Global value chains and the innovativeness of firms in Africa

Abstract

Firm-level innovation in developing countries is mostly incremental and depends on non-R&D activities. Integration into global production networks is one such activity that could help firms in developing countries innovate, particularly since new technologies and foreign knowledge diffuse through inter-firm linkages. Accordingly, this paper examines the relationship between Global Value Chain (GVC) participation and firm-level innovation in Africa, using data from the World Bank's Enterprise Survey (WBES). Employing different estimation strategies that enable us to address various empirical challenges, we find strong evidence suggesting that African GVC firms are highly innovative. They are not just more likely to introduce new products and processes but also more likely to jointly introduce both types of innovation as well as radical innovations. In an extended analysis, we found that integrating small and medium enterprises and younger firms into GVC enables them to overcome resource constraints, resulting in higher innovativeness. Finally, we document that the innovation gains from GVC trickle down to non-GVC firms in the same industry and region, implying that firms engaged in GVC activities generate positive spillovers to other firms in the economy. A proposed framework rationalizes our findings. The framework sheds light on the mechanisms that make firm-level innovation possible across African firms in an era where GVC is an important conduit for inter-firm learning, knowledge exchange, and technology transfer.