Revisiting international knowledge spillovers: the role of GVCs

The diffusion of knowledge is an important determinant of economic development. International trade has been established as a key mechanism in facilitating diffusion. The rise of global value chains (GVCs) has transformed trade in recent years. Yet the role of GVCs in giving rise to knowledge spillovers remains under-explored. In this paper, we study the elasticity of industry-level total factor productivity (TFP) to technology that is imported through intermediate trade in GVCs. To do so, we combine novel input-output decomposition methods with recent insights from the literature on the factor content of trade. We focus on a panel of 32 countries and 39 sectors over the 2000-2014 period using WIOD and OECD data. We find that domestic TFP is elastic to knowledge flows arising from GVCs and that the magnitude of this effect is larger relative to all other knowledge flows. We also find that GVC participation is particularly conducive to technology upgrading in countries that are far away from the technology frontier, and that GVC-related spillovers persist over large geographical distances.