Paper short abstract:

This paper takes the case of Indian manufacturing, and empirically examines the impact of digitalisation on firm-level product and process upgrading in global value chains. Overall, the results indicate that digitalisation can help firms upgrade and and capture higher-value added in GVCs.

Paper long abstract:

This paper takes the case of Indian manufacturing, and empirically examines the impact of digitalisation on firm-level product and process upgrading in global value chains. Data on over 7000 manufacturing firms is drawn from the Prowess dataset for the period 2001-2015. GVC firms are identified as those that are simultaneously importing intermediate goods and exporting. The digital capability of GVC firms is estimated using principal component analysis on the share of software, technology and infrastructure assets in total sales of the firm, and on the share of skilled labour. For capturing product upgrading, the study matches product-level data in Prowess to trade data in WITS, and constructs average firm-level product sophistication using Hausmann's product sophistication index. Process upgrading is captured through estimation of firm-level total factor productivity (TFP), using the Levinsohn-Petrin methodology. The study then employs System-GMM to deal with econometric issues of endogeneity and selection, and controls for other factors affecting upgrading strategies of firms. The study finds that product sophistication in GVCs is positively and significantly affected by digital capability of firms, along with R&D intensity, industry concentration and firm size. Digital capability is also found to have a positive and significant impact on firm-level productivity growth. These results are robust to alternate model and lag specifications, as well as methodologies of fixed effects and propensity score matching. Overall, the results indicate that policies for improving digital capabilities in firms can help them upgrade and and capture higher-value added in GVCs.