This paper investigates which external learning mechanisms in networks contribute to various upgrading types in emerging market firms, and how internalisation of externally acquired knowledge complements external learning. It develops a dynamic model of firm-level upgrading for analysis, where learning in networks is emphasized. Methodologically, it applies a new approach through a comprehensive analysis of a firm's networks embedded not only in production systems (i.e. GVCs/GPNs) but also in knowledge systems. Primary data is collected through in-depth interviews with Polish food-processing and clothing firms. Multinomial logistic regression analysis is applied on a dataset of networks of these firms over 12 years covering the transition period. We find that the key source of process upgrading is learning in knowledge networks as opposed to that of in GVCs. Strikingly, learning-by-interacting in GVCs impedes not functional, but managerial upgrading, a previously unexplored upgrading type, which is also shown to be a prerequisite for functional upgrading. Finally, whilst learning-by-training and research within the firm is a 'potent' condition for external learning to contribute to all of the upgrading types, it is a 'must' for successful functional upgrading. These findings strongly suggest the importance of an integrative approach to learning in research on upgrading and the complementarity between organisational and technology upgrading.

The R&D and technology issues of relevance for catching up cannot be understood or conceptualised only within the R&D based growth model. With this motivation in mind, we have created a composite indicator of innovation capacity and performance of the CEECs, as well as of the EU25, which is meaningful from the perspective of countries lagging behind the world technology frontier. Three conclusions stem from the Index of Technology Upgrading components which have major relevance for policy making. Firstly, we observe a decline in most of the EU25 economies of their production capabilities despite, on average, significant improvements in R&D and technology capability. This suggests that the EU has serious weaknesses in converting its R&D and technological knowledge into production capabilities. Secondly, the Index of Technology Upgrading components show improvements in infrastructure and structural changes in most of the EU economies, but an overall relative decline in firm capabilities. This shows the limitations of current EU supply oriented RDI policies which continue to reinforce the so-called European paradox. Thirdly, increased knowledge interaction between 2006 and 2015 has been confined to the German-led Central European manufacturing cluster. It seems that the EU RDI policy operates as a substitute for technology and knowledge exchange rather than as a complement to it.

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