Globalization or Regionalization? A New Approach to Measure International Fragmentation of Value Chains

There is increasing evidence of denser networks of intermediate input flows between countries suggesting ongoing fragmentation of production chains. But to what extent is this process mainly regional, taking place between countries within a region, or mainly global, involving countries outside the region? We provide new macro-economic evidence regarding this issue, by extending the Feenstra and Hanson (1999) measure of fragmentation to a multi-country setting. We identify the value chain of a product by the country and industry in which the last stage of production takes place. Based on an input-output model of the global economy we derive the distribution of value added by all countries involved in its production. Using a new dataset of world input-output tables covering forty countries and fourteen manufacturing product groups, we find that in almost all product chains the share of value added outside the country is increasing since 1995. The share of value added outside the region has been increasing much faster though. These tendencies were only briefly interrupted by the financial crisis in 2008. Based on a cross-entropy measure of fragmentation we find that despite these trends, the scope for further international fragmentation is still large.