Integration into global value chains and firm innovation: does local business environment matter?

While the learning-by-doing hypothesis suggests the firms that have integrated into global value chains (GVCs) have better performance, it is not clear how this relationship changes in different business environments. Utilizing data of GVC integration and innovation from five rounds of surveys of small- and medium-sized enterprises and data for the quality of the local business environment, this study shows that integration into GVCs does not help these firms to introduce new products. Nonetheless, it raises the likelihood that these firms improve their existing products and production process. This positive relationship is enhanced by the improved-quality local business environment. Further analysis suggests that efforts should be spent on improving crucial aspects of the local business environment, which are legal issues, business support, labor training, and transparency of the local governments, to effectively strengthen this relationship.