BUS606: Operations and Supply Chain Management

The primary data source for this study is the WIOD which covers 35 industries for 40 countries over 1995-2007, so our data structure is a panel at the country-sector level over 13 years. The original 2103 version of the WIOD data covers years 1995-2009, but we drop the data for 2008-2009 to avoid potential complication resulting from the 2008 global financial crisis. We consider all the manufacturing sectors (WIOD sectors 3-16), and focus on two types of modern services in this paper: financial intermediation services (WIOD sector 28) and other business services sector (WIOD sector 30). 

To illustrate the importance of embodied services and to motivate our empirical analysis, we first show in Appendix 1A some data on the gross exports (X) and value added exports (VAX) of financial services for some WIOD countries over 1995-2007. We further separate VAX into direct value-added exports (dVAX) and indirect value-added exports through all other sectors (indVXP). The last row reports the world total for all the WIOD economies. Overall, VAX of services are 53 percent higher than the gross exports, and indirect VAX are 88 percent higher than the direct VAX. Among the 40 WIOD countries/regions excluding ROW, only three of them (Ireland, Luxembourg, and U.K.) have direct VAX higher than indirect VAX. The BRICs (Brazil, the Russian Federation, India, and China), Japan, the Republic of Korea, Lithuania, Turkey, and Taiwan, China, have much higher indirect VAX than direct VAX (especially China, Russia, and Turkey). Financial services in these countries may have reached an intermediate level of development at which they can compete in the domestic market but not yet internationally. It could also be that restrictions on cross-border imports in these countries oblige goods producers to use domestically produced services. For instance, if domestic firms in China have no easy access to foreign financial services due to high trade barriers, they will have to use domestic financial services (e.g., loans from state-owned banks). 

Appendix 1B for business services, analogous to Appendix 1A, offers a similar pattern. Some emerging economics (e.g., Mexico, Russia, and especially Turkey) and Japan have much higher indirect business services VAX than direct VAX. Most of the high-income countries such as the U.S. and the U.K. export large magnitudes of business services both directly and indirectly. By comparison, developing or emerging economies export significantly less business services, with the exception of India. India has developed an internationally competitive business services industry which has large direct VAX but its indirect VAX are small due to the relatively weak manufacturing sectors. 

Because financial intermediation services and other business services sectors cover many different types of services, as listed in Appendices 3B and 3C, measuring their level of development is not straightforward. In this paper, we measure financial or business services development as the share of financial or business services value-added in a country's total valueadded in all sectors (or GDP). The logic is simple: services sectors, especially modern ones like financial and business services, usually account for larger shares in total value added in countries with more developed services sectors. Keeping in mind that this may not always be the case for other industries such as agricultural and manufacturing industries as suggested by the literature on structural change, among others). 

We control for the levels of countries' overall development using the GDP per capita data from the Penn World Tables. Other determinants of manufacturing RCA considered in this paper include the following: productivity measured by total factor productivity (TFP), scale economy measured by a manufacturing sector's employment in logarithms, factor endowment variables including capital-labor ratio (K/L) and skill ratio (SKratio, defined as the share of the wage payment to high skill workers in total wage payment), relative wages in manufacturing sectors defined as a country's average wage per worker over world average wage per worker. These variables vary across countries and sectors. The data for these variables are obtained from or estimated based on the WIOD Social-Economic Account database (SEA). The total factor productivity (TFP) growth rate for each WIOD manufacturing sector is estimated using the dual approach as in Hsieh. It is calculated as a weighted average of the growth rates of labor prices (w) and capital prices (r), weighted by the share of payment to labor (L) and capital (K). For this method to be valid, no assumptions are needed for the relations of factor prices to social marginal products or about the production function form as long as the total factor payments add up to total output (i.e., Y = r*K + w*L).

Finally, we also include a measure for GVC participation. Wang et al. propose a framework to decompose total production activities to different types, depending on whether they are for pure domestic demand, traditional international trade, simple GVC activities, and complex GVC activities. Then they construct indices of GVC participation to measure the degree of a sectors’ GVC participation – a concept similar to the vertical specialization (VS1) as in Hummels, Ishii, and Yu but with a few important improvements. We include a measure of forward industrial linkage-based GVC participation to estimate how a country/sector’s engagement in GVC activities strengthens its overall export performance. 

Table 1 provides the descriptive statistics of these variables and their definitions.