2023/25 | LEM Working Paper Series | ||||||||||||||||
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Vertical integration and patterns of divergence in European industries: A long-term input-output analysis |
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Fabio Ascione and Maria Enrica Virgillito |
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Keywords | |||||||||||||||||
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Input-output analysis; divergence; economic integration; Europe; trade liberalization.
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JEL Classifications | |||||||||||||||||
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F6, F14, F15, D63, O47
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Abstract | |||||||||||||||||
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Against a theoretical background which recognizes the gains from trade liberalization, this
paper asks whether, and if so to what extent, economic integration as directly measured through
vertically integrated value-added has increased or reduced convergence among European
industries and related countries. To answer this question, we draw upon new input-output
tables and sectoral divergence measures for 14 European countries and 19 sectors since 1970.
Our novel database provides consistent long-run measures of international input-output
linkages and sectoral dispersion in labor productivity and wages. We use these measures to study
the timing and mechanisms that govern the relationship between economic integration and
sectoral gaps, taking a European perspective and focusing on the role of international
production fragmentation via input-output linkages. According to our findings, higher vertical
integration has fostered divergence rather than convergence within industries. Lock-in effects
in laggard positions coupled with positive feedback loops and increasing returns for leading
positions are potential mechanisms to explain why the fruits of rising vertical integration are
shared unequally between poor-performing industries and frontier industries.
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