Financialization and Global Value Chains: Evidence from an International Database

This paper attempts to empirically examine the effects of financialization on global value chain (GVC) participation. By applying diverse econometric techniques to a global sample of 49 low-income & lower-middle-income countries (LI&LMICs), 33 upper-middle-income countries (UMICs), and 42 high-income countries (HICs) during the 2005-2022 period, the estimation results demonstrate that the financialization captured by nine indices from the Financial Development Index database has a limited but statistically significant impact on the level of GVC participation. We find robust results by utilizing various econometric techniques and adding more explanatory variables. Both financial market and institutional development appear to increase GVC participation through the positive impacts of financial development in terms of depth and efficiency. Furthermore, there is evidence of the long-term cointegration between financial development and GVC, and our results confirm its effects in the long term. Finally, the nexus between financial development and GVC participation is analyzed for three income groups: LI&LMICs, UMICs, and HICs, but the importance of both financial market and institution is more evident in the UMICs and HICs. Similar findings are found when we reexamine the effects of financialization on backward and forward GVC participation.