Fragmentation of International Production and Business Cycle Synchronization: New Evidence pre and during Global Financial Crises

Abstract

Understanding the link between the fragmentation of international production (FIP) and business cycle synchronization (BCS) is crucial because it affects the world economic stability and hence hampers the sustainability in world trade, world production, and the world supply chain. Following that, this paper investigates the effects of fragmentation in an international production (FIP) on business cycle synchronization (BCS) amongst 38 countries (29 OECD and nine non-OECD countries) for two different periods; pre-crisis (2003–2007) and during the crisis period (2008–2012). This study uses a dynamic panel system GMM estimation in analyzing the effect of FIP on BSC by controlling other explanatory variables, namely, trade linkages and financial openness. Unlike many previous results, the main findings reveal that FIP positively and significantly affects BCS during a crisis period. However, it shows an insignificant effect during the normal period. In other words, FIP would amplify the synchronization of output downfall during the crisis period. Trade linkages have a negative and significant relationship with BCS in both periods, whereas financial openness has a negative and significant relationship with BCS during the normal period. The study suggests that selective measures have to be undertaken in implementing FIP during the crisis period to reduce the negative impact of BCS. Increasing trade and financial activities, on the other hand, would be beneficial for the countries as they would reduce the negative effect of BCS during the crisis period.