Host Country Educational Attainment and Vertical Specialization

Integration of the global economy through trade has enabled firms to adopt new production strategies. Rather than producing in a single country, stages of production are performed in multiple countries to exploit inherent locational advantages. This practice gives rise to vertical specialization across national boundaries. Here, the U.S. exports components to a foreign (host) country that uses them to produce a product that is returned to the U.S. or is exported to other countries. This paper investigates the relationship between host country educational attainment and the extent of vertical specialization. Despite the general finding that educational attainment exerts a decreasingly negative effect on such activity in host countries, a detailed analysis suggests there may be a positive relationship between educational attainment and vertical specialization over some parts of the educational attainment scale. A country can become more attractive as a production location when its workforce is educated.