# **c. Participation in GVCs and productivity growth**

A key feature of developing East Asian countries has been their increasing participation in regional and global value chains. Section 2 has documented the changing nature of East Asian trade with the rise of production fragmentation across borders. The focus of this section is to investigate how GVC participation has affected productivity growth in the region.

Trading in the context of GVCs is associated with multiple border‐crossing by intermediate products and services. Economists rely on this fact to identify GVC‐related trade and to set it apart from conventional trade. Specifically, they look for the following two features in the international trade data: (1) the significant presence of foreign value added in a country’s total or sectoral gross exports, and (2) the significant presence of domestic value added produced by a country or its sectors in the gross exports of all other countries. The first feature reflects backward participation in GVCs, which occurs when countries specialize in downstream, often low‐skilled, stages of the process of production, using imported parts, components and other processed intermediates to produce output that is then exported. The second feature is associated with forward participation in GVCs, typical of countries that offshore labor‐intensive stages of the production process while specializing in upstream high‐skilled stages of production such as design, research and development.<sup>15</sup> This method of identification is not always foolproof, especially in the case of forward participation, which can be confounded with conventional trading of oil and other raw materials.<sup>16</sup> GVC participation can increase labor productivity through two main channels. Recent theoretical models have shown that productivity gains associated with offshoring and participation in GVCs may accrue from the finer international division of labor, which is isomorphic to factor‐ augmenting technical change (Grossman and Rossi‐Hansberg 2008). In addition to specialization, GVC participation can boost productivity growth through greater diversity in input varieties, learning externalities and technology spillovers (Li and Liu 2014; Baldwin and Robert‐Nicoud 2014).<sup>17</sup> The latter effects may be especially important for developing countries with backward participation in GVCs, stemming from the engagement with firms in technologically advanced countries.

In this section, we investigate whether the pattern of productivity growth for developing East Asian countries can in part be explained by the changes in GVC participation. We proceed by examining the general trends in labor productivity based on country‐specific data from The Total Economy Database. As for the trends in backward and forward GVC participation of the developing East Asian countries, we refer the reader to the discussion in Section 1. Second, we

> 15 Calculation of both backward and forward participation in GVCs involves applying Leontief’s approach to synthetically derived international input‐output tables (Hummels, Ishi and Yi 2001; Koopman, Wang, and Wei 2014).

> 16 Indeed, output exported by oil and commodity producers tends to be found in exports of multiple countries that use raw materials as intermediate inputs embodied in their output. Consequently, the forward participation of oil and commodity producers can be high even when the producers themselves may not be engaged in GVCs.

> 17 Trade in general can lead to productivity gains through multiple channels that are the object of a large body of research ‐ see IMF (2016), Chapter 2, for a brief survey.

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