Global value chain participation and intermediate export sophistication

Abstract

The reorganization of the production process in the past two to three decades has led to the emergence of Global Value Chains (GVCs) where the production chain is spread across different geographies. This has in turn led to increased foreign value-added content in each country’s exports as well as increased trade in intermediate goods. Given the rise of GVCs as a key form of international trade and production, several studies in recent years have tried to analyse the benefits from GVC participation. In this paper, we focus on the impact of GVC participation on the sophistication of intermediate exports, i.e., the main channel through which countries participate in GVCs. Our analysis confirms the fact that GVC participation, both backward and forward, contributes positively to the sophistication of intermediate manufactured exports. However, the significance of the two channels varies depending on the income and human capital levels of a country. We find that backward participation has a positive, significant impact only for the high-income countries whereas forward participation is positive and significant for high-income as well as the low- and middle-income countries. Similarly, human capital and FDI, are significant only for the high-income economies, whereas distance from the technological frontier is an important factor determining sophistication for all sets of countries. Our analysis suggests that for countries to derive benefits from GVCs, there needs to be investment in innovation and human capital along with creating a conducive business environment and maintaining liberal trade and investment policies.