Learning between buyers and sellers along the global value chain

This paper analyses learning between buyers and sellers as a new channel through which international trade affects product introduction across different production stages within firms. Using detailed plant level data from the Indian manufacturing census, I find that (i) 45% of multi-product plants produce at least one product pair that is connected in the Input-Output matrix, (ii) 40% of new products added by plants every year are either upstream or downstream to products previously produced by them, and (iii) exogenous increases in upstream export market access cause firms to add new products that are downstream to their previous production sets. I attribute this effect to plants learning about new products from their downstream buyers. To analyze the effects of trade policy on firm scope I build a dynamic quantitative general equilibrium model of Global Value Chains with knowledge spillovers arising from buyer-seller linkages along the value chain. Potentially multi-product and multi-stage producers in the model invest in R&D to increase their product sets and benefit from knowledge spillovers from domestic and foreign markets. Trade policy counterfactuals show that cross-stage product innovation decreases as the economy liberalizes due to convergence in technology levels across countries in general equilibrium.