Abstract: Based on the three-dimensional decomposition of supply-demand-system for the advantages of ultra-large-scale markets, this paper attempts to explore the mechanism and evidence for resolving the puzzle of China's local industrial upgrading paradox from the perspective of GVC. The results indicate that the advantage of a super-large-scale market is a key influencing factor for Chinese local enterprises to achieve industrial upgrading in the context of GVC. It can be decomposed into entrepreneurial spirit effect, domestic market demand effect, and industrial equal competition effect from three dimensions of supply, demand, and system. Further heterogeneity analysis reveals that the entrepreneurial spirit effect has a significant positive impact on the upgrading of local industries in all regions and industries. The domestic market demand effect shows an important promoting effect in the eastern region and all industries. The industrial equal competition effect has a more significant positive impact in the central and western regions, capital-intensive industries, and technology-intensive industries. Moreover, the upgrading effects of local industries caused by various advantages in the super-large-scale market have heterogeneous biases due to different GVC embedding links. Among them, the entrepreneurial innovation spirit effect and domestic market demand effect tend to influence the downstream of GVC, while the entrepreneurial adventure spirit effect and industrial equal competition effect tend to influence the upstream of GVC.
