Firms, Organization and Global Value Chains in International Trade: Transactional Trade Data and the Fragmentation of Production in China

The fragmentation of international production has raised a host of problems in our ability to measure and understand the international economy, leading to varied theoretical approaches.  Global value chains utilize empirically rich case studies and fieldwork on particular industries, large transnational enterprises and inter-firm linkages, often grounded in specific countries.  However, scholars point to several limitations of the literature, including selection bias, generalizability and most importantly an aggregation problem, in which descriptive and casual inferences about national development are derived from firm-level observations.  This paper utilizes a unique Chinese transactional trade database, which records every import and export transaction by every firm in China, and applies it to GVC theory to help resolve these limitations and to build bridges between it and other theoretical approaches to international fragmentation.  Through the development of novel measurements, an inductive methodology, and comprehensive trade data of a full population of Chinese exporters, it finds a distinct hierarchy among “clusters” of supplier firms, in terms of their operations and transactional linkages with global buyers. Furthermore, because the database combines firm-level detail and comprehensiveness, for the first time, the paper makes aggregate estimations of the relative shares of “GVC-governed” trade versus ordinary or “pure market” trade, at least for China and in certain industries and product classifications.   However, contrary to certain branches of trade theory (firm heterogeneity) and some GVC scholarship, it finds little evidence that large firms constitute a distinct class of suppliers.  When examining the full population of firms, large firms and SMEs do not differ greatly across a host of measurements.  Instead, firm specialization and ownership form are critical differentiating factors across firm type.  Finally, it finds wide variance in the capabilities and upgrading of domestic Chinese and foreign-invested firms in China, even when entry barriers are at their lowest, which raises questions about how to assess China’s manufacturing and export capabilities.