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 distinction 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 38 countries over the years 2000-2014.

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. While east European countries are positioned downstream with high process shares in traditional manufacturing industries, Asian countries are placed upstream with low process shares but high labour shares. Western economies take an intermediate position in terms of GVC-measures and process shares of patents together with low labour shares.

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

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