Multinational production in value-added terms

ABSTRACT

Micro-level evidence has emphasised that firms that produce across countries are responsible for a large share of international exchanges of goods, services, capital and knowledge. At the aggregate level, quantitative studies that look at multinational production generally rely on the concept of sales of foreign affiliates, which is a gross concept that includes the value of intermediate inputs. In the case of trade, the literature has recently shifted to a value-added approach that can distinguish in exports the contribution of the different economies supplying inputs. In this paper, we propose a framework that decomposes value-added in domestic sales in order to trace its origin and remove any double-counting. We find that an intercountry input–output table split on ownership can yield an analysis of activities of foreign affiliates of multinational firms in value-added terms.

KEYWORDS:

• Value-added decomposition
• global value chains
• foreign affiliates
• intercountry input–output

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 We refer to sales of foreign affiliates, which is generally the main variable used in empirical work on multinational production and the variable of reference in statistics on Activities of Multinational Enterprises (AMNE). Related variables in statistics and empirical work are the output and the turnover of foreign affiliates. Although not conceptually identical, they share the same issue that we describe in terms of being gross concepts that include the value of intermediate inputs used in the production of foreign affiliates.

2 See Havranek and Irsova (2011) for a review and meta-analysis of a large sample of empirical studies. While these studies are generally at the firm-level, the foreign presence is calculated for a sector (the same sector or sectors upstream or downstream in the case of vertical spillovers). Some authors use value-added shares or the average of foreign equity in the firms sampled, which is a better option than the share of foreign firms in output.

3 Two papers in the literature on the value-added decomposition of gross exports also highlight the difference between these two approaches. See Los and Timmer (2018) and Borin and Mancini (2019).

4 Los et al. (2016) use a hypothetical extraction method to derive a formula for the domestic value-added in gross exports. Our methodology is inspired by this approach and relies on an extraction matrix but we do not calculate a hypothetical GDP. We just use the extraction matrix in an accounting framework.