Not all digital inputs are equal: regional linkages and global value chain upgrading in Europe

Digitalization increasingly reshapes global value chains (GVCs), yet whether it enables economies to move toward higher value-added positions remains contested. This paper argues that the upgrading effect of digital inputs depends on their type and geographic origin rather than on their intensity alone. Europe, with its Single Market and harmonized digital regulation, provides a setting in which this proposition can be tested. Using a panel covering 27 European economies and 45 industries from 1999 to 2020, this study shows that digital inputs significantly promote sectoral GVC position upgrading. Specifically, digital service inputs exert stronger upgrading effects than digital goods inputs, and foreign digital inputs sourced from within Europe exert stronger effects than domestic ones. Mechanism tests identify two channels through which these effects operate: digital inputs lower trade costs and raise sectoral labor productivity. In addition, the upgrading effects of digital inputs are stronger in Central and Eastern European (CEE) economies and knowledge-intensive service sectors. Overall, this study highlights the importance of regional digital linkages and nearshoring strategy within Europe. This study also provides policy implications for digital transformation, regional integration, and competitiveness strategies.