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Trade in Value Added: Domestic and Foreign Value-Added in Total Exports

Improving productivity and remaining competitive in a world dominated by global value chains requires efficient imports of goods as well as services. Several factors determine the share of domestic value in gross exports. First, large countries, such as the USA and Japan, have greater scope to source inputs from domestic providers and tend to import about one fifth of total production, compared to typically 50-60% in small and medium-sized countries. Second, exports of complex goods (cars and consumer electronics) are usually more demanding on foreign intermediate inputs than exports of simple goods (food products and raw materials) and/or services. Third, countries with extensive and well- embedded value chains tend to have higher shares of domestic content in total exports.

The total value added embodied in exports is broken down to the total domestic versus the foreign value-added contents of exports (see Table 5.2). Slovakia (46.8%), the Czech Republic (45.3%) and Hungary (48.7%), had higher share of foreign content in their total gross exports than Poland

Table 5.2 Domestic and foreign industry value added: share in gross exports in 2011 (%)

Total industry

C29: machinery

C30: computer electronics

C31: electrical machinery

C34: motor vehicles

DVA

FVA

DVA

FVA

DVA

FVA

DVA

FVA

DVA

FVA

Czech Rep.

54.7

45.3

53.6

46.5

32.9

67.1

47.1

52.9

46.4

53.6

Hungary

51.3

48.7

53.8

46.2

25.9

74.1

38.3

61.7

38.6

61.4

Poland

67.6

32.4

63.1

36.9

46.3

53.7

58.0

42.0

50.7

49.3

Slovakia

53.2

46.8

54.2

45.8

39.1

60.9

52.2

47.8

39.2

60.8

V4 average

56.7

43.3

56.2

43.9

36.1

64.0

48.9

51.1

43.7

56.3

Greece

75.1

25.0

76.7

23.3

81.8

18.2

71.2

28.8

76.9

23.2

Spain

73.1

26.9

72.6

27.4

70.9

29.1

64.1

35.9

53.9

46.1

Portugal

67.2

32.8

62.8

37.2

47.6

52.5

50.9

49.1

41.7

58.3

South average

71.8

28.2

70.7

29.3

66.8

33.3

62.1

37.9

57.5

42.5

Notes: DVA = share of domestic value added in the total exports; FVA = share of foreign value added in the total exports. Simple averages for the V4 and southern EU members.

Source: OECD (2015): Trade in Value Added (TIVA).

(32.4%), due to the three factors indicated above. High shares of foreign content in their total gross exports were clearly visible in key exporting industries—computer and electronics, electrical machinery and motor vehicles. The shares of domestic and foreign content in total gross exports indicate that the v4 countries were considerably more integrated into global value chains than the southern EU members (Table 5.2). Moreover, their integration deepened over time. Foreign content, for example, accounted for only 31.9% of the total gross exports in Slovakia, 30.5% in the Czech Republic, 30.1% in Hungary, compared to 16.1% in Poland in 1995 (source: OECD 2015, database on the Trade in Value Added). Inclusion in global value chains enabled fast growth in the exports and GDPs of the V4 economies. It is, of course, much easier to participate in incumbent global value chain than to build new ones but this does not automatically support development of domestic innovations and institutions (Elteto 2014, p. 53). Key industries were linked to the global value chains as suppliers and assemblers of the final products in the V4 countries.

The integration of the V4 countries into global value chains boosted the exports of goods much more than services. While the absolute volume of service exports grew, the relative shares of services in total exports decreased significantly in all V4 countries (1990-2014). This was the opposite of the general EU trends. The concentration on exports of goods is a potential weakness of the V4 economies in contrast to advanced EU and OECD economies which focus more on high value added services. International transport, travel and tourism were the most important items in the service trade of the V4 members rather than knowledge-intensive business services. This reflects the underdevelopment of the knowledge economy sectors of the V4 countries in the mid-2010s.

In the short term, the integration of the V4 countries into the EU boosted their economic growth via the low costs of production inputs and the influx of FDI. However, their integration into global value chains also means that, in the long term, the competitiveness of the V4 countries will depend on the continuing competitiveness of European exporters in the global economy. This will differ between the smaller and more open economies, and Poland. The high degree of openness of small and open economies may have reduced their exposure to domestic shocks (Iossifov 2014) while Poland, on the other hand, remains more exposed to shifts in domestic demand.

 
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