Does too much finance suppress a country’s participation in the global value chains?

ABSTRACT

Using a dynamic panel threshold model, we find a nonlinear effect of financial development on participation in the global value chains for 92 countries. The effect is positive below a threshold and turns negative above it. We provide evidence supporting our explanation that when a country’s financial system develops to a certain level, it serves foreign buyers by engaging more in outward foreign direct investments instead of enhancing its participation in the global value chains.

KEYWORDS:

• Financial development
• global value chains
• dynamic panel threshold model
• nonlinear relationship

JEL CLASSIFICATION:

• F14
• F15
• F23

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ This semi-parametric analysis method explores the internal relationship of data without making a presumption on the relationship between the variables.

² We also experiment with four alternative FD measures: IMF’s Financial Institution Development and Financial Market Development indexes, the bank credit to deposits ratio, and the ratio of stock market capitalization to GDP. Our conclusions do not change. The results are available from the authors upon request.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71403295,71603286]; Fundamental Research Funds for the Central Universities, Zhongnan University of Economics and Law [2722020JCG022]; Fundamental Research Funds for the Central Universities, Zhongnan University of Economics and Law [2722021BZ008].