Digital Technologies and Product Upgrading in Global Value Chains: Empirical Evidence from Indian Manufacturing Firms
East Asia and Pacific, South Asia, Trade and FDI
This paper provides empirical evidence on the impact of digitalisation on product upgrading in Global Value Chains (GVCs). Analysis is done for a sample of Indian manufacturing GVC firms in the period 2001–2015 from the firm-level database Prowess, using the methodology of System Generalised Method of Moments. Product upgrading is captured by a novel sales-weighted average product sophistication indicator constructed at the firm level. Digitalisation is captured through a digital capability index, constructed using principal component analysis, which draws information on both ‘hard’ and ‘soft’ digital assets for firms. Empirical results indicate that an increase in digital capability of an Indian GVC firm has a significant and positive impact on its product sophistication, implying that by investing in digital capabilities, Indian manufacturing firms can produce better and more sophisticated products in GVCs, enabling them to upgrade and climb up the value-chain ladder. Firms that are Digital Leaders produce 4–5% more sophisticated goods than Digital Laggards.