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Abstract
The Jones–Kierzkowski model of global fragmentation of production draws attention to the efficiency of ‘service links’ connecting ‘production blocks’ in different countries. Country‐specific service links include transport and telecommunications infrastructure and the overall business climate. Mobile factors of production, most prominently foreign direct investment (FDI), can shop around for countries with the most functional and inexpensive service links along with low labor costs. Those countries with favorable business climates and well‐functioning service links are able to attract FDI and other mobile inputs. We provide cross‐sectional evidence that successful exporters of manufactures, notably in East Asia, have relatively favorable service links.
Acknowledgements
We thank our discussant Hylke Vandenbussche, and Mark Kuperberg, Stephen O’Connell, Philip Jefferson and Janet Ceglowski for helpful comments. Paul Goldsmith‐Pinkham of Swarthmore College provided able research assistance. This paper was presented at the North American Economic and Finance Association meetings, Chicago, 5–7 January 2007.
Notes
1. See Westphal (Citation2002) and Radelet et al. (Citation2001) for detailed analyses of the way in which East Asian countries based their development on integration into the global economy.
2. See also Arndt and Kierzkowski (Citation2001) and Yi (Citation2003).
3. Effective production of infrastructure may require liberalization and participation of foreign capital, however.
4. This is not to say that air transport cannot be crucial for high technology products. An example is provided by Dell’s use of its own fleet of Boeing 747s to transport goods around the world; one such plane with a daily supply of 15,000 computers leaves Malaysia for the United States every evening.
5. The effects of infrastructure on international productivity differences and specialization are examined in Yeaple and Golub (Citation2007).
6. This would suggest that anti‐globalization activists who care about poverty reduction should be protesting against Nike for failing to source from Africa!
7. See Rama (Citation2000) for example on West African labor market rigidities.
8. Choice of countries in Tables and is based on data availability and regional representation. See Appendix 1 for discussion of data sources and methods.
9. The labor costs include fringe benefits and were obtained from a textile consulting firm’s recent survey of labor costs around the world.
10. We are grateful to Lurong Chen of the Graduate Institute of International Studies for making available to us the data on trade in parts and components.
11. The distinction between horizontal and vertical FDI is a central feature of modern theories of FDI such as the knowledge–capital model (Markusen and Maskus, Citation2001). A further issue of reverse causation applies to service‐sector FDI. High FDI inflows in producer services such as transport and telecommunications are likely to lead to service link improvements. Reverse causation seems much less likely for the manufacturing FDI and exports.
12. Of course, not all manufacturing FDI is vertical and some service‐sector FDI is vertical. Manufacturing FDI in bottling plants, for example, is intended for the local market, while call centers are a well‐known form of export‐oriented FDI in services. Nevertheless it seems likely that manufacturing FDI is overall more export‐oriented and footloose than FDI in services.
13. Industry‐level results are not reported to save space but are available upon request.
14. Germany was chosen due to the completeness of data regarding Germany’s infrastructure, as well as the high‐level of infrastructure that Germany is assumed to have as a major developed country. (Some variables were missing for the United States.)
