China’s functional upgrading in global value chains and its drivers: a multi-country chaining structural decomposition analysis

The functional activities, such as management, marketing, R&D and fabrication, carried out by a country or industry is of great importance for its governance and upgrading on the global value chains (GVCs). This paper provides a long-term macro-economic analysis on China’s functional upgrading in GVCs and its drivers between 1999 and 2011. We combine the world input-output database with the newly compiled labour occupations database to measure China’s functional income growth in internationally fragmented production networks, and then incorporate the concept into the chaining structural decomposition analysis (SDA) to explore its drivers. We find that China has achieved functional upgrading to some degree, reflected in the growth of China’s domestic value added in headquarter activities, such as R&D, at the aggregate and industrial levels. However, fabrication activity still stands out, indicating that China still has a long way to go on upgrading in GVCs. Finally, through the chaining SDA, we find that among the GVC production, technology and consumption effects, the consumption level (consumer demand) is the main factor driving the growth of China’s functional upgrading.