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China's Role in Global Production Networks

Vertical specialization is one of the most notable trends in the international organization of production (Hummels, Jun and Yi, 2001; Yi, 2003; Desai, 2009). Thanks to reductions in communication, transportation and other trade costs, multinational firms are slicing up their value chains and are dispersing their production activities across multiple countries. This means that a single final good is often worked on in many countries, with each sequential node in the value chain performed in the location that is most advantageous for the process.China has been a large beneficiary of this vertical specialization process, with multinational firms integrating the country into their global production networks by offshoring labor-intensive final assembly activities to the country (Branstetter and Lardy, 2006; Amiti and Freund, 2008). However, at least a few questions about China’s role in these global production networks are left unanswered. First, in which type of industries is China integrated into global production networks? The answer to this question will be important to understand the driving forces behind the rapid technological upgrading trajectory of China’s exports. Second, what factors have driven multinational firms to offshore assembly activities to China? Existing studies generally attribute this to the country’s relatively low labor costs and its favorable export promotion policies. But, as we will discuss below, China’s heavy reliance on imported inputs for its assembly activities suggests that its geographic location may also have played an important role. Finally, how important is Canada as a supplier to these global production networks?