“Fragmentation and DVAR”

Edwin L.-C. Lai, The Hong Kong University of Science and Technology

Han (Steffan) Qi, Hong Kong Baptist University

In this paper, we develop a model of international fragmentation of production and use it to explain the variation of domestic value-added ratio of gross exports (DVAR) across countries and across sectors. Then we test the theory using the OECD-WTO TiVA data set, which infers bilateral trade flows in value-added from observed bilateral gross trade flows and inter-country input-output (ICIO) analysis. We find reasonably strong empirical supports for our theory.