FDI Functional Specialization and Upgrading Through Global Value Chains: Evidence from the Automotive Industry

This study examines an underexplored dimension of Global Value Chains (GVCs): the transition from backward to forward participation and how this transition is associated with FDI functional specialization and technology upgrading. Focusing on the automotive industries of China, Central and Eastern Europe (CEE), and Western Europe (WE), the analysis shows that the relationship between backward and forward participation differs across development contexts. In WE, deeper backward participation is associated with weaker forward participation, suggesting a possible tension between imported-input dependence and established domestic value-added contribution. In CEE, backward participation is positively associated with forward participation up to a threshold, after which this positive association weakens. The findings further show that different forms of functional specialization are associated with forward participation in distinct ways, while technology upgrading is positively associated with stronger forward participation. Overall, the study refines understanding of GVC upgrading by showing that integration alone is insufficient: its developmental implications depend on the pattern of specialization, domestic capability formation, and the extent of dependence on foreign value added. These findings carry important policy implications for balancing external integration with domestic capability-building and innovation.