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The role of global value chains for German manufacturing

Aaron Sydor (ed.), Trade Policy Research 2011 - Global Value Chains

This paper examines the role of global value chains by German manufacturing. Global value chains have clearly expanded in recent years. Still the bulk of outsourcing concerns materials outsourcing but services outsourcing is growing and catching up at a fast. There is strong evidence that not all German firms participate in global value chains. But, participants are among those that are more efficient in Germany

Close by Central Eastern European countries and new European Union member states have been attractive locations for German firms, not only for low wage manufacturing activities. However, the value generated in these countries and flowing to German firms is still small, albeit growing rapidly compared to other European Union members. Furthermore, these countries seem often to be chosen in an overall global value chain strategy including jointly other more distant locations.

Among the distant trading partners, China has not only become a source of many inputs but also an important customer of German exports of products and services which accounts in 2009 for about 5 percent of total German export. The academic reasoning follows traditional comparative advantages and patterns of specialization. China demands goods like capital-intensive and research-intensive machinery and equipment in which German has a comparative advantage.

There is also evidence that workers in Germany are affected by outsourcing decisions by German firms. However, empirical research does not support net employment destruction following relocation decisions of firms. Instead, German firms adjust and specialize into more skill intensive activities which demand relatively more skilled workers. Another related finding is that some wage decrease is observed among workers employed in activities prone to be outsourced. It appears however that the economic magnitude of it is economically small and far apart from the popular myth of disruptive consequences of global value chains for employment and wages.

More recent empirical research shows economic benefits for German firms from their involvements in global value chains. Reductions in total factor costs induced by increased outsourcing of goods and services permit firms to achieve gains in production efficiency and competitiveness.