Global Value Chains: Benefiting the Domestic Economy?

Global Value Chains (GVCs) have become a central topic in trade and development policy but little is known about their actual impact on economic performance because data availability has been limited. Using a new unique set of Inter- Country Input-Output tables with extensive country coverage, I look at the relationship between GVC participation and domestic value added at the industry-level to determine if and for whom GVCs are beneficial. I show that GVC participation is positively related to domestic value added along the value chain. However, this effect is only significant for middle- and high-income countries. Deriving novel source/destination country-specific indicators, I present evidence on theoretical transmission channels between GVCs and domestic value added that explain these results. More specifically, I find support for productivity enhancing effects through cost savings when richer countries source from low-wage countries. In contrast, low- and middle-income countries only benefit from technology upgrading and spillovers if they have sufficient levels of absorptive capacity.