Do global value chains enhance or slog economic growth?

ABSTRACT

This paper examines the link between trade and economic growth by emphasizing on recent progress of global value chains (GVCs) for a sample of 58 countries over the period 2005–2015. The findings show that trade and in particular trade linked to GVCs spurs economic growth. However, the impact of GVC engagement on economic growth is diverse as we broaden our analysis to sectoral level. The study also notes that the benefits associated with regional value chains are higher. Furthermore, functional specialization in trade also plays a key role in improving growth. Therefore, policies to promote the GVC engagement and strengthening the domestic fundamentals should be the aim for countries to further benefit from trade.

KEYWORDS:

• Global value chain trade
• economic growth
• technology intensive industries
• GMM

JEL CLASSIFICATION:

• F12
• F14
• O4
• R15

Acknowledgments

This version of the manuscript greatly benefited from the insightful comments of the Editor and anonymous reviewers

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Double counting refers to items recorded multiple times in gross trade flows due to production fragmented across borders.

² Human capital or technology for firms.

³ For recent studies related to GVC, please refer to Zhang, Huang, and Liu (2012); Florensa et al. (2015); Ehab and Zaki (2020); and Wang et al. (2020a).

⁴ These variables are chosen based on empirical literature (For instance, Rodrik 2008; Bruns and Ioannidis 2020).

⁵ This methodology is superior to other measures proposed in the literature such as Hummels, Ishii, and Yi (2001); Koopman, Wang, and Wei (2014); and Miroudot and Ye (2018).

⁶ ${\mathrm{Y}}_{\mathrm{k}\mathrm{l}}$ points out goods finalized in k and sold in l. ‘s’ and ‘t’ suggests country of origin. r, j and l indicate final absorption market. Refer to Borin and Mancini (2019) for additional details.

⁷ Australia, Austria, Belgium, Bulgaria, Brazil, Canada, China, Cyprus, Czech Republic, Germany, Denmark, Spain, Estonia, Finland, France, United Kingdom, Greece, Hungary, Indonesia, India, Ireland, Italy, Japan, South Korea, Lithuania, Luxembourg, Latvia, Mexico, Malta, Netherlands, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, Sweden, Turkey, and United States..

⁸ For discussion on the construction and constraints of FS data, refer to Timmer, Miroudot, and De Vries (2019).