Global Value Chains, Foreign Direct Investment, and Taxation

This research volume is concerned with the causes and consequences of global value chains — the fragmentation of production across firms and international boundaries. Figure 1 provides a schema for thinking about these phenomena. The total value of inputs used in producing a given level of output can be represented by the large box. Some or all of the intermediate inputs used in producing the final product can be produced within the firm (insource) or purchased from another firm (outsource). These inputs can be obtained within the domestic economy (onshore) or from abroad (offshore). The box labelled “Parent” represents the inputs or tasks that are performed by the firm which controls production of the final product. Some inputs or tasks can be purchased at arms length from other firms operating in the domestic economy. These inputs are represented by the box labelled “Domestic Suppliers”. Alternatively, a firm can obtain some of its intermediate inputs offshore. Inputs supplied by a foreign subsidiary are represented by the box labelled “Foreign Affiliate”. This source of inputs gives rise to foreign direct investment (FDI). Alternatively, the firm could obtain inputs from an outside firm operating in another country, which is represented by the box labelled “Foreign Suppliers”