From Input-Output Networks to Sectoral Innovation

This paper examines how the structural position of industries in global value chains (GVCs) affects their innovation performance. We develop a multi-sectoral theoretical framework in which endogenous innovation arises under monopolistic competition, and intersectoral linkages shape both the propagation of production costs and the diffusion of knowledge. Centrality in the GVC network enhances innovation incentives by reducing effective costs and amplifying knowledge spillovers. Using a panel dataset covering 35 countries and 17 manufacturing industries from 1995 to 2010, we construct sectorcountry measures of network centrality from OECD Inter-Country Input-Output (ICIO) tables and link them to patenting outcomes from Eurostat. Our empirical strategy leverages instrumental variables and dynamic panel techniques to address endogeneity and persistence in innovation. The results indicate that backward GVC centrality has a robust, positive effect on innovation, especially in contexts of low trade frictions and when linkages involve advanced economies. In contrast, forward centrality has limited or no effect. The impact of GVC centrality also depends critically on the direction and technological quality of international linkages. These findings suggest that the structure of global production networks plays a key role in shaping the geography of innovation. We discuss the implications for innovation policy, particularly in terms of regional integration and strategic positioning in global production, and highlight avenues for future research on the dynamic interaction between network structures and technological upgrading.