Global Value Chains and Product Sophistication: An Empirical Investigation of Indian Firms.

This paper analyses the impact of GVC linkages on product upgrading using the Indian firm-level dataset Prowess, and methodologies of System-GMM and Propensity score matching. Defining product upgrading as a movement towards more sophisticated products, we use Haussmann’s product sophistication index to calculate a sales-weighted average sophistication level of Indian manufacturing firms in the period 2000/01-2014/15. The first section of the paper empirically investigates whether GVC firms produce more sophisticated goods than non-GVC firms. In the next section, we take the sub-sample of GVC firms to analyse the impact of depth of GVC integration on firm-level sophistication. Lastly, the study draws on Gereffi’s (2005)) governance framework and quantifies different types of governance structures to analyse how power asymmetries can impact the sophistication levels of developing country supplier firms. The study finds that the on average, Indian firms participating in GVCs produce more sophisticated goods than non-GVC firms, and increasing GVC integration significantly and positively impacts firm level sophistication. These results lend empirical support to the learning by importing and exporting hypothesis. However, our results also show that firms that link into Captive global value chains produce significantly less sophisticated goods than firms linking into Relational chains.