from GVC participation being higher in auto, electronics and IT/ITeS industries compared to textiles and chemicals. Third, a higher intensity of overall service input use is not necessarily associated with an increase in productivity. The composition of service inputs and the origin of services matter more for productivity. Fourth, an increase in the share of service expenditures on complex services by 1 percent is associated with a 10 percent higher productivity. Complex services are typically high-skill intense. Service inputs like research and development activities, technical, managerial and other sophisticated professional services, and in particular IT/ITeS services have substantially contributed to enhance within-firm productivity. Fifth, the origin of services (domestic vs. foreign) matters for firm performance, with firms importing services having a 10 percent higher productivity compared to firms not importing services. Around three percentage points of this productivity premium can be attributed to imports of complex services. Sixth, firms more deeply integrated in GVCs benefit more from importing services. Firms that are integrated at an intermediate level into GVCs have, on average, a 12 percent higher TFP than purely domestic firms. If these firms also import services, the total productivity premium reaches around 28 percent. Firms importing services and highly integrated into GVCs have on average a 54 percent higher productivity than purely domestic firms.

This paper is organized as follows. Section 2 describes the data and approach to analyze the relationship between firm performance, GVC participation and service input use at the firm level. Section 3 presents the descriptive analysis. The results of our estimation of the productivity premium associated with GVC participation and service input usage are presented in Section 4. Section 5 concludes.

# 2. Data and Empirical Strategy

We use detailed firm-level information from the Prowess database collected by the Centre for the Monitoring of the Indian Economy (CMIE). Prowess contains information primarily from income statements and annual reports of publicly listed companies in India. The data spans the years from 1990 to 2017. The data is a panel of medium and large firms accounting for around 70 percent of economic activity in India’s formal industrial sector (see Goldberg et al., 2010a, 2010b).<sup>2</sup> The panel structure of Prowess enables within and across firm comparisons of performance changes and input usage over time. We use data from approximately 13,937 firms covering 89,804 observations.

## **_Identifying the Mode of GVC Participation_**

We follow Veugelers et al. (2013) and identify a firm’s integration in GVCs from the intensity of a firm’s internationalization strategy, i.e., how many international activities the firm uses in combination. The three criteria used in the identification include (1) whether a firm is an intensive importer – it imports at least one-third of its total intermediate inputs;<sup>3</sup> (2) whether a firm is an intensive exporter – it exports at least two-thirds of total output; and (3) whether the firm has access to international networks -it is majority foreign owned or has a majority stake in companies abroad, or belongs to an international oriented business group (total exports of the group is greater than two-thirds of total output or total imported

> 2 The data set does not include small firms. However, the exclusion of small firms does not affect our analysis since mainly medium and large firms are integrated in GVCs, use a larger fraction of service inputs and undertake the majority of innovation activities. 3 Intermediate inputs include material inputs and as well service inputs.

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