Comparative Advantage of Value Added in Exports: The Role of Offshoring and Transaction Costs

54 Pages Posted: 1 Nov 2016 Last revised: 13 Mar 2017

See all articles by Nakgyoon Choi

Nakgyoon Choi

Korea Institute for International Economic Policy

Soonchan Park

Kongju National University

Date Written: October 10, 2016

Abstract

This study tests whether Ricardian comparative advantage is valid for value added in exports that does not include intermediate inputs imported from various industries in a number of countries. Using a panel data on valued added contents of bilateral exports, we find that changes in the labor productivity lead to growth of value added in exports. This implies that Ricardian comparative advantage is an important determinant of exports in longitudinal changes. The estimated coefficients of the observed productivity turn out to be larger than those of CDK (2012), implying that Ricardian comparative advantage has greater influence on determining the patterns of trade in a world with global value chains.

This study also investigates the role of offshoring and transaction costs in comparative advantage. We use data on value added in exports, offshoring in materials and services, and transaction costs at the country and industry-level for the period 1995-2009 calculated from World Input-Output Table which covers 40 countries and 14 manufacturing industries.

Employing a system GMM estimator to alleviate the potential endogeneity problem, we find that services offshoring has positive effects on comparative advantage while material offshoring affects it negatively. We also find that transaction costs have a negative effect on comparative advantage. Moreover, it turned out that there is a magnification effect of transaction costs on the induced value added in exports.

Keywords: Value Added in Exports, Offshoring, Transaction Costs

Suggested Citation

Choi, Nakgyoon and Park, Soonchan, Comparative Advantage of Value Added in Exports: The Role of Offshoring and Transaction Costs (October 10, 2016). KIEP Research Paper, Working Papers 16-09. Available at SSRN: https://ssrn.com/abstract=2862295 or http://dx.doi.org/10.2139/ssrn.2862295

Nakgyoon Choi (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Soonchan Park

Kongju National University ( email )

527 Yesan
340-800 Choongnam
Korea

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