Participation in GVC, Innovation and Productivity: An Empirical Analysis of Firm-Level Data

In recent decades, advances in information and communication technology and falling trade barriers have led firms to retain within their boundaries and in their domestic economies only a subset of the production stages, generating a growing process of the international fragmentation of production. This project aims to shed light on whether and how participation in global value chains (GVCs) affects firm productivity and innovation. It will do so in three respects. First, I will argue that a firm' involvement in GVCs affects positively its productivity both directly and indirectly via higher innovation and that these effects vary with a firm's position in a GVC. Second, I will maintain that the participation in GVCs increases a firm's incentives to invest in intangibles and collaborate on innovation with other enterprises or institutions. Last, I will argue that the skill endowment of a country's and a sector's workforce influences the way firms benefit from globalisation.

Understanding the productivity and innovation effects of GVCs is the focus of a growing literature. A large number of studies have used data on trade in goods and foreign ownership to uncover the link between trade participation, or multinational status, and economic performance. However, participation in GVCs is much wider than simply trading goods or offshoring, and far less is known about the effects of other aspects of GVC participation on firm performance. My research work will aim at filling this gap by illustrating the effects of the international fragmentation of production and indirect participation in GVCs (via trading links with importing or exporting firms) on firm productivity and innovation. Additionally, this project will also contribute to the body of research studying patterns of upgrading in GVCs. While existing research on GVCs deduces upgrading from measures of performance, this research will examine the way in which this improvement takes place by looking at improvements in innovation capabilities and investment in knowledge capital, and it will investigate how and through which channels technology transfer and learning opportunities in a GVC become innovation capacity.

This research project will be of particular relevance for policy makers in various respects. Firstly, the potential conclusion that a firm's performance and its level of international fragmentation of production or positioning in a GVC are related is highly relevant for industrial policies aiming to foster a firm's or a country's competitiveness. This potential finding implies that policies should be re-oriented to take better account of the organisation of the global economy in terms of activities and tasks instead of industries or products as benefits from GVCs may not be confined to high-tech sectors and manufacturing only. Secondly, even more important would be the potential finding that participation in GVC may affect important firm-level decisions (e.g. investment in innovation or knowledge), and these effects might be the reasons behind the differences in productivity performance between globally active and domestic firms, or among globally active firms. Innovation policies may therefore be crucial for the creation and capturing of value within GVCs, which implies that coordination between trade promotion or industrial policies and innovation policies should be essential. Thirdly, should success in GVCs require investment in knowledge-based assets that extend far beyond R&D, my analysis will also highlight the need for innovation policies to take a much broader view than just R&D for helping firms succeed in GVCs. Finally, the potential conclusion on the moderating role of a country's or a sector's skill endowment in the link between GVC participation and firm performance suggests that industrial policies and education and skill policies should be coordinated in order to amplify firms' gains from GVCs.