Structural Change in Exports: from product to functional specialization

Marcel P. Timmer, Stefan Pahl
DOI number
#Trade and FDI

Trade analysis on the basis of countries’ export baskets can be misleading when production is globally fragmented. The chapter argues for a switch to analysis of the type of activities that are embodied in exports. The chapter discusses two steps towards this goal. It first discusses the transition in trade studies from product to vertical specialization. A country’s vertical specialization in trade is measured as the share of domestic value added in its gross exports. The chapter identifies three waves of vertical specialization in the world economy since 1970 and documents the servicification of manufacturing exports. Results from cross-country analysis show a robust association between specialization and productivity growth, but not between specialization and employment growth. Next, the chapter considers functional specialization in trade based on the measurement of distinct activities in export such as fabrication, marketing and R&D, based on an occupational classification of workers. It documents how advanced economies continued to specialize in headquarter activities, while quickly moving out of fabrication activities. It also shows that there are many idiosyncratic determinants of a country’s specialization pattern beyond its general development level. The chapter ends with suggestions for further research, given that the measures of trade in value added and activities presented are still in a development phase.

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