The role of foreign value added in creating Poland's comparative advantage in world merchandise exports
Tomasz Białowąs, Monika Wojtas The role of foreign value added in creating Poland's comparative advantage in world merchandise exports
U N I V E R S I T A T I S
VOL. XLVIII, 2
The role o f foreign value added in creating P o la n d ’s comparative
advantage in world merchandise exports
Rola zagranicznej wartości dodanej w tworzeniu przewagi komparatywnej Polski
w światowym eksporcie towarowym
Słowa kluczowe: Polska, eksport, przewaga kom paratyw na, zagraniczna i krajowa wartość dodana
One o f m ajor trends in the world economy in the global era is international
fragm entation o f production, which m eans dividing previously integrated process
into separate stages localized in various parts o f the world. This allows to deepen
specialization and achieve additional gains from trade especially in m iddle-income
countries such as Poland.
There have been many theoretical papers on international fragm entation of pro
duction. The m ost significant are two that started two different approaches towards
the issue. R. Jones and H. Kierzkowski  view production process as fragm ents
of production blocks that are located in different geographical locations linked with
various services (adm inistration, transportation, finance). Since diversification of
labour productivity and factor cost is higher between countries rather than regions
in a single country - fragm entation will be international. According to the standard
approach, labour-intensive stages of production will be located in labour-abundant
countries and capital-intensive activity - in capital-abundant countries. The second
trend was initiated with a paper by D. Hummels, J. Ishii and K-M. Yi . They
introduce a concept o f vertical specialization with production tasks localized in various
countries. This leads to the creation of global value added chain. A country accepts
parts and intermediate goods that are processed and then passed on in a more advanced
form to the next link o f the chain for further processing. Both approaches complement
each other, but the latter emphasizes the problem o f value added in various countries.
Development of offshoring significantly alters countries’ trade specialization and in
consequence their revealed comparative advantage. However, the inadequacy of statisti
cal data that relies mainly on the gross exports was a barrier to carrying out meaningful
analysis. A turning point in research on fragm entation was construction o f an alterna
tive method o f m easuring trade flows based on value added. The theoretical basis for
the method was developed in 1930s by the Nobel Prize w inner W. Leontief .
Existing papers using trade data in value-added terms revealed important discrepancies
in comparative advantage, trade balance and geographical structure o f exports and
imports. R.C. Johnson and G. Nougera  proved that real value o f bilateral trade
(depending on a country) was 3-50% lower than calculated using traditional measures.
The m ain goal o f the paper is to evaluate the im pact of international fragm enta
tion on Poland’s comparative advantage. The analysis will focus on:
1) level of internationalization o f production and share o f foreign value added in
Poland’s gross exports,
2) Poland’s comparative advantage in international trade based on RCA indexes
calculated according to the traditional (gross exports) as well as alternative
method based on the concept of country’s value added.
The calculations were carried out using data from O EC D -W TO Trade in Value
A dd ed (TIVA) database and the tim e fram e o f the analysis, determ ined by the avail
ability of data, was lim ited to 1995-2009.
1. Research method
One o f the fundam ental m ethods to evaluate the internationalization level of
cou ntry’s production and its engagem ent in international production networks is
m easuring the share of foreign value added in gross exports. Basic assumption in
value-added to gross exports analysis is a possibility to assess national share of final
product’s value. We simplify by skipping taxes and subsidies. Then, final product
value (Tp) is a summation o f all value-added (VA) in the process o f production in
subsequent countries. The form ula is (
Vp = Z , V A f
Net value added of country A (NVA) which constitutes its trade balance, is a d if
ference between gross exports and im ports as presented in form ula (
). Gross exports
is a sum m ation of direct and indirect domestic value added (DVA) that country A is
exporting and foreign value added (FVA) which consists of previously im ported
foreign parts and components used in the production process. Imports consists of
3 elements: 1) bilateral value added (BVA), 2) reim ported value added (RVA) and
multilateral value added (MVA). BVA is imports to country A of products which
value was added in 100% in country B. RVA means those im ported products which
final value was added in country В as well as components coming from A. MVA is
that part of imports from В that has value added from country C.
NVA = (DVA + FVA) - (BVA+RVA+MVA)
Standard m easure used to assess comparative advantage in world exports is
Balassa index [Balassa, 1965]. The Balassa index is defined as the ratio of coun
try ’s share in world exports of a given industry divided by its share in overall world
trade. More specifically, BIA] is country A ’s Balassa index for industry^ defined as in
). That is a ratio of share of in dustryj in country A exports (U) and share
of industry j in reference country R exports (A). If BI) >1, country A is said to have
a revealed comparative advantage (RCA) in industry^, since this industry is more
im portant for country A ’s exports than for the exports of the reference countries.
BIJJA = \sR
Poland’s comparative advantage in international trade based on RCA indexes can
be calculated in a traditional way using value of gross exports or in an alternative
way - using domestic value added. In the first approach RCA value is determined
by country’s integration with international production networks and foreign value
added. The second one allows to view in a more objective way the real comparative
advantage in world exports.
2. Share of foreign value added in Poland’s gross exports
C ountry’s export potential is dependent not only on domestic enterprises export
capability, but also on the activities of international corporations and nation’s engage
ment in international production networks. Poland, in comparison to other economies
of similar potential, is among most dependent on foreign components and intermediate
goods. Furthermore, a significant increase in share of foreign value added in gross
exports was noted in 1995-2008 - it grew from 15.42% to 30.59%. Due to global
financial and economic crisis all the countries with the available data experienced
a decrease in 2009. In Poland it fell to 27.89% (see Table 1). Share of foreign input
into the gross exports is highly diversified among sectors of the economy. In 2009
the following sectors were characterized by the highest share of foreign value added:
transport equipm ent (38.93%), electrical and optical equipm ent (34.07%), basic metals
and fabricated m etal products (32.67%), chemicals and non-m etallic m ineral products
(32.50%). The sectors w ith the lowest share o f im ported parts and com ponents were
low technology industries, dependent on labor and raw m aterials, such as: m ining and
quarrying (15.85%), agriculture, hunting, forestry and fishing (16.64%) (see Table 1).
Further analysis of foreign value added share in Poland’s gross exports in various
industries revealed the following trends. Share o f foreign com ponents and parts kept
grow ing until 2005 in all sectors, except: 1) agriculture, hunting, forestry and fishing
and 2) m ining and quarrying. The highest grow th occurred in industries with the
m ost fragm ented production processes. In 1995-2005 share o f foreign value added in
electrical and optical equipment increased by 28.04 percentage points, and in transport
equipm ent - by 26.1 percentage points (see Table 1). In 2005-2008 share o f im ported
parts in exports o f the two aforem entioned industries dropped. Sim ilar tendencies
characterized wood and paper, other m anufacturing, textiles and footw ear as well as
food, beverages and tobacco. The remaining industries noted a steady growth until 2008.
M ain sources o f foreign com ponents used to m anufacture exported goods were
countries o f the European Union, m ostly Germany. In 1995-2009 they accounted
for 1/5 o f the total foreign value added in Polish exports. A part from Germ any other
countries w ith significant shares were: Italy, France, the United Kingdom and the
Netherlands. Outside the EU m ost com ponents came from Russia, the United States,
China, Japan and South Korea (see Table 2).
New version o f the OECD database, updated in May 2013, increased its utility al
lowing to calculate input of each country of origin into foreign value added by industry.
The data confirms that in 2009 m ain contributor o f foreign components in all industries
except chemicals and non-m etallic m ineral products was Germ any (see Table 3). The
new data also revealed high concentration o f foreign value added origin. In transport
equipment Germany, the United States and Italy accounted for 16.18% of foreign value
added, and G erm any’s share was 9%. In electrical and optical equipm ent share of
Germany, the United States and C hina was 10.43%, and in basic m etals and fabricated
metal products Germany, Russia and Italy contributed 12.65% of foreign value added.
One o f the industries highly engaged in international production netw orks was
tran sp o rt equipm ent. However, only 35.4% o f foreign value added in gross exports
in 2009 originated in the industry. O ther com ponents and interm ediate goods were
m an u factu red in basic m etals (8.14%), chem icals (4.82%), m in in g and qu arryin g
(3.12%), electrical and optical equipm ent indu stry (2.39%) [OECD, 2013]. Input o f
various services was much m ore significant, w hich is in accordance w ith theo reti
cal assumptions m ade by H. Kierzkowski and R.W. Jones . In 2009 services
accounted for 40.94% of foreign value added in exports o f transport equipment, in
particular: wholesale and retail trade - 17.9%, business services - 10.08%, trans
port, storage and telecomm unication - 5.29%. In other industries share o f services
in foreign value added didn’t surpass 40% and value added from the same industry
amounted for a large share o f foreign value added, especially in low technology and
raw m aterials industries [OECD, 2013].
2. Poland’s comparative advantage in world merchandise trade
In term s o f traditional approach based on gross exports Poland had comparative
advantage in exports o f food products, beverages and tobacco, wood and paper, basic
metals and fabricated metal products, other m anufacturing and transport equipment
(see Table 4). The largest gap characterized trade in electrical and optical equipment,
m achinery and equipment, chemicals and non-metallic m ineral products, also after
the year 2000 - textiles and footwear. M ain trends in 1995-2009 were the follow
ing. In low and medium -low technology industries Poland’s comparative advantage
weakened. In contrast, there was a g a in in comparative advantage in industries using
advanced technologies. The highest grow th o f RCA indicator occurred in transport
equipment (Balassa Index grew by 0.74), electrical and optical equipment (0.33) and
m achinery and equipm ent (0.30). These industries have the highest shares o f foreign
value added, over 30% o f gross exports.
Source: own com pilation based on: OECD .
Using the alternative method of calculating Balassa indexes based on domestic
value added significantly alters Poland’s comparative advantage in world trade. RCA
indexes in the following industries are considerably lower: transport equipment, m a
chinery and equipment, basic metals and fabricated metal products, wood and paper,
textiles and footwear. All o f the above were characterized by a high share o f foreign
value added, which proves its im portant role in creating comparative advantage and
However, an assumption that high share of foreign value added in gross exports
contributes to gaining comparative advantage in international trade is too far-fetched.
The influence may be positive as well as negative. In case of transport equipment
foreign value added caused an increase in comparative advantage. But in other cases
the results were opposite. In electrical and optical equipm ent foreign value added
amounted to 34% o f gross exports in 2009, but there was a high comparative gap.
RCA indexes calculated in a traditional way were even slightly lower than those based
on domestic value added.
Changes in the functioning o f the world economy, cooperation and creation of
international production networks requires a new approach to m easuring trade and
comparative advantage. It is necessary to assess share o f the product’s value that
was added in the analyzed country to evaluate its position in international trade. The
analysis carried out in this paper showed that foreign parts and components were an
im portant element o f Polish m anufacturing exports and their role increased consider
ably in 1995-2009. Foreign value added was particularly important in high technology
industries such as transport equipment or electrical and optical equipm ent while its
role in low technology industries was minor. Large part o f foreign value added was
contributed by European Union countries and in particular Germany. The data also
confirmed the theory that services sector is a significant source of foreign value added.
There is still a considerable gap in Polish exports competitiveness compared to
the old European Union countries [Mucha-Leszko, Kąkol, 2009] so naturally there is
a valid question whether foreign value added can be used to close this gap. However,
the relation between comparative advantage and foreign value added was not proved
to be straightforward. The Balassa indexes calculated using two methods were d if
ferent, but the role o f foreign input was not always positive. In some industries it
allowed Poland to be more competitive (e.g. transport equipment) while in others it
weakened the advantage/enlarged the gap.
The role of foreign value added in creating Poland’s comparative advantage
in world merchandise exports
The paper deals with changing approach to m easuring trade an com petitiveness due to the widely
spread process o f international fragm entation o f production process which m akes it m uch more difficult
to assess origin o f products in international trade. Therefore a method was developed to use foreign
and domestic value added in order to evaluate country’s role in world trade as well as its comparative
advantage. A uthors apply this methodology to Polish trade in goods in 1995-2009 and reveal that for
eign com ponents were an im portant part of its exports. Poland was highly dependent on foreign value
added from European Union countries, especially Germany. Sectors with highest shares were: transport
equipment, electrical and optical equipm ent, basic m etals and fabricated metal products, chem icals and
non-m etallic m ineral products. Foreign value added also affected Poland’s comparative advantage - its
im pact on various industries was adverse. In some cases it im proved RCA indexes while in others using
dom estic value added for the calculations resulted in a larger com parative advantage.
Internacjonalizacja produkcji sprawiła, że tradycyjne m etody m ierzenia udziału kraju w św iato
wym eksporcie oraz przew agi konkurencyjnej w m niejszym stopniu odzw ierciedlają rzeczyw istość.
W zw iązku z tym zaczęły rozwijać się alternatyw ne m etody m ierzenia strum ieni handlu zagranicznego
- na podstaw ie w artości dodanej. Celem opraco w an iajest ocena w pływ u m iędzynarodow ej fragm
entaryzacji produkcji na kształtow anie się pozycji konkurencyjnej Polski. Szczegółow a analiza obejmuje
udział zagranicznej w artości dodanej w eksporcie brutto Polski oraz kształtow anie się przew agi kon
kurencyjnej na bazie indeksu Balassy, obliczonego na podstaw ie m etody tradycyjnej (eksport brutto),
ja k również alternatyw nej (krajow a w artość dodana). Z astosow anie nowego podejścia do analizow ania
polskiego eksportu ujaw niło duży w zrost znaczenia zagranicznej w artości dodanej w badanym okresie.
Z ró d łem jej pochodzenia były w znacznym stopniu kraje Unii Europejskiej, zw łaszcza Niemcy, a sek
tory, w przypadku których FVA m iała najw iększe znaczenie, charakteryzow ały się dużym stopniem
wykorzystania technologii. N ależały do nich środki transportu oraz m aszyny i urządzenia. Inne wartości
przyjm ow ały także indeksy ujawnionej przew agi konkurencyjnej obliczone przy uw zględnieniu zagra
nicznej wartości dodanej. Z ałożeniejednak, że wysoki udział zagranicznej wartości dodanej w eksporcie
brutto powoduje poprawę pozycji kom paratyw nej kraju w handlu m iędzynarodow ym , je st zbyt daleko
idącym uproszczeniem . Może m ieć ona pozytyw ny wpływ, ale w niektórych sektorach okazał się on
bardzo niewielki albo nawet w artości w skaźników były nieznacznie w yższe przy uw zględnieniujedynie
krajowej w artości dodanej.
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