Impact of Human Capital on Global Value Chains in Asia and Southeast Asian Region

Abstract

This thesis examines the relationship between human capital development and global value-chain (GVC) activities in East Asia. It seeks to examine the following: (a) the impact of human capital development on the domestic firm participation in global value chains, (b) impact of human capital development and the impact of SME participation in the GVC, and (c) the effects of servicification and impact on productivity of the firms. The first empirical approach adopted in the thesis is the gravity model framework to identify the relationship between a human capital and GVC participation based on cross-country panel data of 11 countries in East and Southeast Asia. The GVC participation is decomposed into forward GVC and backward GVC linkages at the firm level for the respective ASEAN and East Asian countries. Empirical results indicate the importance of education and skills in enhancing the domestic firm engagement in GVC activities. The results indicate that countries in the sample with higher education and skills are more likely to join forward GVC participation through the supply of domestically produced intermediate inputs to other countries along global production networks. For backward GVC participation, skills of workers seemed to be more important than education level in the GVC participation. We also find evidence that trade policies in form of tariff, free trade agreements and trade facilitation, proximity and quality of transport and logistics system play significant roles in determining the magnitude of valueadded trade in East and Southeast Asia. The second approach adopts firm heterogeneity theory based on firm-level analysis in selected ASEAN countries. The firm level GVC participation is measured by status of import of raw materials and exporting products, while human capital is proxied by share of skilled workers. The results suggest that firms that join global value chain activities are more likely to have higher levels of human capital, higher productivity, more capital assets, and higher technological capacities. The result also highlights the importance of a conducive business environment in the GVC participation of the firms. The firm heterogeneity approach in our study is extended to understand the effects of human capital on SMEs’ GVC participation based on Indonesian firm-level data. The results suggest that SMEs that are exportbased and with linkages to global value chain activities are more likely to have a higher level of human capital, higher productivity, more assets, and investment in research and development. The third approach adopted in the thesis is the semi-parametric method to understand the productivity effect of servicification of manufacturing GVC activities in Indonesia. Empirical strategy involves two procedures. The first stage involves the estimation of productivity from the Cobb-Douglas production function using a semi-parametric method developed by Levinsohn and Petrin (2003). The second stage involves regressing the estimated productivity with servicification variables, which is measured by share of industrial service cost to total input and share of service revenues to total output. Our results demonstrate the significant contribution of services both in supply side and demand side in helping firms raise productivity. We also find evidence suggesting the importance of firm heterogeneity in boosting productivity. Factors such as foreign ownership, access to finance, and participation in global value chains are positively associated with productivity.