2000s. They also relate this surprising finding to the inability of gross exports statistics to capture the value added in internationally fragmented production. More recently, Koopman et al. (2012) studied production in the export sector of China, which consists for a large part of assembly activities based on imported intermediates. They empirically showed that value added in these activities was much lower than suggested by the gross export values, but grew at a faster pace. Johnson and Noguera (2012) confirmed the existence of a similar gap for a larger set of countries in a multi-country setting.

However, none of the studies so far have come up with a new value-added based measure of competitiveness. In this paper we propose such a measure and define competitiveness of a country as “the ability to perform activities that meet the test of international competition and generate increasing income and employment”. As there are no data available at the activity level within firms, we identify an activity by the industry in which it is performed, and the skill-type of labor involved. We focus on activities that are directly and indirectly involved in production of final manufacturing goods. These activities are particularly prone to fragmentation and have a high degree of international contestability. The income and jobs related to these activities are called manufactures global value chain (GVC) income and GVC jobs. We address the links between fragmentation and the creation of income and jobs based on a new input-output model of the world economy using industry-level data. This is not a new methodology but extends the approach used in Johnson and Noguera (2012) and Bems, Johnson and Yi (2011), which in turn revived an older literature on input-output accounting with multiple regions going back to Isard (1951) and in particular work by Miller (1966). We will extend this by further decomposing value added into the various factor inputs. This is related, but not identical, to the work on the factor content of trade (e.g. Trefler and Zhu, 2010), who focus only on production for foreign final demand, ignoring domestic demand. The main novelty is thus in the empirical application and in particular the interpretation of the results in the context of analyzing competitiveness.

The accuracy of the empirical implementation will obviously depend on the quality of the data. We use a new public database (the World Input-Output Database) developed specifically for use in detailed multi-sector models. It is the first to provide a time-series of input-output tables that are benchmarked on national account series of industry-level output and value added. It does not rely on the so-called proportionality assumption in the allocation of imported goods and services to end-use category. Instead, it allows for different import shares for intermediate, final consumption and investment use. It also provides additional industry-level data on the number of workers, their levels of educational attainment and wages (see Timmer (ed.), 2012). This allows for a novel analysis of both the value added and jobs created in GVC production.

In this paper the focus is in particular on the European region as it has undergone a strong process of integration in the past two decades both within and outside the European Union. Our main findings are as follows. We confirm a strong process of international fragmentation of manufacturing production across Europe. This has led to an increasing disconnect between gross exports and GVC incomes. Growth in manufactures GVC income during 1995-2008 is much lower than growth in gross manufacturing exports for all European countries, in particular for Austria, Greece, Spain and Eastern European countries. Also the “super-competitiveness” of the German economy (Dalia Marin, VOX, June 20, 2010) is in large part derived from increasing use of imported intermediates. In addition, we 4