Global value chains and product sophistication in developing countries; the case of Indian manufacturing

This paper examines whether linking into Global Value Chains (GVCs) can facilitate product upgrading in developing country firms, enabling them to climb up the value-chain ladder. The analysis is conducted using an unbalanced panel of Indian manufacturing firms in the period 2001–2015. Extensive data at the product-firm level is used to construct a sales-weighted average product sophistication level of Indian firms. To account for econometric issues of endogeneity and self-selection, the study employs the System GMM estimator and Propensity Score Matching (PSM). Findings indicate that linking into GVCs boosts the average product sophistication level of Indian firms by roughly 2 percent. Younger, more innovative, and more embedded GVC firms capture higher product sophistication gains from GVCs, while no significant impact is found for foreign investment. Results are robust to the use of different measurement techniques, model and lag specifications and methodologies. Findings suggest that designing trade policies in developing countries to increase GVC integration can enable product upgrading but there is a need to boost internal innovative capabilities to maximise gains from linking into GVCs. Further, the study raises important concerns regarding the future of export sophistication in India, demonstrating a shift in India’s GVC trade towards the Global South and its tendency to export less sophisticated goods to Southern partners.