Structural Change and Economic Dynamics 59 (2021) 42–50

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Structural Change and Economic Dynamics

journal homepage: www.elsevier.com/locate/strueco

International trade as a process of choice of techniqueR

Nadia Garbellini
Università degli Studi di Modena e Reggio Emilia, Italy

a r t i c l e i n f o a b s t r a c t

Article history: International trade is often presented as a game played by national states. If this is partially true, espe-
Received 21 November 2020 cially in the case of major countries, it is only a side of the coin. Changes in international trade patterns
Revised 16 July 2021
are therefore treated as the result of a change of technique process, taking place also due to international
Accepted 7 August 2021
diffusion of technical knowledge.
Available online 13 August 2021
In fact, the main players are multinationals, or big OEMs at the head of Global Value Chains. Trade is an
Keywords: integral part of their cost-minimizing strategies: this is not a process of change of technique, but rather
Structural change and economic dynamics
of choice of technique – which then determines change in technique.
Choice of technique
Change of technique The objective of the present paper is to show how the structure of international trade depends not on
International trade comparative advantages, but rather on absolute advantages.
© 2021 Elsevier B.V. All rights reserved.

1. Introduction And in fact, equilibrium conditions for the single verti-

During his long-lasting career, Luigi Pasinetti has made count-
less contributions to economic theory. The best known are cer-
tainly those related to Cambridge Capital Controversy and the the-
ory of distribution. These contributions, though extraordinary, date
back to his youth: in the following decades, Pasinetti developed
what is perhaps his most important contribution, which makes
him worthy of inclusion on the Mt. Olympus of economics: the
theory of structural economic dynamics (Pasinetti, 1981; 1988).
[Domar] pointed out that that investments play a strategic role
in any economic system, as they act through two quite different
channels. On the one side the total level of investments deter-
mines the total level of effective demand, through the operation
of the multiplier relation. [...] On the other side new investment
represents an addition to existing productive capacity.
(Pasinetti, 1974, p. 93. Emphasis in the original)
Pasinetti applied the methodology detailed in his famous 1962
contribution to a multisectoral scheme, where the dual role of
investments is explicitly acknowledged by adding to the matrix
of inter-industry transactions that of investments by industry of
origin and destination. In this way, he could completely gener-
alize equilibrium conditions – where equilibrium, exactly as in
Pasinetti (1962), is defined as full employment of the labor force
and full utilization of productive capacity.
R
The present paper was written within the INET Grant #INO18-0 0 031.
E-mail address: ngarbell@unimore.it
cally hyper-integrated sectors (VHIs, hereinafter) are analogous
to the one derived for the aggregate economy (for details, see
Garbellini and Pasinetti, 2015). The link between all these sector-
specific conditions is what he calls the ‘macroeconomic condition’,
stating that all labor available in the economic system as a whole
must be employed, and that all income generated must be spent.
Sectoral equilibrium conditions, when one goes into dynam-
ics, prove to be extremely hard to achieve, and to keep achiev-
ing through time: any variation of the structure of final consump-
tion demand is enough to drive the system away from equilib-
rium. When adding technical progress to the picture, disequilib-
rium clearly becomes by far the most likely state of the world.
Given final demand for consumption goods and the technique
in use, there is only one configuration of physical (relative) quan-
tities guaranteeing (extended) reproduction of the system. Start-
ing from this quantity structure – and given income distribution,
being determined from outside the system in a Sraffian fashion –
Pasinetti derives, for each VHIs, the structure of (production) prices
reflecting it.
The important thing to keep in mind is that Pasinetti’s is a nor-
mative, not a positive analysis (Garbellini and Wirkierman, 2014).
The goal is that of stressing that no automatism will drive the sys-
tem to equilibrium: on the contrary, institutions must actively in-
tervene, with measures of different kinds, in order to counteract as
much as possible endogenous centrifugal forces.
Here, we want to apply Pasinetti’s ideas to a positive – or,
in Pasinetti’s terms, institutional – analysis, and hence reverse its
logic.

https://doi.org/10.1016/j.strueco.2021.08.003
0954-349X/© 2021 Elsevier B.V. All rights reserved.
N. Garbellini
In what follows, we will start from the existing cost structure,
which we will consider to be given as well as technology, in or-
der to derive the solution to the choice of technique problem and
thus the corresponding quantity structure. The specific problem to
which we will apply this reasoning will be that of international
trade and its determinants. Formally, we will use an Input-Output
framework with substitutable inputs and set up a non-linear pro-
gramming problem.
Our contention, in doing so, is that international trade is not
a consequence of a process of change of technique, but rather of
a process of choice of technique. A country does not specialize
in the sectors characterized by a higher-than-average productivity,
but achieves a higher-than-average productivity in the sectors in
which it specializes.
The paper is organized as follows. Section 2 briefly tackles the
issue of change versus choice of technique.
Section 3 provides a re-interpretation of international trade as
the outcome of a choice-of-technique process, rather than of a
change-of-technique one.
Section 4 illustrates the key methodological points by means of
a simple numerical example.
Section 5 provides a discussion of technological, organizational
and institutional tendencies whose impact on the structure of in-
ternational trade is worth being studied more in-depth.
Finally, Section 6 concludes, sketching out possible develop-
ments in this line of research.
2. Change versus choice of technique
Choice of technique and change of technique are two distinct,
although of course intertwined, phenomena.
In traditional capital theory, choice of technique and changes
of technique have always been presented as two facets of the
same problem. But again the association has been a conse-
quence of dealing exclusively with stationary economic systems,
which represent the special case in which the techniques which
are relevant for the problem of choice happen to coincide with
the techniques which are relevant in the process of change. As
soon as we let time and technical progress into the picture, this
coincidence disappears and two different sets of techniques be-
come relevant for the two problems.
A problem of choice arises any time that a method of pro-
duction has to be put into being and more than one alternative
technical method is available. [...]
A change of technique is an entirely different matter. It is a
process that takes place through time [...]. A process of change
in technique has, therefore, nothing to do with the previous
problem of choice. It involves a movement towards a different
set of possible techniques and, therefore, towards a new prob-
lem of choice.
(Pasinetti, 1981, p. 189, emphasis in the original).
Choice of technique means choosing, among the set of avail-
able options, the technique which minimizes production costs –
and hence maximizes profits. However, this choice is not made
once and for all, as technical progress makes ever new alternatives
available. Technical change is therefore the way in which technical
progress manifests itself, through the provision of ever new tech-
niques for the production of goods and services.
Of course, both technical choice and technical change are the
result of human activity. Ever since, R&D efforts have been fully
organic to profit maximization, and directed towards the develop-
ment of new technologies to intensify labor and hence extract rel-
ative plusvalue more easily. In fact, “[t]he development of technol-
ogy takes entirely place within capitalistic process. [...] Capitalistic
development of technology implies, through the various stages of
43
Structural Change and Economic Dynamics 59 (2021) 42–50
rationalization and more and more refined forms of integration, an
increasing capitalistic control.” (Panzieri, 1961, authors’ translation
from Italian).
3. International trade
International trade is often presented as a game played by na-
tional states. If this is partially true, especially in the case of major
countries, it is only a side of the coin.
According to comparative advantages theory, countries special-
ize in those sectors characterized by a higher-than-average produc-
tivity in order to efficiently allocate global production and get the
most from given global endowments. In Chapter XI of his 1981
book, Pasinetti restated this principle, calling it “principle of com-
parative productivity-change advantage” (Pasinetti, 1981, p. 266, em-
phasis added):
The important distinction that emerges from these conclusions
is again between factors determining the growth of real per
capita income in a country and those determining changes in its
competitive international position (and terms of trade). The for-
mer depend on absolute levels of growth of productivity, while
the latter depend on comparative rates of changes in productiv-
ity.
(Pasinetti, 1981, p. 270, emphasis in the original).
In other words, the changes in international trade patterns are
treated as the result of a change of technique process, taking place
also due to international diffusion of technical knowledge.
Looking at current patterns, we can see that international trade
in intermediates is gaining more and more relevance and it is
shaping the sectoral and regional topology of Global Value Chains
(GVCs, hereinafter).
There is a wealth of literature on the subject of GVCs.1 Multi-
sectoral structures emerge as the natural analytical setting to an-
alyze the connection between activity levels, trade patterns and
production interdependencies between economies. Several insights
from Regional Input-Output Analysis (Leontief, 1953; Leontief and
Strout, 1963) can be re-oriented towards the study of inter-national
inter-industry networks of commodity and money flows. In this
respect, early explicit attempts at exploiting multi-regional Input-
Output models in order to study European integration and interde-
pendence (Rampa, 1986; Rampa and Bertoletti, 1990; Rampa and
Lanza, 1988) can be brought to the fore thanks to the availabil-
ity of new datasets – such as the World Input-Output Database –
WIOD (Timmer et al., 2015) – and new computing techniques.
Such earlier attempts have been embedded, to a certain extent,
in the literature on vertical specialization of production—(triggered
by Hummels et al., 2001) and international transmission of busi-
ness cycles (see for example Ayhan Kose and Yi, 2001; Johnson,
2012). Indeed, the interaction of these two areas for the study of
some of the effects of the ‘Global Recession’ has been recently ad-
dressed by Bems et al. (2010, 2011).
Moreover, the consequences of the crisis upon income, wages
and employment rendered apparent the connections between
trade and value added components of national economies. Explor-
ing this issue gave rise to a growing strand of recent literature
on trade in value added and global value chains (Johnson and
Noguera, 2012; Koopman et al., 2010; Wang et al., 2009).
In a nutshell, we can define a GVC as the process of producing
a single final good or service via a sequence of geographically frag-
mented production stages, coordinated by the company performing
the final assembly.
1
For a thorough review of literature on the topic of GVC, see Antras and
Chor (2021); Hernández et al. (2014).
N. Garbellini Structural Change and Economic Dynamics 59 (2021) 42–50

If we extend the concept of vertically (hyper-)integrated sectors SA = A

to include their international dimension, this means that the in-
SST = 2I
dustry at the head of the chain delivers the final commodity pro-
duced by assembling modules coming either from other domestic where A is the Multi-regional Input-Output (MRIO, hereinafter)
industries or from abroad. The main players here are multination- matrix of coefficients, whereas A is the matrix of input-output co-
als, or big OEMs at the head of GVCs. Trade is an integral part of efficients.3
their cost-minimizing strategies: this is not a process of change of Equivalently, the above expression can be written as:
technique, but rather of choice of technique – which, in its turn, de- L
min pT = aTn w (1)
termines a change in technique. A
As stated above, technology is the “set of possible techniques”.
Among these techniques, it is possible to choose the one that min- s.t.
imizes production costs. Normally, we do not see the whole set
of possible techniques, but only the one chosen, i.e. the technique SA = A (2)
in use. However, when we open the analysis to international rela-
tions and thanks to international trade, each country can choose to
import some intermediates instead of producing at home, and can SST = 2I (3)
choose which country to import from. This means that, for each where L = (I − A )−1 .
producer, the set of possible techniques is given by the set of tech- The first order conditions are:4
niques in use in each country in the world, which represent our ∂ aTn w
L  
technology.  L O (i j ) L
= aTn w
∂A
Of course, importing implies costs: transport costs, exchange
An explicit solution to this minimization problem requires an
rate risk, time, coordination effort, and so on. Whether or not this
enormous amount of computations – being both the objective
is worth, depends on how much one can save by relocating certain
function and the constraints non-linear. In what follows, we will
production stages (i.e., importing the corresponding intermediates)
provide some numerical examples to illustrate the key points, pro-
as compared to these costs.
viding a roadmap for complete generalization in the following sec-
The amount of savings crucially depends on i) labor productiv-
tions.
ity in each country: the less labor is required, the lower produc-
tion costs; ii) the structure of wages: the lower the hourly wage,
4. A numerical example
the lower labor costs. If wages are low enough, they can counter-
balance lower productivity levels. Of course, we are talking here
Let us build a toy example to illustrate the point.
of nominal wages: capitalists do not care of purchasing power, but
Assume we have three countries – c: center; s: semi-periphery;
only of absolute gains.
p periphery – and one commodity, to be either used as an inter-
The structure of international trade is therefore determined by
mediate input or delivered to domestic final demand.
the outcome of this minimization problem.
We disregard final trade, and hence focus on international trade
A reversal of perspective and causal direction is needed here.
in intermediates. In other words, we assume that final demand
Following Sraffa and on the basis of inter-industry coefficients,
must be satisfied domestically. Our MRIO coefficient matrix is:
i.e. the known technique, Pasinetti identifies the total quantities  
that it is necessary to produce in order to obtain a certain basket acc acs acp
of goods for final consumption. Hence, given the distribution of in- A= asc ass asp
come – which is determined outside the sphere of production – he a pc a ps a pp
calculates the production prices. The technique in use in each country is the same – commodi-
Here, the reasoning is reversed: we start with the cost struc- ties are produced with the same amount of intermediate inputs in
ture, which is determined by technique and the wage structure, all countries; the difference is given by the different quality of in-
and calculate the corresponding quantities as a result of cost mini- stalled fixed capital, reflecting in different direct labor coefficients.5
mization. Determining the quantities in our case means determin- In particular assume that, irrespective of the country where
ing their geographical distribution, since the total quantity of each production takes place, we need 0.5 units of input to get one unit
input needed to produce the output is implicit in the technique. In of output. Formally:
fact, we know the technique in use in each GVC – the quantity of
each input required to produce one unit of output, independently eT Ae = 3a = 1.5
of where such inputs come from. Choosing the technique therefore Finally, assume that both hourly wages and labor productivity
amounts to choosing the geographical origin of each input. decrease when moving from the center to the periphery:
Moreover, we know aTn = [arni ] – i.e. direct labor requirements    
for each industry and each country – and wT = [wri ] – i.e. unit
wT = wc ws w p = 30 18 10
wages.
Formally, we want to minimize costs with respect to ‘trade 3
In the two countries (r, s), two commodities (1, 2) case, we would have:
coefficients’ subject to the constraints defined above. Production ⎡ ⎤
arr
11 arr
12 ars
11 ars
12
prices reflect production costs, hence:2 ⎢arr arr ars 22 ⎥
ars
A = ⎣ 21 22 21
⎦
asr 11 asr
12 ass
11 ass
12
 + pT A
min pT = aTn w asr
21 asr
22 ass
21 ass
22
A 
s.t. 1 0 1 0
S=
0 1 0 1

4
See Appendix A for details.
2 5
For the sake of computational simplicity, we will assume here that rates of One can relax this assumption as well and allow for country-specific coeffi-
profit are uniform, and simply disregard them. This assumption can be relaxed if cients. However, in the real world it is actually the endowment of physical and
the task is that of analyzing the consequences of non-uniform rates of profits on immaterial capital to determine labor productivity – as we will see below – and
the structure of international trade. hence this assumption seems reasonable.

44
N. Garbellini Structural Change and Economic Dynamics 59 (2021) 42–50

   
aTn = acn asn anp = 5 6 7 Selling country Buying country

Total wages per unit of output therefore are: c s p

  c 150.0 232.5 315.0
 = 150
aTn w 108 70
s 167.4 108.0 167.4
In such a simple framework, the solution is easily achieved:6 p 147.0 108.5 70.0
cost minimization requires producing all intermediate inputs in the
periphery. In this case, our MRIO becomes: Each country will choose to buy from the country displaying
  the minimum cost. In this case, c and p will continue to buy inter-
0 0 0
mediates from p, while country s will produce its own intermedi-
A= 0 0 0
ates. In this specific case, matrix A can be written as:
0.5 0.5 0.5
 
and the corresponding Leontief inverse and prices are, respec- 0 0 0
tively: A= 0 0.5 0
  0.5 0 0.5
1 0 0
L= 0 1 0 Matrices L and (I − A  T )−1 and vector pT are, respectively:
1 1 2  
1 0 0
  L= 0 2 0
 L = 220
aTn w 178 140
1 0 2
Notice that changes in the wage structure, if strong enough, can  
change the structure of trade. Take country c: in order to change 1 0 0
the structure of trade in favor of domestic production, it is neces- (I − A  T )−1 = 0 2 0
sary to reduce hourly wages in order to reduce total labor costs. In 2.1 0 2
other words, it is necessary to achieve  
pT = 297 216 140 (4)
c
wt+1 − wtc a p w p − ac wc 140 − 178
< n c cn t = = −21.35% Of course, a different structure of transaction costs might imply
wtc an wt 178
a different structure of trade. Fig. 1 shows each country’s produc-
Let us now recognize the fact that international trade implies tion costs by supplier of the intermediate commodities, together
‘transaction costs’. The latter do not merely include transport costs, with the critical values of τ inducing a switch of technique.
though relevant, but also the costs related to the coordination of As can be seen, for τ < 0.54 companies located in the semi-
the various (direct and indirect) stages of production, to exchange periphery will buy intermediates from peripheral partners; for τ >
risk, etc. (see Coase, 1937). 0.54, on the contrary, they will choose domestic suppliers for in-
Let us assume, for the time being, that such transaction costs termediate inputs.
depend on the distance between countries. In our case, the dis- In the same way, for τ < 0.57 intermediates to be used in c will
tance between center and semi-periphery, as well as that between be supplied by p, while for higher values they will be supplied
the latter and periphery, is 1, and hence that between center and domestically.
periphery is 2.7 Let us imagine that countries c and s form a customs union,
These costs, therefore, influence the structure of prices, and which leads to a reduction of transaction costs between the two
hence of international trade, in an asymmetric way according to countries by 90% – whereas delivery costs for periphery remain
the geographic position of each country. unchanged. The new structure of costs is now given by:
The price system becomes:8
 Selling country Buying country
pc = acn wc + pc acc + ps asc (1 + τ ) + p p a pc (1 + 2τ )
ps = asn ws + pc acs (1 + τ ) + ps ass + p p a ps (1 + τ ) c s p
p p = anp w p + pc acp (1 + 2τ ) + ps asp (1 + τ ) + p p a pp c 150.00 158.25 315.0

or, more compactly: s 113.94 108.00 167.4

p 147.00 108.50 70.0

 + pT A  T
pT = aTn w
Now, s will produce intermediates both for itself c and, while p
i.e.:
will continue to produce them by itself. Matrices A and L and the
 (I − A  T )−1
pT = aTn w prices vector become, respectively:
Now, costs change according to the specific couple selling-
 
0 0 0
buying country, and their relative distance. Assuming that τ = A= 0.5 0.5 0
0.55, total labor costs would be given by: 0 0 0.5
 
1 0 0
6
By construction of our toy example, importing ultimately means buying direct L= 1 2 0
labor from abroad, so we can simply compare labor costs, avoiding the complica-
0 0 2
tions entailed by indirect labor.
7
These parameters can be changed according to the specific effects we want to  
estimate. pT = 263.94 216 140
8
Where:
  As can be seen from a comparison with the expression (4),
1 1+τ 1 + 2τ
T= 1+τ 1 1+τ the customs union has allowed companies located in the center to
1 + 2τ 1+τ 1 achieve cost savings, while for those located in the periphery and
semi-periphery the costs remain unchanged.

45
N. Garbellini Structural Change and Economic Dynamics 59 (2021) 42–50

Fig. 1. Production costs for buying country as a function of τ . Critical values inducing a switch of technique.

Let us now switch to a slightly more complex framework. The subject to:
three countries now produce two commodities, 1 and 2 – which 
ai j = ars
ij
can be used both as intermediates and as final consumption goods.
r,s
The MRIO coefficient matrix becomes:
  Also in this case, assume that both hourly wages and labor pro-
Acc Acs Acp ductivity decrease when moving from the center to the periphery.
A= Asc Ass Asp Moreover, assume that the production of commodity 2 is more la-
A pc A ps A pp bor intensive than that of commodity 1:
   
where: wT1 = wc1 ws1 w1p = 30 18 15
    
ars ars aTn1 = acn1 asn1 anp1 = 5 6 7
rs
A = rs
11 12    
a21 ars
22 wT2 = wc2 ws2 w2p = 28 15 11
   
Assume that, irrespective of the country where production aTn2 = acn2 asn2 anp2 = 7 9 10
takes place, we need 0.5 units of input 1 and 0.3 units of com- and hence:
modity 2 to get one unit of commodity 1.    
wTc =
As to commodity 2, getting one unit requires 0.1 units of com-  wc1 wc2
 =  30 28 
ws =
modity 1 and 0.4 units of commodity 2.  ws1 ws2
 =  18 15 
wTp = w1p w2p
Formally:   =  15 11
 acn T =
 acn1 acn2
= 5 7 
a11 = 0.5 a12 = 0.1 asn T =
A
a21 = 0.3 a22 = 0.4  asn1 asn2
= 6 9 
apn = anp1 anp2
T
= 7 10

46
N. Garbellini Structural Change and Economic Dynamics 59 (2021) 42–50

⎡ ⎤
1 0 0 0 0 0
Total wages per unit of output therefore are: ⎢ 0 1 0 0 0 0 ⎥
  ⎢ 1 0.20 2 0.20 0 0 ⎥
c L=⎢
⎢ 0
⎥
  w O O 0 0 1 0 0 ⎥
acn T asn T anpT
O s
w O ⎣ ⎦
0.22 0.17 0.22 0.17 2.22 0.37
O O p
w 1.11 0.85 1.11 0.85 1.11 1.85
 
Hence: pT = 486.3 378.7 390.7 290.5 355.6 242.6
Again, different cost structures may imply the choice of a dif-
Selling country Commodity traded
ferent technique. Fig. 2 shows, for each buying country and traded
c 1 150
commodity, critical values of τ inducing a switch of technique.
s 1 108 Finally, let us assume again that countries c and s set up a cus-
p 1 105 toms union. In this case, we would have:
c 2 196 Selling country Commodity traded Buying country
s 2 135 c s p
p 2 110 c 1 150.0 153.0 210.0

Also in this case, the optimal structure of trade is straightfor- s 1 110.2 108.0 129.6
ward to derive: both commodities will be produced by country p. p 1 147.0 126.0 105.0
Matrices A and L and vector pT are:
c 2 196.0 199.9 274.4
⎡ ⎤ s 2 137.7 135.0 162.0
0 0 0 0 0 0
⎢0 0 0 0 0 0 ⎥ p 2 154.0 132.0 110.0
⎢0 0 0 0 0 0 ⎥
A=⎢
⎢0
⎥
0 0 0 0 0 ⎥ With this new cost structure, the center would also import
⎣ ⎦ commodity 2 from semi-periphery. Direct and total coefficients and
0.5 0.1 0.5 0.1 0.5 0.1
0.3 0.4 0.3 0.4 0.3 0.4 production prices become:
⎡ ⎤ ⎡ ⎤
1 0 0 0 0 0 0 0 0 0 0 0
⎢ 0 1 0 0 0 0 ⎥ ⎢0 0 0 0 0 0 ⎥
⎢ 0 0 ⎥
⎢0 . 5 0.1 0.5 0.1 0 0 ⎥
L=⎢
0 1 0 0 ⎥ A=⎢
⎢0 . 3
⎥
⎢ 0 0 0 1 0 0 ⎥ 0.4 0 0 0 0 ⎥
⎣ ⎦ ⎣ ⎦
1.22 0.37 1.22 0.37 2.22 0.37 0 0 0 0 0.5 0.1
1.11 0.85 1.11 0.85 1.11 1.85 0 0 0.3 0.4 0.3 0.4
⎡ ⎤
  1 0 0 0 0 0
p = 400.6
T
328.6 358.6 267.6 355.6 242.6 ⎢ 0 1 0 0 0 0 ⎥
⎢1.06 0.28 2 0.20 0 0 ⎥
L=⎢
⎢0.30
⎥
Let us now introduce again transaction costs proportional to 0.40 0 1 0 0 ⎥
⎣ ⎦
distance between countries. The structure of costs now becomes, 0.16 0.09 0.22 0.17 2.22 0.37
with τ = 0.2: 0.81 0.45 1.11 0.85 1.11 1.85
 
Selling country Commodity traded Buying country pT = 438.1 354.4 390.7 290.5 355.6 242.6
c s p

c 1 150.0 180.0 210.0 5. Discussion

s 1 129.6 108.0 129.6
The objective of the analysis carried out, although in a super-
p 1 147.0 126.0 105.0
simplified fashion, in the previous section is to show how the
c 2 196.0 235.2 274.4 structure of international trade depends not on comparative advan-
s 2 162.0 135.0 162.0 tages, but rather on absolute advantages. The reason is that the ge-
ographical location of imports is an integral part of cost minimiza-
p 2 154.0 132.0 110.0
tion strategies by OEMs (Original Equipment Manufacturers) and
With the present cost structure, therefore, semi-periphery will multinationals, and hence any change in the cost structure modi-
provide commodity 1 to both itself and country c and s. As to com- fies the solution to this constrained (by technology) minimization
modity 2, the most labor intensive, the smaller transaction costs problem – in other words, modifies the structure of international
associated to buying from s do not compensate the relatively lower trade.
labor costs in the periphery, and hence all countries will continue In general, the optimal (from the point of view of the owners
to buy commodity 2 from p. of the means of production) solution implies getting each interme-
Matrices A and L and vector pT accordingly become: diate from suppliers located in one single country – the one dis-
⎡ ⎤ playing minimum costs.9
0 0 0 0 0 0
⎢0 0 0 0 0 0 ⎥
⎢0 . 5 0.1 0.5 0.1 0 0 ⎥
9
Actually, in the real world this does not happen, for a set of reasons. First, our
A=⎢
⎢0
⎥ data are not disaggregated enough: the output of each industry consists of a great
0 0 0 0 0 ⎥
⎣ ⎦ variety of goods and services, which might be characterized by different cost struc-
0 0 0 0 0.5 0.1 tures (and even different technologies). Second, the process of specialization cannot
0.3 0.4 0.3 0.4 0.3 0.4 change immediately as a response to cost structure changes, and hence what we see

47
N. Garbellini
Fig. 2. Production costs for buying country as a function of τ . Critical values inducing a switch of technique.
The task of big multinationals, therefore, is that of pushing
towards institutional changes modifying the cost structure in or-
der to minimize their costs. This strategy goes through the in-
troduction of technological innovations functional to the adoption
of business models capable of increasing productivity – which, in
most cases, simply means increasing the degree of exploitation –
while reducing transaction costs by increasing the degree of con-
trol over the entire GVC. The geographical dislocation of supplies,
and thus the corresponding structure of international trade, there-
fore becomes strategic.
Institutional changes – for example new trade agreements or
new custom unions – are in turn functional to this strategy and
therefore crucial in their effect on GVC topology.
Supranational organizations such as the WTO and large multi-
nationals are major players in this game; the industrial policy
plans of large nation-states are often functional to the strategies
of big capital.
A simple scheme like the one illustrated above, if generalized
by means of appropriate analytical tools, can be useful to clar-
ify how divergences of interest between different forms of capi-
tal, and between capital and labor, are generated on a global scale,
and to highlight asymmetric effects on center, periphery and semi-
periphery.
is the combination between optimal structures corresponding to a set of different
cost structures. Finally, there might be production capacity issues – i.e., countries
might not be able to deliver any quantity.
48
Structural Change and Economic Dynamics 59 (2021) 42–50
5.1. Technology and business models
A huge amount of literature exists about GVCs, Industry 4.0,
and the spread of business models like lean production, World
Class Manufacturing (WCM) and just-in-time/just-in-sequence.
Dunning (1979), for example, put forward his OLI (Ownership, Lo-
cation, and Internalization) paradigm to explain the determinants
of Multinational Enterprises’ decisions on where to locate their ac-
tivities – including ownership advantages, location advantages and
internalization advantages.
What is missing, however, is a joint treatment of the three phe-
nomena – which, far from being disconnected, strongly feedback
each other.
The control power of companies at the head of GVCs extends
in an increasingly pervasive way not only on OEMs supplying the
main modules to be assembled, but on the entire production chain.
To accomplish this task companies of all sizes, but above all large
multinationals, have been adopting new business models for some
years now, based on the elimination of stocks (both of inputs and
semi-finished and finished products) and increasingly personalized
on-demand production. This implies that the inputs to be assem-
bled must reach the plants at exactly the moment in which they
are necessary neither before nor after. In this way, real-time ad-
justment of production in response to demand fluctuations is pos-
sible.
In order to do so, companies at the head of each chain must
strictly coordinate and fine tune a complex web of suppliers, of-
ten located abroad. In terms of the analytical framework sketched
above, this implies a reduction in transaction costs.
N. Garbellini
This is why ICTs have gained increasing importance since the
1980s, giving rise to the phenomenon of outsourcing that has char-
acterized large companies in the following decades.
This is exactly where Industry 4.0 technologies come in. Litera-
ture about Industry 4.0 often deals with automation – and the con-
sequences it will have on employment; however, the truly revolu-
tionary scope of the so-called Fourth Industrial Revolution is given
by interactivity and connectivity.
Industry 4.0, in fact, relies on Cyber Physical Systems (CPS) –
connected machines interacting as in a social network – and Inter-
net of Things (IoT, hereinafter) – i.e. the virtualization of produc-
tion chains.
Software tools such as MES (Manufacturing Execution Systems),
ERP (Enterprise Resource Planning), APS (Advanced Planning and
Scheduling) and MRP (Material Resources Planning) are used for
M2M (Machine-to-Machine) connection, with the whole system
connected to a central server. This triggers both ‘vertical integra-
tion’10 (the connection of different departments within the same
plant) and ‘horizontal integration’ (the connection between differ-
ent plants belonging to the same group or to its suppliers, located
both domestically and abroad).
These software tools allow production planning, operations
scheduling, the delivery of production orders to suppliers, depart-
ments, lines and workstations, real-time rescheduling of produc-
tion plans and collection of the corresponding data.
Reorganizing production in order to achieve profit maximiza-
tion is therefore becoming easier and easier. It is now ex-
tremely fast and painless to relocate production stages in other
plants/countries; at the same time, just-in-time and just-in-
sequence models gain greatly from geographical proximity. This
means that the producers of first tier components – usually the
more complex ones – are generally located closer to the head of
the chain. OEMs then import sub-modules from close by countries,
and so on, in a sequential shift from the physical center of final
production.
Moving away from the head of the chain, complexity and speci-
ficity of sub-modules decreases. Since automation is generally ap-
plied first and foremost to more labor intensive processes, this also
means that its effects will depend on each country’s position in the
value chain.
Moreover, while employment is likely to decrease in countries
specializing in easily automated production, it will increase where
4.0 technologies – software, next generation robots, etc – are and
will be produced, deepening asymmetries between center and pe-
riphery.
This is particularly apparent in Europe, where core countries
such as Germany are more and more relying on intermediates pro-
duced in Eastern Europe, which in their turn embed sub-modules
produced at the periphery of the Union (e.g. in Turkey), and so on.
5.2. Institutional changes
Technology is not the only crucial element in making the or-
ganizational innovations mentioned above possible. The regulatory
environment is also of considerable importance.
As we have seen, the new business models take advantage of
4.0 technologies to impose more intensive work rhythms, cali-
brated to the speed of machine operations.
All this, however, requires labor legislation to be complacent:
workers and their representatives must have no say in the operat-
ing parameters of the production flow, and must be in a position
to accept labor intensification.
10
Not to be confused with ‘vertical integration’ in the sense of Pasinetti.
49
Structural Change and Economic Dynamics 59 (2021) 42–50
Moreover, with extremely volatile demand, being able to ad-
just the workforce quickly and costlessly contributes enormously
to compressing production costs and stabilizing (and maximizing)
profits.
National and European institutions have been applying pres-
sures towards a weakening of labor protection via the introduc-
tion of labor market reforms, strengthening competition between
working classes of different countries, and hence further exerting a
downward pressure on wages and labor conditions – besides mak-
ing dismissals, and hence re-locations, easier and cheaper.
Indeed, numerous reforms in recent decades have pushed in
this direction. Think of the countless labor market reforms imple-
mented by practically all European countries – from Germany with
the Hartz packages to Italy with a process started with the Biagi
reform and culminated (for the time being) with the Jobs Act –
aimed at making the labor market ‘more flexible’.
Moreover, the liberalization of capital movements favored FDIs,
which have been welcomed by national governments as a way of
smoothing the crisis – while they actually are a strategy put for-
ward by capital to enforce the phenomenon of ‘concentration with-
out centralization’ (see Bellofiore et al., 2015; Bellofiore and Halevi,
2012).
The same applies to the different phases of Eastward EU en-
largement, which has made it easier to integrate the underpaid la-
bor force – in absolute terms, which are relevant to our problem –
into the German GVCs.
Institutional and technological changes, therefore, have been
deeply modifying the inherent nature of European capitalism and
production structures. We have been witnessing a struggle be-
tween different nation-based capitalisms, in which core countries
made up the lion’s share. Peripheral countries are acting as sup-
pliers of (usually high labor intensive) parts and components, in
a lower hierarchical position. The phenomenon is particularly rel-
evant for: (i) eastern European countries. The downfall of social-
ism and the eastward enlargement of the EU absorbed these coun-
tries into the European sphere of interest. Freedom of movement
of commodities and capital made low cost workers available in a
geographically close area; (ii) countries such as Italy, whose na-
tional capitalism was not up to the task of competing with that of
core countries. The latter could therefore take advantage of special-
ized workers, producing technologically advanced parts and com-
ponents for a lower and decreasing wage. Core countries’ corpora-
tions – particularly German ones – could either acquire the owner-
ship of small companies or turn them into captive suppliers, mak-
ing Italy an integral part of their supply chain.
The so-called ‘global capital’ is constantly changing shape: capi-
talist dynamics have always been characterized by spatial reconfig-
urations and reshuffling, necessary to get around obstacles to ex-
tracting surplus value and to overcome crises.
6. Conclusions
International trade theory is based on the assumption that the
shifting topology of trade networks is the outcome asymmetric –
from both the spatial and the sectoral perspective – technological
change.
In reality, as we have tried to show, it is rather the outcome of
a process of choice of technique, and is therefore a determinant –
not a consequence – of innovation processes.
Generalizing the framework described in Section 4 requires the
use of more advanced analytical tools than those usual in tradi-
tional IO literature: non-linear programming, perturbation theory,
neural networks – and network theory tools in general. This might
be a way to revive the school of thought put forward by Luigi
Pasinetti, whose contributions must be put into practice in order
to say something relevant about the reality of the world, the eco-
N. Garbellini Structural Change and Economic Dynamics 59 (2021) 42–50

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and hence:
∂L  

aTn w  L O(11) L
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∂A
CRediT authorship contribution statement

Nadia Garbellini: Conceptualization, Methodology, Software,

Validation, Formal analysis, Funding acquisition, Writing – original
draft, Writing – review & editing, Project administration.

50