Abstract: Against an open economy, the expansion of the local market bears a strong siphon effect and is thus an important way for a country to climb the global value chain. This paper divides the local market size in terms of intermediate input and final demand, and employs national panel data to study the impact of advantages that local market size enjoys and their siphon effects on global value chain upgrading. The results show that the expansion of local market size has a significant promoting effect on global value chain upgrading, and it has withstood the robustness and endogeneity tests; further heterogeneity analysis reveals that the global value chain enhancement effect produced by expanding local market size is more significant in developed countries, countries with high institutional quality, advanced product demand structures, and large household final consumption markets. In addition, siphoning international capital and innovation factors is the main channel through which the expansion of local market size affects the global value chain position, and the siphoning effect of local market size on capital is more significant in countries with a high proportion of technology intensive product demand, while its siphoning effect on innovation factors only exists significantly in countries with larger local market sizes. The research conclusion provides a reference for China to leverage its advantages in the super large market and promote “Made in China” to move towards the high-end of the global value chain.

Key words: local market size, intermediate product demand, final demand, siphon effect, global value chain