International Production Networks and Economic Growth: The Case of the Western Balkan Countries

Abstract

The globalization of the world economy has given rise to new trade patterns through the intensification of international production networks (IPNs). This phenomenon has enabled countries to undertake more in-depth specialization in niche parts of the production chain, with important benefits for their economic activity and growth. The Western Balkan countries are no exception. With their recent integration into global markets, an increasingly large share of their trade flows entail intermediate goods that are eventually processed and exported. This article analyzes the impact of different degrees of participation in IPNs on the economic performance of the Western Balkan countries, thereby testing the hypothesis that trade created by international fragmentation of production may generate effects on economic growth beyond the beneficial influence of total or final goods trade. The article focuses on the period 2002–2013. The results, using a set of panel data models, show that the degree of involvement in IPNs significantly affects economic performance, which partly explains the observed differences in the growth rates of the Western Balkan countries. We also find that the positive influence of processing trade on economic growth is greater than the traditional gains of an increase in foreign demand.

Keywords:

• economic growth
• international production networks
• inward processing trade
• panel data models
• Western Balkan countries

JEL Classification:

• C33
• F14
• F15

Acknowledgments

Please note that the views expressed in this article reflect the personal views of the authors and may not be representative of the official views of the respective institutions with which they are affiliated.

Notes

1. The same process has been labeled differently by different authors. For example, slicing up the value chain (Krugman 1995), outsourcing (Feenstra and Hanson 1997), disintegration of production (Feenstra 1998), intraproduct specialization (Arndt 1997), vertical specialization (Hummels, Ishii, and Yi 2001), and fragmentation (Deardorff 2001; Jones and Kierzkowski 1990).

2. Barriers to trade, including nontariff barriers, were removed, and customs systems and legal practices were aligned with those in the EU. The trade and transport facilitation program for Southeastern Europe helped customs reforms and improved coordination between border control agencies, and, as well, eliminated bottlenecks at border crossings in the region.

3. At the same time that the Stabilisation and Association Process was launched, the EU granted a comprehensive set of Autonomous Trade Preferences to the Western Balkan countries that provided for the unilateral dismantling of import tariffs and duties for almost all goods emanating from these countries.

4. Of the six countries, Croatia became a member of EU in July 2013; Serbia and Montenegro are in the accession negotiating process; Albania and Macedonia are in the status of EU candidate countries; while Bosnia and Herzegovina is considered a potential candidate country.

5. Vertical IIT is defined as the simultaneous exporting and importing of products in the same industry but at different stages of production.

6. A theoretical framework for the value chain analysis was recently provided by Gereffi, Humphrey, and Sturgeon (2005).

7. Other important contributions to the theory of fragmentation can be found in Arndt (1997), Arndt and Kierzkowski (2001), Jones and Kierzkowski (2001), and Deardorff (1998,2001).

8. Three main data sources and methodological approaches have been used in empirical works to measure the scope and impact of the international fragmentation production and GVCs: (1) trade in parts and components, (2) customs statistics on processing trade, and (3) a relatively new line of research involving global input-output matrices and trade in value added. General findings from these works are that intermediate goods trade has been expanding faster than trade in finished goods, and that fragmentation trade and participation in GVCs is a powerful driver of growth.

9. According to Locke et al. (2007) and Rossi (2011) economic upgrading can result in social upgrading, but this does not happen automatically and in all cases.

10. The authors are thankful to an anonymous referee for pointing out this important implication of international fragmentation of trade and participation in IPNs.

11. We include Montenegro and Serbia together because they were one country during half of the analyzed period.

12. However, as an anonymous referee mentioned, we should be conscious that a part of the final goods trade can be in-bounds of the processing trade. This is especially true in the automobile-assembly activity of multinational firms (especially important in Serbia and Croatia).

13. This agrees with the findings of Los, Timmer, and De Vries (2015), who show that international fragmentation trade flows resumed quickly after the 2009 crisis, with emerging economies playing a growing role as suppliers of intermediate goods.

14. These figures might be explained by the high amount of processing trade in apparel, textiles, and leather, especially in Albania, but also in Croatia and Macedonia.

15. Data are available on request.

16. Further extension of this analysis should concentrate on a sectoral approach to the phenomenon we are studying here. Productive specialization logically implies different patterns of processing trade for specific sectors or products.

17. See, for example, Helg and Tajoli (2005), Ramondo and Rodríguez-Clare (2009), or Samuelson (2001).

18. Given the data limitations, we include in the regression the country-specific version of the index. No sectoral data for the rest of the variables are available for Albania, Bosnia, and Herzegovina, and Montenegro.

19. See Baltagi (2013) for more detailed information about panel data models.

20. The results of this test are presented at the bottom of Table 6. As can be seen, the random-effects estimation is preferred to the fixed-effect estimation in all cases.

21. Their work is based on Frankel and Romer (1999). These authors employed countries’ geographical attributes to control for endogeneity of trade in the identification of the effects of this variable on income.

22. Following the literature (e.g., Alfaro and Charlton 2009; Borensztein, De Gregorio, and Lee 1998; Makki and Somwaru 2004), we use the lagged values of FDI and the log of the real effective exchange rate as instruments for FDI.

23. Indeed, the terms IV and GMM can be used indistinctly, as all IV estimators can also be interpreted as GMM estimators using the corresponding moment conditions.

24. The correlation matrix already revealed a positive correlation coefficient between the index of international fragmentation and GDP growth (on request).

25. Following the recommendation of an anonymous referee, we have included a test of overidentifying restrictions at the bottom of Table 6. The results of this test confirm that the random-effect models satisfy the required orthogonality condition. Although initially, given the idiosyncrasy of each country, we can think in terms of time-invariant individual effects, the influence of these variables may have time-varying effects, so the orthogonality assumption, and thus the convenience of using random-effects estimation instead of a fixed-effects model, remains.

Additional information

Funding

The authors would like to thank the Spanish Ministerio de Economía y Competitividad (ECO2014-58975-P) for its financial support.

Notes on contributors

Bojan Shimbov

Bojan Shimbov is an Economist in the Country Office of the World Bank in the Republic of Macedonia, Skopje and an External Research Fellow in the Institute of International Economics, University Jaume I, Castellón (Spain). International Economics.

Maite Alguacil

Maite Alguacil is an Associate Professor in the Department of Economics and Research Fellow in the Institute of International Economics, University Jaume I, Castellón, Spain.

Celestino Suárez

Celestino Suárez is a Professor in the Department of Economics and Research Fellow in the Institute of International Economics, University Jaume I, Castellón, Spain.