Impact of global value chains on total factor productivity: The case of Indian manufacturing

With production increasingly fragmented across borders, global value chains (GVCs) form a key feature of the world economy. A rising body of literature has documented productivity gains from linking into GVCs for developed‐country firms, but studies on the same for developing countries are scant. In this paper, we empirically examine whether GVCs can increase total factor productivity (TFP) in developing countries, using an unbalanced panel of Indian manufacturing firms in the period 2000/2001–2014/2015 from the Prowess data set. To address econometric issues of self‐selection and endogeneity, we use a two‐stage empirical strategy of propensity score matching and system generalized method of moments. The results indicate that linking into GVCs has a positive and significant impact on firm TFP, even after accounting for self‐selection of more productive firms into GVCs. Once linked, increasing GVC embeddedness, captured through firm‐level vertical specialization, also has a positive and significant impact on firm productivity. But productivity gains are not homogenous; GVC firms that link into relational governance chains, captured through the share of skilled workers and infrastructure and communication index relative to industry, have 20% higher productivity growth than firms in other chains. Older and more liquid GVC firms are also more productive. Designing policies to facilitate GVC linkages and firm technological capabilities can thus foster productivity gains in developing countries.