TFP or the total factor productivity is constructed following the methodology of Ackerberg, Caves and Fazer (2015) building on Levinsohn and Petrin (2003) using intermediate inputs as proxy.<sup>5</sup> Since Prowess does not have reliable employment information, the total wage bill is used to measure labor inputs. Gross fixed assets are constructed by the perpetual inventory method Value added, defined as gross output minus the value of material inputs, energy and service inputs, is used as dependent variable in the production function. All relevant values are deflated using sector specific Indian wholesale price indices provided by the Office of the Economic Adviser of the Indian Ministry of Commerce and Industry. The service sector deflator is constructed from the National Accounts Statistics series on the service sector contribution towards the gross domestic output.

To measure service inputs, all expenditures incurred for royalties, technical know-how, license fees, research and development, rent & lease rent, selling & distribution, finance and insurance, outsourced manufacturing and outsourced professional jobs, travel and communication expenses, and repair and maintenance are considered. The variable service intensity measures the intensity of services used in the production and is measured by the share of expenditures spend on service inputs relative to total expenditures.<sup>6</sup> We further disaggregate services and look separately at complex services and IT related services. Complex services are considered as having a greater level of production complexity because of its higher fixed training costs (Costinot, 2009). Complex services are broadly defined as high value-added and high-skill intense services, which usually require strong domestic institutions and the rule of law, because contracting for them is often more complicated than contracting for traditional services. Such services include finance, insurance, securities and pension management, technical, trade and other business services.<sup>7</sup> We also examine the role of service imports in an extension to the baseline.

We control for firm size and the (log) expenditures on services in the vector Xist , following Arnold, Javorcik and Mattoo (2011). Further, we include time and firm fixed effects to account for unobserved firm and industry specific heterogeneity related to a firms’ location, management characteristics, comparative advantages of specific industries, and time specific economic shocks and trends.

# 3. Descriptive Analysis

Table 2 reports average values for some key variables- output, productivity and different service intensities. These vary considerably across the depth of integration into GVCs. Table 3 presents the average output and productivity by GVC mode. The patterns in India are consistent with the empirical evidence from other countries where firms that engage in international trade are usually the ones that are more productive (Melitz, 2003; Helpman, Melitz and Yeaple, 2014). Also, firms with foreign ownership are typically more productive. As can be seen from the table, firms that are more deeply integrated in GVCs

> 5 The correlation between TFP estimates following Levinsohn and Petrin (2003) and Ackerberg et al. (2015) is 0.94.

> 6 Total expenditures include expenditures on imported intermediate goods and services.

> 7 A discussion about complexity can be found in Costinot (2009). Here, complex services include financial and insurance services, outsourced professional jobs, royalties, technical know-how, license fees, and research and development.

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