Productivity and Substitution Patterns in Global Value Chains

Fragmentation of production is posing new challenges to the analysis and measurement of productivity. Traditional approaches focus on firms, industries, or countries as the unit of analysis. This chapter argues that studies of global value chains (GVCs) are needed in situations where production is fragmented across firms and geographical borders. The chapter outlines how existing tools for measuring productivity, factor substitution, and (biased) technological change can be modified to analyze GVC production. A key concept is a production function where final output is generated based on factor inputs only, including both domestic as well as foreign factors. The chapter outlines what type of data would be needed and provides illustrative analyses of GVCs of manufacturing products based on the WIOD (world input-output database).