From Global Value Chains (GVC) to Innovation Systems for Local Value Chains and Knowledge Creation

This paper presents a hypothesis stating that at the initial stage of growth by a latecomer, increased participation in the global value chain (GVC) is necessary to learn foreign knowledge and production skills, that functional upgrading at middle-income stage requires effort to seek separation and independence from existing foreign-dominated GVCs, and that latecomer firms and economies might have to seek reintegration back into the GVC after establishing their own local value chains. This paper aims to verify this “in–out-in-again” hypothesis by looking into firm cases of upgrading in Korea and Brazil. Trends in the share of foreign value-added in gross exports (FVA) in successful catching-up economies of Korea and Taiwan, including China recently, are consistent with this pattern. Regression results also confirm a negative correlation between the degree of local creation and diffusion of knowledge and FVA values, such that gaining increased local knowledge is a basis for increasing (reducing) domestic value-added (foreign value-added). Given that this variable of local creation and diffusion of knowledge is a key innovation system variable, this finding implies that building local innovation systems is the key in making a possible upgrade while being integrated into the GVC.