Abstract
Over recent decades, the globalization of production processes and the rapid expansion of global value chains (GVCs) have fundamentally reshaped the structure of international trade and the sources of national competitive advantage. A country’s position within these chains reflects not only its degree of integration into the global economy but also its technological capabilities, institutional quality, and capacity to generate domestic value added. Consequently, identifying the determinants of countries’ positions in GVCs has become a central concern in the international economics literature. This study employs a dynamic panel data framework to examine the effects of institutional quality and economic complexity on the relative GVC positions of 174 countries—including developed, emerging, and developing economies—over the period 1990–2018. The empirical analysis is conducted using a dynamic panel model estimated through the Generalized Method of Moments (GMM), which controls for unobserved cross-country heterogeneity and addresses potential endogeneity. The findings indicate that the governance index (as a proxy for institutional quality) and the Economic Complexity Index (ECI) both exert positive and statistically significant effects on countries’ positions within GVCs. Among the control variables, natural resource rents have a positive effect, whereas gross domestic product (GDP) per capita, foreign direct investment (FDI), and trade openness exhibit negative and significant relationships. Furthermore, the positive coefficient of the lagged dependent variable confirms the persistence of countries’ GVC positions over time. Overall, the results suggest that improvements in governance quality and the development of more complex production structures are critical for facilitating movement toward upstream activities in global value chains.
Purpose/Aims:
The globalization of production systems and the proliferation of GVCs have transformed patterns of international trade and countries’ sources of competitive advantage. A country’s position within GVCs reflects not only its level of global integration but also its technological sophistication, institutional environment, and capacity to generate domestic value added. In light of the growing importance of functional upgrading within GVCs, this study aims to empirically assess the impact of institutional quality and economic complexity on the relative GVC positions of 174 developed, emerging, and developing economies during the period 1990–2018.
To provide a comprehensive account of the structural and policy determinants of GVC positioning, the analysis incorporates GDP per capita, FDI, trade openness, and natural resource rents as control variables.
Methodology & Framework:
To capture the dynamic nature of GVC positioning and address potential endogeneity concerns, the study adopts a dynamic panel data framework estimated using the Difference Generalized Method of Moments (Difference GMM) approach developed by Arellano and Bond (1991). This estimator eliminates unobserved country-specific effects, mitigates simultaneity bias, and permits the inclusion of a lagged dependent variable to account for persistence in GVC positions over time.
The dependent variable is derived from the UNCTAD–Eora GVC database and measures countries’ upstream–downstream positions within global production networks. Institutional quality is proxied by the Worldwide Governance Indicators (WGI), calculated as the simple average of six dimensions: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. Economic complexity is measured using the ECI, which captures the diversity and technological sophistication of a country’s productive structure.
This methodological framework provides a robust setting for evaluating the combined effects of institutional systems and productive capabilities on countries’ positions in GVCs.
Findings:
The empirical results indicate that both institutional quality and economic complexity exert positive and statistically significant effects on countries’ GVC positions. Economies characterized by stronger governance structures and more diversified, knowledge-intensive production systems are more likely to move toward upstream, technologically sophisticated stages of global production.
The coefficient on the lagged dependent variable is also positive and significant, confirming the persistence of GVC positions over time and suggesting that structural upgrading is gradual and path-dependent.
With respect to the control variables, natural resource rents exert a positive and significant effect, implying that resource-rich economies can improve their GVC positions when they engage in higher value-added processing activities. In contrast, GDP per capita, FDI inflows, and trade openness display negative and significant relationships. These findings suggest that higher income levels, assembly-oriented foreign investment, and greater import penetration may be associated with downstream, final-stage activities within GVCs.
Discussion:
The results underscore the pivotal role of institutional frameworks and productive capabilities in shaping countries’ functional positions within GVCs. High institutional quality—manifested in effective governance, transparent regulation, reduced corruption, and strict rule of law—lowers transaction costs, enhances predictability, and fosters innovation. These institutional attributes facilitate participation in higher value-added segments of GVCs and support the coordination required for complex production processes.
Economic complexity, reflecting accumulated productive knowledge and the capacity to manufacture diverse and sophisticated goods, constitutes another key driver of upstream upgrading. Countries with higher levels of economic complexity are better positioned to engage in design, advanced manufacturing, and innovation-related activities.
The negative association between GDP per capita and GVC position may indicate that as countries attain higher income levels, economic structures increasingly shift toward domestic consumption and services, potentially reducing engagement in upstream industrial activities. Similarly, FDI inflows in many developing economies are concentrated in low-value-added assembly and processing operations, thereby limiting opportunities for functional upgrading. The negative effect of trade openness may reflect dependence on imported intermediate inputs and the predominance of downstream assembly in technologically constrained open economies.
The positive contribution of natural resource rents suggests that resource-rich countries can enhance their GVC positions when resource extraction is complemented by domestic processing and value addition. However, the magnitude and sustainability of this effect are likely contingent upon supportive institutional and policy environments.
Conclusion & Implications:
The findings demonstrate that institutional quality and economic complexity are central determinants of countries’ movement toward upstream positions in GVCs. Strengthening governance systems—particularly in government effectiveness, regulatory quality, and control of corruption—combined with policies that enhance technological capabilities, education, innovation, and productive diversification, can substantially improve countries’ positions in global production networks.
From a policy perspective, governments should pursue a dual strategy: first, improving institutional quality to create a stable, transparent, and innovation-supportive environment; and second, investing in productive knowledge, technological upgrading, and diversification to enhance economic complexity.
Such an integrated approach can facilitate functional upgrading, increase domestic value capture within GVCs, and strengthen long-term structural competitiveness.