Firm innovation and participation in global value chains in a developing country

Abstract Participation in global value chains (GVCs) is considered a vital pathway for developing countries to achieve sustainable development, yet the mechanisms ensuring this integration is both deep and sustainable remain underexplored. While many studies emphasize innovation’s role in firm performance, its specific impact on facilitating sustainable GVC participation lacks sufficient evidence, especially in contexts like Vietnam – a rapidly integrating economy. This study addresses this gap by investigating the impact of innovation on firms’ participation in GVCs. We analyze this proposition by using panel data from the World Bank Enterprise Surveys (2005–2023) and a probit model. Our key findings show that both product and process innovations strongly contribute to firm participation in GVCs. The results are robust when considering alternative measurements and different specifications. In addition, the results are heterogeneous across firm size and ownership structure. The value of this study for sustainable development is clear that innovation is the engine allowing firms from developing nations to not just join GVCs, but to potentially move up the value chain. Therefore, policies that foster innovation are fundamental development strategies, essential for transforming GVC integration into a true driver of inclusive growth and long-term sustainability.