Export and Productivity in Global Value Chains: Comparative Evidence from Latvia and Estonia

This paper investigates the effect of export entry on productivity, employment and wages of Latvian and Estonian firms in the context of global value chain (GVC). Like in many countries, exporting firms in Latvia and Estonia are more productive, larger, pay higher wages and are more capital intensive than non-exporting firms. While this is partly because firms that are originally more productive and have better performances are more likely to enter export, Latvian and Estonian firms also realise more than 23% and 14% higher labour productivity level as the result of export entry. Export entry also increases employment and average wages. Gains in productivity and employment are particularly large when firms enter exports that are related to participation in knowledge-intensive activities found in the upstream of GVC. For instance, Latvian firms that start exporting intermediate goods or non-transport services (which include knowledge intensive services) enjoy significantly higher productivity gains than those starting to export final goods or transport services. These findings underscore the importance of innovation policies that strengthen firms’ capabilities to supply highly differentiated knowledge-intensive goods and services to GVC.