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Middle-income trap: global value chains, skills and innovations in CEE countries

Lithuania, like other Central and Eastern European (CEE) countries, faces middle-income trap. Despite significant (compared to GDP) public investment in research and development (R&D), innovations and higher education, the innovativeness of these economies grew slowly. This contradicts the expectations, and is the basis of the regional innovation paradox. The research project aims to explain this important paradox.

 

The main thesis of the proposed research is that innovation activities of firms depend on their positions in global value chains (GVCs) and competences of employees, determining absorptive capacities of companies. Firms involved at the beginning or the end of GVCs have opportunities and incentives to innovate, and their employees are constantly learning at the workplace, which further increases innovation potential. Meanwhile, firms creating low value‐added in GVCs (despite subsidies for innovation or training) do not have incentives to invest in risky innovations, and their employees eventually lose competences.

 

The research aims to explain and estimate the links between participation in GVCs, skills and innovativeness in the context of CEE countries. The study seeks to:

 

  • Contribute to theoretical understanding of GVCs and middle-income trap by developing a conceptual model for explaining the relationship between firms’ positions in GVCs, innovativeness and employees’ skills.
  • Quantitatively analyse firms’ positions in GVCs in CEE countries at sectoral level. This involves analysis of international input-output tables covering 1995-2014.
  • Estimate factual competences of employees. This involves development a new measurement based on types of tasks that employees carry out at the workplace, indicating the actual use of their skills. This measure will be compared against other existing indices.
  • Empirically estimate relationships between position in GVCs, skills and innovativeness at sectoral level by employing quantitative analysis. This will allow estimating the impacts of position in GVCs and competences on innovativeness, testing the proposed conceptual model.
  • Identify ‘success factors’ of knowledge‐based growth via case studies in Lithuania and Estonia in selected sectors.
  • Propose policy recommendations that could contribute to developing strategies for escaping the middle-income trap, based on obtained evidence.

 

The project is funded by Research Council of Lithuania (grant No. S-MIP-17-116).