Global production network, technology spillover, and shock transmission

ABSTRACT

This study presents a new method to analyse the impact of exogenous shock and its transmission mechanism within the global production network, based on scenarios of the COVID-19 pandemic. We decompose domestic and international technology spillovers and introduce them into an economic growth model to investigate the elasticities of factor inputs and knowledge spillovers through industrial linkages, and eventually estimate a model with spatial specifications. The results from the scenario simulations suggest that the global total output is projected to fall by 3.60% and 8.41% under the V-shaped and L-shaped recovery scenarios, respectively, and that the propagation through input-output linkages is an important channel that causes global economic fluctuations. Economies at the hub of the production network, that is, the United States, China, and Germany, are the most seriously affected. Structural decomposition analysis results indicate that the shortage of intermediate inputs supply is the main driver of output decline, followed by the blockage of technology diffusion, and lastly, the reduction of labour supply.

KEYWORDS:

• Global production network
• technology spillover
• epidemic impact
• shock transmission

JEL CLASSIFICATION:

• C23
• C67
• D24
• O47
• R15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We note that the above scenarios are not a prediction and may not describe the actual situation accurately because of the uncertainty in the spread of the virus and the different control measures in each country.

² There is some difference in the results due to different function forms, specifications, samples of countries, and periods. In general, the coefficients of intermediate inputs are usually large, and the coefficients of labour and capital are relatively small.

³ The international direct effect is negligible since the impact of international feedback effects of factor inputs, which is first transmitted abroad and then retransmitted back to the original country, is quite small.

⁴ From the current estimation of the decline of global GDP in 2020 by international organizations, such as OECD (2020) (6%–7.6%), World Bank (2020) (5.2%–7.7%), IMF (2020) (4.9%), among others, and considering the natural growth rate and the difference between added value and output value, our estimates are in line with the results of these studies.

⁵ The output changes in these three industries are calculated based on the minimum value between the output after the shock from the supply-side and the output after the shock from the demand-side.

Additional information

Funding

This research was supported by the National Social Science Foundation of China under Grant (17FJL006).