28 Capital and labor have been moving to more sophisticated and higher value added activities and more processed goods with higher content of capital and skilled labor have been expanding faster than traditional inputs and unskilled labor intensive products.

# **5. Integration into EU production structures: participation in EU-driven value chains and networks**

The emergence of international production and distribution networks has triggered globalization of economic activities and revamped the economic landscape facing nations, industries and individual firms. Such networks, also known as commodity chains, refer to the whole range of activities involved in the design, production and marketing of a product. Its trademark is dividing up the value chain into smaller components and moving them to countries where their costs of production could be lower. One may distinguish between ‘buyer-driven’ and ‘producer-driven’ value chains (Gereffi, 1999, p.41-42). The former refers to the case of global buyers creating a supply-base upon which production and distribution systems are built without direct ownership. We include in it textiles and clothing (TC), footwear and furniture. The ‘producer-driven’ networks refer to vertically integrated arrangements as exemplified by automotive networks, information, and communication technology networks.

Network trade has been also the driving force of EU-8 economies’ integration into global markets. The most developed of them have moved through two stages. First, ‘buyer-driven’ network exports have been the first major vehicle linking them to external markets. The point of departure has been as a rule inward processing in relatively technologically simple and capital non-intensive activities such as clothing often followed and/or accompanied in transition economies by footwear and furniture. The second stage has been participation in ‘producerdriven’ networks. Engagement in global networks in electronics or automotive industry usually comes at higher stages of economic development. It marks moving to a new division of labor based on production fragmentation.

Integration into EU-25 production and distribution value chains and networks structures has been the driver of Turkey’s increasing participation in division of labor based on outsourcing and production fragmentation. EU-25 absorbed 68 percent (together with other Pan-European countries 72 percent) of all Turkish network exports as compared to 56 percent of Turkish total exports (Table 15). Network exports to the EU have expanded rapidly, with their share in total EU-25-destined exports rising from 58 percent on average in 1995-99 to 62 percent in 2004. Furthermore, the share of markets other than the Pan-European free trade area for industrial products has been declining pointing to closer links of Turkish firms with multinationals operating out of the EU-25.

**Table 15** : _Significance of Pan-European markets in Turkish all network trade in 1995-99 and 2000-04 and 2004 (in percent)_

||Average s<br>total netw|hare in Tur<br>orks' export|key's<br>s|Average sh<br>all goods ex|are in Turke<br>ports|y's|Share of tota<br>all goods exp|l network exp<br>orts to|orts in|
|---|---|---|---|---|---|---|---|---|---|
|Market|1995-99|2000-04|2004|1995-99|2000-04|2004|1995-99|2000-04|2004|
|EU-25|66.2|68.0|69.5|53.7|55.1|55.3|57.9|61.6|61.8|
|Other Pan-Euro|3.2|3.2|3.9|3.6|3.8|4.4|41.8|42.1|43.7|
|ROW|30.6|28.8|26.6|42.7|41.1|40.3|33.7|35.0|32.5|

Note: Total networks include T&C, footwear, furniture, automobile and ICT chains. Source: Computations based on Turkey data from UN COMTRADE Statistics.

Network trade, accounting now for almost three-thirds of Turkey’s EU-destined exports, has also driven Turkey’s integration into EU markets in a pattern and sequence similar to that observed earlier in several EU-8 economies. While Turkey has not as yet moved fully to the second stage, the process appears to be at a full swing. The value of exports of parts and final