From local to global: understanding shifts in production processes

As the global economy continues to integrate, there are notable shifts in how and where products are manufactured. This study examines how increased outward foreign direct investment (FDI) influences shifts in domestic production processes, with a focus on the vertical dimensions of production lines. Using unique Korean firm-level data, we investigate the scope of a firm’s involvement within the production line and the specific stages that have undergone changes. Our findings show that firms with foreign affiliates generally have a narrower scope in their production lines, skewed towards downstream stages – closer to the final stages – compared to firms not engaged in FDI. These micro-level observations are in line with broader trends, such as the decrease in domestic value-added share in gross exports. This study contributes to a more nuanced understanding of FDI’s association with production line modifications, shedding light on the intricate dynamics of global production fragmentation.<br/><br/>