policies are also important factors to consider for countries trying to generate economic upgrading through GVC participation. In line with our results on business climate and institutions, such beyond-theborder policies are a vital part of successful GVC-integration strategy.

# **4.3. Policies That Target the Quality and Condition of Input and Output Factors**

# **_Education and Skills_**

Finally, we focus on policies that affect the quality and condition of input and output factors and directly focusing on economic upgrading. We start by examining the role of education and skills—a policy area that is important for absorptive capacity and competitiveness in international markets. For instance, to benefit from technology embodied in foreign value added that enters a country through backward links, the domestic workforce needs to be sufficiently trained and educated. Similarly, a skilled and educated workforce can produce more efficiently and thus makes a country more competitive for GVC integration as a seller.

Table 7 shows that competitiveness channels seem to be more relevant for economic upgrading through GVCs. Looking at backward links, we find that only educational quality seem to have a mediating impact (column 3), while the remaining variables are positive but not statistically significant.

The picture for GVC integration, as a seller, is quite different. Here, all variables show a facilitating effect on domestic value added. This supportive role of education confirms the findings by various studies on FDI spillovers (Tytell and Yudaeva 2007, Meyer and Sinani 2009, Farole and Winkler 2014), though the results are significant, as usual, primarily for high-income countries.

Nevertheless, we can conclude that this policy area is a relevant mediator for economic upgrading. Even if the gains from improvements in this field might mainly accrue through one type of GVC integration, countries need to take education and skills into consideration when reviewing their GVC strategies.

# **_Product Standards and Innovation_**

Looking at quality and innovation, we observe a very similar pattern to education and skills. The results in table 8 show that this policy area is particularly relevant for economic upgrading through GVC integration as a seller. All four proxies are positive and significant, emphasizing the impact on competitiveness, and supporting the findings of Portugal and others (2009) and Meyer and Sinani (2009). An additional channel to explain the special relevance of forward links that arises with respect to our measure of quality certifications could be signaling. Foreign customers may rely on internationally normed standards to assess a product’s quality. This removes uncertainty and makes products more attractive internationally, which reflects in the strong and consistent results for forward links.

Technology adoption and a country’s overall innovative environment are also positively associated with economic upgrading through backward links (table 8, columns 3 and 4). This emphasizes that the importance of absorptive capacity for GVC-related spillovers should never be underestimated. Only if countries are able to adequately use and exploit technology embedded in foreign value added, they may fully reap the gains from GVC integration.

Interestingly, here we observe that the upper middle-income category causes the mediating effect for GVC integration as a buyer. This means innovation as a second major area—apart from the business climate and institutions—matters for developing economies, even if it mainly applies to wealthier developing economies.

26