Made in Europe? Trends in International Production Fragmentation

In a world dominated by the emergence of global value chains, production processes increasingly fragment across a variety of countries. We provide new macro-economic evidence on this phenomenon, using a Theil-type distribution index of value added, which we call the international production fragmentation (IPF) index. In contrast to the well-known Feenstra and Hanson (1999) measure, this novel index does not suffer from a country size-bias and double counting due to re-imported intermediates. Moreover, it is sensitive to changes in the country-distribution of value added. We identify global value chains (GVCs) by the countryindustry in which the last stage of production takes place. Using a new dataset of world input-output tables covering 40 countries, we find that since 1995 production processes for most manufacturing goods in Europe increasingly fragmented across countries, although at different paces. In 2008, GVCs of electrical products and transportation equipment were generally most internationally fragmented, while food products and minerals production the least. Averaged across products, Belgium, Ireland and the Netherlands had the most fragmented GVCs in 2008, followed by Germany, the Czech Republic, and Hungary, where fragmentation increased at a high pace since 1995. We also find that in 1995, European value chains were mainly fragmented across other EU countries. Afterwards, however, there has been a strong trend towards increased participation of non-European countries. The financial crisis in 2008 led only to a temporary reduction in international production fragmentation.