Functional Upgrading In Global Value Chains And Driving Factors

The 19 th CPC National Congress says,Chinese economy has transited from a phase of rapid growth to a stage of high-quality development,which requires promoting high-quality development to promote China's upgrading in Global value chains(GVCs).Nowadays,GVCs has become the mainstream of international division of labor,and it has arrived at a consensus that understan ding various economic issues from the value-added perspective.However,as production activities are increasingly divided into R&D,fabrication,marketing and management,and the relative proportion of functional activities is crucial to a country's influence,control and value-added acquisition ability on the GVCs,the analysis should not only stop at the aggregate value-added point,but should go further into the functional activities level.In this transformation,China's functional upgrading has attached worldwide attention.If China achieves reasonable functional upgrading expanding to high-value-added and high-tech business functions(such as R&D,management and marketing),then it shows that GVCs participation has injected a steady stream of power into the sustainable development of China's economy to some degree,which is helpful to turn China into a trader of quality and its upgrading in GVCs.Otherwise,China may be trapped by developed economies in the low-end production links with low innovation capacity and weak value-added capacity(such as processing and assembly).Based on the spatial fragmentation of GVCs,this study further incorporates the functional fragmentation,extends the single country input–output accounting on functional value-added to a global multi-country setting,and further redefines it from the forward linkage according to the factor ownership.Furthermore,overcoming the limitations of case studies on functional upgrading,from functional upgrading in export(which only considering foreign demand)to functional upgrading in GVCs(which considering both domestic and foreign demand),from the chaining structure decomposition analysis(SDA)incorporated the GVCs concept to the decomposition analysis distinguishing production activit y types based on the border-crossing number,this study proposes a systematic theoretical analytical framework of a country's functional upgrading in GVCs and its driving factors.The World Input-output tables and the matched Labor Occupation Database are used to conduct the empricial analysis.Firstly,this study systematicly analyzes the dynamic evolutions of China's function upgrading in export,and makes an extensive international comparative analysis with major trade partners.We find that during1999—2011,the pattern of “relying on fabrica tion,entering market,targeting management and R&D” is followed by domestic functional value added in export,relying more on fabrication to participate in GVCs and obtain trade gains.It indicates that China still has a long way to upgrade in GVCs.Dynamically,China's export has achieved functional upgrading to some degree after its accession to WTO in 2001,reflected in the growth of China's domestic value added in headquarter activities,such as management,R&D,and marketing,at the both aggregate and industrial levels.This functional upgrading process differs across headquarter activities as well as among labor-,capital-and knowledge-intensive industries.International comparative analysis shows that,the fabrication specialization of China's export is at the leading level worldwide.In sharp contrast to strong fabrication,weak management and weak R&D is presented,which is almost locked at the lowest level and lags far behind other developed economies and other developing BRIC countries.China cannot pose a threat to the developed economies such as Europe and the United States.Secondly,this study further introduces the domestic demand,and compares the roles of domestic and foreign demand to China's functional upgrading in GVCs.We find that dome stic and foreign final demands(especially the former)jointly lead to China's functional value added growth,indicating that that the large domestic market remains an untapped source of Chian's dynamic economic growth.The domestic demand for non-tradable goods(or services)stands out in functional value-added creation,while foreign demand(particularly that for tradable goods)also contributes to rises in functional incomes,but far less so than does domestic demand.The generally rising trends of China's value added hold in the aggregate as well as by industry and business function,which are quite heterogeneous across industries and business functions.At the aggregate level,fabrication ach ieves the largest growth in value added,while that of headquarters economic activities(especially management and R&D)is relative weak.This holds for most industries,but a few services are exceptions,whose value added grow more from the marketing or R &D rather than fabrication.Finally,the chaining SDA incorporated the GVCs concept and the decomposition analysis distinguishing production activity types are employed to systematically identify the driving factors behind China's functional upgrading in G VCs.We find that China has achieved functional upgrading in GVCs to some degree,reflected in the growth of China's domestic value added in headquarter activities(such as R&D)at the aggregate and industrial levels.The chaining SDA results show that the growth of consumption level(or consumer demand)and the GVCs participation effect(including the relocation effects of intermediate and final goods,especially the latter)largely contribute to the growth of China's functional upgrading,which is partial offset by the technological improvement effect.The decomposition analysis shows that China's functional value added is mainly induced by pure domestic demand,with trade-related activities accounting for less than 30%.Disrupted by the financial crisis in 2008,the contribution of trade-related activities declined temporarily.Furthermore,the effect of simple GVCs activities is outstripping that of those rising from the complex GVCs activities.This thesis,on the one hand,scientifically responds to whe ther China's exports have achieved functional upgrading in GVCs,and help clarify the gap between China as a big trading country and a powerful trader,which shed light on the formulation and adjustment of China's trade policy.On the other hand,clarifyin g the roles of domestic and foreign demand in China's functional upgrading in GVCs has rich policy implications,which provides scientific and objective empirical evidence for understanding China's vast domestic market advantage and the nature of “dual circulation”.In addition,identification of the driving factors provides theoretical support and policy implications for effectively promoting China's functional upgrading in GVCs.This study also provides the basis and support of methods and data for the follow-up research.