Fact of the Week: Participation in Global Value Chains Raises Firms’ Labor Productivity by 20 Percent
Source: Ivan Ledezma and Antonia Lopez Villavicencio, “Global Value Chains and Productivity: Causal Evidence for Firms Worldwide,” EconomiX Working Papers, University of Paris Nanterre, EconomiX, no. 2024-4 (December 2023).
Commentary: A recent working paper by Ivan Ledezma and Antonia Lopez Villavicencio analyzed how participation in global value chains (GVCs) affects firm-level productivity. In this case, the authors define GVC participation to mean participation in both exporting and importing activities. The study looked at both labor productivity and total factor productivity (TFP). Economists frequently treat the latter measure as a proxy for technology. Using firm-level data from the World Bank Enterprise Surveys, the study looked at over 50,000 firms across 144 countries between 2006 and 2021.
The authors found that, overall, GVC participation raises labor productivity by about 20 percent. However, the effects vary depending on a country’s income level and on an industry’s technological intensity. For instance, the increase in labor productivity was greatest among firms in low and lower-middle income countries. GVC participation raised labor productivity by about 30–38 percent among firms in low and lower-income countries. Similarly, the increase in TFP was greatest for firms in low and lower-middle income countries. Specifically, GVC participation raised TFP by about 15–16 percent among firms in low and lower-middle income countries. Among firms in upper-middle income and high-income countries, the effect on TFP was not statistically significant. The authors argue that this is due to the fact that higher income countries tend not to go through the same sort of technological catch-up as lower income countries.
When breaking down firms by technological intensity, the increase in labor productivity from GVC was greatest among firms in medium-high- and high-tech industries. Specifically, GVC participation raised labor productivity by 11–17 percent among firms in medium-high- and high-tech industries. However, the increase in TFP was greatest among firms in low-tech industries. Specifically, GVC participation raised TFP by 17–19 percent among firms in low-tech industries. Among firms in high-tech industries, the effect on TFP was not statistically significant. The authors explain that this too is due to the fact that high-tech industries are already close to the technological frontier. As such, high-tech industries do not exhibit catch-up growth in the way low-tech industries do.
