Is Domestic Value Addition A Source of Export Sophistication: A Case Study of India

Abstract

An implication of a globally fragmented production system is that countries which assemble and export high-tech products could reflect a sophisticated export structure while generating low domestic value-added component. Therefore, understanding the relationship between domestic value- added component in export, and the export sophistication of a country would be helpful in assessing if the country indeed achieved a quality improvement through indigenous attempts. However, for countries with export competitiveness essentially on grounds of cheap and abundant labour, rather than technological advantage, there is a significant disincentive to invest in innovation and R&D. This could possibly the case for India, motivating the investigation.
Results show that exports of sophisticated products, which also belong to the high- technology segment, are paired with low indigenous contribution in the product manufacture. The subscription to imports for exporting high-tech products reflects upon the deficient domestic R&D needed to bolster innovative practices such as product design and engineering. There needs to be a conscious effort to indulge in production stages characterized by high domestic value addition content.

Keywords: Export sophistication, domestic value addition, export quality, high-tech exports, India

JEL Classification: F1, F63, D24