ABSTRACT
In today’s challenging development context, the only possible avenue of upgrading for developing country firms appears to be the type of learning that the global value chain (GVC) literature has assumed to take place when these firms interact with foreign buyers. However, recent work has been skeptical of these benefits to developing country firms, noting instead that “induced searches” usually triggered by events of vulnerability in developing countries are more likely to spur upgrading (Pipkin and Fuentes, 2017). Building on the “induced search” framework, this chapter examines the role of a shock as a trigger for a process of collective learning leading to innovation, focusing on a case with low state and private institutional capacity. In the context of extreme technological gaps, low institutional capacity, and political domination by large economic groups, firm behavior can take the properties of an institutional trap. In this sense, the observed “inertia” of widespread low-road practices becomes a self-reinforcing phenomenon, where only a sufficiently large shock and effective collective efforts to build industry-wide public goods can induce firms to innovate.
