Special Issue Article Do Global Value Chains Offer Developing Countries Learning and Innovation Opportunities?

Special Issue Article
Do Global Value Chains Offer Developing Countries Learning

and Innovation Opportunities?
Valentina De Marchia, Elisa Giulianib,* and Roberta Rabellottic,d
a
Department of Economics and Management, University of Padova, via del Santo 33, 35123 Padova, Italy.
E-mail: valentina.demarchi@unipd.it
b
Department of Economics and Management, University of Pisa, Via Ridolfi 10, 56124 Pisa, Italy.
c
Department of Social Sciences, University of Pavia, Strada Nuova 65, 27100 Pavia, Italy.
d
Department of Business and Management, Aalborg University, Frederikskaj 10B, 2450 Copenhagen,
Denmark.
E-mail: roberta.rabellotti@unipv.it
*E-mail: elisa.giuliani@unipi.it
Abstract The role of emerging economies in the global economy via embeddedness in Global Value
Chains (GVCs) is increasing, but their ability to become innovation leaders is less certain. The GVC
approach stresses that the inter-firm linkages afforded by being part of a chain are crucial for transferring
knowledge. However, their impact on the innovation performance of the developing country firms
involved in these GVCs remains controversial and requires more research. The present study provides a
systematic review of the literature on developing country GVCs to investigate the learning channels used
by local firms, both within (firm level, collective level) and outside of these value chains (i.e. external
sources of learning), and the extent to which this activity promotes innovation. We use cluster analysis to
classify the cases identified in a literature review to propose a novel typology of local GVC innovators:
(a) GVC-led Innovators that achieve high levels of innovation, relying mainly on sources of knowledge
within the GVC; (b) Autonomous Innovators whose innovation activity is based on external sources of
learning; (c) Marginal Innovators, which constitute the largest group and are characterized by low levels
of innovativeness and some use of knowledge available within the GVCs, but scarce use of external
sources.
Le rôle des économies émergentes dans l’économie mondiale via l’intégration dans les chaı̂nes de valeur
mondiales (CVM) est croissant, mais leur capacité à devenir des leaders de l’innovation est moins
certaine. La présente étude propose une revue systématique de la littérature sur les CVM des pays en
développement afin d’étudier les canaux d’apprentissage utilisés par les entreprises locales au sein (au
niveau des entreprises et au niveau collectif) et en dehors (les sources externes d’apprentissage par
exemple) de ces chaı̂nes de valeur. L’article étudie également la mesure dans laquelle cette activité
favorise l’innovation. Nous proposons une nouvelle typologie des innovateurs locaux des CVM: (a) les
innovateurs dirigés par les CVM qui atteignent des niveaux élevés d’innovation, en s’appuyant princi-
palement sur les sources de connaissances au sein de la CVM; (b) les innovateurs autonomes dont
l’activité d’innovation est basée sur des sources d’apprentissage externes; (c) Les innovateurs marginaux,
qui constituent le groupe le plus important et se caractérisent par un faible niveau d’innovation et une
certaine utilisation des connaissances disponibles au sein des CVM, mais une utilisation limitée des
sources externes.
The European Journal of Development Research (2018) 30, 389–407. https://doi.org/10.1057/s41287-017-

0126-z; published online 8 December 2017
Keywords: innovation; Global Value Chains (GVCs); emerging countries; learning; knowledge transfer;
inter-firm linkages
2018 European Association of Development Research and Training Institutes (EADI) 0957-8811
The European Journal of Development Research Vol. 30, 3, 389–407
www.palgrave.com/journals
De Marchi et al
Introduction
Although in recent years some emerging countries have displayed rapid catch up trajectories
(Lee and Malerba, 2017), most developing countries continue to suffer from lack of indigenous
technological resources and capabilities, and rely mainly on technology transferred from
advanced countries (Fagerberg et al, 2010). Learning channels traditionally available to firms
include technology licensing, reverse engineering, labour mobility, exchanges of information
and knowledge with suppliers and buyers, learning through export and spillovers from Foreign
Direct Investments (FDIs) (Lall, 1996; Barba Navaretti et al, 2004). More recently,
participation in Global Value Chains (GVCs) has been recognized as providing an important
opportunity for developing countries to access and acquire foreign knowledge (see, for
instance, Farole and Winkler, 2014). The organization of production in GVCs – based on
intermediate goods and services traded via fragmented and internationally dispersed networks
of suppliers – is now widespread and involves both advanced country firms (which are
interested in more flexible and cheaper production) and developing country firms (that want to
specialize in one or a few specific segments of the value chain without having to develop all of
the capabilities encompassed by a GVC) (Taglioni and Winkler, 2016).
The GVC literature stresses the crucial role of inter-firm linkages in GVCs in the transfer of
knowledge and in the promotion of innovation. It is generally positive about GVC’s ability to
facilitate developing country firms’ access to valuable knowledge on the type and quality of
products being demanded by consumers in global markets (Gereffi, 1999; Sturgeon et al, 2008).
It suggests that building local capabilities required to introduce new products and processes,
and to perform more complex tasks, depends largely on the patterns of governance and power
relations ruling the links between local firms or suppliers and GVC lead firms, which
orchestrate the value chain at a global level (Gereffi et al, 2005; Giuliani et al, 2005).
Some scholars note also that the innovation process in firms involved in GVCs may not
depend solely on the GVCs’ characteristics and the role played by lead firms. They suggest that
innovation in local firms may be influenced by internal or intra-firm sources of learning,
promoted by an autonomous technological capability accumulation process (Morrison et al,
2008), and/or external sources, based on their links to other organizations in the national and/or
regional innovation system (Pietrobelli and Rabellotti, 2007, 2011).
Based on a review of the empirical literature on innovation in GVCs, we investigate the
relevance of various learning channels for the development of local innovation capabilities in
GVC suppliers located in developing countries. Our aim is to reconcile the GVC and innovation
frameworks by reviewing empirical investigations of how innovation takes place in GVCs, and
examining the main learning channels (within and outside the GVCs) that facilitate the
innovation process. We focus on developing economies, where building local capabilities is an
important policy objective, and where participation in GVCs plays a central role in the
economy and innovation activity.
A comprehensive review of the empirical papers on innovation in GVCs resulted in the
identification of studies on fifty GVCs and allowed codification of information on (a) different
forms of innovation taking place at the local level; (b) learning mechanisms within and outside
GVCs. Based on this codified information, we performed a cluster analysis and developed a
novel typology of local GVC innovators, representative of different industries and countries.
The paper is structured as follows. Section ‘‘Literature review methodology’’ describes the
methodology used for the literature survey and provides details on the search and codification
of information. Section ‘‘Do firms involved in GVCs innovate?’’ provides an overview of the
390 2018 European Association of Development Research and Training Institutes (EADI) 0957-8811
various forms of local innovation in the cases examined. Section ‘‘Learning mechanisms within
and outside GVCs’’ describes the main learning mechanisms underlying the local innovation
processes and proposes a typology of these mechanisms within and outside the GVCs.
Section ‘‘Patterns of innovation and learning: a typology of GVC innovators’’ presents the
results of the cluster analysis and the GVC typology. Section ‘‘Concluding remarks’’ concludes
with some policy implications.
Literature Review Methodology
The paper is based on a review of the literature on innovation in GVCs in developing countries.
Our research strategy involves searching journals included in the Scopus database and non-
academic literature, such as books and reports, published by the main international
organizations involved in GVC studies (Werner et al, 2014). The search starts in 2005, when
the GVC literature achieved a critical mass of 50 publications per year. A search on Scopus for
studies with the words ‘global value chain(s)’ and ‘developing countries’1 in their titles,
abstracts or keywords, identified 171 articles (in English). A careful reading of these 171
articles resulted in our excluding 18 that were not focused on developing countries, and a
further 48 that did not have an empirical focus. We manually screened the remaining 105
papers for references to innovation (including catching up, upgrading, technology spillovers,
learning, new product development, etc.) that also reported the learning mechanisms involved.
The final sample for our empirical analysis includes 31 papers covering fifty GVCs (Appendix
Table A-1).2
For each GVCs, we codified the following dimensions related to firms (both domestic and
local subsidiaries of multinational companies) involved in GVCs and located in developing
countries: (a) innovation – distinguishing among product, process, organizational and market-
related inventions, and on the degree of novelty (new-to-the-world, new-to-the-country, new-
to-the-firm)3; (b) learning mechanisms – classified according to the actors involved, inside or
outside the GVCs.
To complement our two main analytical dimensions, we gathered information on lead firm
characteristics (size, sector of specialization, country of origin), GVC governance patterns and
the actors involved in the local innovation system. The whole information was codified based
on a Likert scale, or a score of 0 (if the condition is absent) and 1 (if the condition is present). In
reviewing the documentation related to our GVC cases, we tried to minimize the occurrence of
bias and misinterpretation by multiple cross-referencing of the information (e.g. by consulting-
related material and grey literature).
The codified information on our GVC cases allowed for a set of cluster analyses,4 using both
hierarchical and k-means cluster methodologies to ensure consistent results so that the groups
identified are robust to different clustering approaches (Forgy, 1965).5 The results of the cluster
analyses were used to derive a typology of local GVC innovators; the validity of this typology
was cross-checked with qualitative evidence from the cases matched to the clusters.
Do Firms Involved in GVCs Innovate?
The literature review shows that the patterns of innovation among firms located in developing
countries and involved in GVCs are heterogeneous. In most cases, there is some evidence of
product innovation (82 per cent of the GVCs analysed). Process innovation occurred in 62 per
2018 European Association of Development Research and Training Institutes (EADI) 0957-8811 391
De Marchi et al
cent of the GVCs considered – in some cases, achieved through the adoption of international
standards linked to certification (23 per cent of the process innovators). Twenty-one cases
(42 per cent of the GVCs) were involved in organizational innovations related, mostly, to the
introduction of lean manufacturing practices and modifications to organizational practices,
often to meet international certification scheme requirements. We also found some cases of
market-related innovations (30 per cent), mostly involving the introduction of own brands and
new product lines, and (in a few cases) to innovations in distribution channels and packaging.
Although this is evidence that developing country firms involved in GVCs are innovative,
the level of innovation is less clear. In roughly 40 per cent of cases, we found evidence of
product innovations that can be described as new-to-the-world. In some cases, these
innovations resulted in international patents, owned generally by the local subsidiaries of a
Multinational Enterprise (MNE) (Athukorala, 2014). One such example is provided by studies
of electronics industry GVCs in China (Sun et al, 2013; Dennis Wei et al, 2011). We found
examples, also, of new-to-the-world innovations in traditional industries, such as football
manufacturing by a Taiwanese-owned company based in Dongguan, China, which patented a
machine to stitch high-quality footballs in the mid-1990s, (Nadvi, 2011). This new machinery
boosted China’s productivity and, subsequently, ousted traditional Pakistani hand-stitching
firms from the market, shifting export leadership in the football manufacturing market from
Pakistan to China. Similarly, in the context of coffee production in Brazil, Cafaggi et al (2012)
describe a new-to-the-world innovation, consisting of the development of new varieties of
coffee, obtained via genetics research conducted in a joint venture involving some local
companies and the GVC lead firm – Illycaffé from Italy.
Our review also identified the emergence of innovation driven by the need to develop
products or production processes tailored to the large, underserved, booming developing
country markets (Lema et al, 2015).6 Examples include the gaming technology developed by
Tencent (China) to overcome the problem of counterfeiting in emerging economy markets, and
the innovative business model for mobile phone access introduced by a leading global provider
of mobile telecommunications (Bharti Airtel in India), developed initially to target low-income
consumers in rural inner regions of India, and replicated in other developing countries in Asia
and Africa (Williamson, 2015). Brandt and Thun’s (2011) paper provides another interesting
example in the context of the mobile handset value chain in China, suggesting that the success
of Chinese-based Original Equipment Manufacture (OEM) products depended on the
introduction of a new distribution system (reaching rural customers through the establishment
of commercial subsidiaries) and on the development of a flat organizational structure, allowing
rapid responses to changes in domestic demand and deep knowledge of local customers’ needs.
These innovations involve both original design and original functions. For instance,
according to Kadarusman’s (2012) interviews with Indonesian electronics entrepreneurs, a
special TV antenna system was developed to adapt to the local weak transmitter conditions.
Often, these innovations are based on novel combinations of existing technologies or a new
business model, and may not entail a large technological content. However, they offer large
market potential for indigenous firms in niches where western MNEs may be unwilling to
invest, either because demand is considered too small or because they are unable to adapt their
products and processes to local needs. In some cases, innovations developed originally for the
local market can become relevant in the global market. An example is the flex-fuelling system
for passenger cars, described in Lema et al (2015), developed locally by a Brazilian subsidiary
of Bosch, which ‘went global’ as biofuels became increasingly important worldwide, placing
the local subsidiary in a strategic position within Bosch’s innovation strategy in this industry.
Learning Mechanisms Within and Outside GVCs
In this section, we discuss the main channels through which firms involved in GVCs and based in
developing countries, learn and access knowledge to innovate. To explore the learning mechanisms,
we draw on Pietrobelli and Rabellotti (2011), which identifies various channels within the GVCs
presented in the upper part of Table 1. Our review of the literature also revealed the importance of
learning mechanisms outside the GVCs, that is learning activities that do not derive strictly from
connections to the GVC lead firms or, in some cases, some other relevant upstream firms.7 Table 1
provides a list of within or outside the GVCs learning mechanisms and their frequency in the cases
analysed. Note that, in many cases, we observed a combination of these learning mechanisms; firms
learn through different channels at the same time, involving mechanisms within and outside the
GVCs, and can learn from firms in the same GVCs via different channels. In half of the cases,
learning within the GVC was accompanied by some mechanisms for firm-level learning.8
Learning Mechanisms Within the GVCs
We consider the following within the GVCs learning mechanisms: (a) mutual learning via face-
to-face interactions; (b) training of the local workforce by the lead firm; (c) selective knowledge
transfer from the GVC lead firm for a narrow range of tasks; and (d) pressure to adopt
international standards. Table 1 shows that, in 84 per cent of the GVCs analysed, at least one of
these mechanisms was observed.
Mutual Learning from Face-to-Face Interactions
This learning mechanism is common in the case of complex and not fully codified innovative
processes, when the local GVC firms and the lead firm possess complementary competences
Table 1: Learning mechanisms within and outside the GVCs
# of cases %
Within the GVCs
(1) Mutual learning from face-to-face interactions 17 34.0
(2) Knowledge transfer from GVC lead firms related to a narrow range of tasks 18 36.0
(3) Training of local workforce by GVC lead firms 11 22.0
(4) GVC lead firms’ pressure to adopt international standards 17 34.0
Total # of cases* 42 84.0
Outside the GVCs
Firm level
(1) Internal R&D efforts 24 48.0
(2) Hiring skilled managers and workers 13 26.0
(3) Learning via firms’ acquisition/joint venture/other equity agreements 10 20.0
Collective level
(4) Learning from other firms and local cluster or regional level business 12 24.0
associations
Other external
(5) Imitation of competitors 15 30.0
(6) Learning from suppliers (outside the GVCs), universities and consulting 13 26.0
agencies
Total # of cases* 20 40.0
*Multiple classifications are possible. The total number of cases analysed is 50.
De Marchi et al
that require intensive interactions, and when there is no risk that the supported suppliers will be
able to upgrade to challenge the lead firm’s competitive advantage (Altenburg, 2006). The
literature review suggests that, at least in some cases, the relationships between lead firms and
their suppliers are very close. For instance, Meléndez and Uribe (2012) describe the case of
some Colombian suppliers of chilli pepper paste, that received regular technical assistance from
the lead firm (Tabasco), to improve their agronomic techniques and support the introduction of
technological innovations. Similarly, very close relationships between the lead firm and its
suppliers underlie the quality improvements made to Brazilian coffee (Cafaggi et al, 2012).
Illycaffé, the GVC lead firm, provides its suppliers with continuous technical assistance in
several areas, from quality management and control to packaging and transportation, to ensure
the high quality of the coffee along the GVCs. To stimulate the production of high-quality
coffee and to identify the best producers, Illycaffé sponsored a competition, based on
differential prices, to reward quality. Another initiative was the establishment of a club offering
benefits, such as more intensive technical assistance, which secured a closer relationship
between the lead firm and a selected group of suppliers.
Knowledge Transfer from GVC Lead Firms Related to a Narrow Range of Tasks
This learning mechanism consists of the transfer of knowledge – frequently production process
and/or management knowledge – related to a very narrow range of tasks, for example, assembly
or specific manufacturing activities. This mechanism is most likely if suppliers’ technological
capabilities and skills are lagging. Then, the lead firm needs to provide the support necessary to
ensure adequate product quality (Giuliani, 2008; Pietrobelli and Rabellotti, 2011). This was
observed in Brazil’s Sinos Valley footwear cluster, where US buyers supported local producers
to improve the quality of their product and increase their efficiency. At the same time, they
were discouraged from undertaking activities that would upgrade their design, marketing and
sales skills, which were the lead firm’s core competences (Schmitz, 2006). Confining their
Brazilian suppliers to the manufacturing phase kept these firms dependent on a small number of
powerful customers that were keen to maintain the status quo in the GVC. In general, this type
of learning mechanism, on its own, can risk local suppliers becoming locked into basic
technologies and skills and unable to develop other strategic capabilities.
Training of the Local Workforce by GVC Lead firms
Local training is more likely if the lead firm assumes direct ownership of some GVC operations
by establishing local MNEs subsidiaries. We found evidence of local training programmes in
the electronics industry in countries as diverse as Mexico (Sturgeon and Kawakami, 2011),
Malaysia (Athukorala, 2014) and Indonesia (Kadarusman, 2012). In this last case, the local
workforce learnt from continuous interactions with expatriates occupying key management
positions in the MNE subsidiary operating locally. In other cases, the local workforce
participated in training sessions at the lead firm’s home country production facilities.
GVC Lead Firms’ Pressure to Adopt International Standards
This learning mechanism is the most common in the case of GVC local suppliers that are
skilled and competent, or whose product needs to comply with specific technical and quality
standards – hence the lead firm requires them to be responsible for the technological processes
involved. It does not always require the lead firm to undertake a purposeful process of
knowledge transfer and technical support, and it involves the instruction to adopt and adhere to
specific international production and product standards (e.g. ISO certification, environmental
standards, social standards, etc.). The lead firm puts pressure on the supplier firms to innovate
and to keep abreast of technological advancements, which stimulates learning and innovation
among suppliers (Lema et al, 2015).
The literature reviewed suggests that this type of learning mechanism is common in the
electronics (Sturgeon and Kawakami, 2011; Kadarusman, 2012), mobile phone (Brandt and
Thun, 2011), wind turbine (Lema, 2013) and aeronautics (Cafaggi et al, 2012) industries. In
these GVCs, local firms need to invest in building and constantly updating specialized
production capabilities in order to maintain their positions in the GVC. Their learning efforts
may be autonomous or supported by external consultants and/or accredited institutions, that
offer technical advice on adoption of the international standards demanded by the lead firm. In
about half of the cases investigated, it was associated also with some form of training of the
local workforce by the GVC lead company.
Compliance with standards as a condition for participation in a GVC is common also in
specialized export-oriented agro-industries such as the production of vegetables in Guatemala
(Padilla-Perez, 2014). Exporting firms must fulfil health regulations, rules of origin and trade
standards requirements, and buyers often require certification of good agricultural and
manufacturing practices to guarantee the product quality demanded by consumers. In this case,
the lead firm is not involved directly in the process of quality upgrading, but its requirements to
satisfy international standards create the incentive for local suppliers to focus on quality
(Giuliani, 2008). In contrast, in the case of coffee production in Brazil described above,
Illycaffè played a key role in supporting the adoption of international standards by local
producers.
Learning Mechanisms Outside the GVCs
These mechanisms fall into three groups: (a) firm-level learning efforts; (b) collective learning
efforts at the local level; (c) other external learning efforts unrelated to the GVCs.
Firm-level Learning Efforts
As expected, internal R&D efforts are the most widespread learning mechanism, found in
almost half of the GVCs considered in this study, across countries as diverse as China, India
and Brazil and, also in small developing countries such as Ghana and Guatemala. This
mechanism is often combined with other learning channels – both within and outside the GVC.
In an econometric study of China’s information and communication technology industry, Sun
et al (2013) found that involvement in a GVCs boosts firms’ innovation capacity if there are
well-established R&D functions and well-developed absorptive capacity.
Hiring skilled managers and workers, often with previous experience of employment in
foreign MNEs, is another frequently observed firm-level learning mechanism. Fu et al (2014)
confirm the importance of this mechanism in their survey of Ghana. They found that skilled
workers, who – via trial and error – were able to make considerable production process
improvements, were responsible for more than a third of the process innovations identified.
This is an important mechanism also in Malaysia’s (Athukorala, 2014) and Indonesia’s
(Kadarusman, 2012) electronics industries. In both cases, we found evidence of former lead
firm employees establishing new local firms (spin-offs), and domestic-owned companies that
had acquired knowledge and expertise for innovation by hiring professionals with experience of
De Marchi et al
working in the GVC lead company. In the case of Shenzen (China), Yang (2014) discusses the
LCD industry, and concludes that the indigenous innovation capacity of domestic firms
benefited hugely from the recruitment of a group of senior managers, previously employed by
lead companies in the flat-panel display GVCs involved in the local cluster. The presence of
academics as founders of or affiliated to indigenous firms is another form of this learning
mechanism (sometimes described as ‘forward engineering’), in Chinese high-tech industries
(Lee et al, 2011; Cheong et al, 2016).
Some firms acquire knowledge through links based on acquisitions, joint ventures or other
equity agreements, often involving advanced country firms. As suggested by Williamson
(2015), mergers and acquisitions are a widespread practice among Chinese MNEs (and MNEs
originating in other developing countries) to accelerate technological catch up, especially
among younger firms (Cheong et al, 2016). In the case of the Chinese mobile telecom sector,
Brandt and Thun (2011) provide examples of Chinese joint ventures with foreign firms that
benefited both parties: the Chinese firms acquired access to new designs and technologies and
the foreign firms achieved access to the Chinese market. Another joint venture example is
related to the Ugandan pharmaceutical GVC, specialized in anti-retroviral treatments for HIV.
Haakonsson (2009) provides evidence of how joint ventures allowed access to knowledge and
technology by the domestic companies and entry to the Ugandan market (which would
otherwise have been difficult due to intellectual property rights barriers) for the Indian MNEs.
Collective Learning at the Local Level
Collective learning takes place through interactions with other firms and/or organizations that
belong to the same cluster or region, but that are not part of the GVCs. Earlier research shows
that this form of localized learning is relevant for explaining firms’ innovation and upgrading
(see among others, Giuliani et al, 2005), which was confirmed by our literature review.
In industrial clusters, the critical actors often are business associations, which can provide
local firms with the technical know-how required to meet international standards. This applies
to the case of Sialkot (Pakistan), a surgical instruments cluster. The local business association
provided support and facilitated cluster-wide adoption of ISO 9000 (Nadvi and Halder, 2005).
Similarly, De Castro Souza and Neto (2010), stress the important role of local associations in
supporting technical advancements in the production of fresh fruits in Brazil. In the Petrolina–
Juazeiro cluster, a producer cooperative worked to spread the production techniques needed to
meet international certification, and offered its members training courses and technical
assistance (De Castro Souza and Neto, 2010). These examples demonstrate the importance of
collective action and cooperation among producers to guarantee a common quality standard.
Some firms rely on cluster-level associations to gather context- and sector-specific
information for innovation. A survey undertaken by Fu et al (2014) in Ghana, highlights the
role played by clusters for fostering innovation and technology transfer through knowledge
spillovers and labour market pooling. In the Sinos Valley footwear cluster in Brazil, Navas-
Aleman (2011) stresses the importance of local business associations in supporting the
development and diffusion of knowledge in design and product development, crucial for
facilitating local firms’ successful access to domestic and regional markets.
Other Channels External to the GVCs
This category includes all cases of learning from partners not vertically related to the focal
firms, but also includes firms specialized in the same value chain activity (i.e. competitors),
machinery suppliers, consultants and knowledge providers such as universities and other public
institutions.
One way of learning is by imitating local competitors, for instance, via reverse engineering –
reported to be a common practice among automotive GVCs in China and India (Altenburg et al,
2008) and in the electronics GVC in Indonesia (Kadarusman, 2012). In this last case, domestic
firms purchase product samples in order to dismantle them and make improvements (e.g.
develop new designs and functions, adapt products to the specificities of destination markets,
etc.). Kadarusman and Nadvi (2013) suggest that this is common practice also in the Indonesian
clothing industry. The local firms visit department stores abroad and purchase garments to use
them as samples to adapt to the domestic and other emerging export markets. Firms send their
designers and engineers to domestic and foreign exhibitions to obtain information on product
and process advancements.
Other firms acquire knowledge, manufacturing know-how and learning from suppliers
(outside the GVCs) by purchasing their equipment and obtaining technical support. This applies
to the wind energy industry in China, described in Lema et al (2013). In this case, European
suppliers with subsidiaries in China were provided with specialized electric control systems and
hydraulics components and services; in exchange, they provided technical assistance to Chinese
turbine manufacturers.
To improve product, quality and production efficiency, Indonesian electronics firms obtain
support from universities and consultancies. Most domestic firms have adopted the
international standards required by the global market, such as ISO 9000 certification, with
the support of consultants and accredited certification institutions (Kadarusman, 2012).
As mentioned above, these learning mechanisms are not substitutes, especially if firm
learning is involved (mostly internal R&D effort). In the majority of the GVCs analysed, we
observed firm-level learning coexisting with other forms of learning.
Patterns of Innovation and Learning: A Typology of GVC Innovators
So far, we have provided an overview of the learning mechanisms observed in our sample of
GVC cases. We now turn to classify this evidence, and conduct a set of cluster analyses of the
information collected on innovations and learning mechanisms (see Section 2), by considering
these three dimensions:
• Degree of innovativeness, measured as a count variable ranging from 0 to 5, adding 1 for

each type of innovation introduced (i.e. product, process, organizational, market) with an
additional bonus equal to 1 in the case of a product innovation classified as new-to-the-world;
• Learning mechanisms within the GVC based on summing the number of internal GVC
channels used by the firm, according to the list in the upper part of Table 19;
• Learning mechanisms outside the GVC based on summing the number of channels external to
the GVCs used by the firm, according to the list in the lower part of Table 1.
Based on the cluster analyses, we were able to identify different groupings which correspond
to three types of GVC innovators (summarized in Table 2), as follows10:
• GVC-led innovators (9 GVCs), grouping GVCs displaying high innovation capacity and
intensive use of the learning mechanisms within the GVC;
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Table 2: A typology of GVCs
Innovation GVC-led Innovators (9 GVCs) Autonomous innovators Marginal innovators

(14 GVCs) (27 GVCs)
High High Low
Within Intensive use Some use Low use
GVC • Mutual learning from face- • Mutual learning via face- • Mutual learning from face-
learning to-face interactions to-face interactions to-face interactions
• Knowledge transfer from • Knowledge transfer from • Knowledge transfer from
GVC lead firms related to a GVC lead firms related to GVC lead firms related to
narrow range of tasks a narrow range of tasks a narrow range of tasks
• Training of local workforce • GVC pressure to adopt
by GVC lead companies international standards
• GVC pressure to adopt
international standards
Outside Considerable use Intensive use Very low use
GVC • Internal R&D effort • Internal R&D effort
learning • Imitation of competitors • Hiring skilled managers
• Learning from suppliers and workers
(outside the GVC),
universities and consultancy
agencies
Example Coffee GVC in Brazil lead by Chinese wind GVC Kenyan clothing GVC
Illycaffè selling to the US market
• Autonomous innovators (14 GVCs), including GVCs with local innovative firms, whose
sources of learning are mainly outside the GVC; and
• Marginal innovators (27 GVCs), which includes GVCs displaying low to moderate
innovative performance, whose firms draw on some sources of knowledge inside the GVC,
but rarely use external sources of learning.
GVC-led Innovators are characterized by high levels of innovativeness and use of all
possible learning channels within the GVCs – particularly, face-to-face interactions and lead
firms’ provision of training for local personnel. In some cases, innovation is induced by the
need to comply with the strict production standards imposed by lead firms, which often is
achieved thanks to extra-GVC learning. In addition to intensive use of learning channels within
the GVCs, innovation activities benefit from links to other local non-GVC actors (e.g. suppliers,
universities, business associations) and imitation of proximate actors. GVC-led Innovators are
usually local firms that benefit from being part of the GVC and embeddedness in a well-
developed local innovation system.11 This explains why the firms in this cluster stress the
importance of connections to, and imitation of, other local actors. Note that, firm-level learning
efforts are crucial for absorbing and leveraging GVC knowledge, which is in line with the
evidence on Indonesian handicraft exporters in Fransen and Helmsing (2016). These authors
highlight that absorptive capacity mediates the transfer of GVC knowledge. Another exemplary
case in this group is the coffee GVC in Brazil, described by Cafaggi et al (2012), which is
characterized by a virtuous learning system led by Illycaffé together with some local business
associations and universities. Through incentives to innovate and provision of direct technical
assistance, Illycaffé supports the introduction of process and product innovations required for
entry to the global high-quality coffee market. Business associations, such as the Brazilian
Specialty Coffee Association (GSCA) and the Council of Coffee Growers’ Associations of the
Cerrado Region (CACCER), also support local innovation efforts through the provision of
technical training, knowledge transfer, joint marketing initiatives and promotion of scientific
research programmes in partnership with local research institutions. Supported by a favourable
local innovation system and stimulated by their involvement in the GVCs, local firms invest in
innovation. One example is Daterra, a local Brazilian company and, initially, exclusive supplier
to Illycaffé. Based on investment in an internal laboratory to enable quality analysis, and
development of a traceability system to map quality, Daterra now sells mainly through its own
chain in the global market, with only a small proportion of its total production going to
Illycaffe.
Autonomous Innovators’ use of knowledge for innovation via GVC channels is limited:
about a third of them receive knowledge from the lead firm (mainly for a small range of tasks)
and/or have face-to-face interactions with the managers in the lead firms. These innovative
firms do not exploit other GVC learning channels and rely almost entirely on internal R&D to
sustain their innovative efforts. Around half of these firms acquire knowledge from hiring
skilled employees (often returnees or expats) and via equity agreements (acquisitions, joint
ventures, licensing). In many cases, these kinds of arrangements were considered the most
relevant, since they enable rapid and effective innovation.
The Chinese wind turbine industry developments described in Lema et al (2013) exemplify
this cluster group. Initially, the Chinese wind industry was driven by the domestic market and
most of the technology was imported from European producers, which established local turbine
manufacturing subsidiaries in China. Their success can be explained by the possibility of
tapping into the established design and engineering capabilities of overseas firms, and acquiring
knowledge via technology licensing with European companies. More recently, Chinese wind
companies have been investing in large R&D departments in China as well as in Denmark and
Germany – the leading wind industry countries. Lema et al (2013) and Lema (2012) show that
Chinese turbine manufacturers adopted an innovation strategy that combines internal R&D
efforts with heavy reliance on external knowledge sourcing via licensing, joint ventures and
acquisitions of companies in Europe.
Autonomous Innovators use local learning sources (imitation and interactions with other
local actors) much less than do GVC-led Innovators. This can be explained by the fact that, in
about half of the observed cases, Autonomous Innovators operate in what are described as weak
local innovation systems, which are unlikely to offer valuable knowledge assets to innovative
firms.
Marginal Innovators include GVCs in which local firms have introduced mainly only new-
to-the-firm processes, organizational or product innovations. They do not perform in-house
R&D and the weakness of their local innovation system does not encourage use of local
learning sources. These firms rely on GVC knowledge only to a limited extent: about a third
have been involved in some GVC learning mechanism. This evidence is in line with the
absorptive capacity interpretative framework, which suggests that firms characterized by weak
technological capabilities are unlikely to establish knowledge-rich connections and are likely to
be locked out of the relevant innovative circles (Cohen and Levinthal, 1990; Giuliani and Bell,
2005).
The numerous cases characterized by weak innovation include the clothing industries in
Kenya and Madagascar. According to Kaplinski and Wamae (2010), local firms receive some
technical assistance from buyers, but this results in very little product and process innovation
with the result that Kenyan companies are locked into GVCs serving the US market in the high-
volume commodity segment. An interesting conclusion provided by this study is that
companies from Madagascar involved in GVCs targeting the European or the South African
De Marchi et al
markets seem to engage in more process and product upgrading. This is explained by the
different characteristics of the destination markets, such as demand for small batches requiring
more flexibility, which fosters process innovation capabilities and design independence.
Overall, more than half (54 per cent) of the cases analysed fall into the Low GVC Innovators
group, a third (28 per cent) into the Autonomous Innovators, and just under a fifth (18 per cent)
into the GVC-led innovators group. Since our cluster analysis is based on empirical evidence
from studies of GVCs and innovation, these results are somewhat surprising. First, we would
have expected these studies to report a more relevant role of GVC lead companies in local
innovation, whereas we observe more cases of GVCs where local innovative firms are
described as exploiting knowledge sources outside the GVCs, particularly for their internal
capabilities-building processes. Thus, under certain circumstances, the GVCs might be the
locus of innovation, but the presence of alternative, local level and extra-GVC learning
processes seems to be a fundamental condition for the achievement of local innovation. Second,
in the narratives and in the codification of the cases, we found that innovation cannot be taken
for granted, since most cases scored low for innovation. Hence, despite being part of a GVCs,
about half of the observed cases underperform in that respect.
Concluding Remarks
Since the mid-1990s, empirical analysis of GVCs and their effect on developing countries has
increased among the academic and practitioner communities (Gereffi and Lee, 2012; Werner
et al, 2014). However, it remains debatable to what extent, and under what conditions,
developing country firms benefit from being part of a GVCs in terms of their capacity to
innovate.
Development scholars seem positive about the ability of GVCs to support and incentivize
different forms of innovation at the level of local firms in developing countries, but, so far, the
evidence is limited and weak. As noted in Morrison et al (2008) and Nadvi (2011), the GVC
literature provides a poor conceptualization of firm-level technological capabilities accumu-
lation and learning processes. It also overlooks the heterogeneity at the local level in how firms,
clusters and regions learn and innovate through involvement in GVCs. Local GVC suppliers
differ in their capacity to absorb, master and adapt knowledge and capabilities that lead firms
potentially can transfer to them. They differ also in their openness to other sources of
knowledge outside the GVCs and in their embeddedness in more or less advanced and mature
local innovations systems.
In our analysis, we explored how innovation takes place in local firms involved in GVCs by
adopting a framework that reconciles development research on GVCs (Gereffi, 1999;
Humphrey and Schmitz, 2002) with innovation studies and evolutionary economics focused
on firm level learning and innovation (Nelson and Winter, 1982; Dosi, 1988; Bell and Pavitt,
1993). In particular, putting GVC studies in the context of developing countries, we searched
for empirical evidence on local firms’ learning efforts, in order to develop a typology including
outside the GVC learning (firm level, collective level and other external) as well as within the
GVC learning mechanisms. We identified three groups of local innovators in GVCs, based on
their innovativeness and the main learning mechanisms used: (a) GVC-led Innovators,
(b) Autonomous Innovators and (c) Marginal Innovators.
We offer some general conclusions. First, we observe that suppliers located in developing
countries, despite participation in one or more GVCs, do not always use the GVCs – that is,
their connection to the lead firm or other relevant upstream firms – as a privileged source of
knowledge and technologies. In only a minority of cases, GVC-led Innovators, did we observe
intensive use of GVC learning channels and, in most of these GVCs, local firms invest also in
considerable internal capability building in order to innovate.
In most of the other cases observed, GVC-related knowledge was exploited only to
complement other knowledge channels (e.g. collective learning at the local level, imitation,
learning from other non-GVC actors), reported as being among the most effective. The case of
Autonomous Innovators (roughly about a third of the sample) is an example here; these GVCs
are characterized by innovators drawing knowledge mainly from sources outside the GVCs,
probably reflecting the narrowness and specialist nature of the GVC knowledge. Several
scholars (Laursen and Salter, 2006) have pointed out that a degree of knowledge variety is
needed for innovation. An interesting topic for future research would be to investigate the type
of knowledge typically acquired from within GVCs vs external sources. Future research could
also investigate which types of within and outside the GVC learning mechanism combinations
are more favourable for innovation, depending on the industry specialization, local context and
destination markets. This article provides some interesting findings, but a more systematic
investigation would be useful for the design of policy interventions.
Second, about half of our empirical observations are GVCs in which very little innovation
takes place, a condition that tends to coexist with local firms’ relative closure to both GVC-
related and other kinds of knowledge sources, combined with weak skills and knowledge
creation efforts in local firms. These conditions apply to the category of Marginal Innovators.
This result, combined with the results for GVC-led and Autonomous Innovators, suggests that
there is great local heterogeneity at both the firm and cluster levels, as well as at the regional
and national innovation system levels. This impacts on the extent to which suppliers in
developing countries are able to take advantage of GVC-related knowledge.
In terms of its contribution to scholarship, this paper responds to calls for studies on GVCs
and innovation to be integrated (e.g. Giuliani et al, 2005; Morrison et al, 2008; Rabellotti and
Pietrobelli, 2011) and suggests the need for more empirical research on issues related to inter-
firm learning and innovation differences at the firm, cluster and innovation system levels in
GVCs.
In the policy area, the implications are that GVC participation cannot, on its own, promote
innovation in developing country firms. Rather, it should be seen as an opportunity favouring
development, offering a practical way for international organizations and donors to work with
the private sector (Pietrobelli and Staritz, 2017). Humphrey and Navas-Aleman (2010) identify
three main objectives of GVC initiatives (a) to strengthen the weakest links in the chain (e.g. by
improving the capabilities of local small suppliers), (b) to strengthen the linkages between firms
(e.g. by improving knowledge flows between local firms and lead firms) and (c) to create new
GVC links to connect local firms with new lead firms and/or end markets. Our paper supports
these recommendations, but, more importantly, highlights the relevance for developing
countries of investing in their own capability-building institutional apparatus and encouraging
and promoting firm-level learning via targeted innovation policy interventions. This is
important because belonging to a GVCs will not fix the internal weaknesses in developing
countries’ institutions.
The main limitation of this paper is that it is based on secondary empirical evidence, which
was not necessarily aimed at assessing the innovation outcomes related to GVC participation
and does not consider the evolution of these innovative patterns through time. We need more
empirical research on the impact of GVCs on local innovation and the numerous GVC
initiatives undertaken by international organizations and donors.
De Marchi et al
Acknowledgements
A previous version of this work was commissioned as a background paper for the UNIDO Industrial
Development Report 2016 and was funded by UNU-MERIT. The authors benefitted from comments
received in workshops organized by UNIDO in Vienna and Globelics in Cuba and they also thank two
anonymous referees for their helpful suggestions.
Notes
1. We searched also for alternative terms and synonyms. To identify developing countries, we adopted
the World Bank list available at http://data.worldbank.org/about/country-and-lending-groups.
2. Some articles analyse more than one GVC case and there are some GVC cases that are the subject of
more than one paper (e.g. Automotive in China, Software in India, Electronics in Indonesia and
China). We consider these as different GVCs because the papers focus on different segments in the
GVCs. For instance, in the automotive case, the paper by Hatani (2009) focuses on the sub-chain of
the Chinese firms involved in the Japanese GVC, while Altenburg et al (2008) investigate the Chinese
auto industry in general. Similarly, in the electronics case, the paper by Sturgeon and Kawakami
(2011) studies the Taiwanese GVC, while Altenburg et al (2008) adopt a more general approach.
These differences justify the different cluster classifications in some of these cases (see Appendix
Table A-1).
3. We acknowledge the existence of different, more sophisticated ways to analyse and measure
innovation in developing countries (see Bell and Pavitt, 1993). However, here we follow the simple,
but widely accepted, definition of innovation provided in the Oslo Manual, as the creation or adoption
of new products or processes or new organizational and marketing practices, where ‘new’ means new
to the world, the country or the firm. We are aware that this classification is simplistic and does not
account for the level of sophistication involved in each type of innovative activity.
4. Cluster analysis is a statistical method that allows objects or observations to be grouped (i.e.
clustered) with other similar objects or observations and kept separate from the objects in other
clusters (Aboni and Feil, 2007). ‘Similarity’ is understood as mathematical similarity, measured in
some well-defined sense and, often, defined by means of a distance norm. Distance can be measured
as among data vectors or as the distance from a data vector to some prototypical object in the cluster.
The grouping of observations into clusters can be performed in several ways.
5. Hierarchical clustering algorithms produce a nested series of partitions based on a criterion for
merging or splitting clusters depending on similarity. Clustering algorithms identify the partition that
optimizes (usually locally) a clustering criterion. A hierarchical algorithm yields a dendrogram
representing the nested grouping of patterns and similarity levels at which groupings change. The
dendrogram can be broken down into different levels to yield different data clusterings. K-means
clustering is the simplest and most commonly used algorithm and uses the squared error criterion. It
starts with random initial partition and continuously reassigns patterns to clusters based on the
similarity between the pattern and the cluster centres to meet a convergence criterion.
6. In the management literature, this type of innovation driven by affordability, availability and access to
poor people in developing countries is defined as ‘bottom of the pyramid’ innovation (Prahalad,
2012).
7. We are aware of the fact that local firms in developing countries may be contemporaneously involved
in several GVCs and that the boundaries of GVCs may be not be easily identifiable. However, when
we refer to within GVC learning sources, we mean the GVCs that the authors of each case study has
identified as being the relevant one, or the most salient given the context of their research. More
specifically, we refer here to the learning opportunities deriving from the interactions with the GVC
lead firm or other upstream firms, if relevant. In this vein, other collateral learning sources are
considered outside the GVCs or external.
8. For clarity, cases of learning through multiple channels are not reported in Table 1; we comment on
some significant combinations in the paper.
9. We do not have information on the intensity of use of each channel, only whether or not the channel is
exploited. This could represent a bias in the cluster analysis, which is reduced partially by
complementing the quantitative findings with qualitative evidence from the case studies. Also, we can
report only what the authors mention as relevant in their analyses, which is influenced by the authors’
own interests and research focuses. Hence, the insights of our review need to be taken with caution
and being aware of these important caveats.
10. Differences across clusters in terms of innovativeness and learning channels are statistically
significant, as shown by the ANOVA analysis reported in Appendix Table A-2.
11. In the case of 37 GVCs, we collected information on the level of development of the local innovation
system, taking account of the roles played by potential actors such as universities, knowledge and
business services providers, public agencies and metrology and standards organizations. In more than
80 per cent of GVC-led Innovators, the innovation system is classed as medium to strong.
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Appendix
Table A-1: The GVCs cases analysed
Industry Country Methodology Clusters Article

Complex products manufacturing
Aeronautics Brazil Qualitative GVCI Cafaggi et al (2012)
Automotive India Quantitative LI Kumar and Subrahmanya (2010)
Automotive India Qualitative LI Krishna et al (2012)
Automotive China Qualitative AI Altenburg et al (2008)
Automotive China Qualitative LI Hatani (2009)
Automotive Argentina Quantitative LI McDermott and Corredoira (2010)
Automotive India Quantitative LI Kumaraswamy et al (2012)
Electronics China Qualitative GVCl Sturgeon and Kawakami (2011)
Electronics China Qualitative AI Altenburg et al (2008)
Electronics China Quantitative LI Dennis Wei et al (2011)
Electronics India Quantitative LI Krishna et al (2012)
Electronics Indonesia Quantitative GVCI Kadarusman (2012)
Electronics Indonesia Qualitative GVCI Kadarusman and Nadvi (2013)
Electronics Malaysia Qualitative AI Athukorala (2014)
Electronics Mexico Qualitative LI Sturgeon and Kawakami (2011)
Handset China Qualitative GVCI Brandt and Thun (2011)
ICT China Quantitative LI Sun et al (2013)
LCD Screens China Qualitative AI Yang (2014)
PC China Qualitative LI Yang and Liao (2010)
Pharmaceuticals India Quantitative AI Krishna et al (2012)
Pharmaceuticals Uganda Qualitative AI Haakonsson (2009)
Space Industry India Qualitative AI Altenburg et al (2008)
Wind Turbine China Qualitative AI Lema et al (2013)
Traditional manufacturing
Construction Ghana Quantitative AI Fu et al (2014)
Diamond Cutting Botswana Qualitative LI Mbayi (2011)
Food processing Colombia Qualitative AI Meléndez and Uribe (2012)
Food Processing Ghana Quantitative AI Fu et al (2014)
Football China Qualitative AI Nadvi (2011)
Football Pakistan Qualitative LI Nadvi (2011)
Footwear Brazil Qualitative LI Navas-Aleman (2011)
Footwear Vietnam Quantitative LI Tencati et al (2008)
Furniture Brazil Qualitative LI Navas-Aleman (2011)
Garment Indonesia Qualitative GVCI Kadarusman and Nadvi (2013)
Garment Kenya Quantitative LI Kaplinsky and Wamae (2010)
Garment Madagascar Quantitative LI Kaplinsky and Wamae (2011)
Garment Vietnam Qualitative AI Goto (2012)
continued
Industry Country Methodology Clusters Article

Garment and Textile Ghana Quantitative AI Fu et al (2014)
Surgical Instrument Pakistan Quantitative GVCI Nadvi and Halder (2005)
Textile India Qualitative LI Padmanand and Kurian (2014)
Natural resources
Coffee Brazil Qualitative GVCI Cafaggi et al (2012)
Floriculture South Africa Quantitative GVCI Matthee et al (2006)
Fresh Fruits Brazil Qualitative LI de Castro Souza and Neto (2010)
Seafood Vietnam Quantitative LI Tencati et al (2008)
Vegetables Guatemala Qualitative LI Padilla-Perez (2014)
Wine South-Africa Qualitative LI Ponte and Ewert (2009)
Wood Gabon Qualitative LI Kaplinsky et al (2011)
Wood Thailand Qualitative LI Kaplinsky et al (2011)
Services
Film South-Africa Qualitative LI Barnard and Tuomi (2008)
Software India Qualitative AI Altenburg et al (2008)
Software India Qualitative LI Chaminade and Vang (2008)
Legenda: GVCI: GVC-led Innovators; AI: Autonomous Innovators; LI: Marginal Innovators
Table A-2: Defining GVC groups
Innovation Learning within the GVC Learning outside the GVC ANOVA
(0–1) (0–1) (0–1) p-values
GVC-led Innovators 0.69 0.69 0.43 0.000
Autonomous Innovators 0.68 0.16 0.50 0.000
Marginal Innovators 0.33 0.27 0.14 0.000

Special Issue Article Do Global Value Chains Offer Developing Countries Learning and Innovation Opportunities?

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Special Issue Article

Do Global Value Chains Offer Developing Countries Learning

The European Journal of Development Research (2018) 30, 389–407. https://doi.org/10.1057/s41287-017-

Literature Review Methodology

Do Firms Involved in GVCs Innovate?

Learning Mechanisms Within and Outside GVCs

Learning Mechanisms Within the GVCs

Mutual Learning from Face-to-Face Interactions

Table 1: Learning mechanisms within and outside the GVCs

Training of the Local Workforce by GVC Lead firms

GVC Lead Firms’ Pressure to Adopt International Standards

Learning Mechanisms Outside the GVCs

Firm-level Learning Efforts

Collective Learning at the Local Level

Other Channels External to the GVCs

Patterns of Innovation and Learning: A Typology of GVC Innovators

• Degree of innovativeness, measured as a count variable ranging from 0 to 5, adding 1 for

Table 2: A typology of GVCs

Innovation GVC-led Innovators (9 GVCs) Autonomous innovators Marginal innovators

Table A-1: The GVCs cases analysed

Industry Country Methodology Clusters Article

Industry Country Methodology Clusters Article

Table A-2: Defining GVC groups

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