposite seems to be true for output linkages. Beyond vertical linkages, mere geographic proximity matters only to a minor extent. This suggests that evidence of linkages through geographic closeness at aggregate data levels accrue mainly to reasons of vertical linkages within networks of affiliates. (JEL C31, D22, F21, F23, F68, G31, H32)

Intermediate input linkage and carbon leakage

AbstractClimate regulations tend to target energy-intensive sectors whose products are widely used in industrial production as intermediate inputs, and carbon abatement may be partially offset by intermediate input-led leakage. This paper aims to examine the impact of intermediate input linkages on carbon leakage both theoretically and empirically. The theoretical part develops a Harberger-type model with an input-output linkage structure, identifies four leakage effects and derives closed-form solutions for these leakage effects. Its empirical part builds a computable general equilibrium model of China's economy and introduces structural decomposition analysis to link the theoretical and empirical models. When imposing a carbon price on the electricity generation sector, our results show significant sectoral carbon leakage. Our decomposition analysis further suggests that such leakage is mainly through the production substitution effect and the multiplier effect. Our results highlight the importance of sectoral linkage when discussing the carbon leakage issue of climate policies.

International Inflation Spillovers through Input Linkages

We document that international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multicountry, industry-level data set that combines information on PPI and exchange rates with global input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation.

Reassessing the Productivity Gains from Trade Liberalization

This paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country-industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non-tariff barriers. Finally, we find strong evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.

Does Technological Linkage in Contract Farming Increase Farm Productivity and Efficiency? The Case of Hybrid Paddy Seed Cultivation in Undivided Andhra Pradesh

Increasing interest for knowing whether technological and input linkages in contract farming increase the farm productivity and efficiency, this paper provides an empirical evidence by undertaking a case study of hybrid paddy seed cultivation through contract farming in undivided Andhra Pradesh. Heckman sample selection model has been used to estimate the productivity differences between contract and non-contract farmers and stochastic production frontier has been used to measure the technical efficiency. The results have indicated that contract farmers could achieve higher productivity and more efficiency by growing contract crop compared to non-contract crop. However, non-contract farmers could achieve higher productivity and more efficiency in growing non-contract crop compared to contract farmers. The results have pointed out many avenues for future research; these include the autonomy of farmer in contract farming, technology spill-over effect, and impact of modern technology in contract farming on farmer's traditional knowledge and local environment.

Reassessing the Productivity Gains from Trade Liberalization

This paper reassesses the impact of trade liberalization on productivity. We build a new, unique database of effective tariff rates at the country-industry level for a broad range of countries over the past two decades. We then explore both the direct effect of liberalization in the sector considered, as well as its indirect impact in downstream industries via input linkages. Our findings point to a dominant role of the indirect input market channel in fostering productivity gains. A 1 percentage point decline in input tariffs is estimated to increase total factor productivity by about 2 percent in the sector considered. For advanced economies, the implied potential productivity gains from fully eliminating remaining tariffs are estimated at around 1 percent, on average, which do not factor in the presumably larger gains from removing existing non-tariff barriers. Finally, we find strong evidence of complementarities between trade and FDI liberalization in boosting productivity. This calls for a broad liberalization agenda that cuts across different areas.

Value-added trade and business cycle synchronization

Ever since Frankel and Rose's (1998) seminal paper, the literature on trade and business cycle synchronization has relied on gross trade data, with weak results in recent papers that carefully address omitted variable bias. This paper re-examines this relationship using new value-added trade data for 63 advanced and emerging economies during 1995–2013. In a panel framework, we identify a significantly positive impact of bilateral (value-added) trade intensity on business cycle synchronization—controlling for global common shocks, country-pair heterogeneity and other covariates—that is absent when gross trade data are used. There is also some evidence that the impact of value-added trade on synchronization increases with the degree of (value-added) intra-industry trade. We provide a theoretical rationale for the role of value-added trade for synchronization using a simple international business cycle model that features cross-country input linkages in production.

Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tohōku Earthquake

Using novel firm-level microdata and leveraging a natural experiment, this paper provides causal evidence for the role of trade and multinational firms in the cross-country transmission of shocks. Foreign multinational affiliates in the U.S. exhibit substantial intermediate input linkages with their source country. The scope for these linkages to generate cross-country spillovers in the domestic market depends on the elasticity of substitution with respect to other inputs. Using the 2011 Tohoku earthquake as an exogenous shock, we estimate this elasticity for those firms most reliant on Japanese imported inputs: the U.S. affiliates of Japanese multinationals. These firms suffered large drops in U.S. output in the months following the shock, roughly one-for-one with the drop in imports and consistent with a Leontief relationship between imported and domestic inputs. Structural estimates of the production function for all firms with input linkages to Japan yield disaggreg ated production elasticities that are similarly low. Our results suggest that global supply chains are sufficiently rigid to play an important role in the cross-country transmission of shocks.

(Indirect) Input Linkages

Relative to backward firms, technologically-advanced firms source inputs from other advanced firms. These sourcing patterns lead to a magnification effect of technology adoption. A firm that adopts higher-technology increases the relative supply and demand for higher-technology inputs. As a result, it positively influences the technology of other firms in its production chain. Using data from a Colombian manufacturing survey, we provide evidence that advanced firms disproportionately value advanced inputs. More novel, we provide suggestive evidence that technological advancements in some firms increase the technology of other firms indirectly linked to them through a common input market.

Demand for Value Added and Value-Added Exchange Rates

We examine how cross-border input linkages shape the response of demand for value added to international relative price changes. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes. Spillovers via input linkages lower the sensitivity of the value-added REER to price changes by supply chain partners because they counterbalance demand-side expenditure switching. Input linkages also raise the price elasticity of demand relative to the conventional REER framework, making demand more sensitive to REER changes. Using global input-output data, we demonstrate that these conceptual insights are quantitatively important in a case study of European competitiveness. (JEL E31, F23, F31, L14)

Demand for Value Added and Value-Added Exchange Rates

We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.

Demand for Value Added and Value-Added Exchange Rates

We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.