Decomposing the Effect of GVCs on Innovation

Abstract

With the rise of global value chains (GVCs) countries increasingly specialise in business
functions rather than industries. Fragmentation of production processes across the globe
into upstream and downstream stages also influences innovation along GVCs. Research
has shown that technological change consists of demand-side-driven product innovations
and supply-side-driven process innovations. In a multi-country setting of GVCs a dis-
tinction between the two types of innovations has only been made theoretically. We fill
this gap in empirical research by using data of process-shares of patents and concord this
with country-industry level GVC-measures obtained from input-output tables covering
20 manufacturing industries in 38 countries over the years 2000-2013. We find that while
patenting occurs mostly upstream, process-shares of patents are higher in downstream
stages of production in which labour-shares are also high. Specialisation in upstream
stages is associated with product innovations while specialisation in downstream stages
with process innovation. Typical offshoring destinations are positioned downstream with
higher process-shares as well as high labour-shares, while offshoring countries are rela-
tively more upstream with high levels of product innovations and low labour-shares.

Keywords: Process innovation; Product innovation; Technological change; Patents; Offshoring; Trade

JEL Classification: F60, L23, L60, O14, O57