Does economic policy uncertainty impact global value chain participation of Indian firms? The role of financial constraints

Ketan Reddy, Subash Sasidharan and Shandre Mugan Thangavelu

Economic Modelling, 2025, vol. 152, issue C

Abstract: This study investigates the impact of economic policy uncertainty (EPU) on global value chain (GVC) participation of Indian manufacturing firms. Using firm-level panel data from India spanning 2004–2021, we estimate a probit model and address endogeneity concerns using an instrumental variable approach. Our analysis reveals that higher economic policy uncertainty leads to a decline in firms' GVC participation. The adverse effects of EPU translate via the financial constraints channel with high-leverage and low-liquidity firms experiencing a greater impact of EPU on their GVC integration. Moreover, we find that firms with access to trade credit can mitigate the adverse impact of EPU. In addition, using survival analysis, we also demonstrate that higher EPU is associated with greater exit rates among GVC firms.

Keywords: Economic policy uncertainty; GVC participation; Manufacturing firms (search for similar items in EconPapers)
JEL-codes: F1 F14 L2 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s026499932500238x

DOI: 10.1016/j.econmod.2025.107243

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