On GVC and innovation: the moderating role of policy

This paper empirically investigates the association between global value chains (GVC) participation and countries’ innovation performance. Highlighting the learning effect of foreign knowledge embedded in imported intermediate goods counters the argument that GVC participation is biased towards developed countries with skilled labor abundance. We construct a GVC knowledge spillovers index by merging data on GVC from the EORA26 dataset with R&D of the trade partner. Results show positive association between the GVC knowledge spillovers index and innovation measured by resident patent per capita. Likewise, we show that trade policy, intellectual property rights’ agreements, and competition policy constitute moderating factors in the nexus between GVC participation and innovation. Our results remain robust when we use alternative measures for our two variables of interest and when we control for foreign knowledge spillovers in imported final goods.