Moving up the Value Chain in Manufacturing

for China
Dr. Miaojie Yu
NSD/CCER, Peking University, China
mjyu@ccer.edu.cn
May. 24, 2010

Prepared for the ADB Project

[Very Preliminary & Incomplete ]
The views expressed in this paper are the views of the author(s) and do not necessarily reflect the views
or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they
represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any
statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make
any representation concerning the same.
1
Miaojie Yu, CCER
Outline of the Talk

• Motivation
• Stylized Facts
• Driving Forces of Value Chain Upgrading
• Possible Mechanism of Value Chain Upgrading
• Future Research

2
Macroeconomic Indicators
• Currently it is the second largest economy in the world.
– U.S. , China, Japan (PPP)
– Current GDP is $ 4.9 trillion
– Largest developing country in the world
– GDP per capital reach $4,000
• Secondary industry is the most important contributor for
China’s economy.
– Accounts for 47% of GDP
– Annual economic growth rate is 13% in the last decade.

3
4
5
Understanding the Value-Chain Movement
• Two different scenarios.
• Moving up the value-chain across industries
– Rely more on manufacturing industry than primary industry
– Upgrading across different manufacturing industries
• Moving up the value-chain within industries
– Value-added upgrading
– Moving from assembly up to R&D and marketing

6
Stylized Facts
• China is moving up across industries.
• China’s exporting activity is an ideal window to explore
China’s industrial upgrading
– A large open economy
– Openness ratio: 67% in 2007, 58% in 2008, 46% in 2009
– Largest exporter in the world
– Third largest importer in the world

7
8
9
Stylized Facts
• Export-Oriented Development Strategy.
• Follows a dynamic track of comparative advantage
• China achieves its three leaps in foreign trade
– 1978-85: Oil Exports (Resource/Primary goods-focused)
– 1986-94: Textile (Labor-Intensive Industrial Age)
– 1995-2000: Machinery Exports ( Intra-industry Trade)
– 2001-Present: High Tech. Products Exports
• High Tech. Products Exports is an important feature of
China’s value chain upgrading.

10
Intra-Industry Trade

Sources: database of China Customs

CCER, Dr. Miaojie Yu
How Important of High-tech Manufacturing in China?

12
High-tech Export Growth

13
Dynamic Track of China’s High-Tech Exports

14
China’s High-Tech Exports: A Global View

15
China’s High-Tech Exports by Field

16
 Why Can China Move Up?
• Theoretical Model
– H-O Model in the late 1980s
– Krugman (1979) in the late 1990s: Intra-industry trade
– Melitz (2003): firms with high productivity exports
– Brezis-Krugman-Tsiddon (1993):
• New technology does not initially seem to be an improvement
for leading nations, given their extensive experience with old
technologies
• If the new technique proves more productive than the old,
leadfrogging of leadership occurs

17
Leapfrogging (Krugman et.al, 1993)

18
 Why Can China Move Up?
• Moving up across industries
– China had experienced dramatically trade liberalization over time
– China adopted the exported-oriented development strategy
• Three key reasons for China’s upgrading
– Firms have higher productivity over time
– Lower wages
– Growing size of domestic market

19
20
 Why Can China Move Up?
• Moving up within industries
– Move from low value-added assembly to higher value-added
activities
• Sequential Upgrading
– Feenstra-Hanson (1996): Outsourcing
– Grossman-Rossi-Hansberg (2008): Trading Task
– Hummels, Ishii, and Yi (2001)
– Brandt (2008)

21
Feenstra-Hanson (1996)
Feenstra-Hanson (1996)
How to Move Up?
• Two important channels
– Processing Trade
– Inward FDI
• Processing export plays a key role for China’s foreign trade
• At least two ways to help firms move up the value chain:
– Quality Effects
– Love of Variety
– These two ways help firms foster productivity (Feenstra-Yu, 2010)
• China’s high-tech industries have sizable value-added
these years
24
25
How to Move Up?
• Inward FDI also makes upgrading possible
• China’s manufacturing has distortion on factor
allocation (Hsieh-Klenow, 2009)
• But FDI releases firm’s credit constraint to reduce such
resource allocation (Feenstra-Li-Yu, 2010)

26
 Research Plan

• Quality-upgrading and value chain movement is associated with

China’s emerging export.

• Data Description

• HS 8-digit monthly product-level trade data: including unit-price,

quantity, value, source/routing/destination, shipment.

• Firm Production Data: Covers more than 100 financial variables

listed in main accounting sheets of all SOEs and non-SOEs
firms with more than 5 mil. RMB annual sales.

27
28
29
Future Research

• Quality-upgrading and value chain movement is associated

with China’s emerging export.

• Productivity improvement is a key for China’s moving up

the value-chain

• High-tech. industries have higher productivity over time

30