employment and capital stock data. They can serve as additional controls to gauge the true effect of GVC integration.

For the estimation, we merge the industry coverage of the OECD ICIO database with the WIOD database to allow for comparability and robustness checks, which leaves us with 29 industries. In addition, we exclude nontradable industries, so that the sample consists of 20 industries, of which 2 are primary industries, 13 manufacturing industries, and 5 service industries. For a description on how the variables are constructed, see appendix 5.

# **_Policy Variables_**

To get a comprehensive picture of the role that policy plays in economic upgrading through GVC participation, we analyze seven different categories. These areas can be divided into policies targeting investment and trade flows (categories 1 to 3), the business climate including financial and labor markets (categories 4 to 6), and the quality of input factors (category 7).

_Infrastructure_ has four main dimensions: roads, ports, rail lines, and airports. We proxy for the two latter using the World Development Indicators’ (WDI) _rail_ line coverage (kilometers of rail lines per person)<sup>5</sup> and _airfreight_ volume (value of air cargo as percentage of GDP); the former two are measures from the World Economic Forum’s (WEF) assessment of _road_ and _port_ infrastructure for the Global Competitiveness Report. The report is based on business executives' perceptions of their country's port or road facilities. Data are from the WEF's Executive Opinion Survey and only available from 2006 on, but no indicators with larger country and time coverage are available. WEF scores range from 1 to 7, with 7 being the optimal value. Finally, for a subset of OECD countries in the WIOD sample, we look at investment in infrastructure ( _infrainvest_ ) as percentage of GDP available from OECD Stat.

_Connectivity_ looks at procedures and controls governing the movement of goods and services across and within national borders, as well as a country’s ICT infrastructure. It is accounted for by three categories of the World Bank’s Logistics Performance Index (LPI) ( _LPI overall_ , _LPI customs_ , _and LPI logistics_ ), which ranges from 1 to 5 = best. In addition, we include _Internet_ users per 100 inhabitants and the expected time for exporting ( _time to export_ ) and importing ( _time to import_ ) in days by the WDI as measures of connectivity. The latter two are only available from 2003.

_Investment policy_ is measured on the investment side by an index of investment freedom by the Heritage foundation and by FDI inflows as percentage of GDP ( _FDI inflows_ ) from the WDI. The variable _investment freedom_ <mark>serves as a proxy for investment promotion</mark> . The Heritage score ranges from 0 to 100 = highest freedom, and investment freedom measures the ability of individuals and firms to <mark>move their resources in and out of specific activities both internally and across the country’s borders. This variable is mainly based on official government publications of each country on capital flows and foreign investment.</mark> _Trade policy_ is proxied by a country’s share of exports of goods and services as percentage of GDP ( _openness_ ) from the WDI. We also include two measures regarding services trade, namely, its share as percentage of GDP ( _services trade_ ) from the WDI, and the Services Trade Restrictiveness Index ( _STRI OECD_ ) from the OECD.<sup>6</sup> The STRI takes the value from 0 = completely open to 1 = completely closed.

_Business climate and institutions_ are assessed using six indicators. _Property rights_ (The Heritage Foundation) covers the functioning of courts. It measures the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws. It also assesses the likelihood that private property will be expropriated and analyzes the independence of the judiciary, the

> 5 Rail line coverage and the education variable listed below by Barro and Lee (2010) are interpolated to achieve full coverage.

> 6 For the OECD sample, we use the World Bank’s STRI since it has a larger country coverage.

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