The effect of exchange rate volatility on fragmentation in East Asia: Evidence from the electronics industry

East Asia is characterized by intricate production and distribution networks that allow fragmented production blocks to be allocated across countries based on comparative advantage. These networks have produced enormous efficiency gains. Exchange rate volatility, by increasing uncertainty, may reduce the locational benefits of cross-border fragmentation. This paper presents evidence that exchange rate volatility decreases the flow of electronic components within East Asia. Electronic components is by far the largest category of intermediate goods traded within these networks. These results imply that policy makers should consider how to maintain stable exchange rates in the region in order to provide a steady backdrop for East Asian production networks. J. Japanese Int. Economies22 (4) (2008) 535–544.