## **4.4. Summary**

Overall, our results highlight the importance of policy for economic upgrading through GVC integration. While we cannot claim causal evidence, all assessed policy areas consistently show mediating effects of GVCs and magnify the gains for domestic value added. This holds for policies that affect the quality and conditions of input and output factors, policies targeting investment and trade flows, and policies targeting the business climate and institutions, including financial and labor markets. As a result, strategies for GVC integration need to focus, not only on border measures, but also increasingly on beyond-the-border measures—if they are to extract the maximum benefits for the integrating country.

A more detailed analysis shows that several policy areas mediate the gains from GVCs more through integration as a seller. This holds in particular for connectivity, education, and skills, as well as for standards. We consider this as a sensible result since the mechanisms behind the positive effects of GVC integration as a buyer and seller are likely to be different. For instance, backward links might generate gains by increasing the quality of inputs, while forward links have a direct demand increasing effect for domestic value added. Naturally, domestic policies can influence the demand for domestic goods more than the quality of foreign inputs. Our results are in line with such an explanation.

Finally, we observe that high- and upper middle-income countries drive many of our results. (Notable exceptions are standards and the business climate and institutions.) We consider the conclusions, nevertheless, are highly relevant for developing economies. Many high- and upper middle-income countries have higher levels of GVC integration and it is then evident that they are responsible for a significant part of our results. However, as low- and lower-middle income countries integrate more and more into GVCs, we expect that such domestic policies will play an increasing role.

# **5. Conclusion**

GVCs changed the way we think about trade and its role for development. Initial work on the topic outlined several ways how GVCs can raise growth and value added through increased specialization, knowledge spillovers, or terms of trade effects. However, initial comprehensive empirical tests of the relationship have shown that gains from GVC participation are not self-evident, instead, the effects seem to be dependent on a set of country- and industry-specific characteristics.

Our econometric results confirm that GVC integration—both as a buyer and seller—increases domestic value added, using a large database covering up to 61 countries, 34 industries, and the time period from 1995 to 2011. Interestingly, the results indicate that being a seller (forward links) in GVCs contributes more strongly to economic upgrading than being a buyer (backward links) only.

In a second step, we specifically examined the role of national policies, institutions, and standards for the GVC integration-economic upgrading nexus. We find that the domestic policy environment is indeed a major catalyst for the effects of GVC participation on domestic value added. It can act as either an obstacle or a facilitator for economic upgrading in GVCs and should be a key element of a country’s GVC strategy.

A more detailed analysis shows that several policy areas mediate the gains from GVCs more through integration as a seller, which holds in particular for connectivity, education, and skills, as well as for standards. We consider this as a sensible result since the mechanisms behind the positive effects of GVC integration as a buyer and seller are likely to be different. For instance, backward links might generate gains through increasing the quality of inputs, while forward links have a direct-demand increasing effect for domestic value added. Naturally, domestic policies can influence the demand for domestic goods more than the quality of foreign inputs—our results are in line with such an explanation.

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