Global production networks and the evolution of industrial capabilities: Does production sharing warp the Product Space?

Do production capabilities of countries evolve from existing capabilities, or do they emerge de novo? The Product Space approach developed by Hidalgo, Klinger, Barabási & Hausmann (2007) postulates that a country’s existing industrial structure largely determines its opportunities for industrial upgrading. We advance the Product Space approach to accommodate the role of global production sharing. Using a newly constructed multi-country dataset of manufacturing exports that distinguishes between trade within global production networks and traditional horizontal trade we show that existing industrial structure has a lesser impact on industrial upgrading within vertically integrated global industries.