What drives global value chain participation?

Abstract

Cross-border production sharing has intensified in recent decades, leading to the formation and spread of global value chains (GVC). Using a dataset containing more than 150 countries over 1990-2018, our paper tries to identify what drives backward GVC participation and forward GVC participation at the country and aggregate trade levels. We complement this general exercise with a gravity model analysis of the determinants of bilateral foreign value-added in exports. The econometric analyses highlight structural factors such as aggregate income, level of industrialization and distance to economic hubs as highly significant for GVC trade. Foreign direct investment inflows strongly influence GVC participation and are stronger for backward participation. Trade agreements and their depth boost GVC participation, although the expansionary effect of deeper trade agreements on GVC trade decreases over time. We replicate our general analysis for developed and developing countries to account for the differential effects of GVC drivers at different levels of development. We ensure that our gravity estimates are theoretically and analytically consistent by using the Poisson Pseudo Maximum Likelihood estimator and incorporating multilateral resistance.