SIER Working Paper Series

This paper puts forth a hypothesis that while at the initial stage of growth by a latecomer, more participation at the global value chains (GVC) is desired to learn foreign knowledge and production skills, functional upgrading requires effort to seek separation and independence from existing foreign-dominated GVC, and that latecomer firms and economies might have to re-seek an integration back into GVC after building up their own local value chains. This paper attempted to verify this “In-Out-In Again” hypothesis by looking into cases of “upgrading and independence” in Korea and Brazil, and by checking the national level data of the share of foreign value-added (FVA). Trends of FVA in successful catching-up economies, including China in recent years, are consistent with this In-Out-In Again pattern. Regression results also confirm correlations between the degree of local creation and diffusion of knowledge and FVA values. This finding can be viewed as an important contribution because the relationship illustrates the linkage between innovation system variables (knowledge localization) to the GVC variable of the FVA. This finding further implies that building local innovation systems is the key in making possible upgrading and local value creation while integrating in the GVC.

Keywords: GVC, innovation systems, local value chains, Knowledge, Korea, Brazil