Leveraging global value chains for innovation: the case of SMEs

In this paper, we study the relationship between global value chains (GVC) participation and firms’ innovation, with a focus on unveiling opportunities for small and medium enterprises (SMEs) bound with structural disadvantages. Using firm-level data from the World Bank Enterprise Surveys, we contribute to the existing literature in three ways. First, we analyze the impact of GVC participation on different types of innovation, especially product versus process ones. Second, we bridge literature strands on internal (R&D spending) and external (GVC orientation) innovation inputs and explore whether they act as substitutes. Third, we explore the moderating effect of GVC participation on SMEs innovation. Our findings show that GVC participation incentivizes product and process innovation. In addition, it serves as a substitute for R&D spending and helps SMEs innovate. The GVC effect is particularly significant in middle-income countries with adequate absorptive capacity. Our results remain robust when using alternative methodologies.