Productivity spillover effects of participation in global value chains and FDI inflows

This paper examines how foreign direct investment (FDI) inflows and participation in global value chains (GVCs) influence labor productivity across 35 industries in 29 OECD countries. Employing a two-step System GMM estimator to address endogeneity, we identify distinct productivity spillover patterns associated with the interaction between GVC participation types—forward and backward—and the technological composition of FDI. Our results reveal that forward GVC participation leads to stronger productivity gains, particularly when combined with FDI inflows in high-tech sectors. Conversely, backward GVC participation exhibits greater synergy with FDI inflows in low-tech sectors. These findings underscore the need to align FDI policy with a country's GVC structure: high-tech FDI is more effective in economies specializing in forward GVC linkages, while low-tech FDI yields greater productivity gains in economies engaged in backward GVCs. The results offer important policy implications for designing targeted investment strategies to enhance productivity through GVC integration.