Global value chains and domestic innovation

This paper explores how changes in both position and participation in Global Value Chain (GVC) networks affect firm innovation. The analysis combines matched patent-firm data for Japan with measures of GVC network centrality and GVC participation using the OECD Inter-Country Input-Output (ICIO) Tables over the period from 1995 to 2011. We find that Japan's position in GVCs has shifted from being at the core of Asian value chains towards the periphery relative to other countries in the network, i.e., becoming less “central”. We use China's accession to the World Trade Organization as an instrumental variable for changes in Japanese centrality. Our analysis shows that increases in Japanese sectors' forward centrality – i.e. as a key supplier - tend to be positively associated with increasing firms' patent applications in these sectors and that firms in key hubs within GVCs, specifically as key suppliers, appear to benefit from knowledge spillovers from downstream markets. •Changes in position in Global Value Chain (GVC) networks can affect firm innovation.•Japan has shifted from being at the core towards the periphery in the network.•Fall in centrality accounts for 37 % of the decline in patenting by Japanese firms.•Increases in forward centrality is positively linked to firm patent applications.•Firms in GVC hubs benefit from knowledge spillovers from downstream customers.