GVC and Innovation: Evidence from MENA Firm-Level Data

Despite the broad theoretical and empirical studies diagnosing reasons behind the upscaling global value chains (GVC) participation in recent decades, the latter’s learning effect is still not amply studied, especially for the Middle East and North Africa (MENA) region that is disadvantaged in technology production. Relying on the recent World Bank Enterprise Surveys comprehensive dataset, we conceptualize the learning effect of GVC participation in terms of firms’ innovation performance in developing countries. We contribute to the existing literature in two ways. First, we examine the effect of GVC participation on different types of innovation, namely technological vs. auxiliary services/online communication. Second, we take into consideration the sectoral heterogeneity at three levels: factor (labor vs. capital intensive sectors), skill level (sectors intensive in skilled vs. unskilled labor), and technology intensity (high vs. low technology). We find that the positive effect of GVC participation on technological innovation is not moderated with sectoral heterogeneity. Yet, the GVC positive effect on auxiliary services innovation is positively moderated with medium-low technology intensive activities. Our results are robust when employing propensity score matching and instrumental variables methods in addressing the reverse causality as well as when using alternative GVC measures.