Using two panel data sets at the sectoral level, our empirical strategy relates GVC participation as a buyer (backward GVC links) and seller (forward GVC links) to domestic value added. The measures are based on the Organisation for Economic Co-operation and Development’s (OECD) Inter-Country InputOutput (ICIO) data set as well as the World Input Output database (WIOD). Both databases cover a wide range of industrialized and developing countries, manufacturing and services sectors, and years. Related streams of literature have focused on the productivity gains from international trade and investment at the sector or firm level, including the role of exporting (Bernard and Jensen 1995 and following studies), importing inputs (see, for example, early contributions by Görg and Hanley 2003 or Mann 2003), and FDI (see, for horizontal spillovers, Haddad and Harrison 1993; for vertical spillovers, Javorcik 2004a). To the best of our knowledge, Kummritz (2016) is the only other study that looked into the effects of GVC integration on economic upgrading based on international input-output measures.

The type of GVC integration is a main determinant for which policies matter. Javorcik’s (2004a) seminal study on spillovers from foreign direct investment (FDI) introduced measures of backward and forward FDI links based on input-output data. The concept of backward and forward links has been used widely in the literature of FDI and, increasingly, in international trade. Overall, the literature suggests that backward and forward FDI links have a differential effect on economic upgrading (see, for example, Javorcik 2004a; Havranek and Irsova 2011), and similar results can be expected for different types of GVC integration (Kummritz 2016). Integrating as a buyer into GVCs requires a focus on building the infrastructure and strengthening connectivity to global firms in order to import world-class inputs. While GVC participation as a seller also hinges on a similar policy framework, the focus now shifts more towards increasing productivity in order to be more competitive in the global marketplace. Following Kummritz (2016), we focus on measures of backward and forward GVC links.

In a second step, we investigate whether certain policies at the national level increase the relationship between domestic value added and GVC participation, in order to guide future GVC-related policy making. There are at least two streams of literature that have emphasized the role of national policies for welfare gains: One set of studies looked at the role of country characteristics for economic growth and for escaping the middle-income trap (for recent contributions, see, for example, Eichengreen, Park, and Shin 2013; Pritchet and Summers 2014; Bulman, Eden, and Nguyen 2014; for a literature review, see Raiser 2014). Another strand of literature examined the role of policies for the productivity spillovers from FDI. For an extensive literature review, see, for example, Farole and Winkler (2014). In this paper, we include a wide range of measures at the national level in the form of interaction terms.

We also test whether the findings depend on a country’s development stage by splitting the samples into three income categories. The effects of GVC integration on economic upgrading can vary depending on a country’s development stage, the type of GVC integration, and its underlying transmission channels. The transmission channels include backward and forward GVC links; technology spillovers to local firms in the same or related downstream or upstream sectors; skills upgrading transferred through the training of and demand for skilled labor; investments in infrastructure that would otherwise not be profitable (minimum scale achievements); and pro-competitive market restructuring effects that are not limited to GVC participants, but also extend to nonparticipants (Taglioni and Winkler 2016). It might be possible that countries with lower income levels benefit more strongly from backward links and technology spillovers, while higher income countries show higher gains from forward links and skills upgrading.

First, we find that GVC integration significantly increases the domestic value added of our samples, especially on the selling side. The results hold across all income levels. Second, the results highlight the importance of policy for economic upgrading through GVC integration. While we cannot claim causal evidence, all assessed policy areas are consistently shown to mediate the effects of GVCs and magnify the gains for domestic value added. This holds for policies that affect the quality and conditions of input and 3