The objective of this paper is to examine the relationship between innovation and firms’ participation in global value chains (GVCs). To achieve this objective, we use rich firm-level data from the World Bank Enterprise Survey (WBES), spanning the period of 2006–2017, belonging to 90 countries. Accounting for endogeneity arising from reverse causality, our study finds firm innovation to be a driver of firm GVC participation across countries. These findings are robust to alternative measures of innovation and various sub-sample analysis.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Adaptive innovation refers to innovation undertaken by MNC, which is then transferred to its subsidiaries in emerging economies for adaptation and further use.
Reverse innovation refers to innovation generated by subsidiaries of an MNC located in an emerging economy, with a view of meeting regional needs which are then further taken up to address the global needs.
The descriptive analysis based on EORA I-O table is only to highlight the prominence of GVCs in the present-day trade framework. The main analysis of the study is based on the WBES an enterprise-level survey database.
For example, India introduced ‘assemble in India’ initiative to integrate the country with the world market (Government of India 2020).
The three broad stages of value addition are upstream, midstream, and downstream and the value addition for upstream (R&D, design, management) and downstream (Packaging, sales, after sales) activities is the largest, whereas midstream (assembly of products) has relatively lower value-addition (Marín-Odio 2014; Benkovskis et al. 2019).
The WEBS database provides information only regarding whether a firm provides training for its employees or not and does not provide information differentiating the type of training provided by a firm to its employees Hence, paving the way for a binary variable as used in our empirical analysis.
We also use measures of process innovation, and R&D of the firm for robustness analysis.
Innovation system basically accounts for the role of institutions and organizations that systematically interact thereby shaping and guiding the direction of technological change in an economy (Pietrobelli and Rabellotti 2011).
Rodrik (2006) claimed that ‘China is special’ given the high level of export sophistication of its export basket.
Kindly refer to http://www.enterprisesurveys.org
We also identify a panel of 547 firms for 6 countries corresponding to 1212 firm-year observations. We find a significant and positive impact of innovation on firm GVC participation across this sample. Moreover, taking into account the importance of sunk cost, we incorporate prior GVC status of the firm in our bi-probit model. The results highlight a positive impact of prior GVC participation on current GVC participation of the firm. Further, the positive impact of innovation on firm GVC participation remains significant. An important point to note here is that this panel of firms corresponding to 6 countries do not include information on firms belonging to key GVC participating countries like China, and other east Asian countries. The results however are qualitatively similar to Table 3. The same is available from the authors upon request.
Alternatively, we also run IV-probit estimations and the results are qualitatively similar in terms of direction and significance.
We thank the referee for this valuable suggestion.
The Innovation_new is the sum of the firm’s response to the following question: (1) “Has this firm introduced, in the last three years, new or significantly improved products or services (Yes/ No)”, and (2) “Were any of the new or significantly improved products or services also new for the firm’s main market (Yes/No)”.
for a brief overview of the survey methodology, kindly refer to https://www.enterprisesurveys.org/methodology
This is analogous to the two-step Heckman model (Heckman 1979).
In this study, we identify a panel we do identify a panel of 6 countries and the results are qualitatively similar. Refer to footnote 14 for more details.
Despite this drawback, our definition of GVC is in line with the firm-level literature on GVCs which proxies for GVC participation of firm through its simultaneous participation in exporting and importing activities (Antràs 2020).
Refer to Table 10 in Appendix.
Amador, J., & Cabral, S. (2016). Global value chains: a survey of drivers and measures. Journal of Economic Surveys, 30(2), 278–301. https://doi.org/10.1111/joes.12097.
Amendolagine, V., Presbitero, A. F., Rabellotti, R., & Sanfilippo, M. (2019). Local sourcing in developing countries: the role of foreign direct investments and global value chains. World Development, 113, 73–88. https://doi.org/10.1016/j.worlddev.2018.08.010.
Azar, G., & Ciabuschi, F. (2017). Organizational innovation, technological innovation, and export performance: the effects of innovation radicalness and extensiveness. International Business Review, 26(2), 324–336. https://doi.org/10.1016/j.ibusrev.2016.09.002.
Baldwin, R., & Lopez-Gonzalez, J. (2015). Supply-chain trade: a portrait of global patterns and several testable hypotheses. The World Economy, 38(11), 1682–1721. https://doi.org/10.1111/twec.12189.
Baldwin, R. E. (2013). Global supply chains: why they emerged, why they matter, and where they are going. In D. K. Elms & P. Low (Eds.), Global value Chains in a Changing World chapter 1 (pp. 13–59). Geneva: World Trade Organization https://www.wto.org/english/res_e/booksp_e/aid4tradeglobalvalue13_e.pdf.
Barasa, L., Knoben, J., Vermeulen, P., Kimuyu, P., & Kinyanjui, B. (2017). Institutions, resources and innovation in East Africa: a firm level approach. Research Policy, 46(1), 280–291. https://doi.org/10.1016/j.respol.2016.11.008.
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. https://doi.org/10.1177/014920639101700108.
Barrios, S., Görg, H., & Strobl, E. (2003). Explaining firms’ export behaviour: R&D, spillovers and the destination market. Oxford Bulletin of Economics and Statistics, 65(4), 475–496. https://doi.org/10.1111/1468-0084.t01-1-00058.
Bauernschuster, S., Falck, O., & Heblich, S. (2009). Training and innovation. Journal of Human Capital, 3(4), 323–353. https://doi.org/10.1086/653713.
Brancati, E., Brancati, R., & Maresca, A. (2017). Global value chains, innovation and performance: firm-level evidence from the Great Recession. Journal of Economic Geography, 17(5), 1039–1073. https://doi.org/10.1093/jeg/lbx003.
Buckley, P. J. (2009). Internalisation thinking: from the multinational enterprise to the global factory. International Business Review, 18(3), 224–235. https://doi.org/10.1016/j.ibusrev.2009.01.006.
Caldera, A. (2010). Innovation and exporting: evidence from Spanish manufacturing firms. Review of World Economics, 146(4), 657–689. https://doi.org/10.1007/s10290-010-0065-7.
Campa, J. M. (2004). Exchange rates and trade: how important is hysteresis in trade? European Economic Review, 48(3), 527–548. https://doi.org/10.1016/S0014-2921(02)00320-3.
Castellacci, F. (2015). Institutional voids or organizational resilience? Business groups, innovation, and market development in Latin America. World Development, 70, 43–58. https://doi.org/10.1016/j.worlddev.2014.12.014.
Castellani, D., & Fassio, C. (2019). From new imported inputs to new exported products. Firm-level evidence from Sweden. Research Policy, 48(1), 322–338. https://doi.org/10.1016/j.respol.2018.08.021.
Chen, C. J., & Huang, J. W. (2009). Strategic human resource practices and innovation performance—the mediating role of knowledge management capacity. Journal of Business Research, 62(1), 104–114. https://doi.org/10.1016/j.jbusres.2007.11.016.
Chiu, Y. C. (2014). Balancing exploration and exploitation in supply chain portfolios. IEEE Transactions on Engineering Management, 61(1), 18–27. https://doi.org/10.1109/TEM.2013.2280583.
Coe, D. T., & Helpman, E. (1995). International R&D Spillovers. European Economic Review, 39(5), 859–887. https://doi.org/10.1016/0014-2921(94)00100-E.
Criscuolo, C., & Timmis, J. (2017). The relationship between global value chains and productivity. International Productivity Monitor, 32, 61–83 https://EconPapers.repec.org/RePEc:sls:ipmsls:v:32:y:2017:4.
Das, S., Roberts, M. J., & Tybout, J. R. (2007). Market entry costs, producer heterogeneity, and export dynamics. Econometrica, 75(3), 837–873. https://doi.org/10.1111/j.1468-0262.2007.00769.x.
Del Prete, D., Giovannetti, G., & Marvasi, E. (2017). Global value chains participation and productivity gains for North African firms. Review of World Economics, 153(4), 675–701. https://doi.org/10.1007/s10290-017-0292-2.
Del Prete, D., Giovannetti, G., & Marvasi, E. (2018). Global value chains: new evidence for North Africa. International Economics, 153, 42–54. https://doi.org/10.1016/j.inteco.2017.03.002.
Dethier, J. J., Hirn, M., & Straub, S. (2010). Explaining enterprise performance in developing countries with business climate survey data. World Bank Research Observer, 26(2), 258–309. https://doi.org/10.1093/wbro/lkq007.
Ernst, D., & Kim, L. (2002). Global production networks, knowledge diffusion, and local capability formation. Research Policy, 31(8–9), 1417–1429. https://doi.org/10.1016/S0048-7333(02)00072-0.
Forés, B., & Camisón, C. (2016). Does incremental and radical innovation performance depend on different types of knowledge accumulation capabilities and organizational size? Journal of Business Research, 69(2), 831–848. https://doi.org/10.1016/j.jbusres.2015.07.006.
Gereffi, G. (2014). Global value chains in a post-Washington Consensus world. Review of International Political Economy, 21(1), 9–37. https://doi.org/10.1080/09692290.2012.756414.
Gómez, P. J., Lorente, J. J. C., & Cabrera, R. V. (2004). Training practices and organisational learning capability. Journal of European Industrial Training, 28, 234–256. https://doi.org/10.1108/03090590410527636.
Guan, J., & Ma, N. (2003). Innovative capability and export performance of Chinese firms. Technovation, 23(9), 737–747. https://doi.org/10.1016/S0166-4972(02)00013-5.
Hausmann, R., Hwang, J., & Rodrik, D. (2007). What you export matters. Journal of Economic Growth, 12(1), 1–25. https://doi.org/10.1007/s10887-006-9009-4.
Hernández, V., & Pedersen, T. (2017). Global value chain configuration: a review and research agenda. BRQ Business Research Quarterly, 20(2), 137–150. https://doi.org/10.1016/j.brq.2016.11.001.
Heuser, C., & Mattoo, A. (2017). Services trade and global value chains, World Bank Policy Research working paper; no. WPS 8126. Washington, D.C.: World Bank Group. https://doi.org/10.1596/1813-9450-8126.
Hirsch, S., & Bijaoui, I. (1985). R&D intensity and export performance: a micro view. Weltwirtschaftliches Archiv, 121(2), 238–251. https://doi.org/10.1007/BF02705822.
Ivarsson, I., & Alvstam, C. G. (2011). Upgrading in global value-chains: a case study of technology-learning among IKEA-suppliers in China and Southeast Asia. Journal of Economic Geography, 11(4), 731–752. https://doi.org/10.1093/jeg/lbq009.
Jugend, D., Jabbour, C. J. C., Scaliza, J. A. A., Rocha, R. S., Junior, J. A. G., Latan, H., & Salgado, M. H. (2018). Relationships among open innovation, innovative performance, government support and firm size: Comparing Brazilian firms embracing different levels of radicalism in innovation. Technovation, 74, 54–65. https://doi.org/10.1016/j.technovation.2018.02.004.
Kergroach, S. (2019). National innovation policies for technology upgrading through GVCs: a cross-country comparison. Technological Forecasting and Social Change, 145, 258–272. https://doi.org/10.1016/j.techfore.2018.04.033.
Kersan-Skabi’c, I. (2019). The drivers of global value chain (GVC) partici-ˇ pation in EU member states. Economic research-Ekonomska istraˇzivanja, 32(1), 1204–1218. https://doi.org/10.1080/1331677X.2019.1629978.
Krugman, P. (1980). Scale economies, product differentiation, and the pattern of trade. American Economic Review, 70(5), 950–959 www.jstor.org/stable/1805774.
Kumar, N., & Siddharthan, N. S. (1994). Technology, firm size and export behaviour in developing countries: the case of Indian enterprises. Journal of Development Studies, 31(2), 289–309. https://doi.org/10.1080/00220389408422362.
Lall, S., Weiss, J., & Zhang, J. (2006). The sophistication of exports: a new trade measure. World Development, 34(2), 222–237. https://doi.org/10.1016/j.worlddev.2005.09.002.
Lau, C. M., & Ngo, H. Y. (2004). The HR system, organizational culture, and product innovation. International Business Review, 13(6), 685–703. https://doi.org/10.1016/j.ibusrev.2004.08.001.
Lee, E., & Yi, K.-M. (2018). Global value chains and inequality with endogenous labor supply. Journal of International Economics, 115, 223–241. https://doi.org/10.1016/j.jinteco.2018.09.006.
Lema, R., Quadros, R., & Schmitz, H. (2012). Shifts in innovation power to Brazil and India: Insights from the auto and software industries. IDS Research Reports, 2012(73), 1–84. https://doi.org/10.1111/j.2040-0217.2012.00073_2.x.
Lema, R., Quadros, R., & Schmitz, H. (2015). Reorganising global value chains and building innovation capabilities in Brazil and India. Research Policy, 44(7), 1376–1386. https://doi.org/10.1016/j.respol.2015.03.005.
Lu, Y., Shi, H., Luo, W., & Liu, B. (2018). Productivity, financial constraints, and firms’ global value chain participation: evidence from China. Economic Modelling, 73, 184–194. https://doi.org/10.1016/j.econmod.2018.03.015.
Marín-Odio, A. (2014). Global value chains in services: a case study on Costa Rica. International Trade Centre Technical Paper Geneva.https://www.intracen.org/publication/Global-value-chains-in-services-A-case-study-on-Costa-Rica/.
Marra, G., & Radice, R. (2011). Estimation of a semiparametric recursive bivariate probit model in the presence of endogeneity. Canadian Journal of Statistics, 39, 259–279. https://doi.org/10.1002/cjs.10100.
Melitz, M. J. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71(6), 1695–1725. https://doi.org/10.1111/1468-0262.00467.
Minetti, R., Murro, P., Rotondi, Z., & Zhu, S. C. (2019). Financial constraints, firms’ supply chains, and internationalization. Journal of the European Economic Association, 17(2), 327–375. https://doi.org/10.1093/jeea/jvx056.
Minetti, R., & Zhu, S. C. (2011). Credit constraints and firm export: microeconomic evidence from Italy. Journal of International Economics, 83(2), 109–125. https://doi.org/10.1016/j.jinteco.2010.12.004.
Monfardini, C., & Radice, R. (2008). Testing exogeneity in the bivariate probit model: a Monte Carlo study. Oxford Bulletin of Economics and Statistics, 70, 271–282. https://doi.org/10.1111/j.1468-0084.2007.00486.x.
Montalbano, P., Nenci, S., & Pietrobelli, C. (2018). Opening and linking up: firms, GVCs, and productivity in Latin America. Small Business Economics, 50(4), 917–935. https://doi.org/10.1007/s11187-017-9902-6.
Morrison, A., Pietrobelli, C., & Rabellotti, R. (2008). Global value chains and technological capabilities: a framework to study learning and innovation in developing countries. Oxford Development Studies, 36(1), 39–58. https://doi.org/10.1080/13600810701848144.
Østergaard, C. R., Timmermans, B., & Kristinsson, K. (2011). Does a different view create something new? The effect of employee diversity on innovation. Research Policy, 40(3), 500–509. https://doi.org/10.1016/j.respol.2010.11.004.
Pietrobelli, C., & Rabellotti, R. (2011). Global value chains meet innovation systems: are there learning opportunities for developing countries? World Development, 39(7), 1261–1269. https://doi.org/10.1016/j.worlddev.2010.05.013.
Posner, M. V. (1961). International trade and technical change. Oxford Economic Papers, 13(3), 323–341. https://doi.org/10.1093/oxfordjournals.oep.a040877.
Rodrik, D. (2006). What’s so special about China’s exports? China & World Economy, 14(5), 1–19. https://doi.org/10.1111/j.1749-124X.2006.00038.x.
Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98(5, Part 2), S71–S102. https://doi.org/10.1086/261725.
Roper, S., & Love, J. H. (2002). Innovation and export performance: evidence from the UK and German manufacturing plants. Research Policy, 31(7), 1087–1102. https://doi.org/10.1016/S0048-7333(01)00175-5.
Sampath, P. G., & Vallejo, B. (2018). Trade, global value chains and upgrading: what, when and how? European Journal of Development Research, 30(3), 481–504. https://doi.org/10.1057/s41287-018-0148-1.
Schmitz Jr., J. A. (2005). What determines productivity? Lessons from the dramatic recovery of the US and Canadian iron ore industries following their early 1980s crisis. Journal of Political Economy, 113(3), 582–625. https://doi.org/10.1086/429279.
Secchi, A., Tamagni, F., & Tomasi, C. (2016). Financial constraints and firm exports: accounting for heterogeneity, self-selection, and endogeneity. Industrial and Corporate Change, 25(5), 813–827. https://doi.org/10.1093/icc/dtw033.
Stiebale, J. (2011). Do financial constraints matter for foreign market entry? A firm-level examination. The World Economy, 34(1), 123–153. https://doi.org/10.1111/j.1467-9701.2010.01306.x.
Sung, S. Y., & Choi, J. N. (2014). Do organizations spend wisely on employees? Effects of training and development investments on learning and innovation in organizations. Journal of Organizational Behavior, 35(3), 393–412. https://doi.org/10.1002/job.1897.
Taglioni, D., & Winkler, D. (2016). Making global value chains work for development. Washington, DC: World Bank https://openknowledge.worldbank.org/handle/10986/24426.
Tajoli, L., & Felice, G. (2018). Global value chains participation and knowledge spillovers in developed and developing countries: an empirical investigation. European Journal of Development Research, 30(3), 505–532. https://doi.org/10.1057/s41287-017-0127-y.
Tavassoli, S. (2018). The role of product innovation on export behavior of firms: is it innovation input or innovation output that matters? European Journal of Innovation Management, 21(2), 294–314. https://doi.org/10.1108/EJIM-12-2016-0124.
Thornhill, S. (2006). Knowledge, innovation and firm performance in high-and low-technology regimes. Journal of Business Venturing, 21(5), 687–703. https://doi.org/10.1016/j.jbusvent.2005.06.001.
Veeramani, C., Lakshmi, A., & Gupta, P. (2018). Intensive and extensive margins of exports: what can India learn from China? The World Economy, 41(5), 1196–1222. https://doi.org/10.1111/twec.12592.
Vernon, R. (1966). International investment and international trade in the product cycle. Quarterly Journal of Economics, 80(2), 190–207. https://doi.org/10.2307/1880689.
Wakelin, K. (1998). Innovation and export behaviour at the firm level. Research Policy, 26(7–8), 829–841. https://doi.org/10.1016/S0048-7333(97)00051-6.
Wilde, J. (2000). Identification of multiple equation probit models with endogenous dummy regressors. Economics Letters, 69(3), 309–312. https://doi.org/10.1016/S0165-1765(00)00320-7.
World Trade Organization. (2014). World trade report: Trade and development: recent trends and the role of WTO. Geneva: World Trade Organization https://www.wto.org/english/res_e/publications_e/wtr14_e.htm.
Wu, F., Yeniyurt, S., Kim, D., & Cavusgil, S. T. (2006). The impact of information technology on supply chain capabilities and firm performance: a resource-based view. Industrial Marketing Management, 35(4), 493–504. https://doi.org/10.1016/j.indmarman.2005.05.003.
Yang, C. H., Chen, J. R., & Chuang, W. B. (2004). Technology and export decision. Small Business Economics, 22(5), 349–364. https://doi.org/10.1023/B:SBEJ.0000022213.61143.37.
Zhang, X., & Sun, J. (2007). An analysis of China’s global industrial competitive strength based on vertical specialization. Frontiers of Economics in China, 2(1), 57–73. https://doi.org/10.1007/s11459-007-0003-3.
Zhou, J., Li, J., Jiao, H., Qiu, H., & Liu, Z. (2020). The more funding the better? The moderating role of knowledge stock on the effects of different government-funded research projects on firm innovation in Chinese cultural and creative industries. Technovation, 92, 102059. https://doi.org/10.1016/j.technovation.2018.11.002.
Zhou, K. Z., Yim, C. K., & Tse, D. K. (2005). The effects of strategic orientations on technology and market-based breakthrough innovations. Journal of Marketing, 69(2), 42–60. https://doi.org/10.1509/jmkg.220.127.116.11756.
Antràs, P. (2020). Conceptual aspects of global value chains. background paper - World Development Report 2020: Trading for development in the age of global value chains. http://documents.worldbank.org/curated/en/541931579622262085/Conceptual-Aspects-of-Global-Value-Chains.
Benkovskis, K., Masso, J., Tkacevs, O., Vahter, P., & Yashiro, N. (2019). Export and productivity in global value chains: comparative evidence from Latvia and Estonia. Review of World Economics, 1–21. https://doi.org/10.1007/s10290-019-00371-0.
Bıçakcıoğlu-Peynirci, N., Hizarci-Payne, A. K., Özgen, Ö., & Madran, C. (2019). Innovation and export performance: a metaanalytic review and theoretical integration. European Journal of Innovation Management. https://doi.org/10.1108/EJIM-06-2019-0149.
Criscuolo, C., Timmis, J., & Johnstone, N. (2016). The relationship between GVCs and productivity. Background paper prepared for the 2016 OECD Global Forum on Productivity, Lisbon. https://www.oecd.org/global-forum-productivity/events/Relashionship_btween_GVCs_and_productivity_6_09_2016.pdf.
Gereffi, G., & Fernandez-Stark, K. (2011). Global value chain analysis: a primer. Center on Globalization, Governance & Competitiveness (CGGC), Duke University, North Carolina, USA. https://gvcc.duke.edu/wp-content/uploads/2011-05-31_GVC_analysis_a_primer.pdf.
Government of India. (2020). Economic survey 2019–20. Ministry of Finance, Economic Division New Delhi, India. https://www.indiabudget.gov.in/economicsurvey/.
Greenhalgh, C., Taylor, P., & Wilson, R. (1994). Innovation and export volumes and prices-a disaggregated study. Oxford Economic Papers, 102–135 https://www.jstor.org/stable/2663526.
Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica, 153–161. https://doi.org/10.2307/1912352.
Ito, K., Ikeuchi, K., Criscuolo, C., Timmis, J., & Bergeaud, A. (2019). Global value chains and domestic innovation. RIETI Discussion Paper Series 19-E-028 https://www.rieti.go.jp/en/publications/summary/19040008.html.
Kano, L., Tsang, E. W., & Yeung, H. W. C. (2020). Global value chains: a review of the multi-disciplinary literature. Journal of International Business Studies, 1–46. https://doi.org/10.1057/s41267-020-00304-2.
Khan, S. U., Shah, A., & Rizwan, M. F. (2019). Do financing constraints matter for technological and non-technological innovation? A (re) examination of developing markets. Emerging Markets Finance and Trade, 1–28. https://doi.org/10.1080/1540496X.2019.1695593.
Koopman, R., Powers, W., Wang, Z., & Wei, S. J. (2010). Give credit where credit is due: tracing value added in global production chains. Working Paper 16426. National Bureau of Economic Research. https://doi.org/10.3386/w16426.
Lema, R., Pietrobelli, C., & Rabellotti, R. (2018). Innovation in global value chains. MERIT working papers 038. United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT). https://ideas.repec.org/p/unm/unumer/2018038.html.
Pavitt, K., Robson, M., & Townsend, J. (1987). The size distribution of innovating firms in the UK: 1945-1983. Journal of Industrial Economics, 297–316. https://doi.org/10.2307/2098636.
Rigo, D. (2017). A portrait of firms participating in global value chains. Centre for Trade and Economic Integration, The Graduate Institute. https://ideas.repec.org/p/gii/cteiwp/ctei-2017-01.html.
We thank Malathy D, Alex Eapen, and Raja Sethu Durai S for their thoughtful advice. We also thank all the participants of the XIV Annual International conference of the Forum for Global Knowledge Sharing and the 56th Annual Conference of the Indian Econometric Society for their valuable feedback. We also thank the editor and an anonymous referee for their insightful comments and suggestions.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
About this article
Cite this article
Reddy, K., Chundakkadan, R. & Sasidharan, S. Firm innovation and global value chain participation. Small Bus Econ (2020). https://doi.org/10.1007/s11187-020-00391-3
- Global value chains