Political connections and participation in global value chains: Evidence from MENA firms

We use new data on political connections from the World Bank Enterprise Surveys to examine the impact of connections on firms' participation in international trade through global value chains (GVCs) for six lower middle income MENA countries and territories (Morocco, Tunisia, Egypt, the West Bank and Gaza, Jordan, and Lebanon). Our findings add to the literature on “hidden protection” and corruption in the region: trade- and investment policies and regulations are tailored to benefit or protect politically connected firms. Our findings suggest that politically connected firms are more likely to participate in GVCs by 9.8 percentage points and that the intensity of their participation in GVCs increases by 4.1 percentage points. Combining political connections and grand corruption increases firms' participation in GVCs by 13.6 percentage points. • MENA governments often allocate special benefits to politically connected firms. • Political connections increase firms' participation in global value chains. • Firms that combine connections with grand corruption are more likely to join GVCs. • Politically connected firms can override some trade- and investment regulations.