The Impact of Production Fragmentation on Skill Upgrading: New Evidence from Japanese Manufacturing

This paper examines the hypothesis that industries engaged in international fragmentation
of production experience greater skill upgrading using a panel dataset of Japanese
manufacturing over the period 1980-2000. The novelty of the study comes from the use
of a newly constructed index using trade data on parts and components to measure intraindustry
variations in the degree of international vertical specialization (fragmentation
intensity of trade). It also employs a methodology designed to embody peculiarities of
Japan’s fragmentation trade pattern. While the findings of existing studies are
inconclusive, it is found that the expansion of fragmentation trade with developing East
Asian countries has had a significant impact on the skills composition of Japanese
manufacturing employment. At the same time, fragmentation trade with high income
countries has had a skill downgrading effect.