Growing Together and Apart: Scale Economies and Labor Specialization in Global Value Chains

We study how firm growth reorganizes the division of labor across firms in global value chains.

We study how firm growth reorganizes the division of labor across firms in global value chains. Using a novel dataset linking cross-border firm-to-firm transactions to matched employer–employee data, we show that demand shocks increase trade between firms while reducing occupational similarity, implying greater specialization. We develop and estimate a model of task outsourcing in which firms expand by reallocating tasks to suppliers. The model matches the data and implies endogenous scale economies. Eliminating outsourcing reduces average labor productivity by 25 percent and increases input costs by 10 percent, highlighting the central role of specialization in shaping firm performance.