Climbing the Ladder: Inward Sourcing as an Upgrading Capability in Global Value Chains

How can emerging-economy firms technically upgrade in global value chains (GVCs) and avoid being locked into low value-added activities? Inspired by catch-up cycles theory and in-out-in policy of GVC participation (Lee et al., 2017), we propose a novel concept of inward-sourcing capability - the ability to implement a dynamic transition from foreign sourcing to local sourcing in GVCs. We argue that inward-sourcing capability is critical for technical upgrade of emerging-economy firms. Using a full sample of Chinese manufacturing firms (714,117 firm-year observations) from 2000 to 2015, we investigate four antecedents of inward-sourcing capability and find that market-based institutions, openness to foreign multinational enterprises, and R&D intensity strengthen such capability-building, while state ownership impedes it. We also find inward-sourcing capability widens Chinese firms' search breadth and strengthens innovation capability and technical impact. Our new concept and findings carry important policy implications for the second stage of in-out-in GVC participation.

Automated summary

This study proposes the concept of inward-sourcing capability, aiming to address the technical upgrade and avoidance of low value-added activities for emerging economy firms in global value chains. Through an investigation of Chinese manufacturing firms, the study finds that market-based institutions, openness to foreign multinational enterprises, and R&D intensity enhance inward-sourcing capability, while state ownership hinders it. Furthermore, the study also reveals that enhanced inward-sourcing capability expands Chinese firms' search breadth and strengthens their innovation capability and technical impact.