It is widely recognized that global production networks provide developing countries with better access to foreign markets and opportunities to learn and transfer tacit knowledge (Taglioni and Winkler, 2016). However, existing studies have revealed that a substantial portion of firms—the majority of them are small and medium sized firms with lower productivity— lag behind in terms of participation in the global production networks and that “absorptive capacity” of indigenous firms in developing countries is vital for successful knowledge transfer (Girma, 2005). The purpose of this research project is twofold. First, we will examine the determinants of firms’ “absorptive capacity” by comparing the management practices employed by local firms in international production networks with those employed by local firms in domestic production networks. Management practices represent multiple dimensions of each firm’s capability and are correlated to the firm’s productivity (Bloom and Van Reenen 2010). Second, we will empirically study how participation in global production networks by a small fraction of firms affect total factor productivity (TFP) at the firm and industry-levels as a result of TFP changes in the intensive and extensive margins.