Firm innovation and global value chain participation
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Firm innovation and global value chain participation Ketan Reddy & Radeef Chundakkadan & Subash Sasidharan
Accepted: 4 August 2020 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract The objective of this paper is to examine the relationship between innovation and firms’ participation in global value chains (GVCs). To achieve this objective, we use rich firm-level data from the World Bank Enterprise Survey (WBES), spanning the period of 2006–2017, belonging to 90 countries. Accounting for endogeneity arising from reverse causality, our study finds firm innovation to be a driver of firm GVC participation across countries. These findings are robust to alternative measures of innovation and various subsample analysis.
Keywords Global value chains . Innovation . Crosscountry
JEL classifications F14 . O30 . D22 . F61 . O50 . L26
K. Reddy (*) : S. Sasidharan Department of Humanities and Social Sciences, Indian Institute of Technology Madras, Chennai, India e-mail: [email protected]
S. Sasidharan e-mail: [email protected] R. Chundakkadan Department of Liberal Arts, Indian Institute of Technology Bhilai, Raipur, Chhattisgarh, India e-mail: [email protected]
1 Introduction Innovation and international trade are two driving forces of economic growth and development (Romer 1990; Posner 1961; Vernon 1966). The relationship between them has grabbed much attention among policymakers and researchers. On the one hand, innovation reduces the cost of production and enhances the possibility of product differentiation, which provides an avenue to penetrate the international markets (Krugman 1980; Guan and Ma 2003; Tavassoli 2018). On the other hand, trade with foreign countries results in technological spillovers (Coe and Helpman 1995; Castellani and Fassio 2019). In addition, recent literature also highlights a shift away from adaptive innovation1 to reverse innovation2 by developing countries, which drive their participation in global value chains3 (GVCs) (Lema et al. 2012). For instance, Lema et al. (2015) illustrate this phenomenon for the service and automotive industries. For example, the SAP Labs in India developed the SAP business, which catered to the global markets. Similarly, the Flex power train fuelling system in Brazil was meant to cater to the local market initially, but 1
Adaptive innovation refers to innovation undertaken by MNC, which is then transferred to its subsidiaries in emerging economies for adaptation and further use. 2 Reverse innovation refers to innovation generated by subsidiaries of an MNC located in an emerging economy, with a view of meeting regional needs which are then further taken up to address the global needs. 3 A value chain comprises a set of activities that are involved in bringing a product from its inception to the final consumer (Minetti et al. 2019; Heuser and Mattoo 2017).
K. Reddy et al.
became pivotal for the global markets. These two cases exemplify the importance of being innovative for firms to participate in GVCs. Participation in GVC
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