4. What are reasons behind the differences between developed and developing countries?

Why are there differences between developed and developing countries in terms of the relations among GVCs participation, capital deepening, and labor income shares? To answer this question, we analyze the effect of GVCs participation on the rate of capital deepening in the services and nonservices sectors separately. The results are as follows. In developed countries, GVCs participation raises the rate of capital deepening only in the nonservices sector and not in the services sector. (The correlation of the coefficient between the GVCs participation change and the capital deepening change is 0.8129 in the nonservices sector and �0.072 in the services sector.) In developing countries, the opposite relationship is observed. The rate of capital deepening in the services sector increases along with GVCs participation, but in the nonservices sector, it does not. (The correlation of the coefficient between the GVCs participation change and the capital deepening change is 0.097 in the nonservices sector and 0.739 in the services sector.) If GVCs expansion is measured by a backward index (the share of imported inputs in the overall exports of a country), not by participation index (the sum of backward and forward indices) in the case of developing countries, it is revealed that GVCs participation raises the rate of capital deepening of both the services and the nonservices sectors. For developing countries, the main contributions of being involved in GVCs are making them depend on imported foreign intermediate goods to make exports. This is just a role of backward linkage. In this respect, we can conclude that developing countries can increase the rate of capital deepening of both sectors by becoming involved in GVCs. Figure 6 indicates that the impact of GVCs on capital deepening is larger in the services sector than in the nonservices sector in developing countries. As a result, there is a positive correlation between GVCs participation and the relative capital deepening rate of the services sector to the nonservices sector in developing countries. There is a negative correlation between them in developed countries because GVCs participation raises the rate of capital deepening only in the nonservices sector in developed countries.

Consequently, the next question is why does GVCs participation have a different impact on capital deepening between developed and developing countries? The results found for developed countries are intuitive. Tasks in the nonservices sector are relatively labor intensive and are likely to be offshored from developed to developing countries. For developed countries, the composition of production in the nonservices sector becomes more capital intensive.

between the changes in services value added share to total final demand and the changes in GVCs participation throughout the years of 1995 until 2011. The results are shown in Figure 7. As indicated in Figure 7, services input shares to final demand and the degree of GVCs participation have a positive correlation in developing countries. The R-squared value is higher when the degree of GVCs participation is measured by the backward index rather than by the participation index (backward + forward indices). As mentioned before, the forward index is a measure of domestic value added embodied in foreign exports and the backward index is a measure of foreign value added embodied in domestic exports. Many developing countries in GVCs are primarily involved in backward linkages with developed countries. This is why the positive correlation between the services input shares and GVCs participation is clearly recognized when using backward index. The same positive correlation between the degree of services input and that of GVCs participation can be observed when shares of services input are measured not only to total final demand but also to the demand of the

Figure 7. Changes in the GVCs participation (participation and backward indices, x-axis) and changes in the share of inputted services embodies in the total final demand (y-axis) in developing countries. Gross rate between 1995 and 2011.

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains

http://dx.doi.org/10.5772/intechopen.81316

33

This intersectoral input-output linkage between the services sector and the nonservices sector works to enhance the relative capital deepening of the services sector in developing countries. (The correlation of the coefficient between the degree of intersectoral linkage and the relative rate of capital deepening of the services sector to the nonservices sector in developing countries is 0.776.) From these analyses, we can conclude that for the nonservices tasks offshored from developed to developing countries, demand for services as intermediate input to these tasks

Figure 8 describes the mechanism by which GVCs participation decreases labor income shares in developing and developed countries as a summary of the previous analyses. Tasks that are relatively labor intensive and low elasticity of substitution between capital and labor are likely

increases and this enhances capital deepening in recipient developing countries.

nonservices sector and exports.

What needs careful examination is the mechanism for how GVCs enhance capital deepening of the services sector in developing countries. The key is the intersectoral production linkage in which nonservices, especially manufacturing sector activities, are increasingly service dependent. This close production linkage between services and nonservices sectors is called "servicification" [10].

On the supply side, the increased internationalization of production has intensified reliance on services. When products can be sourced, made, and sold anywhere in the world, services become especially critical. For example, design, R&D, and prototyping services help decrease the cost of production failure and shorten the product development cycle. For sourcing of intermediate inputs, logistics and transportation services, as well as supply chain management services, make the geographic dispersion of GVC operations possible [10].

This study uses the Trade in Value Added (TiVA) database to measure the shares of inputted services embodied in the total final demand. This database contains indicators measuring the value-added content of international trade flows and the final demand. We check the relation

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains http://dx.doi.org/10.5772/intechopen.81316 33

GVCs participation raises the rate of capital deepening only in the nonservices sector and not in the services sector. (The correlation of the coefficient between the GVCs participation change and the capital deepening change is 0.8129 in the nonservices sector and �0.072 in the services sector.) In developing countries, the opposite relationship is observed. The rate of capital deepening in the services sector increases along with GVCs participation, but in the nonservices sector, it does not. (The correlation of the coefficient between the GVCs participation change and the capital deepening change is 0.097 in the nonservices sector and 0.739 in the services sector.) If GVCs expansion is measured by a backward index (the share of imported inputs in the overall exports of a country), not by participation index (the sum of backward and forward indices) in the case of developing countries, it is revealed that GVCs participation raises the rate of capital deepening of both the services and the nonservices sectors. For developing countries, the main contributions of being involved in GVCs are making them depend on imported foreign intermediate goods to make exports. This is just a role of backward linkage. In this respect, we can conclude that developing countries can increase the rate of capital deepening of both sectors by becoming involved in GVCs. Figure 6 indicates that the impact of GVCs on capital deepening is larger in the services sector than in the nonservices sector in developing countries. As a result, there is a positive correlation between GVCs participation and the relative capital deepening rate of the services sector to the nonservices sector in developing countries. There is a negative correlation between them in developed countries because GVCs participation raises the rate of capital deepening only in the

Consequently, the next question is why does GVCs participation have a different impact on capital deepening between developed and developing countries? The results found for developed countries are intuitive. Tasks in the nonservices sector are relatively labor intensive and are likely to be offshored from developed to developing countries. For developed countries, the composition of production in the nonservices sector becomes more capital intensive.

What needs careful examination is the mechanism for how GVCs enhance capital deepening of the services sector in developing countries. The key is the intersectoral production linkage in which nonservices, especially manufacturing sector activities, are increasingly service dependent. This close production linkage between services and nonservices sectors is called

On the supply side, the increased internationalization of production has intensified reliance on services. When products can be sourced, made, and sold anywhere in the world, services become especially critical. For example, design, R&D, and prototyping services help decrease the cost of production failure and shorten the product development cycle. For sourcing of intermediate inputs, logistics and transportation services, as well as supply chain management services, make the geographic disper-

This study uses the Trade in Value Added (TiVA) database to measure the shares of inputted services embodied in the total final demand. This database contains indicators measuring the value-added content of international trade flows and the final demand. We check the relation

nonservices sector in developed countries.

sion of GVC operations possible [10].

"servicification" [10].

32 Globalization

Figure 7. Changes in the GVCs participation (participation and backward indices, x-axis) and changes in the share of inputted services embodies in the total final demand (y-axis) in developing countries. Gross rate between 1995 and 2011.

between the changes in services value added share to total final demand and the changes in GVCs participation throughout the years of 1995 until 2011. The results are shown in Figure 7.

As indicated in Figure 7, services input shares to final demand and the degree of GVCs participation have a positive correlation in developing countries. The R-squared value is higher when the degree of GVCs participation is measured by the backward index rather than by the participation index (backward + forward indices). As mentioned before, the forward index is a measure of domestic value added embodied in foreign exports and the backward index is a measure of foreign value added embodied in domestic exports. Many developing countries in GVCs are primarily involved in backward linkages with developed countries. This is why the positive correlation between the services input shares and GVCs participation is clearly recognized when using backward index. The same positive correlation between the degree of services input and that of GVCs participation can be observed when shares of services input are measured not only to total final demand but also to the demand of the nonservices sector and exports.

This intersectoral input-output linkage between the services sector and the nonservices sector works to enhance the relative capital deepening of the services sector in developing countries. (The correlation of the coefficient between the degree of intersectoral linkage and the relative rate of capital deepening of the services sector to the nonservices sector in developing countries is 0.776.) From these analyses, we can conclude that for the nonservices tasks offshored from developed to developing countries, demand for services as intermediate input to these tasks increases and this enhances capital deepening in recipient developing countries.

Figure 8 describes the mechanism by which GVCs participation decreases labor income shares in developing and developed countries as a summary of the previous analyses. Tasks that are relatively labor intensive and low elasticity of substitution between capital and labor are likely

includes the interaction term in which the changes of GVCs participation index and those of

The Declining Labor Income Shares Revisited: Intersectoral Production Linkage in Global Value Chains

Figures in parentheses are p-values. As clearly shown in this estimation, the modified explanatory variable (the changes in GVCs participation index multiplied by changes in services share of GDP) explains the change in labor income share well. Also, the R-squared value escalates from 0.1151 to 0.3712. From these analyses, we can conclude that intersectoral production linkage spurred by GVCs between the services sector and the nonservices sector plays

This chapter focuses on GVCs as an important determinant of changes in the labor income share and analyzes the mechanism responsible for the share decline under GVCs in developing countries. This mechanism has not been documented in prior studies. The crucial mechanism is that intersectoral production linkage between the services and nonservices sectors promotes capital deepening in the services sector, and this leads to the decline of the macrolabor income share. In developing countries, labor-intensive nonservices (especially manufacturing) tasks have been offshored from developed countries in GVCs since the late 1990s. The services sector in developing countries actively accumulates capital to supply quality services to the inflowing nonservices tasks, while the nonservices sector also promotes capital accumulation under severe international competition. As a result, a developing country raises its rate of capital deepening significantly in this period and thus, decreases the labor income share, as the theory predicts. This mechanism can be analyzed by utilizing the data of sectoral labor income shares and the sectoral rate of capital deepening for developing and developed countries. Preceding studies have rarely used the kind of comprehensive dataset used in this study and have rarely discussed intersectoral linkages between the services and nonservices sectors as important

This appendix describes the calculation procedures and data sources for labor income shares and the rate of capital deepening for two different sectors (services and nonservices) in developing and developed countries. We use a static growth model, and by using GDP, GDP deflators, and employment data for each industry, we can analytically calculate factor shares of income and the rate of capital deepening for the two sectors. We review the effectiveness of the model by comparing the actual data with our calculations for developed countries and

� 0:108Δlog GVCs ð Þ ð Þ :044

� Δlog services share ð Þ R-squared:0:<sup>3712</sup>

http://dx.doi.org/10.5772/intechopen.81316

(4)

35

þ 0:016Δlog GVCs ð Þ ð Þ :845

a major role in the downward trend of labor income share in developing countries.

the share of services in the total economy are multiplied as follows:

ð Þ :000

determinants of changes in macroeconomic labor income shares.

some developing countries where these data are available to use.

Δlog labor income share ð Þ ¼ 1:064

5. Conclusion

A. Appendix

Figure 8. The mechanism by which GVCs participation promotes capital deepening and decreases labor income share in developed and developing countries.

to be offshored from developed to developing countries. For developed countries, because the offshored tasks are labor intensive, the composition of production in these countries becomes more capital intensive. As Dao et al. [6] point out, many tasks left in developed countries are substitutable by capital, contrasting to offshored tasks with low elasticity of substitution between capital and labor. As a result, the tasks left in developed countries are automated with the help of a steep decline in the relative price of investment goods, and thus, the labor income share decreases.

On the other hand, in developing countries, the services sector promotes capital deepening and an increasing involvement in GVCs. This is because nonservices tasks are offshored from developed to developing countries and demand for services as intermediate input to these tasks increases in recipient developing countries. The capital deepening is promoted also in the nonservices sector, and thus, total economy experiences a progression of capital deepening. As discussed in Section 2, capital deepening results in lower labor income share.

In Figure 4 indicating the relation between the changes of GVCs participation index and those of macrolabor income shares, we found that expanding GVCs has a significant impact on labor income share in developed countries. In developing countries, however, the same negative relationship cannot be clearly observed. The reason for this result can be interpreted as follows. In developing countries, GVCs have a profound capital deepening effect on the services sector but not the nonservices sector. Developing countries vary in terms of the share of services in the total economy, and thus, the capital deepening effect that GVCs have on the macroeconomy may become large in economies with a large share of services and small in economies with a small share of services.

As a modified version of Figure 4 in which changes in labor income shares are compared with the changes in the GVCs participation index, the following estimation for developing countries includes the interaction term in which the changes of GVCs participation index and those of the share of services in the total economy are multiplied as follows:

$$
\Delta\log\left(\text{labor income share}\right) = \underbrace{1.064 + 0.016\Delta\log\left(\text{GVCs}\right) - 0.108\Delta\log\left(\text{GVCs}\right)}\_{\text{(A45)}} \times \Delta\log\left(\text{sieves share}\right) \tag{4}
$$

$$
\Delta = \underbrace{\Delta\log\left(\text{K}\right)}\_{\text{(A20)}} \times \Delta\log\left(\text{K}\right) \tag{5}
$$

Figures in parentheses are p-values. As clearly shown in this estimation, the modified explanatory variable (the changes in GVCs participation index multiplied by changes in services share of GDP) explains the change in labor income share well. Also, the R-squared value escalates from 0.1151 to 0.3712. From these analyses, we can conclude that intersectoral production linkage spurred by GVCs between the services sector and the nonservices sector plays a major role in the downward trend of labor income share in developing countries.
