The Changing Pattern of Production Fragmentation in Singapore and its Economic Consequences
The slicing up of the value chain, to use the term coined by Krugman (1995), or the phenomenon of production fragmentation, the term preferred by Jones and Kierzkowski (1990, 2001a, 2001b), is a major factor behind the growth of world trade in the postwar era. Because of the importance of intermediates or “middle products” in the production of final goods whose production characteristics can be differentiated by varying factor intensities, it is economically attractive for firms to base different production blocks in different countries based upon their relative factor endowments. Consequently, in the absence of significant trade barriers, relatively labor-abundant countries produce labor-intensive parts and components, while relatively capital-abundant countries concentrate on producing capital-intensive items. Such vertical fragmentation of the production process based upon countries’ comparative advantage, however, requires the crucial function of service links (see Jones and Kierzkowski 1990). Determining whether firms choose to outsource part of the value chain or to engage in the whole vertically integrated process within national borders requires a comparison of the total cost involved in the two modes of organization. Crucially, the lower marginal cost of production made possible by taking advantage of international specialization must be balanced off the higher fixed cost of providing service links to coordinate activities across nations.
KeywordsForeign Direct Investment Real Wage Production Fragmentation Service Link Capital Intensity
Unable to display preview. Download preview PDF.
- Cheng, L., L. Qiu and G. Tan (2001), “Foreign Direct Investment and International Fragmentation of Production,” in Ardnt, Sven and Henryk Kierzkowski (eds.), Fragmentation: New Production Patterns in the World Trade (Oxford: Oxford University Press).Google Scholar
- Jones, R. and H. Kierzkowski (1990), “The Role of Services in Production and International Trade: A Theoretical Framework,” in Jones, R. and A. Krueger (eds.), The Political Economy of International Trade (Oxford: Basil Blackwell).Google Scholar
- Jones, R. and H. Kierzkowski (2001a), “Globalization and the Consequences of International Fragmentation,” in Dombusch, R., G. Calvo and M. Obstfeld (eds.), Festschrift in Honor of Robert A. Mundell (Cambridge, MA: MIT Press).Google Scholar
- Jones, R. and H. Kierzkowski (2001b), “A Framework for Fragmentation,” in Ardnt, Sven and Henryk Kierzkowski (eds.), Fragmentation: New Production Patterns in the World Trade (Oxford: Oxford University Press).Google Scholar
- Krugman, P. (1995) “Growing World Trade: Causes and Consequences,” Brookings Papers on Economic Activity, no. 1, 327–77.Google Scholar
- Lim, C. Y. et al. (1988), Policy Options for the Singapore Economy (Singapore: McGraw-Hill).Google Scholar
- Lloyd, P. (1996), “Specialisation and Value Adding in the Global Economy,” in Kapur, B., E. Quah and H. T. Hoon (eds.), Development, Trade and the Asia Pacific: Essays in Honour of Professor Lim Chong Yah (Singapore: Prentice-Hall).Google Scholar
- Lloyd, P. and R. Sandilands (1986), “The Trade Sector in a Very Open Reexport Economy,” in Lim C. Y. and P. Lloyd (eds.), Singapore: Resources and Growth (Singapore: Oxford University Press).Google Scholar
- Report of the Economic Committee (1986), The Singapore Economy: New Directions (Singapore: Ministry of Trade and Industry).Google Scholar
- Sandilands, R. and L. H. Tan (1986), “Comparative Advantage in a Reexport Economy: The Case of Singapore,” Singapore Economic Review 31,34–56.Google Scholar
- Tan, T. Y. (1994), An Analysis of Singapore’s External Trade in the Light of the New (1988) Input-Output Tables, unpublished master’s dissertation, National University of Singapore.Google Scholar
- Woon, K. C. (1991), Net Exports and Economic Growth: Assessment of Applicability of Export-led Growth Hypothesis to Singapore, unpublished master’s dissertation, National University of Singapore.Google Scholar