Global Firms and Global Value Chains: Measurement and Mechanisms

Project Information

GLOBALFIRMS

Grant agreement ID: 724880

DOI

10.3030/724880

Project closed

EC signature date 11 May 2017

Start date 1 January 2018

End date 31 December 2023

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 1 462 304,00

EU contribution

€ 1 462 304,00

Coordinated by

UNIVERSITY COLLEGE LONDON
United Kingdom

Periodic Reporting for period 4 - GLOBALFIRMS (Global Firms and Global Value Chains: Measurement and Mechanisms)

Reporting period: 2022-07-01 to 2023-12-31

Summary of the context and overall objectives of the project

The growing fragmentation of production across firms and countries has revolutionized international trade in recent decades. Firms today choose which production stages to conduct themselves and which to outsource to other parties, which to complete at home and which to offshore abroad. Known as global value chains (GVCs), this phenomenon creates new opportunities and challenges for firms and aggregate economies. Of primary interest are the implications for economic growth, shock transmission across firms and borders, and optimal policy design. Yet academic research has faced two major challenges: poor measurement and poorly understood mechanisms.

This research program exploited exceptional new data and novel GVC measures for path-breaking GVC analysis. It was organized around 6 projects that combined innovative theory and empirics. The novelty of the data and the complex mechanisms driving GVCs made this agenda highly ambitious, while the importance of understanding GVCs for economic policy and academic research made it extraordinarily high-return.

First, I capitalized on unique, unprecedented datasets that made it possible to inform key questions for the first time. Different projects used different economic contexts and combinations of data sources to best examine the question of interest. I utilized merged panel data on firm production (China, USA), management practices (China, USA), patent activity (China), export and import transactions (Belgium, Chile, China, France, UK, USA), and domestic firm-to-firm transactions (Belgium). Studying countries at different levels of economic development and different positions in global value chains made it possible both to illuminate universal economic mechanisms and to empirically identify effects of interest.

Second, I developed and implemented empirical measures that are grounded in economic theory and can thus be used to characterize and analyze firms’ GVC activity to gain valuable insights. I constructed measures to capture firms’ value added, production-line position (upstreamness), and buyer-supplier network position (connectivity). I implemented these as relevant in each project.

Third, I examined the determinants and consequences of firms’ GVC position through 6 synergistic projects. Each project made a distinct contribution by investigating new economic mechanisms, establishing new empirical facts, and combining theory and data for informative welfare conclusions.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

Over the grant’s lifetime, I successfully realized the ambitious research program of 6 projects. For each project, I consolidated the research team, developed the research design, secured proprietary data access, and managed workflow. I revised the research strategy for some projects in response to scientific developments or difficulties with the initial approach.

Taking stock, I advanced Projects 1-3 to the ultimate outcome of journal publication and Projects 4-6 to working papers, with Project 4 under review and Project 5 invited for journal revision. I widely disseminated all projects to much interest from both academic and policy audiences. I delivered 17 keynotes at high-level academic, policy and business conferences; 1 podcast; 31 presentations and 10 discussions at various conferences; and 53 university and policy seminars in Europe, US, Asia and South America.

Project 1 studied the evolution of firms’ productivity, global production line position and performance over the firm lifecycle. It showed that firms span more production stages when they grow more productive, bigger and more experienced. This is associated with higher value added, higher production costs, and higher profits. In 2021, this project was published in the top field journal, Journal of International Economics.

Project 2 analyzed the role of production networks for the extremely skewed firm size distribution. It developed a sophisticated model that permits an exact decomposition of firm size into characteristics of the firm, its upstream suppliers and its downstream buyers. The results revealed the focal role of firm-to-firm connections, and signaled the importance of two firm attributes: productivity and “matchability” to match with partners. In 2022, this project was published in the Journal of Political Economy, a top-5 general-interest journal.

Project 3 demonstrated that superior management practices improve firms’ export performance by enhancing both their production efficiency and their quality capacity. The empirical analysis was disciplined by a stylized but rich model. The results informed open questions about the drivers of export success and the impact mechanisms for managerial competence. In 2021, this project was published in the Review of Economics and Statistics, a top-7 general-interest journal.

Project 4 examined how the market structure of upstream suppliers affects the input sourcing of downstream buyers and the welfare gains from trade. Rigorous theory and consistent empirics established that more productive firms match with more suppliers, inducing tougher competition among them and lower input prices. This project is under review at Journal of Political Economy.

Project 5 assessed how a shock to a firm’s market value in one country can impact its sales worldwide by improving its reputation with foreign partners. It used cutting-edge identification to show that US patent grants enable firms to expand sales both in the patent’s jurisdiction and in other markets. This effect operates through the patent signaling the firm’s quality capacity and contract credibility. The working paper has been invited for revision at Journal of International Economics.

Project 6 evaluated how the Brexit Referendum, Brexit and the new Trade & Cooperation Agreement affected UK’s trade. It found limited anticipation and uncertainty effects of the Referendum, but a significant persistent drop in UK imports from the EU relative to the rest of the world and a smaller temporary fall in UK exports. This project informs the impact of economic policy with GVCs. The working paper has been featured in policy briefs and the popular press.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

This ambitious research program advanced the state of the art in several respects. First, I exploited unprecedented datasets that made it possible to unlock new insights on frontier issues. Second, I developed new empirical measures and creative empirical strategies that are founded in economic theory and can thus be used to study firms’ GVC activity. Third, I uncovered novel economic mechanisms and models of firms’ GVC participation, and generated new solution methods for welfare counterfactuals. Finally, while my research program was anchored in international economics, it was novel in bringing together insights from other fields (IO, organizational, macro, development) and paving the way for future cross-fertilization.

This ground-breaking project has pushed the research frontier in international trade and other fields, and already enabled follow-on academic and policy work. One indication of this impact is the academic, policy and business interest the research has attracted, as evidenced by keynotes at wide-reach academic, policy and business events and advisory capacities at policy institutions. Another indication is the GoogleScholar citations of published Projects 1-3 (217, 159, 122).

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