Reaping gains from global production sharing: Domestic value addition and job creation by Indian exports

Is it in the interest of a country to promote strong local linkages for domestic industries or to participate in global production sharing (GPS) activities wherein linkages are globally dispersed? This paper informs this debate by empirically analyzing which one of these strategies would result in higher levels of domestic value added (DVA) and employment in a developing country, India. A higher level of participation in GPS entails that, for any given country, DVA per unit of exports is smaller than when most inputs are sourced locally. However, owing to the scale and productivity effects of producing for the world market, participation in GPS can lead to higher absolute levels of DVA and domestic job creation. We test this hypothesis using a unique panel data on DVA and jobs tied to Indian exports from 112 sectors for the period 1999-2013. Our regression analysis confirms that participation in GPS, as measured by the sectoral ratio of DVA to gross exports, leads to higher absolute levels of gross exports, DVA and employment. These results are robust to alternative model specifications and estimation techniques. We conclude that developing countries can reap rich dividends by adopting policies aimed at strengthening their participation in GPS.