Of Smile Curves and Global Value Chains: The Role of Functional Specialisation for Economic Growth

Anniversary Fund of the Oesterreichische Nationalbank
January 2018 – June 2019

The central insight of the smile curve is that different functions (or ‘tasks’) that need to be performed along a firm’s value chain have different potentials for generating value added, with the production stage often being the least promising one. Project-level data on greenfield crossborder investments with information on both the industry and the function they serve are used to identify countries’ functional specialisation. A metric labelled ‘relative functional specialisation in global value chains’ and a related measure, the ‘relative production specialisation index’, are developed. The descriptive part of the project will use these indicators to create ‘portraits’ of functional specialisation of EU Member States, NAFTA and the South East Asian region. In a second step, the implication of the smile curve, i.e. that countries specialised in the pre-production and post-production tasks of the value chain should capture higher value added, is tested econometrically. To this end the relative function specialisation measure and the relative production specialisation index are embedded into an empirical endogenous growth model.