From Trade to FDI: A Radical Shift in Measuring Global Supply Chain Participation

In a landmark working paper from the National Bureau of Economic Research (NBER), economists Zhi Wang (George Mason University), Shang-Jin Wei (Columbia University and Fudan FISF), Xinding Yu (University of International Business and Economics), and Kunfu Zhu (Renmin University of China) propose a new accounting methodology that radically transforms how we understand and measure global supply chains (GSCs). Their integrated framework decomposes gross output, GDP, and trade flows while formally incorporating the role of Foreign Invested Enterprises (FIEs), subsidiaries of multinational corporations operating within host economies. By doing so, the researchers reveal that existing metrics significantly underestimate GSC activities, and their improved method captures three times the volume of global supply chain transactions than traditional approaches.

From Value Chains to Supply Chains: Bridging Two Worlds

The authors begin by drawing a crucial conceptual distinction between Global Value Chains (GVCs) and Global Supply Chains (GSCs). GVCs trace value-added components of production, while GSCs map the entire movement of intermediate goods across stages and borders. Their framework considers GVCs as a subset of GSCs, where value creation is just one aspect of broader production interdependencies. Previous decomposition techniques, whether focused on GDP or gross trade, failed to reconcile these perspectives, often producing inconsistent insights. Moreover, none of these methods adequately captured the footprint of FIEs, which are central players in today’s globally fragmented production systems.

By unifying net (value-added-based) and gross (output- and trade-based) decompositions into a single analytical structure, the authors fill this gap. This allows for a comprehensive measurement of both economic value creation and exposure to foreign supply shocks. Crucially, the framework traces intermediate transactions, the heart of GSCs, and classifies them by firm type, production stage (upstream or downstream), and engagement mode (trade, FDI, or both).

FIEs: The Hidden Backbone of Global Production

A central innovation in the framework is its treatment of FIEs. Traditionally, national accounting systems categorize all within-border transactions as domestic. This blurs the line between local and international economic activity, especially in economies like China or Mexico, where foreign affiliates of multinational firms drive a significant share of industrial output. The authors reject this simplification by disaggregating domestic firms and FIEs at the input–output table level. They consider FIEs as carriers of foreign capital and technology, meaning that even their sales to local firms are part of international production sharing.

This revised classification has transformative implications. It allows the framework to identify and attribute FDI-driven production flows that traditional trade statistics ignore. For example, a Chinese FIE that assembles products using Japanese parts and sells to another Chinese firm is still embedded in a cross-border chain, even if no actual export occurs. Capturing such nuances, the authors demonstrate, significantly raises estimates of GSC participation, especially in high-tech and capital-intensive sectors.

Tripling the Estimates: Evidence from Global Data

Using the OECD’s AMNE-ICIO database covering 76 countries and 41 industries between 2000 and 2020, the authors conduct a granular empirical analysis. Their gross output decomposition breaks down production into five key segments: purely domestic, traditional trade, upstream GSC, downstream GSC, and activities spanning both directions. They find that around 70% of global output remains domestic, but nearly 25% involves GSC-related transactions. Of this, three-quarters are embedded in intermediate inputs and outputs, flows missed by GDP and trade statistics.

This undercounting problem is not trivial. When measured with traditional GVC tools, GSC activity appears moderate. But when applying the new gross-output framework with FIE disaggregation, the participation rate nearly triples. Moreover, FDI-related GSCs, once invisible, emerge as equal in scale to trade-driven ones. The authors also show that sectors with high technological intensity, such as electronics, automotive, and financial services, exhibit the deepest GSC entanglement.

Country-level analysis yields striking contrasts. China’s electronics industry has shifted from an import-dependent assembler to a balanced participant in both upstream and downstream chains. The U.S., meanwhile, shows growing downstream dominance, exporting high-value intermediates while reducing its reliance on foreign inputs. FIEs in both countries play pivotal roles: in China, they dominate downstream production; in the U.S., they occupy upstream niches. These asymmetries underscore how deeply GSC engagement is structured not only by trade, but also by ownership and investment dynamics.

Position, Length, and Vulnerability: New Indices for a New Era

Beyond participation rates, the framework introduces indicators for production chain length and a firm or sector’s position within it. This helps policymakers and researchers evaluate whether an economy is primarily engaged in upstream supply (e.g., raw materials, intermediate goods) or downstream functions (e.g., final assembly and sales). For instance, between 2000 and 2020, China’s textile sector moved upstream, away from low-cost garment assembly toward materials and design, while its automotive sector moved downstream into final assembly and branding. In contrast, the U.S. electronics sector increasingly occupies an upstream position, reflecting a shift to design and innovation over manufacturing.

The authors also refine the concept of vertical specialization (VS), originally used to quantify how much of a country's exports depend on foreign inputs. They extend VS to cover both gross inputs and outputs, and to include FDI-driven production. This is crucial in sectors where foreign capital, rather than trade, supplies the backbone of production, think pharmaceutical chemicals, fine electronics, or advanced machinery.

Implications: Resilience, Decoupling, and Domestic Benefit

Perhaps the most policy-relevant insight is that FDI-related GSCs generate more domestic value-added per unit of output than trade-related ones. This has profound implications for strategies like reshoring or industrial decoupling. Policymakers aiming to reduce external risk should recognize that cutting off trade might limit exposure, but also reduce efficiency. In contrast, retaining or increasing FDI-driven production may offer a better balance, domestic economic benefit with relatively lower exposure to global disruptions.

In essence, this new framework gives researchers and governments a sharper lens through which to view globalization. It shows that international production sharing is far more extensive, nuanced, and resilient than previously understood, and that capturing its full complexity requires both trade and investment to be accounted for with equal precision. This work sets a new benchmark for the measurement of global economic integration.