This paper empirically investigates the extent to which increasing participation in global value chains affects accumulation of productive knowledge across products in the Korean manufacturing industries, and then analyzes the trickle down effect of 10 potential export products on domestic sales.

First, the effects of global value chain (GVC) participation on productive knowledge and firm productivity are estimated as follows. Using OECD/WTO trade-in-value-added (TiVA) data and 800 different product complexity indexes (which measure the amount of productive knowledge held in a product) from 2000 to 2010, this paper finds that participation in the global value chain may increase the accumulation of productive knowledge, and consequently the improvement of product complexity increases firm productivity in the Korean manufacturing industries.

However, the effects of Korean value-added trade on product complexity differ across domestic-content and foreign-content exports. In particular, a 1-percent increase in domestic value-added exports increases product complexity by 0.30 percent, while a 1-percent point increase in foreign content share of gross exports increases product complexity between 0.02 percent and 0.03 percent. In addition, a 1-percent increase in product complexity affects firm productivity by 0.52 percent.

The results show that the accumulation of product complexity associated with greater participation in global value chains statistically significantly affects firm productivity in Korean manufacturing industries. Global interdependence in the production process influences product complexity, and product complexity affects firm productivity as firms are increasingly interconnected in the global value chains.

Second, this paper selects 10 potential export products based on its possibilities of development of comparative advantage, and analyzes the effect of the evolution of comparative advantage of the products on small and medium-sized enterprises (SMEs) domestic sales in the manufacturing industries.

Using Korean SMEs’export and domestic sales data form 2009 and 2011, this paper finds that as exports of 10 potential products increase by 31.8 percent in 2011, domestic sales of small and medium-sized export firms and domestic firms increase by 39.6% and 52.8% respectively. The results show that the development of comparative advantage of prospective exports by enhancing productive knowledge in value-added trade through GVC participation may increase exports and as a result, positively affect domestic sales in the manufacturing industries that produce the prospective products.

Productive knowledge enhancement with the greater GVC participation in the Korean manufacturing industries may help increase invigoration of Korean economic growth. It is partly because easier global value chain participation positively affects firm productivity in Korean manufacturing industries. In particular, greater trade in value-added exports and international outsourcing may increase the accumulation of productive knowledge. And the accumulation of productive knowledge affects firm’s productivity enhancement and may lead to manufacturing renaissance.

The development of product complexity in exports may bring export and domestic industries' competitiveness into balance. “Made in the world”associated with both domestic and foreign content exports thus should be encouraged and the interrelatedness between SMEs and large firms continually needs to be developed not only within a country but also across borders.