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Working Paper No. 13-13

The Evolution of the Global Value Chain: Theory and Evidence
Yibei Liu
November 2013


This paper develops a theory of the evolution of global production and the aggregate welfare effects it has. In my task-based growth model, a learning-by-doing mechanism enables firms to improve their production eciency, giving rise to task upgrading in rms and countries that
are engaged in global production. In a North-South framework, both the technologically advanced North and the lagging South move up the global value chain through this self-reinforcing process. I characterize the evolution of welfare in the steady state and during the transitional
period. While non-monotonic welfare effects may exist in the short run, both countries gain from openness to o shoring in the long run, provided that they both undertake manufacturing activities. The model yields testable predictions for the share of industry value added in each country over time. When I confront the model with data on multinational subsidiaries in China, there is strong support for the key predictions of my model.


JEL classification: F23, F43, F63, O14, O33
Keywords: Value Chain, Offshoring, Learning, Trade of Tasks, Production Dynamics