Does Global Value Chain Participation Matter for Economic Upgrading? A Nonlinear Insight

ABSTRACT In recent decades, global value chains (GVCs) have come to dominate much of world trade. Participation in GVCs is widely regarded as a key driver of development by enabling countries to climb the value‐added ladder. However, tighter governance structures within GVCs can make these benefits uncertain. This paper investigates the dynamic impact of GVC participation on economic upgrading using a semiparametric smooth coefficient model with panel data from 62 countries over 1995–2018. We uncover a novel N‐shaped nonlinear relationship between GVC participation and economic upgrading, extending beyond the linear or U‐shaped patterns found in earlier research. This relationship reveals three stages: initial learning with rising upgrading effects, an intermediate ‘upgrading trap’ with declining effects, and an advanced breakthrough stage with renewed rise. Decomposing transmission mechanisms shows that while GVC participation imposes output efficiency costs, it enhances upgrading by improving input factor productivities. Critically, forward linkage participation proves more effective than backward linkage for escaping the upgrading trap. Middle‐income countries exhibit the strongest internal input factor efficiency gains from GVC participation alongside the highest dispersion in overall outcomes. These findings offer policy insights for designing openness and industry policies tailored to a country's development stage and GVC position.